All eyes are on the new government as there is talk building up of an ambitious 100-day reform agenda. Expectations are rising now that the government has won a decisive mandate and there is pressure to deal with a multitude of macroeconomic troubles. It is reassuring to note that resolving DISCOM offtake risk seems high on the agenda of the new government. News sources quoting senior government officials give us a peek into various solutions being considered by the government – payment security fund, restructuring of tariff subsidies, penalising DISCOMs for failure to provide a basic minimum standard of service and a joint power sector council comprising the central and state governments.
- A permanent structural reform is needed to sort out DISCOM finances forever;
- The joint power council could free DISCOMs from local government interference by developing a consistent set of operating standards and guidelines;
- GST implementation and constitution of the GST council should provide a useful template;
Financially weak DISCOMs are a source of most of the challenges pervasive in the power sector including poor customer service, suppressed demand, low investment in T&D infrastructure, lack of financing and policy reversals. The country can’t afford another expensive DISCOM bailout and a radical permanent fix is needed to sort out this problem forever.
We don’t believe that creating another payment security fund or mitigating offtake risk through an intermediary like NTPC or SECI is a solution. Rather it is a wasteful way of living with the problem. It increases costs for developers and consumers, and creates a false sense of security only for the crisis to grow bigger and bite back at a later date. Amendments in tariff policy, non-binding in nature, to reform subsidies and hold DISCOMs accountable, do not appear an attractive option either. A policy move along these lines will take a long time in implementation and face enforcement challenges.
In contrast, the idea of a joint power sector council is very powerful. The proposed council would be headed by the Indian power minister and have power ministers of all states as members. It is proposed to be assisted by a committee comprising top finance and energy bureaucrats from the central and state governments. The council is expected to develop a consistent set of operating standards and guidelines to free DISCOMs from local government interference. While there is no change expected to regulatory regime in the tentative plans, we argue that the government should go one step further and disband state regulators, who have been complicit in this crisis. State level regulation is an outdated idea without parallel – all other sectors (aviation, telecom, real estate) have one national level regulator. To this end, CERC should be strengthened and armed with all necessary powers to adjudicate across the country.
The two big questions are – does the Indian government have the commitment to reform and will the state governments comply? The answer lies in the recent constitution of the GST council and implementation of a nationwide indirect tax regime after decades of resistance from state governments.