25 January 2021 | BRIDGE TO INDIA
Tata Power recently completed acquisition of 51% stake in WESCO and SOUTHCO, two of the four Odisha DISCOMs, covering western and southern parts of the state respectively. Remaining 49% stake will continue to be held by the government of Odisha. The company will operate the two businesses for a period of 25 years. It is also keen to acquire the other two DISCOMs – CESU, where it has already acquired an LOI and NESCO, where it is the sole bidder.
- Central government seems to be pinning all its hopes on DISCOM privatisation for revival of the chronically troublesome distribution business;
- But power distribution in large states with low consumer density and high agricultural consumption is a far more challenging proposition than distribution in cities;
- The government needs to act decisively as DISCOMs financial position is deteriorating rapidly while the range of choices available to fix the sector are narrowing;
Privatisation of DISCOMs seems to be becoming primary hope of the central government for fixing the chronically troublesome distribution business. Progress has been held up on Electricity Act amendments and associated policy measures. Interestingly, while the central government is seeking support from state governments on these policy measures as part of quid pro quo for the INR 1.2 trillion (USD 17.6 billion) DISCOM liquidity support package, it gave in rather quickly to the farmers’ demand to not pass the Electricity Amendment Bill 2020.
The enthusiasm for privatisation stems mainly from perceived success of private DISCOMs in Delhi, Mumbai, Kolkata and Ahmedabad. But power distribution in large states with large geographical spread, low consumer density and high agricultural consumption is an altogether more challenging proposition in comparison to distribution in dense urban clusters with no agricultural loads. A summary comparison of Odisha and Delhi distribution businesses highlights these differences.
Table: Summary comparison of Odisha DISCOMs with Delhi DISCOMs for FY 2019
Source: Power Finance Corporation’s Performance Report of State Power Utilities FY 2018-19
The case of Odisha DISCOMs holds a cautionary tale. Odisha was the first Indian state to privatise its power distribution business in 1999 after AES and BSES gained majority control of the four DISCOMs. But the experiment was not successful with AES abandoning operations in 2001 (the state government revoked its licence in 2005). Then in 2015, the state government also cancelled the three licences given to BSES after persistent operational and financial underperformance of the DISCOMs (see table below).
Table: Performance of Odisha DISCOMs
Source: Power Finance Corporation’s Performance Report of State Power Utilities
According to a recent report by NITI Aayog, the failure of private DISCOMs was mainly on account of inadequate capital expenditure in the distribution network to reduce AT&C losses. But the private parties complained of inaccurate baseline data, high ratio of rural consumers and unmetered connections.
Elsewhere, the central government is pushing through privatisation in union territories of Puducherry and Chandigarh. But the Uttar Pradesh government has already given up on proposed privatisation of Purvanchal DISCOM after facing resistance from its employees.
If the government is serious about privatisation, it needs to commit more political capital as well as learn appropriate lessons from the previous experience. A half-hearted approach and another failed episode will have adverse repercussions across the power sector. Rapidly deteriorating position of DISCOMs and narrowing range of choices to fix the sector means the government needs to act quickly and decisively.