The Discom Conundrum
Debts and inefficiencies plaguing the distribution companies in India
Last week, we read the fundamentals of power. In this post, I analyse the working of the sector from the lens of inefficiencies in the distribution system and incremental debts that have plagued Discoms for about 25 years now.
What’s the problem?
Financial health of distribution companies has been a long going concern since even before 2003.
As of 2023-24, Discoms have an outstanding debt worth Rs 6.61 lakh crore, 2.4% of the national GDP at the time. Something doesn’t sound right here – does it? Let us therefore delve deep into the problem of the “Discom debt”.
The vital underlying economic reality, of the, “Discoms problem”, guides the policy and regulation of the electricity sector and is set out in the following section.
Where is the inefficiency?
Discoms are stuck in a cycle of financial trouble, mainly due to outdated practices and structural problems.
Outdated PPAs
Their costs remain high because they are bound by old PPAs with generation companies. These deals often lock in prices that do not reflect the advancements in production efficiency, leading to higher costs that are not matched by current revenue.
Electricity tariffs are generally updated infrequently, designed to avoid sudden spikes in consumer prices. This means that Discoms, often endure prolonged financial strain as they absorb additional costs.
Billing Cycles
Inefficiencies in billing systems leads to errors and delays, causing revenue losses. To add to the woes, a significant portion of billed revenue remains uncollected due to poor enforcement and lack of stringent recovery mechanisms.
Electricity theft or non-payment of bills for years on end is not something we in India are un-familiar with.
Image sourced from Unsplash.com
Debt on Debt
Long-term PPAs signed at higher prices and take-or-pay clauses put financial pressure on Discoms. Fluctuations in coal and gas prices, coupled with transportation issues, increase the cost of power purchase. To cover operational deficits and capital expenditures, Discoms have accumulated significant debt over the years.
The interest on this debt further exacerbates their financial instability, creating a vicious cycle of borrowing and debt repayment.
I discuss regulatory assets and other important issues mentioned here in detail in subsequent posts.
Subsidies
On top of that, state governments provide subsidies to make electricity more affordable for specific sectors, such as agriculture and residential consumers. While these subsidies aim to alleviate the financial burden on consumers, they inadvertently place a significant strain on Discoms.
The promised state compensation for these discounts can however, be irregular and delayed. As a result, Discoms are forced to absorb the financial shortfall, leading to cash flow problems and mounting operational challenges.
Mismatch
On account of this, the revenue Discoms earn from selling power often does not cover their actual costs. This mismatch, combined with slow and inadequate subsidy recovery, worsens their financial problems and makes it harder to invest in necessary infrastructure and maintain service quality.
Poor Management
Many Discoms suffer from inadequate management practices, lack of accountability, and outdated technology and overstaffing.
Image sourced from Unsplash.com
What do the Courts say?
These problems were considered by the Supreme Court about two years ago in the case of, Andhra Pradesh Southern Power Distribution Power Company Ltd. vs. Hinduja National Power Corporation Ltd.[1] that held that Discoms are instrumentalities of the State within Article 12 of the Constitution of India. Hence, they are required to operate with non-arbitrariness, reasonableness, and rationality as their guiding principles, with paramountcy to public interest. Emphasizing that investments by generating companies represent a pooling of public resources, Court asserted that these should not be squandered.
In another landmark decision[2], the Supreme Court determined that the Discoms’ delays in paying dues ultimately harm end consumers and are the primary cause of severe financial strain throughout the power sector.
What is other side of the story?
Conversations about the power sector inevitably turn into critique of Discoms for their wayward conduct toward both suppliers and consumers. Ever since the enactment of the Electricity Act, 2003, Discoms have borne the brunt of criticism, facing accusations of corruption, delayed payments, transmission and distribution losses, irrational tariff structures, and poor customer service, among other issues. Despite a decrease in electricity costs over the past decade, discoms have not been able to mitigate their losses effectively. They are often accused of shifting blame onto private generators to mask their own inefficiencies.
The debt situation of Indian Discoms is primarily a result of it facing challenges from both ends i.e. pressure of recovery from the generator for high priced electricity and supply to end consumers at the lowest possible tariffs. Despite the distancing of government from tariff determination process, as discussed above, the Discom is not yet immune from politically motivated subsidies. Discoms face systemic issues including high AT&C losses, subsidized tariffs, billing and collection inefficiencies, regulatory challenges, operational inefficiencies, rising power purchase costs, and heavy debt burdens.
Discoms have failed in reviving themselves out of the cycles of debt and inefficiencies despite the hand holding of the last 20 years. Having said that, let us analyse this also from the perspective of the contribution of the stakeholders towards this problem.
Some of the reforms aimed at Discom debt resolution have been nothing but lip service and have failed to identify the root cause of the problem. Schemes such as Ujwal Discoms Assurance Yojana (UDAY), have had limited success due to inadequate implementation and monitoring.
Delayed tariff determination by Regulatory Commissions have created the tariff gaps discussed above that cause Discoms to suffer. This problem was suo-moto taken up by the Appellate Tribunal for Electricity (APTEL) in 2011 and directions were issued to the Regulatory Commission to conduct tariff determination exercises in a timely manner.
How do we unravel this conundrum?
There is a growing recognition today of the need for systemic reforms to address these issues and ensure a more sustainable and efficient power sector. Addressing the Discom issue requires comprehensive reform and improved management practices.
The Draft Distribution Perspective Plan, 2030 published by the Central Electricity Authority suggests some reforms which appear to be a forward step in this direction.
I intend to deal with solutions in detail in later posts. For now, among the suggestions are addressing the challenges of legacy contracts and shutting down inefficient plants, curbing cross-subsidies, cutting AT&C losses through digitalization, revising tariffs, fostering increased private competition, transitioning to a national pool market, and incentivizing distribution companies to invest in new renewable energy capacities by designing an updated tariff structure. Privatisation is a another solution that is being considered now as the over-arching solution.
These measures offer a hopeful outlook and signal the potential for significant improvement—suggesting that a light may indeed shine at the end of the tunnel.
P.S. - I intend to do two short explainers on “Regulatory Assets” and “Point of Connection” Charges. Keep an eye out. Dropping Monday!
[1] (2022) 5 SCC 484
[2] GMR Warora Energy Ltd v. CERC, (2023) 10 SCC 401