Distribution of Electricity

Distribution of electricity is the panache in the power sector which interfaces with the end customers and provides revenue for the entire value chain. The fortunes of the whole sector are closely intertwined with the distribution business segment. It comprises the system of wires and associated facilities between the delivery points on the transmission lines or the generating station connection and the point of connection to the installation of the consumers. The consumers are served through regional networks of overhead or underground cables by distribution utilities, electricity departments, private distribution companies, corporatised distribution companies and State Electricity Boards. Distribution network is connected to the national grid, there are secondary embedded networks that connect to distribution networks and in turn supply clusters of consumers at specific sites. Indian electricity distribution caters to nearly 200 million consumers. Sustenance of other elements in the sector like generation, transmission, equipment manufacturing is dependent on the commercial performance and financial viability of the distribution sector in India. The significant achievements of the power sector all sit atop a distribution business.

Legislative Scheme

The Electricity Act, 2003 (the EA, 2003) has laid down a roadmap for utilities to transform from vertically integrated monopolies to unbundled autonomous entities for profit. It has supported private participation in electricity distribution by providing for multiple distribution licensees and non-discriminatory use of electricity distribution system.  Section 12(1)(b) of the EA, 2003 harness restraint that no person shall distribute electricity unless he is authorised to do so by a licence issued under Section 14, or is exempted under Section 13. Under Section 14, the Appropriate Commission may, on an application made to it under Section 15, grant a licence to any person to distribute electricity as a distribution licensee. The licence may be issued to two or more persons within the same area to supply electricity to customers through their own distribution system but have to comply with the additional requirements pertaining capital adequacy, creditworthiness, or code of conduct as may be prescribed by the Government. If distribution licensee proposes to undertake distribution of electricity through another person, that person shall not require separate licence. The Appropriate Commission for promoting competition, securing the equitable distribution of electricity and to maintain the efficient supply, may by order under Section 23 regulate distribution of electricity. However, if distribution licensee breaches the terms and conditions of licence or fails to maintain uninterrupted supply quality electricity to the consumers, the Appropriate Commission by invoking provisions of Section 24 may suspend the licence of the distribution licensee, indubitably assigning reasons in writing and appoint an administrator for a period not exceeding one year and subsequently after giving opportunity of hearing, may revoke licence or withdraw suspension.

Section 42 of the EA, 2003 pitches duties on distribution licensee, accordingly licensee has to develop and maintain an efficient, co-ordinated and economical distribution system in his area of supply and to ensure supply of electricity is in conformity with the legislative intent. In case the State Commission permits a consumer or class of consumers to receive supply of electricity from a person other than the distribution licensee of his area of supply, such consumer shall be liable to pay an additional surcharge on the charges of wheeling, as may be specified by the State Commission, to meet the fixed cost of such distribution licensee. The duties of the distribution licensee with respect to such supply shall be of a common carrier providing non-discriminatory open access. It is also obligatory upon distribution licensee to establish a forum for redressal of grievances of the consumer’s commensuration guidelines specified by the State Commission.

Every distribution licensee is duty-bound under Section 43 of the EA, 2003 to supply electricity to the owner or occupier of any premises on his request by way of application in an appropriate form complete in all respects along with documents showing payment of necessary charges and other compliances. Distribution licensee may demand reasonable security under Section 47, additional terms of supply under Section 48 of the EA, 2003. But security cannot be urged if the person requiring the supply is prepared to take the supply through a pre-payment meter.  In case distribution licensee fails to supply electricity to the customer within one month of receipt of his application he shall be liable to a penalty which may extend to one thousand rupees for each day of default. Still no person already having a separate supply shall be entitled to demand, or to continue to receive supply of electricity unless he agrees with the distribution licensee to pay to him such price as determined by the Appropriate Commission. Under Section 45 distribution licensee has power to recover charges for supply of electricity in accordance with such tariffs fixed and specified by the State Commission concerned. Such charges may include a fixed charge in addition to the charge for the actual electricity supplied. It may also include rent or other charges for electric meter or electrical equipments furnished by the distribution licensee. The State Commission under Section 46 may, authorise a distribution licensee to charge expenses reasonably incurred in providing any electric line or electrical plant used for the purpose of giving electric supply.

The State Commission shall under Section 50 of the EA, 2003  specify an electricity supply code to provide for recovery of electricity charges, intervals for billing of electricity charges, disconnection of supply of electricity for non-payment thereof, restoration of supply of electricity; measures for preventing tampering, distress or damage to electrical plant, or electrical line or meter, entry of distribution licensee or any person acting on his behalf for disconnecting supply and removing the meter; entry for replacing, altering or maintaining electric lines or electrical plants or meter and such other matters. Simultaneously Central Electricity Authority may under Section 53 in consultations with the State Government; specify suitable measures for protecting the public from dangers arising from distribution of electricity.

Section 51 of the EA, 2003 empowers the distribution licensee that he may in his discretion engage in any other business for optimum utilisation of its assets subject to prior intimation to the Appropriate Commission but the revenues so earned from such business shall be utilised for reducing charges for wheeling.

The key challenges

Distribution has always struggled with inefficiencies. The continuing underperformance of distribution has prevented the sector from providing adequate and reliable power to consumers. Lack of coordination in the upstream segments add to the cost of power purchased and is passed on to consumers. Despite considerable progress in implementing the EA, 2003 mandates and associated policies over the past decade, the distribution segment continues to post significant losses.

Weak sectorial finances

Many factors that constrain performance are under the control of the utilities themselves. Utility losses mainly are due to underpricing average billed tariffs below cost-recovery tariff levels, under collection, operational inefficiency owing to time taken in collecting payments and physical losses due to technical reasons or due to non-technical factors, such as theft. State subsidies to the sector impose a heavy opportunity cost. The expense of providing below-cost power to key consumer groups, such as agricultural and rural consumers weakens utility finances. Rising debt has escalated the risk of financial contagion. Mounting debt and continuing losses have led to a precipitous decline in discom creditworthiness.  Utilities are unable to cover their costs or make the investments required to serve customers. They are unable to purchase electricity available in the market to meet demand.

 Difficult operating environment

Average cost has gone up, largely due to rising power purchase costs spurred by fuel shortages, which have resulted in higher fuel prices and due to rising interest costs from the sharp expansion in utilities ‘debt. Static tariffs have dampened revenue growth. Unforeseen shortages of fuel, mainly coal and poor planning have led to a steep rise in the price of bulk power widening gap between discom costs and revenue.

Poor performance

Utilities have failed to adequately plan for power procurement. Even under the few urban franchise operations, the retail customer is unable to benefit from competition among retail suppliers. There is a skill crunch in the utilities. Utilities have not able to design communication/awareness strategies on the impact of theft on consumer tariffs and quality. Most distribution utilities struggle to maintain and utilise a comprehensive information system be it across their assets, commercial, customers or financial.

Governance shortcomings

The regulatory environment has not sufficiently pushed utilities to improve performance. The EA, 2003 foresees competition in the distribution segment, in part by segregating carriage from content business. However, competition, and the benefits of price discovery and private participation remains unaugment. Open access, a key enabler of competition under the the EA, 2003 has still not been implemented in a manner such that a robust merchant market could compensate for a decline in sales to State discoms and thus balance supply and demand. Distribution licensees mostly State Government-owned distribution companies (discoms) still remain “bundled” in the sense that the wires and the supply business are combined. The initiatives from the Government have not proven to be successful in reducing losses and making the sector viable. Some of the reasons attributed are inadequate unviable with inadequate tariff increases and non-payments of subsidies by the State Government to cover the unexpectedly high T&D losses.

Step forward

Implementation of the key mandates of the EA, 2003 for tariffs, open access, and standards of performance in distribution system is exigent. This will incentivise loss reduction, modernise operations, and improve service delivery and cost recovery, bringing distribution performance up to international benchmarks of quality. Widespread concerns about objectivity of decisions and autonomy of decision making arise from the revolving door among the regulator, utility, and Government. It is therefore imperative to ensure regulatory autonomy, effectiveness, and accountability in practice. Insulate utilities from State Government to prevent interference with internal operations. Experiment with and learn from different models of service provisions, including private sector participation through joint ventures, public-private partnership (PPP) models, franchising and management contracts. Encourage franchisees to gradually expand their services to cover rural areas through a series of concentric circles, so that learning consolidates over time. Rural service delivery will become viable only if discoms are compensated fully for supplying power to rural consumers. Use central programmes and other support to incentivise operational and financial efficiency. Rationalising domestic tariff structures to improve targeting and reduce the fiscal burden is essential. An accurate system of identifying households below the poverty line can better target subsidies to the poor. There must be the volume-differentiated tariff instead of incremental block tariff. Households must be grouped on the basis of total monthly consumption, and each household in a group should pay the same tariff for every unit of power it consumes. Perpending electricity consumption patterns of households at different incomes may be the better approach for tariff block cut-offs. Higher consuming households should be charged above cost-recovery tariffs. States with fairly low fiscal costs of subsidies must restrict and limit the subsidies. In theory, utilities should project demand and load duration curves and plan long, medium and short term power purchases based on these projections. High quality, updated data must be in a public domain to be used for monitoring and measuring the policies, programs, strategies of electricity distribution system for planning and decisions for improved utility performance. While encouraging benchmark competition among multiple discoms, criteria should include service quality and reliability, operational efficiency and public satisfaction in distribution of electricity.

* Harsha Rajwanshi is the Assistant Professor of Law, Gujarat National Law University & Faculty Advisor to GUVNL-GNLU Research Fellowship  on Energy Law and Policy.