A useful first step in power reforms

Business Standard     5th November 2020     Save    
QEP Pocket Notes

Context:  Recently, The Ministry of Power had released a Standard Bidding Document (SBD) for the privatization of Distribution Companies (DISCOMS) that will help in reforming their structure, operations and finances.

Key features of the draft SBD:

  • Minimizing government role:  By seeking 100 % and 74 % equity participation by the private sector for urban and urban-rural options, respectively.
  •  Maintains the existing set of DISCOMS: It bypasses the issues of selective investments, where rural areas are avoided due to less profitability.
  • Only good entities shall be privatized: The entity to be handed over would have a clean balance sheet, free of accumulated losses and unserviceable liabilities.
  • Not Binding: SBD will not be binding on the states.

Challenges to the draft SBD:

  • Limited investor interest:  Maintaining the existing set of DISCOMS may limit investors interest since there could be vast areas (typically rural) which are less attractive. 
  • Huge subsidies by the states: linked to the losses of DISCOMS renders the privatization of good entities by SBD ineffective.
  • Little flexibility to procure cheap power: Since the SBD provides for Power Purchase Agreements (PPAs) to be transferred to the newly privatized entity, it may lead to 
  • An increase in consumer tariffs.
    • A ‘Moral hazard’, in the form of reneging of PPA’s, which the few states have done recently.
  • Uncertainty in government support: related to issues like transition support, staff union resistance handling, law and order matters emanating from billing, collections and disconnections.

Way Forward:

  • Adopt a Franchise model: In areas where an outright sale may not be the desirable option, as it is much simpler and cost-effective.
    • ‘Transition Support’ by the government: To ensure there is no consumer backlash with sudden spikes in tariffs and also sustains investors’ confidence.
  • Allow for more creative consortia formation: would serve to enlarge the pool of potential bidders 
  • Regulating the freedom for DISCOMS to pick PPAs: In this context, two points become important – 
    • Ensuring the reduction in PPA’s to be passed on to consumers.
    • Devising a mechanism to handle the stranded capacity for PPA’s that are moved out of the new entity.

Conclusion: DISCOMS privatization requires cooperation and communication between consumers, feisty power sector unions, vested interests, investors and governments at all levels.

QEP Pocket Notes