Privatizing electricity distribution

Restructuring the electricity business through corporatisation and subsequent privatisation has been the model followed in Orissa in 1995. This has now been adopted by some states as part of power sector reform in India. The ongoing process in Delhi for the restructuring of the DVB (Delhi Vidyut Board) and privatisation of its distribution business shows that some groundwork will have to be undertaken for reaping expected benefits out of this exercise. The government?s commitment and regulatory involvement in the privatisation process are somewhat unique to Delhi. The three public distribution companies into which the DVB has been, inter alia, split, have been put into bidding process for their privatisation, based on certain criteria. Select bidders will have to ensure efficiency gains over a period of five years through the reduction of AT&C (aggregate technical and commercial loss, a euphemism for T&D loss combined with loss due to revenue collection inefficiency), beyond a threshold limit as fixed by the government. Further, any additional efficiency improvement will have to be shared with the chosen bidders, who will also be assured of a 16 per cent rate of return on issued and paid up capital. The Delhi government will also provide a comfort level to the Transco by providing a loan of Rs 2600 crore to bridge the gap between the cost of power supply and the paying capacity of the distribution companies, to be repaid along with interest after a period of three years. In sharp contrast, the publicly owned Gridco in Orissa was not provided with such comfort in the beginning, and the hands off approach of the Orissa government had led to its financial losses mounting to the extent of Rs 1250 crore by 2000-01. The starting point of taking AT&C loss as the base for the purpose of efficiency monitoring appears to be a better step than the usual practice of taking the T&D loss number as their base. For instance, the T&D loss level in the power sector in Orissa was benchmarked by the World Bank in 1996-97 at 39.5 per cent while its actual AT&C loss, following the Delhi methodology, would have been 67 per cent according to the Kanungo Committee Report (2001). The inaccurate methodology for calculating the loss figure did not bring out the enormity of the task involved on the part of the regulator and the private companies in Orissa, and this brought a bad name to the reform process in the power sector. Nevertheless, the Orissa privastisation exercise can offer some positive lessons to Delhi as also to others. First, even after the privatisation of the electricity distribution business, continuous support of the law enforcing machinery for some harsh measures must be provided. Precisely this is one of the reasons why AES of the United States (one of the CESCO shareholders in Orissa) effectively withdrew last year, citing law and order problems, and lack of political support to cut off power supply to non-paying and illegal connections. Second, in Orissa, the issue of rural electrification and access to disadvantaged groups in urban areas have been neglected by private service providers. There is a need to avoid this tendency in the privatisation exercise. Third, the Orissa example has shown that unless the mindset of the employees of the distribution licensee is gradually oriented towards better customer service, the quality of service will not improve in near time frame. Therefore, the role of the electricity regulator in framing quality of service regulation and enforcing the same has become very important. Finally, proceeds of the privatisation should be ploughed back to the sick power sector for its improvement, rather than it being utilised for other purposes as has happened in Orissa.