Opinion Why the central government should stop funding the power distribution sector
Somit Dasgupta writes: Grants and loans to the power distribution sector haven't worked. States should step up to clear the mess.
The losses in the system comprise technical losses and commercial losses, the latter largely implying theft. (File Photo) 
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The Power Finance Corporation has reported that the aggregate technical and commercial (AT&C) losses of discoms have gone up from 20.7 per cent in 2019-20 to 22.3 per cent in 2020-21. The term AT&C is frequently used while talking about the power sector. What does it really mean? The AT&C estimate gives us an idea of the losses a distribution company (discom) faces in its line of business. In layman’s terms, if a discom has received 100 units of power, the AT&C figure will tell us how many units are not recovered in terms of revenue. So, a figure of 25 per cent would mean that for every 100 units of power fed into the discom, 25 units are not recovered. Consequently, the discom has to operate with a recovery of only 75 units.
Broadly, the losses in the system comprise technical losses and commercial losses, the latter largely implying theft. Some technical losses are inevitable in a distribution system but these can vary a lot across discoms (roughly between 4 to 12 per cent) depending on the technology adopted, the condition of the distribution infrastructure etc. Commercial losses are due to meters not being read, faulty meters, meters being manipulated or bypassed etc. The Indian distribution system has always faced high AT&C losses (in excess of 30 per cent in the early 2000s) which drains the discoms financially and makes it economically unviable. To meet this revenue gap, discoms borrow money from banks leading to a very high-interest burden.
Policy planners have been trying to lower AT&C losses by providing grants/cheap loans to discoms to improve their distribution infrastructure and also for the installation of meters which would have a direct bearing in reducing theft. This has been going on since the early 2000s when the accelerated power distribution scheme (APDP) was launched. Over the years, many versions of the scheme have been attempted and hundreds of crores of rupees have been doled out to the states to reduce AT&C losses. In the latest scheme announced by the government in July 2022, a budgetary outlay of about Rs 3 trillion was earmarked for aiding the distribution sector. However, the sector registered only a small reduction in losses. The AT&C figure was 26.6 per cent in 2011-12. It has come down to 22.3 per cent in 2020-21, implying an improvement of a little less than half a per cent a year. As per a recent report, AT&C losses for the subsequent year have declined to 17 per cent. However, as the data source has not been mentioned, it is difficult to comment on the figure.
There are several reasons for AT&C losses not coming down despite the huge investments. Apart from what can be grouped as a “work culture” issue in public discoms, one major reason is the lack of consumer indexing. In a distribution set-up, all end consumers get their supply from some identified distribution transformer (DT). Each DT is under the supervision of one person who is held accountable for losses (meaning theft) from his DT. The problem is that in the case of most public discoms, no one knows which consumer is attached to which DT (implying a lack of indexing), hence, it is difficult to fix responsibility on any one employee of the discom. Incidentally, a large number of DTs are not metered. One of the first tasks undertaken by private discoms is to do indexing of consumers. They could, therefore, hold the person in charge of the DT accountable. The results are there for all to see. In the case of Delhi discoms, the AT&C losses came down from 50 per cent (in 2002) to somewhere between 7 to 8 per cent today.
Along with the AT&C figure, other data also reveals that things got worse in 2020-21. The financial losses of the discoms have gone up and so has the difference between the average cost of supply and average revenue. Hopefully, things will look better in the years to come. While the national AT&C average is 22.3 per cent (2020-21), the range is wide, stretching from 4.5 per cent (Daman and Diu) to 60 per cent (Nagaland power department). The major states where the AT&C figures are higher than the national average include Maharashtra, Uttar Pradesh, Rajasthan, Odisha, Bihar, Jharkhand and Madhya Pradesh.
There are two points to ponder here. First, one very frequently hears the argument that if AT&C losses go down in the discoms in India, the distribution sector will become financially viable. This may not be totally correct. Of course, the situation will improve but may not result in discoms coming out of the red completely. Back-of-the-envelope calculations show that if the AT&C losses come down to 15 per cent (the target in several government policy documents) from 23 per cent, an additional revenue of about Rs 50,000 crore may be generated. This will still not take care of the losses faced by the discoms in 2020-21. So, the full remedy lies in enhancing retail tariffs along with reducing losses.
Second, it is quite evident that this approach of providing easy money to the states for improving distribution infrastructure and linking it to a reduction in AT&C losses has not worked. It has been seen repeatedly that states take the money, but fail to engineer a commensurate reduction in losses. Of course, the Union power ministry would like to continue with such schemes since then they would have a huge budget and the states, in turn, would like to continue as beneficiaries — a win-win situation for all. The central government should stop funding the distribution sector and leave it to the states to clear the mess. If the states fail to deliver, they will have to face their voters.
The writer is senior visiting fellow, ICRIER and former member (Economic & Commercial), CEA . Views are personal
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