Privatizing Power Discoms: Challenges and Workability
On May 16, 2020, the Union Finance Minister announced that all Power Distribution Companies (DISCOMS) in the Union Territories (UTs) will be privatized. This means that operations concerning the businesses of distribution of power in UTs shall be open to private participation to an extent of 100% control. While this is an exciting step that has drawn praise from industry stakeholders and policymakers, there are a number of uncertainties that remain in enforcing this strategy.
At the outset, the Seventh Schedule of the Indian Constitution is conflicting when it comes to assignment of the subject ‘power’. The Union List contains ‘atomic energy’, ‘oilfields’, ‘mineral resources’, ‘petroleum’, petroleum products’, etc. State List contains ‘water power’ and Concurrent List has ‘Electricity’. Considering that power is derived from all of these sources, it squarely falls under the administration of both the Union and State Governments. UTs, by virtue of their centralized affiliation, are therefore well within the Central Government’s ambit to authorize this directive as regards to privatization of power distribution operations.
Power, essentially, has three major operations: generation, transmission and distribution. After the reforms brought in 1990s, private players began to enter the power sector. Today, the private sector accounts for 46.9% of the total installed generational capacity in the country. In the areas of transmission and distribution, however, private participation has seen a leisurely growth. Leaving aside selected players in Odisha, New Delhi and some other cities, DISCOMS haven’t witnessed meaningful privatization efforts until now.
The intention behind privatization of power DISCOMS is chiefly to encourage Foreign Direct Investments (FDIs). The loss of electricity utility was more than 15% of the gross revenue due to outdated structures, withering networks, power theft, inadequate billing and collection. The government had to recently bail out distressed electricity DISCOMS to the tune of Rs. 90,000 crores. This reduction in technical as well as commercial losses could be done away with by private players entering the markets because of their increasingly corporatized and incentivized manner of performance.
Additionally, bringing in more players is certain to boost competition in an erstwhile monopolized sector. Breaking down singular state-implemented regulation barriers is expected to show promising results in terms of quantum of distribution, employment, removal of subsidies, capacity utilization and an increase in power consumption per capita.
However, efforts at privatization can succeed only with commensurate regulatory amendments and creating market conditions that are appropriate for investors looking to enter. The establishment of an independent central power regulatory body would be opportune at this point to diminish some of the redundancies posed by multiple regulatory agencies incorporated across a host of individual power sectors such as electricity, thermal, nuclear power, etc. This body could implement uniform licensing policies, labour/environmental clearance mechanisms, tariff structures, comprehensive framework on auction-processes and assist in sectoral dispute resolution matters via statute-empowered tribunals or arbitration. Care should be taken to ensure its functional and financial autonomy coupled with periodic legislative oversight.
When it comes to administration over DISCOMS in UTs, appropriate decentralizing mechanisms should be evolved to cater to timely resolution of permits, operation and grievances. Presently, the time period between ‘concept to commissioning’ of power projects in India is 5–6 years. If the goal is to attract private businesses, regulatory logjams and red-taping must be reduced considerably, preferably by instituting single-window clearance mechanisms.
The Environmental Impact Assessment Studies must be also conducted in a time-bound and effective manner, while preserving the utmost standards of fairness and accuracy in such assessments. A platform to incentivize reduced carbon-emissions must be followed in tandem with international protocols. Similarly, quality standards must be evaluated and enabling levels of innovation and technology must be given preference in the order of establishment so as to moderate increasing levels of participation that might emerge in the sector.
Examples in other countries have shown that in terms of privatization in the power sector, distribution must be followed by generation and transmission in the same order. Observing this pattern, India seems to have certainly made progress in the right direction. However, considering the policy gaps and institutional capacity in India, one might infer that this progress may come with a lot of challenges. The Union Territories, on top of that, are provincial capitals with limited project capacities. Some of them, do not even have a state electricity regulatory commission (Jammu and Kashmir) as is mandated in The Electricity Act, 2003. However, given the appropriate regulatory overhauls and policy incentives, these provinces can emerge as exemplar pilot projects in a country with huge power demands and ample potential for growth.
(Originally published in the Legal Armor Blog)
