The high-level advisory panel headed by former Power Minister Suresh Prabhu is finalising a proposal that seeks to do away with the territorial monopolies of electricity distribution companies and introduce competition in the sector by allowing multiple firms to supply power to end-users, who could, in turn, choose between them. The envisaged amendment to the Electricity Act, 2003, is radical. If it goes through, it would usher in the second generation of electricity reforms in India. As in the telecom sector, users would be able to choose their service provider from among the supply licencees in their area and migrate to another provider if they were unhappy. In order to facilitate this in power distribution, it has been proposed that the extant discom be broken into a wire company, which is a natural monopoly, and an intermediate supply company. Multiple players could then compete to supply to end-consumers, subject to price ceilings specified by the state electricity regulators, using the carriage infrastructure of the wire company.
Starting in the 1990s, the first stage of reforms unbundled power generation, transmission and distribution, and sought to make these operations more efficient by allowing private operators in these sectors. This strategy has certainly worked. For instance, by privatising distribution, the Delhi government saved Rs 30,000 crore between 2002 and 2012. Overall, privatisation has led to a reduction in transmission and distribution losses as well as outages and load shedding. It has improved billing percentages and the quality of power supplied. But when inefficient, monopolistic government discoms were supplanted with private monopolies, electricity regulators took centrestage in tariff fixing. However, this arrangement is not desirable either. Experience has shown that regulators are unable and unwilling to revise tariffs upwards to keep up with changed market fundamentals such as the price of coal. Now, if competition is allowed in distribution, the stage would be set for the electricity regulators to take a step back from fixing prices and, similar to Trai, assume the role of industry watchdog and frame broad policy guidelines. Prices should ideally be set by market competition, not by regulators with imperfect information.
In fact, the root cause of most of the conflicts between private power discoms and the government can be traced back to the regulators’ pricing policy. The 13th Finance Commission estimated that discom losses would amount to Rs 1,16,000 crore in 2014-15. Increased competition and the subsequent market-based pricing this would bring in may well be the way out.