Impressive UDAY Report Card: Energising State-Owned Power DISCOMs

Losses of the state power distribution companies (DISCOMs) down 70 per cent, marked reduction of 5 per cent in the aggregate technical and commercial (AT&C) losses, and a near 60 per cent improvement in the most important operating ratio of DISCOMs – the unitised gap between the average cost of supply and average revenue realisation: that’s the impressive report card of UDAY, or the Ujwal Discom Assurance Yojana announced by the then power minister, Piyush Goyal, in early November 2015.

At the time of launch, UDAY was written off as yet another central government financial engineering programme to rescue the perennially loss-making, debt hit, poorly-managed state DISCOMs. To be sure, UDAY did have an important component of financial engineering, which converted the accumulated debt of the DISCOM to state government debt via one-time issuance of special bonds. But UDAY was different from the past such interventions made in 2003 and 2012. Swarajya covered the features of UDAY in detail when the programme was launched. An important part of UDAY was to fix operational improvement accountability for the states. This aspect was largely ignored by a wide section of power sector commentators and national media analysing UDAY.

Just over two years after a bulk of the states signed up for UDAY, the results are showing up. As per the provisional March 2018 data available on the UDAY portal, several states have indeed shown tremendous improvement on the urgent items.

About 86 per cent of the total bond issue needed to transfer the high cost DISCOM debt to lower cost state government debt has been completed. Twenty-five of the 27 states have set in some level of tariff revisions to accurately reflect their cost of operations in their customer facing businesses.

The central government has also progressed on its part of the deal. A full rural feeder audit has been undertaken to understand where the billing gaps are. Sixty-three per cent feeder segregation between urban and rural feeders is completed, which will eventually help more efficient power transmission and make it possible to use different power generation sources for different usage requirements.

The distribution transformer metering (DT metering) is progressing too – 59 per cent of the urban and 52 per cent of the rural work is completed. DT metering is crucial to understand where power theft occurs in the electricity distribution network, and helps in better energy accounting and power supply reliability.

The three key improvement areas are a culmination of this multi-pronged operational efficiency improvement focus.

The accumulated losses are down 70 per cent to about 1.73 lakh crore in 2017-18 because of two factors. Firstly, as the DISCOM debt was moved to state government books, the cost of debt servicing for DISCOMs has significantly reduced. Secondly, due to reduction in the unitised gap between the average cost of supply (ACS) and average revenue realisation (ARR), the pace of making new losses has reduced.

The AT&C losses, often a euphemism for power theft reflecting poor power infrastructure, DISCOM governance, and state policing are now at 18.74 per cent. This figure was almost 24 per cent when UDAY was launched. The best performance on reduction of AT&C losses came from Manipur (12.5 per cent improvement), J&K (7 per cent), Assam (7 per cent), Rajasthan (6.5 per cent) and Bihar (6 per cent). Five states – Uttarakhand, Tripura, Punjab, Madhya Pradesh and Mizoram saw AT&C losses increase. Madhya Pradesh, which saw a deterioration of 4.8 per cent in AT&C losses ascribes this spike to increased rural power supply in rain deficient regions. Nonetheless, this is an area of ongoing work for each state.

In absolute terms, Bihar (33 per cent, down 6 per cent), Uttar Pradesh (28 per cent, down 2.2 per cent), Haryana (20 per cent, down 5 per cent), and Rajasthan (just under 20 per cent, down 6 per cent) showed significant movement on curbing power theft and making consumers accountable for paying for their power usage. With significant improvement opportunity still existing in these large states alongside Madhya Pradesh (just under 30 per cent), there’s still work cut out to reach the 15 per cent AT&C levels, which are the bare minimum required for DISCOMs to run stable businesses.

The tariff cost gap (difference between ACS and ARR) reduced at the fastest pace ever in the financial year 2017-18. After the UDAY launch, the gap has narrowed by 3 per cent (2015-16), 18 per cent (2016-17) and 48 per cent (2017-18). The last year improvement comes on the back of tariff hikes by most DISCOMs. Better metering and revenue realisation itself also helped reduce this gap.

All these improvements also reflect in how DISCOMs deal with power generation players. On an average, the account receivables for power generation firms fell by 8 per cent between the financial years 2016-17 to 2017-18, while the number of days these receivables stand outstanding reduced by 13 per cent. This improvement demonstrates that DISCOMs, who buy power from these generation players are paying them more regularly and faster.

As the benefits of UDAY-driven efficiency improvements kick in, the good news for DISCOMs is that there is still a large room for further progress.

The central government firm Energy Efficiency Services Limited is working to procure almost 250 million smart meters and help DISCOMs install them for their large customers. Billing efficiency and potential time of day billing structures can help both DISCOMs and the end customers. Smart metering was also a key aspect of UDAY design, but the progress on this front has been slower compared to other areas. So far, less than 1 per cent of the target for smart metering has been achieved, but pace should pick up in the current financial year.

The current Power Minister R K Singh has suggested that power tariff determination should account only for 15 per cent AT&C losses after March 2019. This means that the inefficient DISCOMs will have to work really hard to hit the 15 per cent. Cost of losses over 15 per cent will not be allowed to be passed on to the customers and will directly hit the DISCOM books. This measure is expected to nudge DISCOMs into taking a hard look at their operations.

The central government also wants any state government power subsidies to directly go to the customer accounts via direct benefit transfers (DBT). Currently, states promise cheap per unit power to the consumers and then delay the subsidies to the DISCOMs, which get paid by the end customers at a lower rate. If DBT is used, the state governments will have to pay the consumers directly, who will then pay a fraction of the transferred amount to DISCOMs. This measure will ensure that political parties do not make unreasonable promises to the citizens, and later avoid paying subsidy differentials to the discoms.

The power distribution sector clean up is well and truly on. Bulk of the credit for this goes to Minister Piyush Goyal, who pushed through transformational ideas which made states more accountable both financially and operationally. He ensured that state governments did not leave their respective DISCOMs orphaned, while making unreasonable promises to the voters. There’s still a big distance to cover but the central government has lined up a series of levers to employ as this DISCOM clean up continues.

All these measures will still only bring DISCOMs to a capability level, where they can keep their lights on and strike a balance between their utility role and running a consumer business. The elephant in the room is to ensure round-the-clock, round-the-year power availability to all consumers – residential, industrial and agricultural – in a reliable and affordable manner.

Despite India reducing the gap between power demand and power generation to just 1 per cent, our cities still do not get 24x7 power. The reason is the creaking urban power infrastructure. The DISCOMs have hardly any money to invest in maintaining, let alone completely renovating the power equipment which makes the last-mile supply possible. Currently, the UDAY induced improvements are guiding DISCOMs towards bare minimum operating profitability. Their capacity to invest afresh and invest big is still and will remain poor, even with the full UDAY benefits kicking in.

This next problem has two potential solutions – large scale privatisation of DISCOMs across states and creation of a national DISCOM for improving investment efficiencies with greater gentral government say. The former is a political non-starter as the experience of the past 15 years shows. The latter is another new idea that is doing rounds in Delhi.

Further improvement of state DISCOMs' health can help the central government expedite a movement towards this national DISCOM. A follow up article will explain how this national DISCOM can transfer the power generation, transmission and distribution improvements made by this government to the end customer.

That we have reached this point is a testimony to the success of the central investments and a participatory and federal environment created by the Narendra Modi government under the UDAY programme.