‘Privatization in power distribution’:-

The past few years have seen major developments in the power distribution sector in India. We
have now achieved universal access to electricity, The Electricity Act, 2003, was a milestone in
the reform journey. Since then, several states have reformed their distribution sectors along
different paths. However, the path forward isn’t smooth. There are many challenges to overcome
mainly due to the implementation problems faced in our country and the gap that exists between
what is actually planned what is implemented.

The power sector on the whole can be divided into three parts Generation, Transmission and
Distribution. India has the fifth largest generation capacity in the world with an installed capacity
of 388 GW as on 31 August 20211. The power generation in India is fuel based of which thermal
power generation dominates. The graph below shows the various means used to generate power
and that thermal power for which coal is a prime input.

India has set ambitious targets for the power sector. We are aiming for 24X7 power for all, with
450 GW of renewable capacity by 2030. Many of the government’s major initiatives, such as
Make In India or Aatmanirbhar Bharat, require access to reasonably priced, high quality power
to take off. However, the distribution sector has been the Achilles’ heel of the power sector,
consistently making large losses (estimated at Rs. 90,000 Cr. for FY 21), reflecting weaknesses

1
https://www.ukessays.com/essays/economics/privatization-of-the-indian-power-sector-economics-
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in operations, infrastructure, and regulation 2. We will not be able to achieve a high-growth, low-
carbon economy unless the distribution sector achieves profitability.

These changes will require flexibility throughout the power sector. Most new generation capacity
is likely to be renewable. Increased flexibility in generation will be required - both physical
(flexible generation, and demand response) and institutional (such as access to markets). The
transmission sector will require greater capacity to evacuate power from renewable-rich regions
to the rest of the nation3. Digitalization of the grid will enable bidirectional flow of information
and power. Utility-scale energy storage, being able to act as load or as supply, will play an
important role in enhancing the flexibility of the system.

In India, this transition is even more challenging because of the poor operational and financial
condition of the distribution sector. Most distribution utilities are making major losses as a
consequence of expensive long-term power purchase agreements, poor infrastructure, and
inefficient operations, among others. These losses, in turn, prevent them from making the
investments required to improve the quality of the power supply and to prepare for the wider
penetration of renewable energy. The distribution utilities’ inability to pay power generators
endangers the financial health of the generators and their lenders, causing a negative domino
effect on the economy.

Distribution serves the most vital function in India’s power supply chain, yet it is also possibly
the weakest link. State discoms continue to make losses despite multiple bailouts. While the
government’s Ujjwal Discom Assurance Yojana (UDAY) scheme seeks to reduce discom losses,
there is hardly any impact on their financial status4.

Over the years, the power distribution segment has been plagued by issues such as weak
financial performance, high operational losses and poor customer service. Private participation
has often been suggested as the solution, given that private discoms have been faring well on
these parameters. In May 2020, Finance Minister Nirmala Sitharaman had announced plans to

2
Turning Around the Power Distribution Sector: Learnings and Best Practices from Reforms. NITI Aayog, RMI, and
RMI India. Available at https://www.niti.gov.in/sites/default/files/2021-08/Electricity-Distribution-
Report_030821.pdf.
3
Ibid
4
Shalabh Srivastava, Opinion: The case of power discom privatization available at
https://www.livemint.com/Opinion/CfhWUvgC9sFZUtfmQD2xQM/Opinion--The-case-for-power-discom-
privatization.html.
privatize electricity distribution departments/companies in the union territories (UTs) under the
Aatmanirbhar Bharat Abhiyaan. The decision was fueled by the suboptimal performance of state
power distribution utilities. Privatized utilities in the UTs are expected to act as a model for the
privatization of power distribution at the pan-Indian level. To this end, an important development
was the release in September 2020 of the draft standard bidding documents (SBDs) for
privatizing discoms5.

There was a general belief that the power sector had to be vertically integrated with the
generation, transmission and distribution being controlled by a monopoly player. Since, power
was vital for the economic growth, it had to be in the hands of the government. So in India also,
the entire power sector was controlled by the government through the State Electricity Boards
and Central Agencies. The power sector had a very low share of private players operating.
Transmission and distribution is also dominated by Power Grid Corporation and State Electricity
Boards.

However, electricity Act, 2003 provides an enabling framework for accelerated and more
efficient development of the power sector. The Act seeks to encourage competition with
appropriate regulatory intervention. Competition is expected to yield efficiency gains and in turn
result in availability of quality supply of electricity to consumers at competitive rates.

The preamble to the 2003 Act, among other things, states that the government is to take measures
conducive to the development of the electricity industry and to promote competition while
protecting the interests of the consumers6. Thus, electricity act 2003 stops short of explicitly
mentioning privatization of the sector but implies it.

The initiatives undertaken by the Government of India and various states have led to competition
in power generation and transmission. However, the spirit of competition and private
participation in the Indian electricity distribution sector is still in the nascent stages. The
Electricity Act, 2003 laid down the foundation for introducing competition at the consumer end
through open access and provision for parallel licensees. However, the parallel licensee regime
insofar as it requires distribution licensees in an area to distribute power “through their own
distribution system within the same area” has potential adverse consequences on tariff. Each
5
Redefining Distribution: Updates on DFs and UT discom privatization available at
https://powerline.net.in/2021/08/30/redefining-distribution/.
6
Preamble, Act No. 36 of 2003, The Electricity Act, 2003.
distribution licensee investing in its own network would lead to replication of network and, as
capital investment is a pass-through expense, it would also push up costs/tariffs for the end
consumers7.

Union power minister RK Singh told finance express on April 8 that he intended to introduce a
Bill to amend the Electricity Act 2003 in the ongoing session of Parliament to enable operations
of multiple distribution companies in any area and end the current state government-owned
monopoly regime in the power distribution business8. The central government has made several
attempts in the last six years to amend the law by drafting amendment bills 2014, 2018, 2020 and
the current draft of 2021, which seeks to facilitate the entry of private capital into the distribution
business.

Electricity is a concurrent subject and distribution of electricity in States is handled generally by

the State distribution utilities (Discoms). Accordingly, decision to privatize the power
distribution in the States lies with the concerned State Government. Government of India
announced privatization of Power Departments & Utilities in Union Territories (UTs) under
Aatma Nirbhar Bharat Abhiyaan. The decision is guided by sub-optimal performance of power
distribution utilities and the objective of providing better services to consumers with
improvement in operational and financial efficiencies.

As a precursor to the grand plan of introducing private players into the distribution business
through the proposed amendments, the central government decided last year to invite private
players to manage the supply of power in the Union Territory of Chandigarh and later in Dadra
and Nagar Haveli and Daman and Diu.

On Nov. 10, 2020, the Electricity Wing of the Engineering Department of the UT of Chandigarh
became the first discom to issue a tender under this initiative. 100% of the shares in the discom
were offered for purchase, with the last day for submission of bids being Dec. 31, 2020. This
move had its critics. Following public protests in conjunction with some citizens’ associations,
the UT Power men Union filed a petition against the privatization in the Punjab and Haryana

7
Introducing competition in retail electricity supply in India, available at
http://www.forumofregulators.gov.in/data/reports/6_9_13.pdf.
8
Pramod Deo & Arijit Maitra, Discom privatization: Lessons from Chandigarh and Dadra & Nagar Haveli, available
at https://www.financialexpress.com/opinion/discom-privatisation-lessons-from-chandigarh-and-dadra-nagar-
haveli/2209463/.
High Court. On Dec. 3, 2020, the Court issued a stay order on the privatization process,
remarking, “We feel that the matter will require detailed deliberations as it touches the
employment scheme of the society in general9”.

The Bombay High Court recently suspended the tender process in Dadra and Nagar Haveli based
on a PIL filed by an individual who appears not to have any institutional affiliations. The High
Court was prima facie convinced that the process of privatization was contrary to section 131 of
the 2003 Act, which deals with the reorganization of state electricity boards. In contrast, the
notice of inviting bids was for privatizing the electricity department in the Union Territory, not a
state electricity board10.
The other argument that found favor with the court is that the electricity department was not
incurring any loss, and yet there was an attempt to transfer majority shares to private enterprise.
The High Court stated that in the absence of any provision in the Act justifying the action of the
central government, it was prima facie satisfied that not only the PIL petition had set up an
arguable case on merits but had also set up a strong case for grant of interim relief.
Power sector reforms in India: a case study from Delhi

Ever since electricity distribution was decentralized in Delhi in 2002, the national capital has
saved at least ₹1.2 lakh crore, mainly in terms of transmission loss. The Delhi Vidyut Board was
disbanded in 2002 and the power sector was privatized because of which aggregate technical
and commercial (AT&C) losses have significantly reduced, the discoms said.
“Delhi discoms have saved the city and its consumers over ₹1.2 lakh crore over the past 19
years. Of this, the biggest component is AT&C loss reduction, which has saved over ₹95,000
crore. At present, each percentage of AT&C loss reduction saves Delhi consumers around ₹250
crore11”.
Records show that at the time of privatization, AT&C losses in the national capital were over
55%. In fact, they were as high as 63% in east and central Delhi. Currently, AT&C losses stand
at around 7.5%, a record reduction of around 48%.

9
Akshay Jaitly, Discom Privatisation Challenged: Insufficient Planning Or Tactical Move? Available at
https://www.bloombergquint.com/opinion/discom-privatisation-challenged-insufficient-planning-or-
tactical-move.
10
Supra Note 8;
11
https://www.hindustantimes.com/cities/delhi-news/privatisation-of-power-helped-save-delhi-1-2-lakh-crore-
since-2002-say-discoms-101628015973757.html.
“This is followed by investments of around ₹19,000 crore made by the Delhi discoms to
improve the distribution network in the national capital. Currently. In the decade before
privatization, the AT&C losses in Delhi had increased by 20%. This, coupled with prolonged
outages, was a reason to bring in privatization. Now if we compare Delhi’s current power
distribution system, then the losses in other states will be much higher12”.

12
Ibid.