36
security Founding Partners Knowledge Partner January 2020
security
Founding Partners
Knowledge Partner
January 2020
Analytical contacts
Mr. Suman Ghorai
Director - Energy & Natural Resources
CRISIL Infrastructure Advisory
3
The theme of the World Utility Summit (WUS) 2020 is
“Utility Next”.
A massive digital transformation is sweeping the
electricity business, touching every stakeholder in the
value chain. Electricity utilities will soon need to work
with smart grids, artificial intelligence, Internet of
Things (IoT), supervisory control and data acquisition
(SCADA) systems, and more.
Two, climate change is driving another wave of
transformation. To meet the Paris Agreement climate
goal of keeping the rise in temperature to well below 2
degrees above pre-industrial levels, greenhouse gas
emissions need to be reduced by at least 40% by 2030
from 1990 levels. India is seeing the proliferation of
large scale renewables, penetration of electric
vehicles (EVs), etc., in a move to eventually reduce its
dependence on fossil fuels.
Three, today’s electricity consumers are far more
informed about power quality, utility services, and their
costs, than ever before - thanks to rapid digitization
and ease of access to information.
Owing to these transformations, utilities need to
urgently adapt to technological disruptions and
consumer expectations.
The WUS™ 2020, to be held over 20-21 January,
2020, will provide a meeting place for electricity, water,
and gas utility professionals, and industry
representatives, consultants, service providers,
researchers, and regulators. It will attempt to re-define
the “utility of utilities,” in the changing business
environment. The summit will bring in leaders from
across the globe to share their views on various
challenging and exciting scenarios that will help shape
the future path of utilities.
The theme
4
The WUS will focus on the following topics:
Market enablers
With the emergence of distributed generation
resources and availability of multiple electricity
providers today, consumers have a range of options
to meet their changing energy demand. Moreover, the
future of the electricity ecosystem will include higher
penetration of next generation technologies such as
renewables, EVs, energy storage, and digitization.
The role of utilities, thus, has to be re-engineered to
prepare for the future.
Revenue security
Utilities generate revenue primarily through billing
their customers for demand and energy usage. New
ecosystems, with multiple options for consumers to
meet electricity demand, are expected to pose stiff
competition to utilities. Hence, it is all the more
important now to safeguard their investments. For
that, it is important to ensure utilities are resilient to
transformational changes.
Grid transformation
Renewables and EVs are being promoted across the
globe for various reasons. These technologies will
transform power grids in unprecedented ways.
Renewables introduce high variability and
intermittency issues in the grid. High intermittency
leads to underutilization of transmission infrastructure,
increased impact on grid operations, and greater need
for flexible generation sources.
Enabling technologies for data privacy and
cybersecurity
With abundance of critical data in power systems and
remote access, securing operations without
compromising system availability and data privacy is
a major concern. Cyber security threats are on the rise
and there is a continued need to develop mitigation
technologies and solutions to make power equipment
and control systems more secure. Data encryption,
communication robustness, malware protection, etc.,
are currently being used by stakeholders to address
cyber security issues. They will have increasingly
have to play a major role.
Policy and standards
With the changing dynamics of the electricity
ecosystem, policies and standards have become
extremely critical to ensure technical, financial, and
business viability for all stakeholders. There is need
for robust policy, especially in the areas of distributed
generation, renewables, EVs, and storage.
Consumers must be made aware of changing
scenarios and engaged in the decision-making
process.
Energy storage
Energy storage has a versatile role to play in operating
grids and providing value to all stakeholders. This
includes: balancing demand and supply, regulating
frequency, managing renewables, and providing
autonomy for consumers. In the future, storage will
play an ever-significant role in achieving full potential
of new and upcoming technologies.
5
Foreword
Mr. Suman Ghorai
Director - Energy & Natural Resources
CRISIL Infrastructure Advisory
World Utility Summit has a pertinent context in
creating a heterogeneous forum, with utilities at the
centre stage, to deliberate together on the challenges,
ideas and the wider transformations that await in the
near future. This year especially, the summit has its
core theme as ‘Utility Next’ which indeed focuses on
the role of various stakeholders ranging from central
government, state government, regulators and most
importantly the utilities’ role to adapt with the dynamic
transformations yet remain consumer friendly.
CRISIL Infrastructure Advisory is pleased to be
associated with the prestigious World Utility Summit
(WUS) 2020 as a Knowledge Partner for the theme
‘Revenue Security’. The WUS has been a strong
platform to share utility experiences from across the
globe and also debate on innovative as well as critical
aspects of the sector. The theme ‘Revenue Security’
is particularly important as the revenue of the power
distribution utilities directly impacts the sustainability of
the transmission and generation arm in the value
chain.
While the advent of Indian Electricity Act 2003 has
brought in competition and much needed structural
changes in the power sector, but it has also increased
the complexity and challenges of the utility business.
The Act embarks upon of liberalization, competition
and commercial aspects of the utilities and at the
same time gives due importance to consumer
interests and concerns. The responsibility of balancing
all the stakeholders thus became the key to ensure
sustainable operation of power utilities. Hence long
term prosperity of the power sector is dependent on
‘revenue security’ of the power distribution utilities for
its journey from consumers to prosumers.
Wish all success to the WUS 2020 and look forward to
an enriching discussion with the esteemed panel.
6
Abbreviations
Acronym Definition
ACS Average Cost Of Supply
AMI Advances Metering Infrastructure
AMR Automatic Meter Reading
R-APDRP Restructured Accelerated Power Development And Reforms Programme
ARR Aggregate Revenue Requirement
BESCOM Bangalore Electricity Supply Company Limited
BOOT Build Own Operate Transfer
BPL Below Poverty Level
CEA Central Electricity Authority
CERC Central Electricity Regulatory Commission
CESC Calcutta Electric Supply Corporation
CRIS Crisil Risk And Infrastructure Solutions
CSS Cross Subsidy Surcharge
DBFOT Design-Build-Operate-Transfer
DBT Direct Benefit Transfer
DDUGJY Deendayal Upadhyaya Gram Jyoti Yojana
DMS Distribution Management System
FRP Financial Restructuring Plan
GDP Gross Domestic Product
HHD Hand Held Device
HVDS High Voltage Distribution System
IPDS Integrated Power Development Scheme
JBVNL Jharkhand Bijli Vitran Nigam Limited
MBC Meter Reading Billing And Collection
MIS Management Information System
MSEDCL Maharashtra State Electricity Distribution Company Limited
NPA Non-Performing Asset
NTP National Tariff Policy
OMS Outage Management System
PPA Power Purchase Agreement
PPP Public And Private Partnership
RGGVY Rajiv Gandhi Gramin Vidyutkaran Yojana
SCADA Supervisory Control And Data Acquisition
SERC State Electricity Regulatory Commission
SPV Special Purpose Vehicle
UDAY Ujwal DISCOM Assurance Yojana
USO Universal Service Obligation
WUS World Utility Summit
7
Contents
The theme .................................................................................................................................. 3
Foreword .................................................................................................................................... 5
Introduction ............................................................................................................................... 8
WUS objectives 9
Revenue security as a key priority 9
Understanding the utility business model ........................................................................... 10
The power sector value chain 11
Importance of revenue security in the value chain 11
Issues at large 13
The reforms record 14
Ensuring revenue security: Time to plug the gaps ............................................................. 16
Centre must lead the way 17
State governments: The game changers 24
SERCs need to play a bigger role 26
Utilities to set the bar 26
National and international experiences: Are we learning? ................................................ 28
Lessons from addressing sector financial issues through development policy operations 31
Way forward ........................................................................................................................... 33
8
Introduction
9
WUS objectives
The WUS was conceptualised to foreground a wider
forum to deliberate upon upcoming changes in the
utilities space and to exchange ideas and solutions to
deal with these changes. The WUS returns in 2020
with the theme ‘Utility Next.’
The electricity ecosystem is undergoing an
unprecedented transformation with the proliferation of
renewables, distributed generation of resources and
EVs, on one side, along with consumer activism and
regulatory pressures, on other. The forum aims to help
utilities navigate the complexities of the network and
to prepare them to drive future decisions based on
probabilities and real-time data.
The summit’s objectives are to create integrated and
sustainable utilities in the future, for the benefit of all,
by:
Bringing together world utility leaders on one
platform and stimulating interactions between
them on a global scale
Providing networking opportunities to collaborate
and learn among themselves, and with the forum’s
committee members
Setting the agenda for the future by sharing and
debating innovative solutions and new ideas to the
world’s most pressing challenges faced by utilities
Creating value by providing the global leaders with
knowledge and insights that engender a better
understanding of the global and regional
challenges
Revenue security as a key priority
Given the evolving market dynamics, it becomes
imperative for government, regulators, and other
stakeholders, to ensure revenue security of the
electricity distribution utilities.
Power distribution 24x7 is a legal obligation in
India. Hence, adequate power procurement
through long term power purchase agreements
(PPAs) and short term contracts are an absolute
necessity for the utilities. Apart from power
procurement expenditure, the cost of power
transmission (interstate and intra-state) is also
borne by the utilities. Besides, there are other
expense heads detailed in the annual accounts.
Therefore, it needs to be ensured that all the major
heads are covered under regulatory treatment of
expenses by regulatory commissions, along with
return on equity as mandated in the related
regulations
Power distribution is a capital intensive business
and utilities need to invest in network
strengthening capex projects at regular intervals.
In a regulated market, all these expenses, along
with cost of capital and other operational costs,
need to adequately reflect in the consumer tariff
Utilities are also required to adapt to emerging
technologies such as solar rooftop, EVs, etc.,
which often give rise to a complex business
structure requiring policy and regulatory oversight
India has multiple policy makers and regulatory
bodies at the central and state level, with varying
levels of legal authority and jurisdiction. Any failure
to ensure revenue security may drive inefficient
operations, leading to power cuts, fatigued
infrastructure, and demotivated employees,
eventually impacting all consumer segments and
the economy in general. It is hence necessary to
accommodate the changing needs of regulated
and unregulated markets
Keeping in view the above mentioned aspects,
there is a strong case for all stakeholders in the
power sector, including the utilities, to work
towards ensuring revenue security. Policy
makers, regulators, power generators, and
consumers, need to be part of the relevant policies
and practices that act as safeguards for revenue
security of the utilities
This knowledge paper points to the possible ways
of navigating relevant institutions to ensure
revenue security for sustainable operations
The paper has been organised into six broad chapters
to address the concerns:
Chapter 1: Introduction
Chapter 2: Understanding the utility business
model
Chapter 3: Recommendations ensuring revenue
security
Chapter 4: National and international experiences
Chapter 5: Way Forward
10
Understanding the utility
business model
11
The power sector value chain
The power sector value chain can primarily be divided
into three segments: generation, transmission, and
distribution. The fundamental structure is shown
below.
The value chain for power
Source: CRIS
Power distribution is the last leg of the electricity value
chain. The main function of the system is to provide
power right up to the individual consumer’s premises.
In India, responsibility for distribution and supply of
power to end-consumers rests with the states and is
dominated by state-owned utilities, though a few
private entities are also present. Traders and
exchanges facilitate trading of power between
generation and distribution utilities. Further, open
access (OA) allows large consumers to procure power
through traders or exchanges, subject to transmission
corridor availability.
The viability of the entire power sector depends upon
the financial health and the operational efficiency of
the distribution utilities (or discoms). Therefore, it is
necessary to focus on improving performance of this
segment especially that of government owned utilities.
1 Source : CEA 2 As per latest available data with MoP
Studies and data show that a radical reduction in the
aggregate technical and commercial (AT&C) losses
and a re-orientation of the operational procedures of
these utilities is crucial for achieving the goal of
adequate power supply to all.
Promoting competition and efficiency is seen as one
way. A step in this direction was the enactment of the
Electricity Act, 2003. However, as electricity is a
concurrent subject, the Ministry of Power, Government
of India, is primarily responsible for creating the overall
policy framework for the power sector in the country,
while the respective state governments have to take it
forward by formulating state level policies and
addressing issues. All states and union territories have
set up regulatory commissions to regulate and
determine tariffs for distribution and transmission as
well as generating companies, which sell power to the
distribution companies. The Central Electricity
Regulatory Commission (CERC) fulfils this
responsibility for inter-state generation and
transmission, and also for central power utilities. The
Appellate Tribunal for Electricity was established to
hear appeals against the orders of adjudicating
authorities (State Electricity Regulatory Commissions
(SERCs), Joint Electricity Regulatory Commissions
(JERCs), and CERC.
Importance of revenue security in
the value chain
India has come a long way in managing its power
demand-supply position effectively. Out of the total
energy requirement of 1274 Billion Units1 in fiscal
2019, 99.4% of demand was met during the year. The
net deficit is projected to have narrowed from 10.1%
in fiscal 2010 to 0.5% in fiscal 20202. The power
demand-supply trend is depicted below:
12
Source: CEA
India has addressed supply side issues to a large
extent: It is evident from the above chart that India has
significantly addressed its supply side constraints in
the last five years. This has been primarily due to
integration of large scale renewable energy into the
system, which rose 146% from 33.79 GW as of
December 2014 to 83.37 GW as of October, 2019.
The peak demand-supply deficit too, reduced from
12.7% in fiscal 2010 to 0.7% ( as per latest available
data with MoP) in fiscal 2020.
In transmission, the regional grids (northern, eastern,
western, north-eastern, and southern) are integrated
into one national grid. By 2017, India had total inter-
regional transmission capacity to transfer nearly
75,050 MW. This is expected to increase to about
1,18,050 MW by the end of the 13th Plan (2017-2022).
This would be adequate to meet the energy flow
requirements across the regions within India.
But weak distribution threatens sustainability of
the value chain: Distribution - the most important link
in the value chain - is also the weakest in terms of
financial and operational sustainability. The revenue
accruing to the distribution utilities ensures the
sustainability of the value chain components
preceding it. As of end September 2019, 95 power
generators reported an overdue outstanding amount
of Rs 65,132 crore from various distribution utilities.
3 CERC 4 Niti Ayog
To be fair, distribution utilities, or discoms, have
adequately tied up with generators in the form of long
term contracts, along with short term agreements
through exchanges or traders. This has resulted in
minimal economic load shedding across the country.
However, various consumer clusters, led by industry,
opt for OA contracts, thereby leaving the utilities with
surplus stranded capacity. In 2018-19, industrial
consumers consumed 11.24 BU of electricity through
open access, which formed 22% of the total day ahead
volume transacted through the power exchanges
during the year. At the end of 2018-19 there were 4362
open access consumers registered in IEX and
procured 11.21 BU3 of electricity. Overall open access
transaction has grown at a CAGR of 6.3%4 from FY
10-11 to FY 17-18. Most of the open access
consumers are located in Tamil Nadu, Andhra
Pradesh, Punjab, Chhattisgarh etc.
Although there are regulatory safeguards in the form
of cross subsidy surcharge (CSS) and additional
surcharge in various states, an immediate revenue
threat looms over the discoms. Besides, the CSS or
additional surcharge components are often mired in
litigations in various courts, which delay the much
required revenue accruals.
Such revenue shortfall can seriously thwart reform
efforts of various utilities. Hence, at the outset, the
10.1%
8.5% 8.5% 8.7%
4.2%
3.6%
2.1%
0.7% 0.7% 0.6% 0.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
200
400
600
800
1000
1200
1400
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Requirement(BU) Availability(BU) Deficit (%)
13
financial health of utilities need to be strong to adapt
to the changing market dynamics. While India is
looking to become a low carbon economy, it needs to
keep its base strong and its long term approach
balanced. Electricity demand is set to grow for all
consumer segments but technological disruptions in
transport (which contributes to 14% in India’s primary
energy demand) would make this segment a
significant growth driver. Penetration of other digital
technologies to achieve better efficiencies with
sensors and IoT platforms would eventually facilitate
consumption optimisation for energy usage.
However, despite access to resources, capital,
technology, investment in new infrastructure,
strengthening and automation projects are perceived
to be risky, affecting the agility in decision making of
utilities. This needs to be addressed through
institutional and organisational realignment, cultural
shifts, and a strategy which focusses on revenue
enhancement and long term financial sustainability of
the utilities.
Issues at large
The distribution sector has been reeling under
financial losses with a consolidated outstanding debt
pegged at Rs 4.3 lakh crore5, as of March 2015. Piling
financial burden, along with ailing operational
parameters, have caused significant stress in the
business.
Despite various structural changes with the advent of
Electricity Act 2003, financial health remains a
concern. Why?
Government often provides subsidies to
compensate losses of utilities on account of
discounted billing rate for agriculture and low slab
domestic consumers. However, several times, the
state government does not pay up in time leading
the utilities to carry the loss in their books.
Regulatory commissions are expected to revise
the tariff (based on petitions submitted) at regular
5 Niti Ayog 6 Regulatory assets imply previously-incurred losses that are in the nature of deferred expenditure and that can be recovered from consumers in future provided allowed by regulatory authorities. 7 UDAY portal 8 Power Finance Corporation (PFC)’s Performance Report of State Power Utilities 2015
intervals in such a way that it reflects utilities’ cost
of supply. In most instances, tariff are not revised
for long periods. While average cost of electricity
supply (ACS) has increased due to rising fuel
costs and inflation, growth in aggregate revenue
realised (ARR) by discoms has been much lower
because of irregular/inadequate tariff hikes. As a
result, the gap between ACS and ARR has
widened and subsequent cash constraints have
led to declining capital expenditure, negligible
technology interventions, and issues relating to
capacity-building and training of manpower,
culminating in high financial and transmission and
distribution (T&D) losses. Even on a conservative
note, the ACS would be around Rs 7/unit. On the
other hand, while cost recovery has improved, the
ACS-ARR gap is still close to Rs 0.40/unit as of
September 2019. The gap is significantly higher
for some states (Rajasthan – Rs 1.25/unit, Bihar –
Rs 0.93/unit, Andhra Pradesh - Rs 0.67/unit, Tamil
Nadu – Rs 0.78/unit, and Uttar Pradesh - Rs
1.1/unit). Country wide, the overall gap translates
to around Rs 62,482 crore of financial loss
annually. Besides, the distribution utilities are
already reeling under burden of around Rs
135,000 crore worth of ‘regulatory assets’.6
High levels of AT&C losses has also remained a
cause for concern for long. It includes inherent
technical line losses, as well as commercial losses
comprising electricity theft, meter faults, and
errors in meter reading and estimating un-metered
supply of energy. Commercial losses are also
attributable to under recovery or non-recovery of
billed amounts. In fiscal 2019, India’s AT&C losses
were 21.08%7 as against world average of 10-
12%8. As many as 18 states still suffer losses
beyond the 15% target threshold; seven of them
have registered over 30% losses. Many states
such as Andhra Pradesh, Delhi, Gujarat, Kerala,
Uttarakhand and Maharashtra have reduced their
losses significantly in recent years. States like
Rajasthan, Madhya Pradesh, and Maharashtra
have depicted remarkable improvement but still
fall short of revenue targets of utilities owing to
large area of operations and high number of
consumers handled. High level of AT&C losses,
14
indicating operational inefficiencies, has
financially stressed state-owned discoms over the
years.
The reforms record
The government has been quite pro-active in
undertaking various reforms in power distribution
sector. Some of these are structural in nature, some
operational, and most are important financial reforms.
Many structural reforms such as the Electricity Act,
2003, unbundling of state electricity boards (SEBs),
enabling private sector participation, power trading,
etc. gave the much required push to the state utilities
in terms of administrative independence and
optimization of viable commercial propositions.
While structural reforms focused on institutional
overhauling, the operational reforms aimed at
improving power supply and boosting system
performance. Many programmes such as RGGVY9
and DDUGJY10 led to last mile power connectivity,
separation of agriculture feeder11, and strengthening
of 33 KV and below network infrastructure. Through
the schemes, the central government has been able
to achieve its target of 100% village electrification in
2018. It has also taken up major programmes such as
R-APDRP and IPDS to reduce AT&C losses and
improve power supply quality in urban and semi urban
areas. The IPDS was introduced in 2014 with a capital
outlay of Rs 33,000 crore12.The information
technology (IT) and automation component that was
initially planned under the R-APDRP scheme, also got
included in the IPDS scheme, with an additional outlay
of Rs 44,011 crore.
Improvements in network strengthening can be
observed in urban areas. However, AT&C loss levels
are still on the higher side. The implementation of R-
APDRP and IPDS scheme is very important as it
brings IT and automation to centrestage for efficient
9 Rajiv Gandhi Gramin Vidyutkaran Yojana 10 Deen Dayal Upadhay Gram Jyoti Yojana 11 Agriculture feeder separation is a progressive step taken by various state governments, and also well incentivised by the central government through certain programmes. For pure agriculture connections, farmers require 8-10 hours supply every day for irrigation activities. However, the domestic consumers and other commercial consumers are supposed to get 24x7 uninterrupted electricity supply. Feeder separation resolves this issue to a large extent. This not just helps in better load management but also contributes to higher revenue due to higher sales in domestic and commercial segments. 12 Ministry of Power
operation, leading to better billing and collection
efficiencies, This, in turn, optimises the revenue of
utilities.
Financial reforms, by far, has remained the most vital
for the last few decades. These reforms include
measures directly helpful for utilities to mitigate their
financial losses. Some of the important ones
introduced are:
2001: Bailout package
A bailout package was announced for SEBs in fiscal
2001, with the assumption that this one-time package
would enable them to clean up their balance sheets
and improve their operational efficiency in order to
ensure timely payments, going forward. The bailout
converted Rs 35,000 crore ($7.4 billion) of debt
(outstanding arrears of the erstwhile SEBs) into state
government bonds and waived 50% of the interest
outstanding. Thus, a number of states began fiscal
2003 with accumulated losses that were lower than in
the previous fiscal.
2012: Financial restructuring package (FRP)
In order to meet their working capital requirement,
discoms contracted a huge chunk of short term loans.
Lenders’ short-term exposure to discoms reached an
estimated Rs 1.5 trillion in 2012. Any slippage on the
part of the discoms to repay these loans could have
created huge non-performing assets (NPA) for the
banking sectorin order to ease the stress of the
discoms and financial institutions, the Centre
introduced an FRP in fiscal 2012. States took over
50% of outstanding short-term loans, including
payables for power purchase, as on March 31, 2012.
These were converted into bonds backed by
government guarantees and a moratorium of 3-5
years, with a repayment period of 10 years. The
balance 50% was restructured into long-term loans by
lenders, with a moratorium on principal repayments up
15
to three years, lenient repayment terms, and waiver of
penal interest.
2015: Ujwal Discom Assurance Yojana (UDAY)
Even after FRP, the discoms continued to reel under
financial losses. As of March 2015, their accumulated
losses stood at ~Rs 3.8 lakh crore and outstanding
debt, at ~Rs 4.3 lakh crore. Such high debt burdens
seriously limited utilities’ capability to invest in system
strengthening infrastructure projects. Against this
backdrop, the Ministry of Power launched UDAY on
November 5, 2015. Under the scheme, states took
over 75% of discoms’ total debt as on September 30,
2015 over the following two years – that is, 50% in
fiscal 2016 and 25% in fiscal 2017.
This has helped discoms reduce their interest cost
burden substantially (to 8-9%, from as high as 14-
15%) and improve their payments to generators.
However, UDAY comes to a close in 2019, and the
ACS-ARR gap is far from the target of Rs 0/unit. AT&C
loss level is at 21.09%13 against the targeted 15%.
Hence it can be said, the UDAY scheme was only
partially successful in meeting its objective.
The key reasons for the failure are baseline data
quality and slow operational improvement.
Some of the states continue to reel under losses
(despite UDAY scheme). For these states, private
sector participation could be considered through
public private partnership (PPP) models and risk
sharing mechanisms based on market conditions
(customer profile, per capita income, tariff subsidy,
population density, etc.) in division/ circle, with
complete clarity on tariff pass through and provision of
subsidy.
Summing up
While the distribution sector has seen reforms on all
three fronts – structural, operational, and financial –
the following weak spots still remain:
Poor quality of baseline data as well as
inadequate capturing of real-time data
Schemes such as UDAY and R-APDRP
envisaged a reduction in the AT&C losses, but
failed to address the issues in totality. AT&C
loss level increased owing to intensive
electrification efforts of last-mile connectivity
(addition of rural consumers)
Tariff structure does not properly reflect the
costs and leads to under recovery of fixed cost
through fixed charges in tariffs
The Electricity Act and the National Tariff Policy
envisaged a reduction in cross-subsidy;
however, most state discoms have not been
able to bring this within prescribed limits
While unelectrified households are being
electrified, Universal Service Obligation (USO)
(i.e., both access and 24x7 supply) and direct
benefit transfer, or DBT, remain areas of
concern
Learnings from UDAY
13 Uday Portal
16
Ensuring revenue security:
Time to plug the gaps
17
We have seen how progressive programmes such as
RGGVY, DDUGJY, and SAUBHAGYA have led to
100% village and household electrification, on the one
hand, but owing to widening ACS-ARR gap, financial
stress of utilities hasn’t eased, on the other. Over 90%
of the new connection additions come from Uttar
Pradesh, Madhya Pradesh, Haryana, and
Maharashtra. Considering 70 units of
consumption/household, we estimate an additional
revenue gap of ~Rs 3000 crore annually. This
additional requirement has to come from either
government subsidy or commensurate tariff hike, or a
mix of both, to avoid any tariff shock.
The figure below depicts the financial impact of rural
consumer addition under SAUBHAGYA scheme.
Source: CRIS analysis
Various agencies need to play an additional role to
ensure revenue security of the utilities. Different steps
that could be taken by different stakeholders are
outlined below.
Centre must lead the way
Separate carriage (wire) and content
(supply) business
The Electricity Act, 2003 supports private participation
in electricity distribution by providing for multiple
distribution licensees and non-discriminatory open
access for consumers. Power supply and distribution
are two separate business activities. However, the
Electricity Act does not have any explicit provisions to
treat them as such, in its present form.
It is suggested that the electricity network
infrastructure business must be optimised to avoid
duplication of assets in the same area, whereas retail
supply can be open to competition.
One could visualise the various stages of transition in
retail competition as:
I. Vertically integrated monopoly
II. Competition in generation
III. Partial wholesale competition
IV. Partial retail competition
V. Full retail competition
India started off as a vertically integrated monopoly
and has evolved up to the third stage, i.e., partial
wholesale competition. As a sector in transition, it
could move towards achieving full retail competition.
In this pursuit, there is a need to separate wires and
supply business, which is the final stage of the
structural reform process.
Need for separation of content and carriage
The separation of carriage and content will provide:
Transparency and accountability of AT&C losses
suffered by the distribution sector. If the content
and carriage are separated and given to two
separate entities, theft of electricity cannot be
hidden under the head of overall distribution
losses
Upon separation, carriage or wire would be
typically subject to non-discriminatory open
access for allowing competition in the content
segment. This cuts down monopolistic practices
and increases competition, thereby giving users
greater opportunity to improve efficiency
Competition would lead retailers, generators, and
distributors to develop technologies to increase
efficiency, lower costs, and increase reliability of
supply. Specialization resulting from competition
would further lower costs and raise consumer
welfare
18
Key steps
The separation of content and carriage would require the following key steps:
Development of robust wholesale market
As a prerequisite to separation of carriage and
content, it is critical to develop a conducive wholesale
market which would provide a level-playing field for
competition in the retail supply business. The key
measures for a wholesale market would include:
Establishing market institutions: To make
wholesale trading of power/contracts for sale of
power effective and efficient
Reducing dominant generators: To ensure that
a few generators cannot manipulate the market,
thereby reducing the risk of gaming
Creating platform for trading for:
‒ Generators and retail supply parties to make
power purchases
‒ Retail supply parties and consumers to make
power trades
Developing an ancillary market: To ensure
reliable operations of the grid, power quality, and
grid security
Segregation of ownership of distribution and
retail supply business
The next step would be to segregate the distribution
from the supply business. The key measures would
be:
Distribution business: This would still be
operated by existing discoms and would continue
to have the following features –
‒ Loss assessment:
‒ System strengthening
‒ Regulated business
Retail supply business: This could be created
in the following manner:
‒ Creation of new functional entities: New
competitive entities which can trade in the
wholesale market would be registered on the
platform for trading power to service the
consumers
‒ Roles and responsibilities: The retail supply
business would be responsible for demand
forecasts, efficient power procurement,
revenue collection, fulfilling regulatory
obligations, etc.
‒ Commercial loss reduction: The retail
supply entities would be responsible for
improvement in collection efficiency and
reduction in commercial losses
A few critical aspects at this stage would be:
Metering Services :
Metering services consist of two kind of work.
• Development of market institutions
• Reduction in dominant market power in generation
• Trading platforms
• Development of ancillary market for reliable operations
Development of a robust wholesale market
• Creation of new functional entities
• Defining roles and responsibilities of new entities
• Treatment of existing losses, PPAs, upgrading existing metering
Segregation of ownership of distribution and retail
supply business • Improve conduciveness of the market
• Competitive market
Opening up the market for competition in retail supply
business
19
‒ Meter reading (record meter reading manually
or preferably using communication devices.
‒ Other meter related activities (Meter
installation, replacement, meter operations
and testing.
These two activities can be taken up separately by
retail supply company, Distribution Company or any
third party. However, considering that the retail supply
company would be responsible to improve collection
efficiency, hence the supply company can be
entrusted with meter reading and other meter related
services.
Treatment of existing financial loss
The existing losses could be transferred to the
intermediary company. The intermediary
company would amortize the losses through a
regulated charge to be levied on consumers or
through state government funding support. Other
unrecognized financial losses would either be
allocated to either existing companies or
government support for cleaning up balance
sheets.
Consumer interface
A common consumer interface could be set up by
both retail Supply Company and the distribution
company.
Consumer grievance redressal mechanism
A single consumer grievance redressal forum
(CGRF) can be set up for distribution and retail
Supply Company.
Segregation of standard of performance
Before segregation separate SOPs should be
formed by state commissions for retail supply and
Distribution Company.
Allocation of existing PPAs
The existing PPAs would be transferred to
intermediary company. State Governments to
explore possibilities in respective transfer
schemes to shift PPAs completely or partially to
wholesale market.
Addressing regulatory issues and existing
losses:
The commercial loss could be attributed to retail
supply licensee while the technical loss should be
on Distribution Company.
Opening up the market for competition in retail
supply
The final step would be to open the market for
retail supply competition. This would require the
following measures:
Allocation of technical and commercial
losses:
As has been briefed earlier, the technical and theft
losses could be allocated to Distribution business,
as these losses are related to physical
infrastructure.
In license areas where the current level of losses is
high, entire commercial losses could be allocated to
the retail supply business to attract investment,
improve metering and faster reduction of losses.
Cross-subsidy reduction: This could be done
through -
‒ USO: During the initial phase of open
competition, the retail supply business can be
restrained from adding only high-tariff
consumers
‒ DBT: Direct payments to the targeted
consumers through state government annual
budget, can allow better energy accounting.
But before rolling out DBT, the government
must ensure complete pre-paid metering
model for consumer segments. Consumers of
selected categories, like agriculture, after they
have consumed (to the extent they have paid),
would be reimbursed the subsidy amount
through direct transfer in their respective
accounts. This would improve the
segmentation of needy consumers on the
basis of units rather than on the basis of
category. Also, the subsidised consumers
would utilise electricity efficiently or move out
of the subsidised slabs.
‒ Gradual reduction in cross-subsidy
charges
Most industrial and commercial pay more than their
cost of supply. Year on year tariff hike may lead to tariff
shock for other consumer categories, hence it is
20
recommended to have a ‘uniform charge’ as issued by
respective SERC or may be mitigated by direct
subsidy from state government.
Consumer database: It would be important for
the utilities to develop a consumer database which
would allow for competition
Competitive market: A fully competitive market
would require -
‒ Licensing area: For supply of power
‒ Consumers switching mechanism: A well-
defined mechanism for consumers to switch
their retail supplier
‒ Redressal mechanism: Framework for
consumer grievances, etc.
Procurement of PPAs: PPA mechanism for
power procurement through generators
Summing up
The following aspects need to be dealt with carefully
for separation of wire and supply business.
Treatment of existing outstanding debt
Treatment of financial losses in books
Transfer of existing PPAs
Customer interface framework
Tariff setting norms
Balance sheet segregation
Allocation of AT&C loss
The above would lead to maximization of revenue
accruals due to better management, capital infusion,
and greater accountability.
Incentivize innovative PPP models in
electricity distribution
Any infrastructure deficit is considered a major factor
that holds back the country’s economic growth. Since
most power distributution utilities are owned by state
governments, there is no competition in terms of
improving financials, customer service, or power
supply quality. That ultimately results in inefficient
operations and unsustainable financial burden.
Despite all its inefficiencies, governments still have an
edge when it comes to power supply in semi urban and
rural areas, which comprise most of the licence areas.
Hence, the role of government cannot be completely
ignored.
On the other hand, the private players have done
reasonably well in the power distribution business.
Although their role has mostly been limited to urban
areas, which might have catalysed their success
stories, yet, better project management capability, use
of techniology, and strong balance sheets enable
private participation to be profitable and effective.
Hence, we could say it is a joint venture of the two
which can ensure affordable and accessible energy
supply to all.
Performance matrix of private players across India
21
Hence, the government needs to bring in clear policies
and frameworks to encourage more private
participation in the ailing power distribution segment.
Some effective ways of attracting private investments
are illustrated below:
PPP models with risk sharing: The models
should address market concerns and have
contract structures with equitable risk sharing and
clearly laid out terms and conditions.
Quality baseline data: Third-party audit of
operational parameters must be undertaken prior
to award to private players.
State government support: Operational,
administrative support should be provided through
the SERCs and state governments.
Manage tariff cross subsidy: Transparent tariff
with DBT to subsidised consumers can attract
investments.
Bidding criteria: Bidding criteria should be based
on investment requirement, which should be
reflective of global experience.
Some salient features of PPPs that would attract
private investments even in semi-urban areas, are
illustrated using two models below. Such innovative
PPP models reduces the risk of cherry picking of
urban areas by private players.
Illustration 1: City/town-based licence (to be awarded through bidding)
Key aspects Implication
Proposed model/legal
framework
Section 13 of Electricity Act
Exclusive licence to serve designated area for 25 years
Capital Investment Investment in required areas
Transfer of existing/new PPAs
Tariff Tariff to be set by SERC
Asset ownership Existing asset to be transferred to new licence at appropriate valuation
New capex to be funded by the new licensee
Benefits to government Reduced capex burden, loss reduction, free from capital subsidies, premium earned through sale
utilised for other social schemes
Political acceptance Funds freed up for social schemes, opportunity for more industrialisation
22
Illustration 2: Substation & distribution network augmentation (to be awarded through bidding)
Key aspects Implication
Proposed model/ legal
framework
DBFOT/BOOT basis
Developing & operating 33/11 kV s/s and other network strengthening projects
Capital investment Concessionaire
Tariff Monthly rental to be paid by discom
Asset ownership Asset to be on the books of the concessionaire for facilitating charge creation
Benefits to government Reduced capex burden, concessionaire helps meet funding gaps, loss reduction, quality power
Political acceptance Funds freed up for social schemes, opportunity for more industrialisation
Summary: In order to strengthen the power utilities, it
is imperative to improve utilities’ operational efficiency
and ensure full-cost recovery through attracting
private investments.
Delhi's experience with privatisation clearly highlights
the positives in terms of power supply quality,
operational performance indicators and customer
satisfaction.
Further, the performance of privately owned utilities
can always be improved through strong incentives and
governance systems, duly supported by the
government.
Incentivise utilities to reduce AT&C
losses
AT&C loss is linked to poor billing and collection
efficiency. It not just digs a hole in the finances of
utilities, but also meddles with efficient operation of
utilities.
As electricity is a concurrent subject, the central
government cannot directly amend working principles
of distribution utilities, most of which are owned by
state governments. However, the central government
can put up a corpus and regularly incentivise better
management of operations by utilities. It can come out
with a programme giving state-wise utility-specific
AT&C loss reduction targets, meeting which those
utilities would be eligible for certain incentives. The
incentives can be in terms of low-cost loans, or priority
in coal linkages or even direct subsidy.
The central government should also initiate an award
programme for utilities with regard to operational and
financial loss reduction achievements. Besides,
investments in latest technologies like AMI, smart
meters should also be acknowledged and
incentivised.
Recent media reports suggest the central government
is about to come up with a new scheme with a capital
outlay of Rs 2 trillion, aimed towards incentivising
better infrastructure, proliferation of smart meters, and
private sector participation.
Mandate state regulators for tariff
rationalisation
Time and again, it has been observed that the average
tariff levied on consumers does not reflect the average
cost of supply. There is a slack in the part of SERCs
with regard to rationalisation of tariff. A brief analysis
of existing tariff orders for various states, suggests that
the consumer categories and consumption slabs,
based on which tariff is designed, are too complex to
look out for a uniform solution. The number of
categories varies from as low as eight (Rajasthan) to
as high as 18 (Gujarat) among the sample states. The
number of sub-categories/slabs within these
categories varies from as low as 14 (Delhi) to as high
as 72 (West Bengal). There is a huge variation among
the sub-categories/slabs across states as well.
23
The SERCs should work towards a common goal of
simplifying consumer categories and consumption
slabs.
Under-recovery of fixed costs
The retail supply tariff comprises two parts:
fixed/demand charge and energy/variable charge.
Fixed/demand charge is designed to recover utility
costs that are fixed in nature, such as capacity
charges payable to power generators, operation and
maintenance expenses (includes employee expense,
administrative expenses and repair & maintenance),
depreciation, interest on loans, and return on equity.
The fixed cost is recovered on the basis of sanctioned
load/connected load / contract demand or maximum
demand of consumers. Energy/variable charge is
designed to recover utility costs that are variable in
nature, such as the variable cost component of power
purchase. This cost is recovered on the basis of the
actual consumption during the billing period (per kWh
or kVAh basis).
The relevant sections of the Electricity Act, 2003, and
NTP 2016 that also emphasise on two-part tariff, are
as follows:
Section 45, Electricity Act, 2003 (Power to recover
charges)
(1) Subject to the provisions of this section, the prices
to be charged by a distribution licensee for the supply
of electricity by him in pursuance of Section 43 shall
be in accordance with such tariffs fixed from time to
time and conditions of his licence
(2) The charges for electricity supplied by a distribution
licensee shall be:
(a) Fixed in accordance with the methods and the
principles as may be specified by the concerned state
commission;
(b) Published in such manner so as to give adequate
publicity for such charges and prices
(3) The charges for electricity supplied by a distribution
licensee may include a fixed charge in addition to the
charge for the actual electricity supplied”
NTP 2016 also emphasises on the two-part tariff
NTP 2016 and NTP 2006 focus on introduction of a
two-part tariff. Clause 8.4 (1) of NTP 2016 defines the
tariff components and their applicability as follows:
"Two-part tariff featuring separate fixed and variable
charges, and time differentiated tariff shall be
introduced on priority for large rammer consumers
(say, consumers with demand exceeding one
megawatt within one year)…"
However, there is major difference between the actual
fixed cost incurred and the proportion of cost
recovered through fixed charge. The retail tariff
structure as on date includes most fixed cost
components in the energy charge. This kind of tariff
structure leads to a skewed cash flow, which make
things difficult as distribution utilities have certain fixed
charge obligations to generators that does not depend
on the actual quantum procured. Working capital
management and any abrupt change in consumption
pattern, due to economic factors or seasonal change,
can impact the cash flow of discoms. Even though
there would always be a mismatch between the real
fixed cost liabilities and the amount collected thereof
through tariff, reliance on the variable component can
impact discoms’ viability significantly. An analysis of
Delhi discoms revealed while the fixed cost forms
around 45% of the ARR, the revenue accrued from
fixed charge is only 15% of the total. Also, the energy
cost forms 55% of the ARR, but the revenue accrued
is to the tune of 85% of the total.
The central government is expected to bring out a
policy paper or mandate the SERCs (through
amendment of the electricity act) to carry out tariff
rationalisation within a stipulated timeframe.
24
State governments: The game
changers
Most power distribution utilities are owned by state
governments. Electricity being a concurrent subject,
the primary responsibility of reforming utilities lies with
states. State governments must initiate steps to
ensure long-term financial sustainability of utilities.
Introduce compulsory Direct Benefit
Transfer (DBT) schemes
DBT – Utilities are obligated to provide connection to
new consumers whenever an application is made.
Subsequently, they are also supposed to supply
quality power to such consumers as mandated by
regulations. Unlike private distribution utilities, which
have urban domestic, commercial and industrial
customers, state utilities have to supply power to
various BPL households, rural residential consumers,
and most importantly, agricultural consumers. Many of
these consumers, especially agricultural consumers,
are offered a flat rate tariff (unmetered consumers),
which is significantly lower than the cost of supplying
electricity. Besides, the tariff designed for metered
agricultural consumers is discounted for affordability.
Many a time, even the billed amounts are not paid. In
order to compensate distribution utilities for the loss of
revenue, state governments, under Section 65 of the
Electricity Act, give subsidies to minimise the loss
impact. Besides, the regulatory commission charge
the commercial and industrial consumers high to
compensate the revenue loss for supplying electricity
to the agriculture consumers. High cross-subsidy
leads to revenue loss for state utilities, as it
incentivises industries to scale up captive power
generation. There is a need to reduce cross-subsidy
and at the same time, keep rural tariffs low, hence DBT
is one of the solutions.
Under DBT, the subsidy (with payments through state
budget) can be transferred directly to the beneficiary’s
bank account. If the DBT scheme is implemented, only
the actual consumption will be subsidised, and not
power pilferage or loss.
State governments give subsidy payments to discoms
for selling electricity to consumers below the
procurement cost. However, the payments by states
are not regular, adding to the financial burden of
discoms. For proper implementation of DBT, states
would need to identify and earmark separate
budgetary allocation for subsidised consumers.
Challenges in DBT implementation
While DBT is successful in subsidy pilferage and
hence cutting down government expenditure
significantly, but DBT also brings in its own set of
challenges in implementation.
DBT implementation directly depends on the banking
network of the consumer cluster it targets. Hence, if
the consumer does not have a bank account, it would
not be able to be a part of the scheme. With Jan Dhan
Yojana Programme notwithstanding, banking
penetration is still poor amongst the economically
backward consumers in the rural areas.
It is not commercially feasible to have a bank in every
village, however, all villages can be served through
payment banks and banking correspondents.
Besides, the documentation requirement also has to
be minimal to avoid unwarranted delays or hurdles in
opening up a bank account. The banks should have
proper capacity building of its employees to remain
well-mannered with the target consumers and treat
even ‘zero balance’ accounts as a professional aspect
of operation.
Measures for DBT implementation
Ministry/department to set up a DBT cell
DBT cell to identify DBT schemes or DBT
components and study process/fund flow
DBT cell to develop IT-based system/MIS, create
a grievance redressal unit and train officials
Ministry/department/state
department/implementing agency to identify
beneficiaries
Ministry/department/state
department/implementing agency to digitise
beneficiary database after verification
Public Financial Management System to send
bank/postal account and Aadhaar details of
beneficiaries to banks and the National Payments
Corporation of India for validation
25
The DBT scheme, if implemented efficiently, will cut
down the losses of discoms. In fact, it will help control
delays in transferring benefits and reduce structural
expenses in distributing subsidies.
Mandate data quality improvement: Fund
initiatives (fully/partially)
Reduction in manual intervention for data handling is
the need of the hour, for accurate flow of information.
When data as reported from the field reaches the head
office without any moderation, it yields the desired
result. The more it gets distorted in the process,
decision making gets erroneous. Hence, as a
mandatory measure, state governments must insist on
utilities completely automating database management
systems. The same has to be in place both for project
management tools as well as data capture and
analytics formation.
The undistorted data can be used to provide
information to consumers, relevant government
authorities, lenders, commission etc. All utilities should
undertake capacity building regarding data quality
review.
The following table summarises the key issues and
mitigation measures using data quality tools.
Ensure government departments pay bill
in time
State governments must make it loud and clear that
power distribution utilities work under provisions of the
existing Companies Act. Hence, all state departments
must treat the electricity bill payment accordingly and
meet its dues in the stipulated timeframe.
Outstanding dues to the tune of Rs 41,386 crore
from various state government departments add
to the financial burden of utilities (states with the
highest dues are shown in the chart)
Regulatory assets as created by regulatory
commissions also slow down the reform initiatives
of any utility
A massive regulatory asset of Rs 135,000 crore
has been created so far due to inadequate tariff
revisions over the years. (MSEDCL - Rs 12,382
crore spread for fiscals 2019 and 2020, Jharkhand
(JBVNL) - Rs 11,813 core spread across five
years till fiscal 2019, UP – Rs 40,541 crore)
26
Outstanding dues of state government bodies
Other factors
States need to introduce specific legislations that
change in government should not stall ongoing
infrastructure projects by utilities. Any awarded
contract should be awarded at all costs. The
insulation of power distribution utilities from
political risk is a must in order to reflect the actual
expenses in tariff and also to ensure requisite
infrastructure is in place to cater to existing
customers and future load growth
Make policy for mandatory usage of smart pre-
paid meter: The state government need to fund
initiatives (fully/partially)
SERCs need to play a bigger role
Ensure tariff rationalisation
While the need to rationalise tariff has been
briefed under role of central government, but there
are few aspects which need to be taken up by the
state regulators on priority. The Commission
should design the tariff in such a way that it not
only reflects the correct cost of supply but also
properly reflect in the revenue recovery thereof.
The Commission may opt to redesign the tariff
with the provision of recovery of charges as
follows:
i. Fixed cost obligation to Genco and Transco – To be built in Rs /kw or Rs/ KVA charges
ii. Other Fixed obligation towards
establishment, manpower, network etc –
Fixed monthly fees per consumer to be paid
in advance annually
iii. Energy charges towards genco – to be built in energy charges
Minimise regulatory assets
Close to Rs 1 trillion crore worth regulatory assets
are stuck with regulatory commissions.
Commissions should work in an efficient manner
such that such regulatory assets do not create
additional capital requirement, and thereby driving
the utilities to go for additional debt from banks.
Introduce ToD tariff for domestic users
ToD is not just efficient for better load
management, but also contributes to revenue.
Considering domestic consumption is almost 30%
in India, the revenue from ToD would be quite
significant.
Ensure timely issuance of tariff orders
If the utilities delay in filing tariff petition within
stipulated timelines, the state commissions may
take suo muto cognisance of the matter and with
enabling provisions in the tariff Regulations,
SERCs must initiate issuance of tariff orders on its
own. In the due process, it may direct the utilities
to comply with required data sets.
Utilities to set the bar
Utilities are the main protagonist in this whole
discussion and should take the centre stage when it
comes to implementing reforms. The government
would introduce laws, policies, regulations, etc, but the
onus to implement them successfully lies with the
utilities.
Following are the action points of utilities.
Develop pre-paid metering framework
Begin with selective pre-paid metering for C&I
consumers and high-end domestic clusters
Utilities need to ensure that all commercial and
industrial consumers are billed through pre-paid
meters. This fundamentally implies, power supply
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Outstanding dues of state departments to utilities as of FY19 (Rs crore)
27
would be given to the extent payment has been done
in accordance with the regulated tariff.
Utilities should implement pre-paid metering for high-
end domestic consumers whose average monthly
consumption is more than 300 units. This way, the
utilities would have the much needed fund in hand and
would be able to better manage their working capital
requirement.
Introduce attractive incentives
For bulk payment against pre-paid consumption,
utilities must include attractive discounts or incentives.
For example, 5% discount on every Rs 10,000
recharge, where power worth Rs 10,000 would be
made available to users.
Enable a complete shift from pre-paid metering to
all consumers
As has been briefed in the earlier paragraphs, pre-paid
metering could be initially implemented for commercial
and industrial consumers. On bulk payment, the
utilities can even roll out some incentives. This would
alleviate working capital challenges for the operations.
Eventually all domestic consumers, barring BPL,
should be connected through pre-paid smart meters
using the AMI technology. This would address the
problem of delayed recovery or under recovery of
utilities. Besides, it would also enable the utilities to
optimize the power procurement requirement in a real
time basis in case there is an increase or decrease in
load.
Develop consumer analytics in terms of
revenue collection
Utilities should study the trend of revenue collection for
each consumer cluster, using standard analytics
software, and classify consumers into following
segments:
i. Assured payment without reminder
ii. Consumers who pay after one or two
reminders
iii. Consumers who pays after more than
five reminders (SMS/text)
iv. Consumers who regularly default
This way, utilities would be able to focus on the right
consumer category for revenue collection.
Increase digital engagement
R-APDRP and IPDS programmes have created the
much needed buzz for digital payments. However, as
of July 2019, around 23.1% consumers across all
utilities in India pay their bills through the digital mode.
Concerted effort must be made by utilities on their own
to encourage consumers to pay through the digital
mode. Utilities must undertake awareness campaigns
on digital payment processes, benefits, and penalties
for non-payment.
Digitalisation of operation helps to make financial
transactions transparent, which leads to savings in
time and better accounting processes, thus
contributing to optimising revenue.
Accept part payment policy
The part payment policy can be especially taken up for
temporarily for agriculture consumers or consumers
who regularly default. Utilities may also consider
introducing low-cost or zero-cost instalments to pay
quarterly bills.
Invest in latest technology
Finally, distribution utilities should always focus on
establishing a strong network infrastructure and adopt
the latest technology. Investments in the following
aspects must be made to maximise operational
efficiency:
Systems to detect meter tampering/theft
Predictive analysis tools for payments
Data quality improvement
Consumer database indexing and electrical
network mapping
However, for any investment in technology, utilities
should practice adoption of open architecture and
adaptive communication n network.
Amongst other factors, distribution utilities
should always file tariff petition in due time, and
indicate the actual cost of supply in the aggregate
revenue requirement.
28
National and international
experiences: Are we learning?
29
Example of a successful DBT implementation
The Bolsa Família programme, which has technical
and financial support from the World Bank, is cited as
one of the key factors behind the positive social
outcomes achieved by Brazil in the recent years. It is
an innovative social initiative taken by the Brazilian
government. It reaches 11 million families, more than
46 million people, and a major portion of the country’s
low-income population. The model emerged in Brazil
more than a decade ago and has been refined since
then.
Poor families with children receive an average of
R$70.00 (about $35) in direct transfers. In return, they
commit to keep their children in school and take them
for regular health checks. Thus, Bolsa Família has two
important results -- helping reduce poverty, and
getting families to invest in their children.
There are some aspects of the programme that have
attracted particular interest. The first is conditionality.
The payments are dependent on the family's children
staying in school until 17, and attendance must be at
least 85% up to 14 years and 75% for the remainder.
Another form of conditionality is the children get the
full set of vaccinations in their first five years and that
mothers avail of pre- and post-natal care services.
One of the advantages of the conditionality is
investment in welfare gives more bang for the buck.
For just 1% of GDP, Brazil is simultaneously boosting
education levels, improving dire health indices, and
reducing poverty. What has been controversial is
transparency. All the names of recipients are publicly
available on a website. Independent evaluations found
80% of the money is reaching the poor -- pretty good
in a country in which welfare has been dogged by
corruption. One clever aspect of the programme was
to put all payments through the banking system.
Recipients use a debit card to withdraw money from
their bank accounts at ATMs. The registering of claims
is a more complex process and, since the scheme
started in 2003, the network of social services centres
has increased from 1,000 to 9,000.
Project cycle of the Bolsa Familia programme
a) Identification of beneficiaries (eligibility and
targeting)
b) Enrolment of beneficiaries
c) Payments
i. Type and amount of Bolsa Família benefits
ii. Payment of benefits
d) Verification of conditions
iii. Process for monitoring conditions for health
iv. Process of monitoring conditions for
education
e) Relations with other social programmes and
services
v. Integration with other cash transfer
programmes in the country
vi. Integration with cash transfer programmes in
states
vii. Integration with social assistance services
viii. Integration with productive inclusion
programmes
f) Updating of beneficiaries’ registration
(recertification)
g) Criteria and rules for separation
ix. Temporary permanent status in cases of an
increase in income
x. Voluntary withdrawal and guaranteed return
Brazil: Revenue maximisation initiatives
Technical loss reduction initiatives
Key initiatives undertaken for reduction of technical
losses were as follows:
Upgradation of existing distribution system and
service infrastructure of the concerned area
Installation of twisted and bi-coaxial cables with
new connections
Replacement of the 12 conventional overloaded
transformers with more efficient and reliable
transformers
30
Non-technical loss reduction initiatives
More emphasis was put on reducing the non-technical
losses, which were observed to be more persistent in
the area compared with technical losses. A slew of
measures, as listed below, were taken up in order to
reduce these losses:
Waiving off the initial upfront fee for new consumers:
Setting up of price-capped low-income tariff for
economically weaker section
Assisting consumers to prove their eligibility to
receive low-income tariff
Capping billed consumption until consumers of
the section are regularised
100% metering in the area for all categories of
consumers
Installing electronic meters for proper recording of
energy consumption and controlling electricity
theft
Conducting awareness drives, wherein
consumers were provided with benefits like
efficient light bulbs and replacement of inefficient
household appliances like refrigerators and
electric showers
Upgrading of internal household wiring
Holding community campaigns and door-to-door
visits to apprise residents about the regularisation
process
Suggesting ways to help new consumers in
improving their efficiency and affordability of
electricity use
Replacing inefficient individual lights installed on
the exterior of houses
Community engagement to gain support and
preparing the community about the upcoming
changes by holding frequent community
campaigns
Impact
Financial analysis of the results from the perspectives
of the company and consumers, provided a measure
of the overall impact of the project. The main
takeaways of the project were regularisation of
consumers, successful implementation of energy-
efficiency measures and creation of new physical
infrastructure in the pilot area. The key benefits
achieved were:
Substantially improved revenue due to improved
collection efficiency virtually going up from 0%
earlier to 68% after regularisation
Reduction in average electricity consumption
within the pilot area to the tune of 40%
Reduction in costs to the company due to timely
payment of electricity dues
Reduction in expenditure incurred on account of
power purchase
Conversion of consumers to metered and paying
customers, which enabled the utility to collect the
low-income subsidy component of the tariff from
the government
It was concluded that the project’s financial success
greatly depended upon customer satisfaction and the
fact that their upgraded electricity service was worth
taking on the new financial burden of their electricity
bill.
31
Lessons from addressing sector
financial issues through
development policy operations
Turkey Programmatic Electricity Sector
DPO14
The Turkey Programmatic Electricity Sector
Development Policy Operation (DPO), approved in
June 2009 for $2.1 billion equivalent, addressed the
then-looming electricity supply shortage in the country
by introducing cost-reflective tariffs and improving
payment performance for transactions in the
electricity wholesale market. After the DPO, the
main state-owned utilities have achieved profitability in
recent years and paid their arrears in full to private
sector generators. The improved sector finances
helped attract a large volume of private capital, adding
31,000 megawatts of new generation capacity since
2008 without sovereign guarantees, and an
investment of about $12.7 billion for the electricity
distribution privatization program. Turkey’s electricity
supply security improved considerably, generation
capacity more than doubled, and the severe supply
imbalances projected for the early 2010s were
avoided.
Major lessons learned from this highly successful
policy operation in Turkey include the following:
Country ownership. A strong country ownership
of the sector development program, including the
financial viability goals, anchored the DPO
approach.
Operational and policy engagement. World
Bank operational engagement in the electricity
sector complemented the DPO through a series of
investment projects, high-quality analytical work,
and productive collaboration with the
government’s own Restoring Equitable Growth
and Employment Program and key sector
stakeholders.
Criticality. The operation’s financial components
focused on the most critical aspects of sector
financial performance, such as cost-based
electricity pricing and full payment collection.
Large-scale privatization of the sector has largely
strengthened these improvements.
Implementation time. The four-year
implementation period—longer than usual for
programmatic DPOs—was appropriate for the
nature and breadth of issues addressed.
Incentives matter. The large amount of direct
budget support under the DPOs provided a strong
incentive for the government to comply with the
policy conditionality and strong leverage for the
World Bank.
14 A World Bank Program
32
Key takeaways
Following factors led to revenue maximisation:
Technical loss reduction
‒ Load balancing
‒ Network redesign and upgradation
Non-technical loss reduction
‒ Better energy accounting (100% billing,
replacement of defective meters)
‒ Meter reading (AMR/smart metering)
‒ Billing (spot billing/ appointment of metering,
billing and collection or MBC franchise)
‒ Collections (increase in avenue and modes)
‒ Soft initiatives (community campaigns about
regular bill payments)
Competition promotion
‒ Introduction of private participation - DF
initiatives/ privatisation
‒ Public-private partnerships
‒ Outsourcing
Process strengthening
‒ Implementation of IT application in MBC
activities (AMR/HHD/e-mail, SMS-based
intimation)
‒ Implementation of IT application in network
management activities (SCADA, DMS, OMS,
etc.)
Network strengthening
‒ HVDS implementation
‒ Agriculture feeder separation
Government support
‒ Performance monitoring and review
‒ Cost reflective tariff
‒ Capital injection
‒ Employee incentive schemes
Regulatory initiatives
‒ Tariff rationalisation
33
Way forward
For India to successfully move forward on its path of
energy transition, it is important to address revenue
security concerns through investment-friendly
regulatory and policy framework. The institutional set
up must encourage financing in new technologies and
also provide government support to encourage
broader societal inclusion. This will be an important
journey and the foremost measure that will be required
to ensure policy and regulatory stability, not changing
the rules of the games post-facto. The legitimate risks
will have to be priced in the contracts. The government
and regulators need to work out credible mechanisms
for resolving challenges and disputes.
Electricity distribution business must be opened up for
more competition to allow for greater flexibility and
lower transaction costs. For this, the building blocks
must be put in place in terms of Universal Service
Obligations (USO), planning regimes, data disclosure,
capacity adequacy statements and appropriate
penalties for load serving entities for defaults.
The most important recommendation is overhauling
sector governance. Authorities in governance and
regulatory roles in the sector must define their roles
aligning to the overall economic and sector agenda
and besides working towards securing utilities’ long-
term financial sustainability. Energy will continue to
remain a sensitive socio-economic commodity that
touches human lives closely. At the same time, energy
is also the fuel of economic growth. In order to cater to
the vibrant and responsible economy, India must also
radically change the sector ownership arrangements
to step forward to a new low-carbon developed future.
34
Notes
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