The template for discom reform is improving thanks to more state governments gaining confidence

The Union Government has tried multiple initiatives over the last two decades to bail out electric power distribution companies as a tool to enact operational improvements.

Access to reliable electric power is critical for India’s human development and economic growth aspirations. Union government-led bailout programmes for India’s state-run distribution utilities happen every few years, with limited long-term impact. Meaningful reforms in the power sector are seen as politically fraught due to poorly conceived and poorly executed reforms of distribution companies (discoms) starting in the late 1990s.

But states quietly continue to adopt models of private distribution of electric power – and are now proving that smart reforms can be politically neutral while meeting economic and social goals.

A Tough, But Necessary, Sell

India’s state-run electric power grids are generally in poor operational and financial condition. There are exceptions, notably in Gujarat and Haryana. But, barring these two states, virtually all of the highly-ranked state distribution utilities are run by the private sector. The basic reason for the poor performance of these state utilities is politically motivated pricing, along with rampant theft and under-billing. The poor financial position of these utilities also makes it difficult to invest in infrastructure, resulting in further losses due to faulty equipment. 

State governments that have attempted to make dramatic changes in this politically-motivated pricing model have been punished in subsequent elections. This holds true in Tamil Nadu, Andhra Pradesh, Odisha, and Delhi, among other jurisdictions. Governments that tried extensive reforms – in particular, tariff rationalisation – have lost subsequent elections. The governments that replaced them reversed course and expanded subsidy programmes.

The Union Government has tried multiple initiatives over the last two decades to bail out electric power distribution companies (discoms) as a tool to enact operational improvements. The list includes the Electricity Act Amendments and the Accelerated Power Development Reforms Programme in 2003; the Financial Restructuring Package in 2012; the Ujwal Discom Assurance Yojana in 2015; and the Revamped Distribution Sector Scheme in 2021. Such programmes would, at best, trigger short-term operational improvements. But such positive changes are often short-lived.

Early Failures To Growing Acceptance

Another form of reform has been to allow private firms to become distribution companies. There are two basic models; the first, as an owner-operator wherein the private firm owns the utility outright. The second, as a distribution franchisee wherein the private firm manages basic discom functions for a set period of time.

Both models have been tried in multiple states. Not all attempts have been successful. And some of the states that experimented with private discoms were punished at the ballot box.

The privatisation models started proliferating in the late 1990’s without much success. Most notable was Odisha’s decision to completely privatise electric power distribution. This ended up being a failure due to bad baseline accounting and a devastating cyclone which destroyed crucial infrastructure. The concept of privatising electricity generation was downplayed and for a decade few attempts were made to revisit and improve the model.

However, over the last decade, a few states have been revisiting the idea of private electric power distribution. Rajasthan allotted a handful of franchises to CESC and Tata Power. The Union government handed over electric power distribution of Dadra & Nagar Haveli and Daman & Diu to Torrent Power. And more significantly, in 2020, Odisha privatised its four electric power distribution companies for the second time, with Tata Power taking control of all four.

The fact that these reforms have been handled so quietly is reflective of the fact that both the state government and the private entities have learned the painful lessons of the past and manage key stakeholders – and operational issues – with more finesse than before.

Discom Privatisation Strategies 

Based on a range of interviews we have conducted for a forthcoming report on private discoms, two stakeholder groups are most important. The first are the employee unions. If these unions feel changes could be problematic for employees, they can organise effective resistance and political opposition. The second group, naturally, are customers. The state and private operator must lay out a transparent process for the handover and what it will mean for operational changes, as well as tariff changes.

If the employee unions and consumers are comfortable with the model for a private firm taking over a discom, there should be minimal political blowback. Odisha’s state election next year will be a key political litmus test – if opposition parties rally around this issue and gain traction against the incumbent Biju Janata Dal (BJD) government.

Electricity reform in India is crucial. The Union Government’s models of top-down reform can have only limited impact without a more decisive push to amend the Constitution. Given political realities, the evolving model of state-led discom privatisation should be studied, improved, and adopted more broadly across India. Voters have shown more acceptance of recent models – which should give confidence to state governments. Lives can be improved through smart electric power reforms without ballot-box retribution.

Richard M. Rossow is Senior Adviser and holds the Chair in US-India Policy Studies at the Center for Strategic and International Studies (CSIS), Washington, DC. Views are personal, and do not represent the stand of this publication.