Power distribution privatisation: The why comes first, the how comes later

Time of India

06-05-2025

Michael Faraday discovered the secret of converting kinetic energy to electrical energy in 1831. By 1883, Surat became the first place in India to have electricity, followed by Kolkata, Darjeeling, Mysore, Hyderabad, Delhi, Mumbai, Jamshedpur - in that order (Ahluwalia S., 'From Lattus to Lasers'). The rest, as they say, is history. These new 'businesses' were started by private sector companies – a trend that continued till independence. After 1947, Government assumed primary role in shaping electricity sector as a public service and infrastructure, comprising generation, transmission, distribution. As a concurrent subject in India's constitution, electricity distribution has been controlled largely by state govts, and by the Central govt in case of Union Territories (UT).
Things came full circle when some state governments started revisiting the pros and cons of Private vs Govt. ownership of Power Distribution Companies (DISCOMs). In 1993, UP government privatised electricity distribution in Greater Noida. Like Jamshedpur, Greater Noida too was more like a greenfield venture, where the city itself was built from scratch – and so was power distribution infrastructure. By contrast, privatisation of existing state-owned utilities with the prime objective of
turnaround
started later in 1999, when Odisha government attempted privatisation of power distribution. However, it yielded mixed results, was aborted midway and then reattempted successfully in 2020, after incorporating the learnings from Delhi privatisation of 2002. Delhi government privatised power distribution with the objective of turning around a lackadaisical Delhi Vidyut Board by using the Private Sector Partner as the
agent of distribution reforms
.
Even today, the private sector's footprint forms a miniscule portion of India's overall power distribution landscape, whereby a vast majority of India's states continue to be serviced by government owned Utilities (70+). Why is that so, even when Delhi privatisation has strongly demonstrated how across 3 DISCOMs operated by 2 different private players (Reliance Infra and Tata), the
Aggregate Technical & Commercial Loss
(AT&CL) has been consistently and uniformly brought down from 45 per cent-60 per cent to ~6 per cent in a couple of decades?
What went right in case of Delhi?
First and foremost, Delhi's AT&C Loss reduced sharply because that was precisely the bid parameter defined by the Delhi govt – AT&CL Reduction in first five years – so no wonder that the winning bidders delivered successfully on the criterion they had bid for. While both Delhi (2002) and Odisha (1999) had put up for divestment exactly 51 per cent equity in their DISCOMs, Odisha government had made the price (valuation) for that stake as its bid parameter. Later, in the second privatisation initiative in 2020, Odisha government defined bid parameter as a combination of AT&CL Reduction Target, price for 51 per cent equity and certain other criteria.
This difference in approach between Delhi privatisation vis-à-vis Odisha-1999 vis-à-vis Odisha-2020 privatisation holds the key to what makes privatisation successful or not – The 'why' comes first, the 'how' follows why. Since in case of Delhi, the purpose (WHY) behind privatisation was distribution reforms (as reflected by AT&C Loss Reduction), all aspects of the privatisation process reflected that theme. In case of over-achievement of loss reduction target by the privatised DISCOM, monetary gains of such over-achievement were shared with and retained by the DISCOM (in part or in full depending on the varied ranges of performance) as an additional incentive. Similarly, there was additional incentive for collecting past arrears. All of that added up.
Yet, this operational turnaround (AT&C Loss Reduction) has not automatically resulted in financial turnaround.
Delhi Electricity Regulatory Commission
(DERC) has been reluctant to raise tariff, and has disallowed significant expenditure when passing tariff orders. Between FY 2009-10 and FY 2021-22, DERC, on average, disallowed 15 per cent-18 per cent of the ARR projected by the DISCOMs (Chitnis, Nair and Singh, CSEP). This leads to a vicious cycle of litigation. Both private players have about a
dozen each
of tariff order disputes still sub judice.
Now let us look at privatisation efforts by the Central government - UTs of Daman Diu Dadra and Nagar Haveli (DD-DNH) in 2022, and Chandigarh in 2025. Chandigarh is the first and only case where 100 per cent shares of DISCOM have been divested up front to a private player (it was 51 per cent equity in all other cases, with a provision to extend from 51 per cent to 74 per cent in case of DD-DNH based on milestone achievements that are yet to unfold). The reserve price was based on net fixed assets, and the winning bidder (CESC), outbidding six others, ended up paying a whopping five times that amount! And then comes the twist in the tale. The bid was floated in the market on 10th November 2020, and the private player could take over the government-owned DISCOM only by 1st February 2025 - after a delay of 4 years – all because of litigation by staff of erstwhile utility protesting against privatisation.
The question staring states like UP who have recently initiated DISCOM privatisation process is: why do they want to privatize (no, it cannot be 'all of the above')? The why should then determine how to go about it – the bidding process, the labour unions, the works. The how (e.g., bid parameter, bidder eligibility, opening balance sheet, post takeover treatment of various financial and operational aspects, etc.) will follow once there is absolute clarity on why.
(Shalabh Srivastava is Visiting Senior Fellow at the Centre for Social and Economic Progress (CSEP). Views are personal.)