Impact of Excluding AT&C Loss as Bid Parameters for DISCOM Privatization

 Introduction

Distribution Companies (DISCOMs) form the backbone of the power sector, bearing the brunt of both operational and financial challenges. Their financial health is significantly strained due to high-cost legacy Power Purchase Agreements (PPAs), delayed government subsidy payments, rising coal prices, escalating railway freight and transmission charges. These factors collectively drive up the Average Power Purchase Cost (APPC). Additionally, weak governance and persistently high Aggregate Technical and Commercial (AT&C) losses exacerbate the crisis.

Addressing these issues demands structural reforms in power distribution. While legislative un-bundling to break natural monopolies and introduce competition may offer a long-term solution, political resistance remains a key barrier. Alternatively, a Public-Private Partnership (PPP) model emerges as a pragmatic approach, leveraging private sector efficiency and investment while protecting the interests of all stakeholders, including governments, private entities, and consumers.

Privatization Framework: The Standard Bidding Document (SBD) Approach

Recently issued Ministry of Power’s Standard Bidding Document (SBD) outlines a structured framework for privatizing DISCOMs, ensuring operational efficiency, transparency, and financial sustainability. Key features of the framework include:

1. Transaction Structure: Transfer of a majority equity stake and control of a DISCOM to a private entity through competitive bidding.
2. Employee Rights: Protection of existing employment terms for DISCOM employees.
3. Bidding Parameters:
• For DISCOMs with AT&C loss ≥15%: AT&C loss reduction is the primary bid parameter.
• For DISCOMs with AT&C loss <15%: Upfront premium on equity consideration is the bid parameter.
4. Key Agreements: Share Purchase Agreement, Shareholder Agreement, and Bulk Supply Agreement.
5. Timeline: The process from strategy finalization to DISCOM handover is expected to take around 32 weeks.

This framework aims to balance stakeholder interests, ensuring efficient service delivery and financial stability. However, deviations from these principles, particularly in the selection of bid parameters, may undermine the reform's objectives.

Hypothetical Case Analysis: Excluding AT&C Loss Reduction as a Bid Parameter

Scenario Assumptions

Consider a hypothetical case of DISCOM-X , a distribution company with high AT&C losses. In this case, privatization occurs through the sale of a 51% equity stake using a premium-based bidding approach in deviation from the Ministry of Power's SBD provision of AT&C loss reduction as bid parameter. Key metrics for DISCOM-X are:

Metric	Value
Assets (Rs. Crore)	11,745
Reserve Price (51% Equity)	1,660
Distribution Loss (%)	17.89
AT&C Loss (%)	37.58
Energy Input at Discom Periphery (MU)	14,875
Collection Efficiency (%)	78.27
Average Cost of Supply (Rs./kWh)	7.85

 

If the bid parameter is changed from AT&C loss reduction to a premium on equity, the financial and operational landscape shifts significantly. The five-year distribution loss reduction target is set at a modest 4.85% (from 17.89% to 13.04%).

Potential for AT&C Loss Reduction through increased collection efficiency

• Current AT&C Loss: 37.58%
• Envisaged Distribution Loss (Year 5): 17.89%
• Current Collection Efficiency: 76.04%, if collection efficiency is increased by 5%.

1. New Collection Efficiency with 5% improvement=76.04%+5%=81.04%

2.      New AT&C Loss:

New AT&C Loss (%) = (1−(Collection Efficiency (%))×(1−Distribution Loss (%))

                                                       = 1-(.8104) *(1-.1789) = 1-.0.6652= 33.48%

So, with a 5% increase in collection efficiency, the new AT&C Loss is 33.48% (reduced from 37.58%).

3.      Energy Input = 14875 MU (given)

New Energy Realized (considering new AT&C loss): Energy Realized (MU)=Energy Input (MU)× (1−New AT&C Loss (%)100)

 = 14875-*(1-.3348) =9894.71 MU

So, with a 5% increase in collection efficiency, the new energy realized is 9894.71 MU (compared to the previous 9283.56 MU).

4.      ACoS (New)=Total Cost of Supply (₹)​/ New Energy Realised

= 9283.65 *7.85/9894.71= Rs.7.37

 Following the same method for every 5% improvement in collection efficiency, we get following:-

Impact of only Collection Efficiency Improvement 

Collection Efficiency (%)	Energy Realized (MU)	AT&C Loss (%)	ACoS (Rs./kWh)	Reduction in ACoS (Rs./kWh)
76.04 (Current)	9283.56	37.58%	7.85	-
81.04 (+5%)	9894.71	33.48%	7.37	0.48
86.04 (+10%)	10356.42	29.48%	7.04	0.81
91.04 (+15%)	10889.75	25.48%	6.69	1.16
96.04 (+20%)	11494.30	21.48%	6.34	1.51

For every 5% increase in collection efficiency, AT&C loss reduces, leading to a reduction in the Average Cost of Supply (ACoS) by 6.18%. Energy realization increases by around 6.5% with each 5% improvement in collection efficiency. These gains are perpetual over the 25-year license period and far exceed the one-time reserve price paid by the private operator. The remaining AT&C loss of 21.48% reflects the distribution losses including billing in-efficiency.

Following is the value of corresponding annual saving :

By prioritizing equity premium as a bid parameter, private players focus on minimal distribution loss reduction (4.85%), ignoring the potential for significant collection efficiency improvements (24.54%). This oversight harms consumers, as they forgo annual and perpetual benefits that could be realized from better AT&C loss reductions.

Regulatory Context

The regulatory framework strongly emphasizes AT&C loss reduction in tariff determination, as highlighted in the Electricity (Second Amendment) Rules, 2023:

• Rule 20: State Commissions must determine AT&C loss trajectories for tariff approval, aligned with national programs like the Revamped Distribution Sector Scheme (RDSS).
• Measurement Guidelines: The Central Electricity Authority (CEA) notification (CEA-GO-13-25/1/2023-DPR Division/73, dated 30-06-2023) outlines clear guidelines for calculating AT&C losses.
• Distribution Loss has been defined in Electricity ( Accounts and Additional Disclosure ) Rules 2024 notified on 10th Oct.2024 as ratio of
• Energy Sold with in Periphery of Discom/ Energy available at Discom's periphery.

Conclusion

Excluding AT&C reduction as a bid parameter for discoms having AT&C losses in excess of 15% in deviation from SBD could distort and undermine the reforms objectives, as the inefficiencies might be passed to consumers through higher tariffs. It allows private players to prioritize equity premiums over efficiency improvements, undermining consumer welfare. A robust PPP model must ensure that efficiency gains from AT&C loss reductions are shared with consumers by way of reduced tariff, government by way of reduced loss & subsidy burden, and private players by way of fair return. This balanced approach not only reduces subsidies but also avoids socializing losses while privatizing profits. Prioritizing AT&C loss reduction will lead to a win-win situation for all stakeholders and ensure a successful reform for a sustainable power distribution ecosystem.