The unravelling of unbundling?

The rapidly unravelling Dabhol contract appears to have sent the Union government scurrying for less devastating payment security mechanisms for IPP power. Union power minister Suresh Prabhu says the government is exploring the possibility of handing over distribution to IPPs in lieu of payment security devices such as counter-guarantees and escrows. Power distribution falls under the purview of the states, but the minister has been quoted saying that the law will be amended to end the utilities' monopoly on distribution. Whether he can pull the states along on this controversial move remains to be seen. For starters, he has given the green signal to NTPC to set up a joint venture with BSES to enter the distribution business. On the face of it, the proposal might sound eminently workable. After all, if the generator is also responsible for distribution, it would have an interest in making sure that all the power supplied is billed and paid for. Theoretically yes. But it is doubtful whether any generator would willingly get into the messy business of retail supply. Years of neglect has bred powerful vested interests, political interference and civic apathy which cannot be waved away with a magic wand. A great deal of investment, determination and staying power is necessary to succeed in the distribution game. The poor response in states seeking to privatise their distribution business shows that few players ? even among those with distribution experience ? have these qualities. Generation on the other hand, is child's play. Generators have always exhibited a demonstrated preference for the convenience of single buyer utility which will help them concentrate on their core business. The only exception that they might be willing to make is to contract directly with big industry for bulk supply. The proposal may have been prompted by the existence of such an arrangement in three of the five distribution zones run by private licensees in the country. BSES in Mumbai, CESC in Calcutta and AEC in Ahmedabad have their own generation which they supplement with purchases from the grid. These, however, are chiefly products of backward integration ? of distribution licensees setting up generation capacities. Recently, when Orissa privatised the distribution business, AES, the IPP which set up the Ib Valley generation project in the state was persuaded to take over the central distribution company, CESCO in order to avoid all the four distribution companies being awarded to a single bidder ? BSES. Now, in less than two years, there are already reports that AES wants to pull out of distribution business in the state, finding itself unequal to the task of bringing down commercial and technical losses. Even if there are takers for the government's proposal, it is unlikely that any IPP would want to take over anything other than metropolitan areas with a high concentration of industrial and commercial consumers. Historically, that is how private licensees evolved ? serving the more affluent customers. Let us not forget that the State Electricity Boards were set up in the first place to make sure that all the customers in an area were served without discrimination. If IPPs are allowed to take over distribution zones, we will once again be putting the clock back to let cherry picking occur. There will be a scramble among IPPs located in a state for the lucrative zones like industrial estates and commercial complexes, leaving the vast majority of the rural and poor customers for the utility to service. Which brings us back to the same million dollar question ? how to maintain supplies to those who can't afford the full cost of supply. Phasing out cross-subsidies and charging the customers the full cost of supply ? even if it is deemed desirable ? is a politically infeasible option in a coalition democracy. Besides, why unbundle utilities, if the government suddenly re-discovers merit in vertical integration of generation with distribution? Merely separate the accounts of generation, transmission and distribution functions of the SEB and try and split them vertically and sell them piecemeal to prospective buyers. If there are any takers, that is.