DisCom Billing Losses: Moderate Improvements, but Miles to go

Executive Summary

Aggregate Technical and Commercial losses (AT&C losses) have consistently remained a major problem in the distribution space of the electricity sector in India. AT&C losses are a widely discussed issue, with conventional wisdom blaming high AT&C losses as the root cause of Distribution Company (DisCom) financial problems. However, recent trends show improved AT&C losses. In this paper we examine the losses in detail, breaking the composite AT&C loss figures into constituents to understand if these improvements are sustainable and address the financial problems of DisComs.

A high AT&C loss does not inherently mean financial losses for the DisCom—the impact depends on the target set by the regulator. Regulators allow a certain level of AT&C losses, and these costs are passed through to consumers. However, the excess losses (i.e., beyond the specified mark) incurred by the DisComs pose the real threat. Although the AT&C losses have improved from a high of 30.47% (in FY2007) to 15.79% (in FY2023), in financial terms they are still high, more so when we multiply percentage per unit losses by the rising volume and higher prices.

Even at the improved level of 15.79% (2023), the excess AT&C loss costs around Rs 0.21 per each unit of energy (kilowatt-hours or kWh) sold by the DisComs. The same excess AT&C losses, cumulatively over a period of 17 years (FY2007–FY2023), constituted over one-third of the total cash basis financial gap suffered by all public sector DisComs put together. Therefore, the improvement observed in AT&C loss in percentage terms is not a reason to feel relieved. To address the problem of financial gap suffered by public sector DisComs, AT&C loss is an urgent issue that needs to be tackled upfront.

Digging into its constituents, AT&C loss comprises of two components: technical loss (also called billing loss) and collection loss. Billing loss is the amount of energy (in kWh) lost in the network, i.e., from the point of input at the DisCom periphery to the delivery point of the end-consumer. Billing loss happens due to network physical losses as well as theft of electricity. Theft includes stealing electricity by laying bare hooks onto the transmission conductors, withdrawal of energy by an un-registered consumer from distribution lines and poles, meter tampering etc.

In contrast, the collection loss indicates loss due to DisComs’ inability to collect money against the bills raised to the consumers and is measured in rupees. Collection loss also includes loss due to drawl of electricity under the subsidised consumer category–but using it for commercial purposes, etc. Collection losses span both types of non-payments–by the end-consumer and the state government in case it had promised a subsidy. However, collection loss also includes another form of theft such as unauthorised use of electricity (using a domestic connection for commercial purposes), drawl through tampered meters etc.

Is Steady Improvement of AT&C Losses Good Enough?

Since FY2007, both the components of AT&C loss have been improving in percentage terms. While the billing losses have improved from a whopping 26.2% (in FY2007) to 13.28% (in FY2023), the collection losses improved from 5.83% to 2.89%. Irrespective of the improvement in percentage terms, it is the excess losses’ beyond the mark specified by the regulator and its impact in financial terms that matters most.

This improvement in billing losses can be seen where the FY2023 loss was observed to be Rs 4,730 crore, while the cumulative billing loss (FY2007-FY2023) beyond the normative target was Rs 74,766 crore.

Although the gap between normative billing loss and the billing loss achieved substantially reduced over the period, still there exists significant scope for further correction of the current normative mark of billing loss from 12.58% to around 4%.1. More than ten public sector DisComs have already achieved less than 10% billing loss, and this is good enough signal for regulators of other DisComs to bring down the normative mark much further. Putting it all together,there is enough scope for billing losses to come down from the current level of 13.28%.

Bringing down the billing losses helps bridge the financial gap that distribution sector is currently suffering from. At the current power purchase costs, assuming DisComs achieve a moderate target of close to 6%, the financial value of this 7.28% of billing loss reduction can bring down the DisCom’s p power purchase cost by around Rs 33,000 crore every year, from FY2030 onwards (at the current power puchase prices). Given the escalation in power procurement costs over the period, if the billing loss is not improved, the loss in rupee terms is likely to increase further. As such, it is needless to say that any reduction in DisComs’ expenditure brings down the tariff burden on the consumer.

In this context, this paper focuses its analysis on billing losses and the way forward for its improvement.

Critical Issues That Helped Loss Improvement

What is the path forward to reduce losses further? This paper is aimed at addressing a range of questions for public utilities across India:

1. Given the billing loss improvement achieved since FY2007, what is the level of investment (or channels of revenue) that facilitated such improvement?

2. What have been the roles of Government (through schemes) as well as the Distribution Companies (DisComs) (through capital expenditure and repairs and maintenance) in facilitating such improvement?

3. How do investments through ‘repairs and maintenance’ and ‘capital expenditure’ complement each other?

4. Can the efficacy of investment be measured? If not, what are the challenges?

5. Regarding DisComs, is there any saturation effect between high and low loss areas? Stated another way, where would we expect the maximum bangfor-buck improvement?

6. What does it take to achieve the ultimate goal of matching the best figures achieved by a public DisCom?

7. What are the policy implications based on the inevitable heterogeneity across and within DisComs?

Challenges in Measuring Efficiency of Investments

Progressively tighter targets for billing losses require a combination of steps by DisComs; some are based on intangibles (including political will), but many loss reductions require investments in grid strengthening, IT infrastructure, manpower, etc. Another challenge is the ongoing evolution of the grid, which is growing in reach, changing consumer mix, change in demand, among other factors.

Measuring billing losses and the efficacy of investments made is complex for two main reasons. Firstly, the data on billing efficiency are never 100% accurate because of the lack of universal metering (and meter reading). The overwhelming majority of agricultural consumption is unmetered, and its accounting is heavily assumption-based. Historically, there was a wider lack of metering across a large chunk of consumers, and so some older data are also questionable. Secondly, measurement of investments made, and its efficacy is also quite challenging.

Given DisComs are cash-strapped, there is a greater reliance on many Central Government schemes for capital expenditures, some of them explicitly geared towards loss reduction (e.g., Restructured Accelerated Power Development & Reforms Programme (R-APDRP)). Even for other investments like the Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) scheme for rural electrification, the investment went not just for new wires but also for increasing the capacity of existing rural networks, which ultimately facilitates lowering billing losses. Most of the investments being dual or multi-purpose, breaking down the investment into identifiable components that directly improve billing losses is challenging. At the same time, it remains to be seen if well-accepted regression techniques provide any insights.

The Way Forward

Given the criticality of the objectives and the challenges as explained above, this paper therefore, makes recommendations on the following lines:

1. Regulators should consider a tightened billing loss improvement trajectory to bring down losses from the current 13.28% to reach the benchmark 6%, i.e. 7.28% improvement over a seven-year period (they could consider a lesser range as well, depending on a host of factors including consumer mix, geographic terrain etc.).

2. Given the track record of past investments, there is a requirement for greater Central Government allocations and capital expenditure as well as ‘repairs & maintenance’ expenditure by the DisComs.

3. Owing to the criticality of government support through multi-objective schemes in improving networks, the schemes should be designed for a longer duration, while customising the terms and conditions to meet the heterogeneous nature of DisComs which also have varying loss levels.

4. As measurement of losses suffers from inherent challenges, distribution transformer (DT)-level and feeder-level (in that order) metering should be taken up as a priority.

5. Loss due to theft is part of billing losses, and it can be safely assumed that efforts towards modernisation of network coupled with efforts of the on-ground staff must have improved the loss due to theft by a considerable measure. Given the opacity of data, the exact measure and improvement in loss due to theft is not examined in this paper. With this backdrop, continuation of efforts towards mitigation of theft is suggested.