The central government recently clarified that IBC proceedings could be triggered against state government-owned electricity distribution companies (discoms). This could have major implications for the electricity sector. Successful resolution of discoms would, however, require further policy thinking.
States have strong incentives to favour important political constituencies by charging lower tariffs and selectively enforcing against unauthorised electricity use. Discoms have, therefore, been used as a tool of redistribution. Despite four bailouts in the past two decades, they continue to suffer from precarious financial health.
Privatising discoms could potentially solve problems. Some states have opposed this idea. The central government is, therefore, considering delicensing electricity distribution itself. This idea has also been met with opposition. Against this backdrop, enabling creditors to trigger IBC proceedings against discoms assumes significance. The threat that the Indian Bankruptcy Code (IBC) poses would compel states to either reform their financially distressed discoms or yield to privatisation efforts through insolvency resolution.
Successful privatisation of discoms through the IBC would depend on multiple factors. The consumer mix and geography are important determinants of a discom’s commercial viability. A recent Niti Aayog report argues that privatisation would be difficult when a discom’s service area is more rural. Given the tariff differential and difficulty of billing, collection and, in some cases, metering, the cost of servicing rural and agricultural consumers becomes commercially challenging. In addition, state regulators, which issue distribution licenses and set tariffs, have not turned out to be as independent of state government control as needed. This remains a major risk for investors. Given such sectoral factors, a going concern sale of some discom assets through the IBC may be challenging.
Policymakers also need to consider the interplay between the electricity regulators and the insolvency tribunal. For example, the US bankruptcy code explicitly preserves the regulatory agencies’ rate-setting authority under a plan of reorganisation. There is no similar provision in the IBC. Therefore, clarity is needed on the National Company Law Tribunal’s power to approve a discom resolution plan that proposes a tariff change. If the NCLT could do so, tariff changes through resolution plans would be binding on the State Electricity Regulatory Commission. The policy on this issue may have significant implications for discom resolution.
Insolvency of such utility service providers may need special treatment to ensure continuity of supply. Widescale disruption of such services could have disastrous consequences for an economy. For this reason, the United Kingdom restricts the rights of energy suppliers and their creditors to initiate insolvency proceedings. Comparable institutional safeguards may be required in India, while being mindful of state capacity constraints. The policy solutions that emerge should be informed by foreign precedents but rooted in Indian realities.
This article was originally published in Pratik Datta on 21 January 2022 Co-written by: Pratik Datta, Senior Research Fellow. Click here for original article
Contributed by: Pratik Datta, Senior Research Fellow
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