The municipalization of power distribution companies: Some thoughts
In the recent past, the Chief Secretary of Odisha questioned Tata Power Central Odisha Distribution Ltd for sluggish restoration of supply after nor‘westers (locally known as ‘Kal Baisakhi’). Such a reaction from the senior-most bureaucrat of the state is praiseworthy. The post has shown that he understands the problem of people and is ready to raise his voice wherever required. This gesture has made him a hero in the eyes of ordinary citizens. But it has also exposed the helplessness of the government machinery in managing the power sector in general, and the powerful private player which controls the power distribution in the state, in particular.
Orissa had privatized the distribution business but not with much success. The first experiment, with the Reliance, failed which led to the cancellation of its distribution license. The electricity regulator of the state demonstrated its courage and conviction in asking the private player to leave the State. The people of Odisha thought a lesson has been learned and the mistake will not be repeated. But once again all four distribution companies were transferred to another large private player: Tata Power Ltd.
The majority control of all four distribution companies of Odisha, serving more than one crore customers, having annual revenue of more than ten thousand crores, and having assets of more than fifteen thousand crores was transferred to Tata Power Limited for less than one thousand crores. The power to manage such an important public asset was transferred to a private company without much public debate and without involving any stakeholders.
Who owns the power distribution companies of Odisha? Tata Power Limited holds a 51% stake in all distribution companies of Odisha and the balance is with the Government of Odisha. 45% of Tata Power Limited is owned by an unlisted company Tata Sons Limited, and 50% of Tata Sons is owned by two Trusts: Sir Dorabjee Trust and Sir Ratan Tata Trust. It seems in the name of the power sector reforms we have created a private monopoly by dismantling government monopoly. In the process, we have created a wide gap between the owners and the consumers.
Let us refer to Tata Power Limited’s prospectus (a statutory document given to SEBI at the time of the issue of shares) as an example to understand the power of the promoters and the major shareholders of a large private company. It says, Tata Sons, as a significant shareholder, will continue to have the ability to exert influence over the actions of Tata Power. Tata Sons may also engage in activities that conflict with the interest of Tata Power’s shareholders and in such event Tata Power’s shareholders could be disadvantaged by these actions. Tata Sons could cause Tata Power to pursue strategic objectives that conflict with the interests of Tata Power’s shareholders.
Such statements are within the ambit of the law and there is nothing illegal about it. That is the power of major shareholders of a corporate entity. They control the companies where they have the majority stake and also control their subsidiaries. So, we cannot achieve much by questioning the local management of one of the small subsidiaries of Tata Power Limited. It is more important for the government and other stakeholders to reflect on the ownership of the power companies. It may not be a bad idea to initiate a public debate on the alternative forms of ownership and management structures of the power sector.
Odisha was the first state in the country to usher in reforms in the power sector by unbundling the vertically integrated Orissa State Electricity Board (OSEB) into distribution, transmission, and generation companies. Odisha also takes credit for setting up the first state-level electricity regulator in the form of the Orissa Electricity Regulatory Commission (OERC). Unlike many other states, Odisha did not hesitate to privatize its distribution business. In retrospect, we feel the State has hurried with the transfer of ownership.
According to a survey by the World Bank, 70% of the countries have electricity distribution utilities that are majority-owned by the public sector, while the remaining 30% privately-owned distribution utilities are in middle and high-income economies. We are at a loss to understand the reasons behind the privatization of power distribution in Odisha despite not being a high-income economy.
Since our experience with privatization was not good, it is time for us to explore other forms of organizations. If required, let us be bold and roll back privatization. This leads to the next question: If we roll back privatization, who will manage the distribution of power? There can be several models, but we would like to stress “municipalization” as an alternative to privatization.
Municipalization is the legal process by which the local community assumes the control of generation and distribution business from an investor-owned company. It is the opposite of the “privatization” process. Private-sector firms focus on profits for shareholders, whereas municipal utilities try to provide better-quality services, and the profit if any, goes to the municipal budget. Municipalization helps in the maximization of stakeholders’ benefits rather than just being driven by the maximization of shareholders’ wealth.
Municipalization helps in controlling the flight of capital which happens when the companies are owned by large private players. Companies transfer funds through dividends and several forms of related-party transactions. For example, during the last ten years, Tata Power (a listed company) has distributed Rs. 4000 crores as cash dividends to its shareholders. Of this amount, more than 1800 crores have gone to its promoter, Tata Son Ltd (an unlisted company). Municipalization may stop such a flight of capital to a large extent.
The idea of utility municipalization is not a new concept. Several countries are actively pursuing municipalization of formerly privatized assets. For instance, in France and Latin America, municipal involvement is particularly common in the water sector. In Germany and the USA, municipalization is popular in the energy sector. Even Japan is experimenting with municipalization of energy utilities aggressively after the Fukushima Daiichi nuclear disaster.
The Los Angeles Department of Water and Power (LADWP) is one of the oldest municipal utilities operating since 1917. At present, it serves over 4 million residents and employs more than 10,000 people. The Board members, as well as the General Manager, are appointed by the mayor and confirmed by the City Council. The operations are financed solely through the sale of water and electric services. No tax support is received. Moreover, 8% of gross operating revenue is transferred to the City General Fund each year for local development. Similar examples are found in Europe too. In 2013, the citizens of Hamburg voted to take back the power grid from Danish giant Orsted.
We need not roll back reforms but can experiment with the rollback of privatization. In that pursuit, let Odisha become the first State in the country to take steps towards municipalization of the power distribution companies.