Operations and maintenance (O&M) costs estimation and performance benchmarking for power distribution companies (DISCOMS) in India
Student name: Ms Aakriti Chaudhary
Guide: Dr Kaushik Ranjan Bandyopadhyay
Year of completion: 2012
Host Organisation: ICRA Management Consulting Services Ltd., Noida
Supervisor (Host Organisation): Mr Sunil Varma Marri
Abstract: In January 2012, the 2nd Working Group on power – a committee constituted by the Planning Commission,
Government of India to formulate the programme for development of the power sector during the 12th Plan,
presented its report on the electricity needs of the country in the recently entered 5-year plan period (FY 2012-
2017). The report mentions the projected growth in demand for power and the necessary infrastructural growth
in the power sector to enable provision of affordable, reliable and clean electricity to the citizens of India in the
current planned period. Despite the economic conditions prevalent in the world and the result on Indian
economy, the Working Group is ambitious in its vision to provide power for all by end of the plan period. The
present plan’s mission is of a ‘Low-carbon growth strategy’ which emphasizes on the reduction of dependence
on the conventional sources of energy and on increase in the share of hydropower and renewable energy
sources.
A very important aspect in the sustainable growth of the power sector is the reduction of losses of electricity and
finances in the entire power value chain. Our country has faced tremendous losses, even to the extent of 50%, in
the transmission and supply of electricity to the end users in the past few decades. Distribution of electricity was
in most states, till a decade back, the most wasteful link in the electricity supply chain. Financially, the state
electricity boards were loss-making entities that needed government budgetary support to meet their working
expenses. Even at present, after the liberalization of the power sector and the unbundling of most state
electricity boards to form separate entities for generation, transmission and distribution, the financial health of
most electricity distribution companies remains a concern. A study by PFC Ltd. on the performance of power
utilities in India reveals that most distribution companies are still running in net losses and the revenue gap has
to be met the respective state governments. Assessment of operations and maintenance (O&M) expenses forms
an important exercise for a power utility in order to judge its operational efficiency.
This report assesses the cost performance of eight city-based power distribution companies vis-Ã -vis that of
state-distribution companies. An econometric approach is taken to estimate optimum level of O&M expenses
where the actual incurred O&M expenses are compared with model-generated expenses for the year 2010 for
the utilities in the sample. The sample size for the study is composes of 38 power distribution companies in
India, including eight city-based distribution utilities. Operations and maintenance costs comprise three costs
components1
– (i) Employee Expenses, (ii) Repairs and Maintenance Expenses, and (iii) Administrative and
General Expenses. These are controllable expenses because the management can exercise a certain degree of
control over these yearly expenses.
O&M expenses form most city-based distribution companies are higher than the model-expected expenses and
State Power Distribution Companies show better cost performance owing to ‘economies of scale’ – as it is
revealed in the report that O&M expenses do not rise linearly and show very less correlation with increase in
distribution area. Network density, Sales per area and number of employees affect O&M expenses more than
other parameters.
Thus, all city-based discoms show poorer cost performance than the model predicted performance benchmarks
as the entire sample of 37 discoms comprises some very large state discoms like MSEDCL (Maharashtra State
Electricity Distribution Company Ltd.) and the Andhra Pradesh discoms, among others.
This does not mean that the concept of city-based distribution companies should itself be challenged. There are
obvious benefits that CBDs have over state discoms in terms of reliability, power outages and quality of power.
The CBDs also have a consumer-centric focus and have provided other benefits to consumers like online billpayment,
higher level of automation, IT-enables customer care centres, et al.
We can say that the huge differences in O&M costs incurred by city-based discoms as compared to state
discoms is due to a difference in management philosophies and strategies followed by the former. There are,
however, areas that can be looked up on for improvement in terms of cost performances like – the number of
employees maintained by DISCOMs. The number has fallen drastically from about a decade back owing to
technology up-gradation but there is a need to bring this number down in the coming years. Direct employee
expense is one of the major O&M cost heads.
In terms of repairs and maintenance expenses, city-based discoms have higher network densities (km of network
per unit area) than the state discoms, which is shown to have a higher correlation with R&M expenses. There is
a need for more capital expenditure in infrastructural development like – undergrounding of cables and
automation to detect and rectify faults immediately. Underground cables are less susceptible to damages than
the overhead lines but are costlier than the latter. Transformer failure rates have also reduced drastically since
the privatization of distribution companies but again, investments in assets are needed to increase the overall
reliability of the distribution system and bring down the costs of Repairs and Maintenance.
The report also presents the employee productivity and capital productivity ratios to support its claims on the
operational cost performance of distribution companies.
