Electricity distribution sector is at a cross-road, with rising cost of supply, emergence of competitive renewable supply options, loss of cross-subsidising sales, and sustained high-cost base-load surplus. At the same time, the age old challenges of high transmission and distribution losses, poor quality of supply and service, and burgeoning financial losses persist. This implies that there will be significant demand uncertainty for distribution companies, making power purchase planning more complex and riskier. Also, the traditional model of cross-subsidy based tariff design is unsustainable.

Unless guided by conscious policy decisions, these changes will unfold chaotically, leaving the distribution companies stranded with excess capacity and huge losses—and the sufferers of such a fallout will be mostly small and rural consumers with serious implications for state level politics. To avoid such consequences, it is extremely important to intervene at the earliest. The impending changes can be turned into opportunities only if distribution companies, regulators, and policymakers begin acting at the earliest. This discussion paper suggests an approach and some concrete measures to enable a smoother transition for the sector and especially, for the small consumers.