The Lost Paradise of Reform: How Privatization Replaced Competition in Power Distribution

India’s electricity sector stands at a critical inflection point. The historical integration of carriage (distribution wires) and content (power supply) in the hands of state-owned distribution companies (Discoms) has led to inefficiencies, financial stress, and lack of consumer choice. As the country pushes towards a more competitive, consumer-centric, and sustainable power sector, the separation of carriage and content has emerged as a reform with transformative potential. This blog examines the roadmap, prerequisites, regulatory amendments, and implications of this separation, drawing from policy discussions, regulatory principles, and global experiences.

The Electricity (Amendment) Bill introduced in 2014 explicitly contained provisions for carriage-content separation. The Standing Committee on Energy under the then Chairman Shri Kirit Somaiya broadly endorsed this framework, raising only limited concerns around the design of the Universal Service Obligation (USO) and the need for clarity in consumer protection mechanisms. Rather than addressing these manageable shortcomings, the government eventually dropped the proposal under sustained pressure from private discoms. The policy thrust shifted toward privatization of state discoms, for effectively replacing public monopolies with private monopolies. This is a poor substitute for genuine structural reform, especially in India’s current context of weak regulatory and institutional capacity. Without strong, independent regulators to enforce non-discriminatory access and consumer safeguards, privatization risks entrenching inefficiencies rather than solving them.

Both incumbent political establishments and private discoms have resisted carriage-content separation, albeit for different reasons. For politicians, integrated discoms are convenient instruments for electoral populism, such as announcing free or subsidized power, without transparent budgetary support. For private discoms, the fear is even more fundamental: true separation would open their captive consumer base to competition. Today, they operate as de facto monopolies in their urban territories, shielded from consumer choice. Allowing multiple suppliers on the same wires would mean competing on efficiency, service quality, and innovation—areas where many have grown complacent. In short, the political class uses discoms as a tool for patronage, while private players fear the erosion of monopoly rents. This dual resistance explains why such a structurally sound reform has been delayed for over a decade.

The Rationale for Carriage & Content Separation

Discoms in India today shoulder two very different responsibilities: maintaining the distribution network and supplying electricity to end consumers. This vertical integration has created a monopoly structure that discourages efficiency, weakens financial performance, and denies consumers real choice. By separating the wires business (carriage) from the supply business (content), multiple suppliers could compete over the same network, introducing efficiency, innovation, and consumer empowerment.

It is also worth noting that almost all other modern network industries already operate on the principle of separating carrier and content. In telecom, carriers provide network infrastructure while multiple operators compete to offer voice and data services. In airlines, airports act as carriers and multiple airlines compete to provide content (flight services). Similarly, in natural gas distribution, pipeline infrastructure is treated as a carrier while suppliers compete to provide gas. The electricity sector, therefore, is an outlier in persisting with a vertically integrated model. Aligning it with the best global practices is not just desirable but necessary for fostering competition and consumer choice. The case for separation is even stronger now with the nationwide rollout of smart meters under the RDSS. Smart meters enable detailed tracking of consumption, time-of-day pricing, and even real-time switching between suppliers. In a segregated framework, this technology would allow consumers to select the most cost-effective or service-oriented supplier at any moment—similar to switching a mobile plan. Such competition, supported by smart metering and digital platforms, would drive innovation in tariff design, customer service, and energy efficiency. Consumers would no longer be passive recipients of electricity but active participants in a dynamic marketplace, benefiting from both financial savings and improved quality of service.

 Essential Principles

The separation envisions two distinct licenses through amendment in the Electricity Act:

1. Distribution Licensee: Responsible for the wire business, i.e., maintaining the distribution network and providing non-discriminatory access to all suppliers.
2. Supply Licensee: Responsible for the business of electricity supply to consumers, operating competitively in the marketplace, billing and collection of electricity dues.

3. Universal Service Obligation (USO): Every consumer, including those in remote or low-income areas, must be assured of supply.
4. Provider of Last Resort: The incumbent discom may be designated as the default supplier to ensure continuity.

This ensures non-discriminatory access, fosters competition, and maintains reliability of supply.

Pre-requisites for Segregation

Before separation can be effective, several conditions must be met:
- Legal Amendments: The Electricity Act must be amended to recognize distribution and supply as separate licensed activities.

- Asset Unbundling: Discom assets, accounts, and staff must be segregated between wires and supply businesses.

- 100% Metering: All feeders, DTs, and consumer connections must be metered to prevent leakage and disputes.

- Intermediary Company: A government-backed entity should manage legacy PPAs, socializing costs across suppliers.

- IT Systems: Advanced metering infrastructure (AMI), billing software, and settlement systems must be deployed.
Failure to achieve these will perpetuate high losses and inefficiencies.

Licensing Framework

Post-segregation, separate licenses for distribution and supply must be issued:
- Distribution license: Long duration (25 years) to reflect natural monopoly nature.
- Supply license: Short duration (3-5 years) to encourage competition.
- Incumbent Discoms may hold both licenses initially as supplier of last resort.
- Universal Service Obligations (USO) to be separately defined for distribution and supply.

- Regulatory Oversight: Capital adequacy, creditworthiness, and codes of conduct must be enforced for supply licensees. 

Power Purchase & Allocation

An intermediary company should manage legacy PPAs:
- Act as counterparty to existing contracts.
- Socialize costs and risks across suppliers through universal charges.
- Allocate fixed and variable charges proportionally among supply licensees.
Once PPAs expire, supply licensees may procure from competitive markets while meeting RCO and other obligations.

Tariff Determination

Tariffs will undergo a major re-design:
- Distribution licensee tariffs (wheeling/network charges) determination based on cost-plus principles.
- Supply tariffs regulated through ceiling tariffs, within which suppliers compete.
- Technical losses allowed for distribution, commercial losses assigned to supply licensees.
- Direct Benefit Transfer (DBT) for subsidies to consumers.

Amendments to the Electricity Act 2003

Major amendments are required:

• Section 2 (Definitions): Needs to define “retail supply license,” “distribution license,” “supply license,” “Universal Service Obligation (USO),” and “Provider of Last Resort (POLR).” Clear definitions are essential to avoid ambiguity in roles and responsibilities.

• Section 5 (Use of electricity by licensees): Must be revised to reflect the separation of functions and to specify the conditions under which supply licensees can use distribution networks.

• Section 12 (Authorised persons to transmit, supply, etc.): At present, this section grants a single license to both distribute and supply. It must be split so that one entity can hold a license for distribution (carriage) and another for supply (content).

• Section 14 (Grant of licence): Needs modification to allow multiple supply licensees in the same area while ensuring that distribution remains a regulated natural monopoly. It should also define license duration (long-term for distribution, short/renewable for supply).

• Section 42 (Duties of distribution licensees): To be amended so that distribution licensees are responsible only for network maintenance and providing non-discriminatory open access. Supply-related duties must be removed.

• Section 43 (Duty to supply on request): Currently places supply obligations on distribution licensees. This must be shifted to supply licensees, while distribution licensees retain only the obligation to connect consumers to the network.

• Section 45 (Power to recover charges): Needs bifurcation between network (wheeling) charges and supply tariffs. This will ensure transparency in cost recovery.

• Section 47 (Power to require security): Should specify that distribution licensees may seek security only for network usage, while supply licensees handle billing and payment risks.

• Section 48 (Power to require agreements): To be revised so that consumer agreements can be entered into directly with supply licensees, not with distribution licensees.

• Section 50 (Electricity Supply Code): Must be redrafted into two separate codes—one for distribution (network access, connection standards) and one for supply (billing, metering, grievance redress).

• Section 53 (Provisions relating to safety and supply): To clarify that network safety remains with distribution licensees, while supply licensees focus on service and billing compliance.

• Section 55 (Use of meters): Needs alignment with smart metering, specifying that meters should support multiple suppliers, real-time switching, and consumer choice.

• Section 56 (Disconnection of supply): Responsibility for disconnection due to non-payment should lie with supply licensees, but physical action will be executed through the distribution licensee. This division must be codified to avoid disputes.

• Section 57 (Standards of performance by licensees): Should clearly distinguish performance standards for distribution (network reliability, voltage quality) and supply (billing accuracy, complaint resolution, response times).

• Section 62 (Determination of tariff): To be amended so that regulators set (i) wheeling/network charges for distribution, and (ii) ceiling tariffs for supply. Suppliers then compete within that ceiling, ensuring affordability and choice.

• Section 86 (Functions of State Commissions): Must explicitly empower State Commissions to license multiple suppliers, monitor competition, enforce USO obligations, and oversee both distribution and supply codes separately.

Implementation Challenges & Opportunities

Challenges:
- Political economy resistance from states and incumbents.
- Managing stranded costs and employee issues.
- Ensuring metering and IT backbone for billing.

Opportunities:
- Greater efficiency through competition.
- Improved consumer service.
- Financial relief for Discoms.
- Enabling renewable integration through smarter supply competition.

Global Experiences & Learnings

Countries like the UK, Australia, and parts of the EU have successfully implemented similar reforms. Lessons include:
- Strong regulatory oversight to prevent abuse of market power.
- Consumer education for effective switching.
- Safeguards for vulnerable consumers through social tariffs.

Boogey of What if?

One of the recurring arguments against carriage-content separation is the fear that private suppliers will avoid unserved or less profitable areas, leaving network development unattended. Critics worry that competition will only thrive in urban or high-paying consumer segments. This concern, while valid, overlooks the fact that network development is the responsibility of the distribution licensee—the carrier—not the supplier. As a regulated natural monopoly, the carrier’s obligation is to extend the network under universal access mandates, supported by capital investment frameworks and, where necessary, government subsidies. Also, after implementation of SAUBHAGYA, electricity accessibility is near universal. Suppliers, on the other hand, are responsible for offering competitive electricity supplies once the network reaches consumers. Far from undermining expansion, segregation strengthens accountability: carriers focus on infrastructure growth, while suppliers compete on efficiency and service. With proper regulatory design, the fear of stranded or neglected areas can be effectively mitigated.

Accountability in a segregated framework must be carefully designed through law, regulation, and contracts. The distribution licensee, as the carrier, will be accountable for the quality and reliability of the physical network—voltage stability, outage management, metering infrastructure, and timely network expansion. Their performance should be benchmarked through strict Standards of Performance (SoPs) issued by the regulator, with penalties for non-compliance. The suppliers, on the other hand, will be accountable for consumer-facing services: timely billing, transparent tariffs, grievance redress, and meeting renewable purchase obligations. Competition among suppliers will act as a natural accountability mechanism, since consumers can switch to an alternative if a supplier fails to perform. To ensure fairness, regulators must maintain separate consumer grievance forums for network and supply issues, so responsibility is unambiguous. This dual accountability system ensures that both the wires business and the retail supply business are disciplined—by regulations in the case of distribution, and by competition in the case of supply.

To ensure that carriage-content separation does not compromise equity, India can adopt a Universal Service Fund (USF) model, like what has been successfully implemented in the telecom sector. In telecom, operators contribute a small share of their revenues to the USF, which is then used to finance connectivity in rural and remote areas where commercial viability is weak. A similar electricity Universal Service Fund could be created, funded through a small levy on all supply licenses, to support the costs of serving low-paying or geographically difficult consumers. This would spread the burden fairly across all suppliers, prevent cherry-picking of lucrative segments, and guarantee universal access. By institutionalizing USO financing through a dedicated fund, the government and regulators can ensure that competition and consumer choice coexist with social obligations

Cherry Picking of Cross Subsidizing Customers

A concern often raised is that since Section 62(3) is not being amended, tariff differentials across consumer groups will continue. In such a scenario, if a new supply licensee offers tariffs lower than the regulated ceiling for cross-subsidizing groups, it may do so by effectively reducing their cross-subsidy contribution. Over time, this could erode the cross-subsidy pool, leaving the burden to fall disproportionately on the remaining base and eventually leading to higher tariffs for presently subsidized groups. 

However, this risk does not inevitably follow if the framework is designed properly. Regulators can require all supply licensees to contribute proportionately to the cross-subsidy pool—whether through a regulated levy or a Universal Service Fund mechanism—regardless of which consumers they serve. This ensures that competition drives efficiency, better service, and consumer choice without weakening support for subsidized categories. Indeed, the existing monopoly structure has not prevented rising tariffs or inefficiencies. By contrast, carriage-content separation, with the right safeguards, can make cross-subsidies more transparent, fairly shared, and financially sustainable.

Even DSO is a monopoly. How things will change?

A recurring concern is that even after segregation, the Distribution System Operator (DSO) will remain a monopoly. If the network continues to be controlled by a single entity, sceptics ask how much will really change in practice. They also point out that India already allows a form of carriage-content separation through Open Access for consumers above 1 MW. If that mechanism exists, the question naturally arises—what incremental benefit will full-scale carriage-content separation bring to the system?

Yes, the DSO will still be a monopoly, but only for the wires business, which is a natural monopoly and constitutes smaller share in tariff compared to energy charges . The real shift is that supply will become competitive, giving consumers real choice. Open Access technically allows this for 1 MW+ consumers, but in practice it has been restricted by regulatory barriers—high surcharges, delays, and now the complexity of General Network Access (GNA) approvals. These hassles mean only a small insignificant share of large consumers actually use it. Why normal consumers be deprived of this choice? Carriage-content separation extends supplier choice to all consumers, removes the need for case-by-case open access approvals, and makes competition the norm rather than an exception. This is the big incremental difference. 

 Why not Privatize Discom itself?

Privatizing discoms fully without separating carriage and content risks nothing more than replacing a public monopoly with a private one. Such a move does not create real competition, consumer choice, or efficiency gains. In fact, under India’s current weak regulatory capacity, private monopolies could exploit consumers, slow down universal access, and resist much-needed innovation. The real reform lies in segregation—keeping the wires business as a regulated natural monopoly while opening the supply business to competition. A key caution in this debate is that, without strong and independent regulators, even well-intentioned privatization can backfire. Weak regulatory frameworks may fail to enforce non-discriminatory access, monitor performance, or safeguard consumer interests. Strengthening regulatory institutions and building their capacity must therefore precede or accompany any structural reform; otherwise, privatization risks becoming a cure worse than the disease.

It is true that India’s regulatory institutions are not yet as strong as they should be. However, segregation can still succeed because it builds accountability through two complementary forces. First, the wires business (distribution licensee) remains a regulated natural monopoly with clearly defined Standards of Performance—so regulators focus only on network quality, reliability, and expansion. This is simpler and easier to monitor than the current bundled model. Second, the supply business is disciplined by competition. Even if regulation is weak, consumers can vote with their feet: poorly performing suppliers will lose market share to those offering better tariffs, billing systems, or customer service. In other words, regulation ensures the wires are neutral and reliable, while competition ensures suppliers are efficient and consumer-focused. Together, they reduce the burden on regulators and create a self-correcting system that is far more robust than the current monopoly structure.

What happens to meter when Supplier is changes?

When a consumer decides to switch from one supplier to another, no physical change of the meter is required. Instead, the Meter Data Management System (MDM) of the smart meter simply reassigns billing rights from the old supplier to the new one, effective from the date of switching. The historical data remains preserved for audit and transparency, while the new supplier only accesses consumption records from the date of transfer. This system ensures seamless switching, reduces transaction costs, and eliminates consumer inconvenience. Just as a mobile phone tower supports multiple telecom operators without being rebuilt each time a user changes their plan, a single smart meter can support multiple suppliers through intelligent data allocation. In this way, smart metering combined with an MDM backbone becomes the technological foundation of consumer choice in electricity supply. 

The Way Forward

The separation of carriage and content is not just a structural reform, but a paradigm shifts in India’s power sector. It will require coordinated legislative amendments, political will, regulatory innovation, and technological readiness. If executed well, this reform can unleash consumer choice, efficiency, and financial sustainability, paving the way for a more competitive and resilient power sector in India.

Case Studies: Lessons from Abroad

Reforms in the electricity distribution sector are not unique to India.Almost all developed countries have implemented structural separation of carriage and content with varying degrees of success. Their experiences provide valuable lessons for India’s journey.

In the European Union, electricity laws mandate the unbundling of distribution and supply to promote competition. While implementation varies, the principle is consistent: regulated Distribution System Operators (DSOs) manage the networks, and multiple suppliers compete for customers. In Germany, DSOs own and operate the wires while suppliers compete nationally. France follows a similar model with Enedis as the regulated DSO and suppliers like EDF and Engie competing. Spain, Italy, the Netherlands, and the Nordic countries have also embraced this structure, creating some of the most competitive electricity retail markets in the world.

United Kingdom: The UK pioneered the separation of electricity distribution and supply in the 1990s. Distribution networks were regulated natural monopolies, while multiple suppliers competed for consumers. This led to increased efficiency, significant reduction in losses, and greater consumer choice. However, it also required strong consumer protection frameworks to safeguard vulnerable households.

Australia: Australia’s National Electricity Market (NEM) followed a similar model. Distribution businesses remained regulated monopolies, while supply was opened up to competition. One key lesson from Australia is the importance of advanced metering infrastructure, which enabled demand response and dynamic pricing.

Japan has completed the segregation in  2016.

In USA, it has been done  in states like Texas, New York, Pennsylvania, Illinois, Massachusetts and in Canada, it has  been implemented in Alberta.

Numerical Perspective: Why Separation Matters

To illustrate the impact of separating carriage and content, consider a state discom with the following profile:

- Total consumers: 33 million with annual consumption of say 125 TWh
- Aggregate technical & commercial (AT&C) losses: 25% or (125/(1-.25)) TWh= 41.67 TWh
- Average cost of supply: ₹7.50/kWh
- Average revenue realized: ₹5.50/kWh
- Annual revenue gap: ₹ (41.67810^9* 7.5)/10^7 crore= ₹ 31,250 Crore

If supply is competitively bid among multiple licensees, efficiency gains of even 10% could reduce AT&C losses by 2-3 percentage points annually. This would translate into savings of ₹3300–₹5000 crore annually. Moreover, with ceiling tariffs in place, suppliers would innovate through smart metering, time-of-day pricing, and digital billing to win consumer trust.

Detailed Roadmap & Milestones

The separation of carriage and content should be seen as a phased reform, implemented over 5–7 years, with clear milestones:

Phase I (1–2 years): Preparatory Stage
- Amendments to the Electricity Act and Rules.
- Creation of intermediary company for PPAs.
- Universal 100% metering at all levels.
- Pilot projects in select urban areas to test retail competition.

Phase II (3–5 years): Transition Stage
- Roll-out of separate supply licenses in urban centers.
- Gradual allocation of PPA costs through intermediary company.
- Strengthening of consumer grievance redressal mechanisms.
- Roll-out of smart meters with prepaid/TOD features.

Phase III (5–7 years): Consolidation Stage
- Expansion of supply competition to semi-urban and rural areas.
- Phasing out of intermediary company as PPAs expire.
- Consolidation of supply licensees with proven track record.
- Full-fledged competition across states with cross-border supply options.

By setting milestones and evaluating progress annually, India can ensure that the reform is both ambitious and practical.

Conclusion

The roadmap for carriage and content segregation represents one of the most ambitious reforms in India’s power sector since the enactment of the Electricity Act 2003. It aims to move the sector away from monopolistic inefficiencies towards a model that prioritizes consumer choice, efficiency, and sustainability. While challenges such as political economy considerations, stranded assets, and regulatory readiness are real, they are not insurmountable.

By learning from global experiences, leveraging technological advances like smart metering and digital platforms, and ensuring a strong consumer protection framework, India can unlock the full potential of this reform. The end result will be a financially viable, consumer-friendly, and future-ready electricity sector—one that is capable of meeting the twin goals of universal access and decarbonization.