My views on Power Distribution Sector Issues - Power Watch India magazine

Question 1: What are the accumulated losses of the state distribution companies as of now?


The accumulated losses as of March 2010 estimated by the High Level Panel on Financial Position of Distribution Utilities that studied the 15 state utilities (accounting for nearly 91% of power consumed) were Rupees 107,000 crores. On an average, the losses accruing per annum, after provision for subsidies, can be estimated at Rupees 27,000 crores. Along with these, there are some concerns about the quality of debtors and other current assets on the books of accounts of the distribution utilities, which if examined and assessed prudently, may reveal possibly a substantially higher value of accumulated losses.

Question 2: Given the current position of the power distribution companies, are the banks/financial institutions are now wary of lending fresh loans to them?


Certainly. The banks have concerns about NPAs which can affect their performance and may even lead to greater systemic issues. The lenders to distribution utilities have typically been government owned banks, who may have had some political compulsions to extend loans to distribution companies, with some hope hinged on guarantees provided by the states. The financial condition of the distribution utilities appears gloomy, as these are not able to recover their cost of operation, owing to the mismatch in costs and tariffs. Even though the costs have risen substantially, there has been no substantial increase in power tariffs in the last several years which has led to distribution utilities resorting to loans to fund their operations. Quality of these loans obviously being suspect has given the banks a concern about extending further loans when the pace of reforms in the sector have been slow.

Question 3: Discom's financial losses are much debated. There can't be competition without economic freedom. What are the real problems with Discoms? Who is to blame – regulators, state government or power utilites?

One of the most critical and fundamental problems of the electricity sector in India has been the unwillingness of the consumers to pay for electricity and pay higher for higher quality of supply. This has led to the political classes to continue to look at electricity as a free give-away to please their constituencies. It is this fundamental consumer behavior that has led to devising of ways and means to keep the tariffs artificially suppressed and not allow the regulators to regulate cost-reflective tariffs. To this end, the regulatory mechanism itself has been subverted in several cases by compromising on the independence of regulators, poor quality of management of the distribution companies and not implementing prudent and appropriate technologies to establish effective billing and collection. To summarize, the blame can be distributed among the market participants but the unwilling consumer of electricity may well be the biggest culprit.

Question 4: Do you think, the recommendations made by the Shunglu committee report will help the utilties to come out the mess?

The recommendations of the High Level Panel puts the onus on the state governments for distribution losses including paying up for the debt in case SEBs are unable to meet payment obligations even after restructuring and moving the debt to the SPV. The Panel also proposes to establish independence of regulators and applications of mechanisms and business models for effective reduction in AT&C losses.

The Panel observed that there was wide disparity between the T&D losses reported across various areas within the state. Hence it has been suggested that the regulator impose a surcharge over the basic tariff based on actual losses in a particular area, which would vary. The committee observed that several regulators avoided tariff shocks despite having validated the costs incurred. The gap creates regulatory assets intended to be converted into cash in due course of time. This gap has reached significant proportions in several states like Tamil Nadu, West Bengal and Haryana. The committee has recommended an end to this practice. These recommendations mostly address the long term concerns and may have significant impact on the outlook for power sector in India, since the distribution sector being the weakest link has also reflected the strength of power sector in general.

Question 5: Shunglu Committee has proposed to create the Special Purpose Vehicle (SPV) to deal with the defaulting utilities/State Governments. How far this move would be beneficial to achieve the purpose?

The High Level Panel has proposed the formation of special purpose vehicle with RBI contributing 76 per cent of the share capital, while the rest of the capital contributed by the two state-run power lenders — Power Finance Corporation and Rural Electrification Corporation. The Panel recommended that the lenders may jointly negotiate with the distribution utilities to restructure the loan and invoke state government guarantees to recover parts of the loan extended. The central bank may extend a line of credit to the SPV and the interest on this account may be charge to the utilities whose assets are transferred to the SPV. The transfer of these assets from utilities to SPV would be subject to the state governments agreeing to a plan to move to cost-reflective tariffs, payment of electricity dues by the state departments, payment of outstanding agriculture subsidies, and also supporting the operational plans of the distribution companies to franchise services and upgrade of assets. Through this take-out provision, the distribution companies may get fresh capacity to borrow and upgrade their assets focused on reducing AT&C losses, while the restructured loans are paid to the lenders with no hair-cuts.

Question 6: Pune has successfully implemented the franchise model. What are the hinderances in implementing similar models in other parts of the country?



Other than 5 major known operating urban Input Based distribution franchises in the country (Bhiwandi, Agra, Nagpur, Aurangabad, Jalgaon), there are various other operating distribution franchises in the country in states like Orissa and MP. The models can vary depending upon the financial feasibilities and risk appetite of the state governments/distribution utilities. The High Level Panel observed that the franchise model was more successful in implementation as well as loss reduction. In case of Bhiwandi Franchise model, the Panel reported that loss reduction had been effected through better service to customers as also due to better management practices and improved surveillance. While attempts are being made to adopt models with appropriate modifications to suit the local requirements, hindrances have been observed from the political will to resistance from the distribution utilities.

Question 7: It's been noted that despite mounting losses, power utilities have not curbed their capex. Over 2006-09, consolidated capex is increased from Rs 26,100 crore to Rs 52,200 crore. In present financial burden, how important for the utilities is to take control of the cost?

Capital expense is inevitable to upgrade the distribution networks and assets, and for effective implementation of loss reduction programmes. These need to be looked at from the perspective of investment in sustainability of business. The take-out of accumulated losses through the SPV may be directed at this objective as well. However, there is no denying that better control is required on costs and expenses.