What has contributed to the positive margins of the four distribution companies along with the subsidy support has been the reduction in power purchase costs.

C. Shivkumar

Bangalore, Sept. 29

CHANGED accounting norms and reduced power purchase costs are expected to effect a turnaround of the four State-owned distribution companies in Karnataka and make them attractive for private equity party participation.

This year, sources said, the four companies - Bangalore Electricity Supply Company Ltd (Bescom), Mangalore Electricity Supply Company Ltd (Mescom), Hubli Electricity Supply Company Ltd (Hescom), and Gulbarga Electricity Company Ltd (Gescom) together are expected to generate a surplus of at least Rs 515 crore.

This is despite the reduction in the power tariffs by six paise per unit by the electricity regulator. This year onwards, tariffs will be calculated on the basis of 12 per cent return on equity instead of the conventional three per cent return on net fixed assets.

The surplus was inclusive of subsidies payable by the State Government to three distribution companies. The power subsidies budgeted is estimated at Rs 1,779 crore for the current fiscal and distribution companies are expected to be the beneficiaries.

But this year onwards, Bescom will not be getting any subsidies from the State Government.

The subsidies budgeted for the current year would be payable only to the remaining three distribution companies, which have extensive agricultural load.

There are an estimated 15.3 lakh irrigation pump sets in Karnataka and a bulk of them are concentrated in Mescom, Gescom and Hescom circles. The sources said that this would be first time since unbundling that the distribution business would be earning a surplus. Based on the surplus, the distribution margin per unit is expected to be at least 75 paise per unit of electricity sold. To achieve this margin, the subsidy support from the State Exchequer is to the extent of 70 paise per unit of electricity sold.

Besides, the State Government has assumed all the debts payable to the domestic financial institutions - including the Power Finance Corporation and The Rural Electrification Corporation - by the erstwhile integrated entity, Karnataka Power Transmission Corporation Ltd. As a result, the debts of the distribution companies are minimal. What has contributed to the positive margins of the four distribution companies along with the subsidy support has been the reduction in power purchase costs.

These costs are substantial lower than the estimates made in the expected revenue charge submissions to the electricity regulator - the Karnataka Electricity Regulatory Commission (KERC).

Power purchase costs of the four companies were scaled down to Rs 6,614.51 crore against Rs 8,402.50 crore estimated by the distribution companies.

The combined effect is that the four companies would end up having small positive earnings of slightly under Re 1 per share.

This would be first time since the unbundling process that the companies would actually have positive earnings, implying that a turnaround is under way. But, the sources said, the target is to better the earnings ratios. The only way it could be achieved is by bringing down the distribution losses further. The average distribution loss allowance permitted by the regulator is 22.08 per cent against 28 per cent the companies had sought.

Consequently, the sources added, if the loss reduction is lower than what the regulator allows, the earnings would improve further and positively impact valuation.

(This article was published in the Business Line print edition dated September 30, 2005)
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