Don’t forget the power discoms

Crisis in the power sector is reaching a tipping point with distribution companies’ losses, as a percentage of the nominal GDP, likely to reach 1.2 per cent by March next year, if reforms are not expedited in earnest.

In March this year, rating agency ICRA had projected the losses for discoms — before accounting for government subsidy — in the country at Rs 80,000 crore in the past financial year, much higher than Rs 63,500 crore seen in the fiscal 2010. The estimates were based on a study of discoms’ functioning in 11 States. The financial health of discoms is a major concern and many States in recent times have moved towards hiking electricity tariffs to improve their financial position.

In fact, the Shunglu Panel report suggests that the net loss of 15 discoms — which account for over 90 per cent of the country’s power consumption — after subsidies was Rs 27,000 crore for the year ended March 31, 2010. And one of the major causes for this ill health is a mismatch between the low tariff structures and the cost of generating power.

According to a study by CRISIL, the share of energy expenses in Indian household expenses declined for the first time in two decades. In the five years ended fiscal 2010, power tariffs grew at under 5 per cent a year whereas per capita income grew at 13.4 per cent a year, and household expenditure at 10.6 per cent a year.

Power tariffs vary across States. Tariffs in West Bengal far exceed those in Tamil Nadu. Even though tariffs have gone up in some States in the past two financial years, still further hikes are critical to resuscitate the discoms.

Low tariffs

Data suggests that though the consumption power of Indian consumers has improved significantly, electricity tariffs are low. Tariffs can be increased so that the system is able to tap into the consumption power to restore sector viability. In fact, retail power tariffs in India are lower than those in developed countries by 8-10 cents a unit and those in developing countries by 2-4 cents a unit. As a rule, domestic tariffs are higher than industrial tariffs in developed countries while the reverse is true in developing countries. The realised tariff as a percentage of cost is 74 per cent in India compared with 115-120 per cent in developed countries and 80-90 per cent in other developing countries.

The other factor is the cost of power generation in India. It is estimated that over the next five years fuel costs will account for about 54 per cent of the total increase in power purchase cost for utilities. Domestic coal production has been virtually stagnant the past four years and over the past 12 years, domestic coal use for power generation grew by 6 per cent a year by volume against 24 per cent a year for imports.

Costlier imports now account for 15 per cent of coal-based power generation. Over the past two years, imports met a majority of the coal consumption by the power sector. The volume share of imported coal use for power generation doubled to 15 per cent and the energy share of imported coal use for power generation stands higher at 18 per cent, according to CRISIL data. To compound matters, with the recent changes in tax structures in some of the coal-producing countries such as Indonesia, Australia and South Africa, imported coal is priced at 1.6 times Indian coal on an equal-energy basis.

Tariff growth

The financial health of utilities will worsen if tariff growth lags increase in fuel prices and other costs. Any prescription for cure needs to include regular cost-linked tariff growth and higher domestic coal production. On account of cost increases, the tariff would have to increase at a CAGR of 6 per cent over the next 5 years.

The emphasis of almost all State Governments is currently on capacity addition in the generation sector and village electrification. However, distribution has for long been the ugly duckling of the power sector. Capacity addition will not have the desired results unless distribution reforms are implemented at the earliest.

Distribution companies are tiding over the cash shortfalls by borrowing from commercial banks. However, with increasing concerns over the creditworthiness of discoms, the availability of bank funds has been affected from FY2012 onwards, thus resulting in a stretched liquidity position. This has affected debt repayments and resulted in delays in payments to power and fuel suppliers. Regulatory authorities have not been able to ensurethe financial health of the distribution utilities. State Commissions must also provide for a power purchase cost adjustment formula to compensate the distribution companies for the increase in cost of power procurement during the financial year.

The Appellate Tribunal on Electricity has also taken a strong stand on the recovery of regulatory assets. Carrying cost of the regulatory asset should be allowed to the utilities in the average revenue realised of the year in which the regulatory assets are created to avoid the problem of cash flow to the distribution licensee.

Accounting problems

Regulatory assets face the twin problems of the accounting methodology and the actual liquidation of the same within three years. The State electricity boards with regulatory assets face massive cumulative losses, once Indian accounting standards converge with the International Financial Reporting Standards in April, due to a crucial accounting difference.

These losses, as calculated by the utilities, could be as high as Rs 17,457 crore for the Tamil Nadu Electricity Board, Rs 3,257 crore for Maharashtra State Electricity Distribution Co. Ltd and Rs 1,445 crore for Uttar and Dakshin Haryana Bijli Vitran Nigam Ltd. According to accounting experts, this loss could be averted if the International Accounting Standards Board agrees to change the International Standards to bring them in line with the Generally Accepted Accounting Principles used in India and some other countries.

Till the discoms see their way out of the red, the return on new investments in the power sector could be jeopardised. Serious attention needs to be drawn to the growing risk of bank loans drying up for setting up power plants, as a fall out of discoms’ mounting losses. Timely and regular revision of tariff — critical for systemic sustainability. Automatic tariff increases need to be effected for an approved fuel mix. There should be a game plan for improving distribution efficiencies.

(The author is Managing Director, Tata Power.)

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