Third time lucky?

Three major aspects need to be addressed while attempting to reform State electricity distribution utilities — restructuring their finances, ensuring future financial discipline and improving operational efficiencies, including the important matter of tariff rationalisation. The Ujwal Discom Assurance Yojna or UDAY grapples only with the first two as the third and most important issue lies squarely in the domain of the State governments. Unless operational efficiencies are improved and tariffs rationalised, the UDAY package may well go the way of the other two packages devised by the government in 2002 and 2011. That three bailouts have been necessary in just over a decade shows how difficult it is to reform this sector, which is prone to political interference and populist subsidies. Yet, the fact is that the distribution segment is crucial in the power chain and no meaningful reform of the power sector is possible without cleaning up distribution.

The UDAY package is different from the preceding two bailouts in two ways. First, it transfers three-quarters of the outstanding debt of the State utilities, estimated at ₹4.3 lakh crore in all, to the respective State governments in a phased manner. This is unlike the past when the dues were converted into bonds issued by the utilities. The advantage of the UDAY move is that it will reduce interest costs as the States will issue bonds at rates linked to government securities. Second, it attempts to enforce discipline on States as it requires them to absorb a part of future losses of the discoms. This is a commendable step that will, at best, force States to prevent utilities from going into losses, and at worst, ensure that such losses are funded out of the State budget. The package, thus, clearly pins responsibility for the financial health of the utilities on the shoulders of the respective State governments.

The success of the package, which aims to bring down aggregate technical and commercial losses (AT&C) from 22 per cent now to 15 per cent, hinges on improving operational efficiencies of the utilities. Stuff such as smart metering or upgrading of transformers, separating agricultural connections at the transformer level, or even the simple matter of weeding out pilferage will be difficult to implement unless the utilities play ball. Tariffs also need to be rationalised with subsidies for agricultural connections coming out of the State government budgets. To get States on board, the Centre has also offered carrots such as additional funding through its schemes for the sector and additional coal at cheaper prices. Clearly, there is only so much the Centre can do, given the constraints of the federal set-up. It is now up to the States to see reason and cooperate with the Centre in reforming this critical infrastructure sector.

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