The power sector in India is going through extremely challenging times with widening demand-supply gap, idle generating capacity due to coal and gas shortages, and mounting financial losses.

According to the Economic Survey presented earlier this year, as well as several other reports on the subject, the combined annual losses of all State utilities in the year 2010-11 were close to Rs 50,000 crore.

This is not the first time that such alarm has been raised; in 2000-01, a similar situation arose and large-scale financial restructuring and unbundling of the erstwhile State Electricity Boards (SEBs) was undertaken. The reform process initiated a decade ago has not produced the desired result, as is evident from the present situation. Power sector reforms commenced in the early 1990s with the generation sector allowing private investment, both domestic and foreign. Investors welcomed this policy with enthusiasm, but failed to convert that enthusiasm into actual investments. The Government, at the turn of this century, realised that the focus on generation alone was not enough, as returns from investment accrue from the distribution sector.

MOUNTING LOSSES

Apart from distribution being in the domain of the State governments, it was becoming financially unviable with mounting losses. In 2001-02, the annual loss of SEBs stood at around Rs 30,000 crore. Inevitably, SEBs started defaulting on power procurements and the level of outstanding dues reached Rs 50,000 crore for government-run power companies alone. The focus, therefore, shifted to the distribution sector.

The Government of India responded with a scheme to enable payment of outstanding power dues, while at the same time seeking commitment of comprehensive reforms in the hitherto-neglected distribution sector.

The implementation of the Montek Singh Ahluwalia committee allowed waiver of a part of interest on outstanding dues of SEBs and amortising the dues over a 15-year period with promise of financial and regulatory reforms, in particular stressing on energy accounting, metering and collection.

The Accelerated Power Development and Reforms Programme (APDRP) complemented the process. It provided financial support for upgrading distribution infrastructure and incentives for loss reduction.

FINANCIAL DISTRESS

However, it would not be off the mark to say that the reform process has been slow and skewed, with some States marching ahead of the others. While a comprehensive reform process is being expedited, as announced by the new Union Power Minister recently, the turnaround of financial health of the utilities needs urgent affirmative action. The precarious financial situation has forced many States to avoid sourcing power through long-term contracts -- and meet the demand, particularly during peak hours, by overdrawing from the grid.

Grid overdrawal provides a handy tool to the utilities to meet demand, without a long-term financial commitment that their financial situation perhaps does not allow. Undeniably, this is not a very healthy situation and causes severe distress on the grid. The recent grid failures are pointers to the fact that such a situation cannot be allowed to continue.

Taking cognisance of the financial distress, the government set up a High Level Panel under the Chairmanship of a former CAG to recommend remedial measures. The HLP in its report submitted in December of 2011, has recommended a host of regulatory, managerial and financial measures to revive the distribution sector and improve its financial health.

The HLP notes that the accumulated losses during 2005-10 for 15 States are in excess of Rs. 80,000 crore after accounting for subsidies. These losses have been funded largely by borrowings from public sector banks and financial institutions like PFC and REC, and half of them have been guaranteed by the State governments. Given that in most utilities, there is a gap between the average cost of power and the average revenue realised, the report highlights that neither the utilities nor the financial institutions are in a position to repay the loans – in spite of the guarantees.

The report cautions that newer loans to the utilities will not be easy in this situation. This, in the backdrop of mounting operational losses, would stress the sector even more and could impact the ability to pay for power procurement. The consequences, in the wake of the recent grid failures, are not hard to fathom.

RESTRUCTURING EFFORT

The HLP has, therefore, suggested setting up of a Special Purpose Vehicle (SPV) that will facilitate refinancing of loans that banks and financial institutions have redefined, or feel a need for it. The report recommends a line of credit from RBI to the SPV to enable it to take over such loan assets.

The recommendations require the States to agree to a direct debit by RBI from the State government account in the event of default.

It requires State governments and utilities to agree to implement an operational pan for turnaround of the distribution sector that must include tariff revisions, financial upgradation of utilities, managerial certainty, and putting in place all reform measures that the State has consented to (like energy accounting, 100 per cent metering, segregation of feeders, etc).

These recommendations are prudent and practical and need the urgent attention of policy makers. Financial upgradation of utilities is the first step that needs to be taken in addition to capital investments that could yield revenue.

It is worth noting from the overall balance sheet of the utilities that the debt: equity ratio is 20:3. The low levels of equity, apart from the problems of debt repayment, also limit the ability of utilities to borrow. Moreover, the consolidated balance sheet indicates a significant proportion of loans from the State governments.

Inevitably, the servicing of State loans too follows the same route as commercial bank loans.

Therefore, to operationalise the first set of recommendations, States should proactively take steps to restructure their loans to utilities, which are neither getting serviced nor are likely to be repaid in the near future.

If such outstanding State loans are converted into equity, it will have a positive effect of reducing interest cost of the utilities, thereby enabling reduction in tariff.

This will help reduce the gap between average cost of supply and the average revenue realisation, which is at present around 60 paise per unit. It will also prepare the ground for implementing reform measures recommended by the HLP to restore bankability and commercial viability of the sector.

(The author is Programme Officer, OzonAction Programme, United Nations Environment Programme, Bangkok. The views are personal.)

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