Hanging by a thin line, discoms show signs of life

The fact that the power generating and distribution industry is in a shambles in many parts of India will come as no surprise to many. For instance, the Tamil Nadu Electricity Board (TNEB), responsible for distributing power to much of the state, has accumulated losses of Rs 50,000 crore. Many power distribution companies (discoms) in other states mirror TNEB’s fragile financial condition.

Now, however, a sea change has gradually taken place over last year in the finances of discoms who were broke because of their inability to raise the price of power. At least fifteen have been able to raise tariffs, thereby minimising what would have otherwise been a brutal year, considering the huge increase in the price of coal during this period. Moreover, twenty-three of these discoms have applied for permission to further increase tariffs for the following year, suddenly altering, for the better, the future financial viability of their operations. This may not be good news for customers, but is a crucial boost to the industry, since electricity generators can now get paid on time and don’t have to consider shutting off power supply until payments are received from discoms.

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Discoms are hobbled by the fact that the cost of fuel is passed on to them, making these distributors vulnerable to price fluctuations. Since fuel costs accounted for around 48 per cent of the total increase in costs for utilities over the last six years, and will go up to 54 per cent over the next five, it is easy to see why discoms were desperate for a price increase. On account of the cost increases, the tariff would be required to increase at a CAGR of six per cent over the next five years, according to a report by CRISIL.
This is a big deal for both discoms as well as the power sector, which together service an economy and a population that are growing, by and large, at a rapid clip. In an environment where the industry has been prevented from raising the price of power largely due to political compulsions—most states hadn’t done so in as many as eight years—the fact that so many have, in just one year, substantially raises the prospects for discoms.

The numbers tell a very simple and direct story about the financial health of discoms. According to data from the power ministry, the average cost of supply (ACS) for all power companies has clearly far exceeded the average revenue realised on a subsidy basis. In 2008-09, the average costs stood at Rs 3.41/kwh versus revenues of Rs 2.91/kwh; in 2007-8, costs were Rs 2.93/kwh versus revenues of Rs 2.65/kwh; and in 2006-07, costs were Rs 2.75/kwh compared to revenues of Rs 2.49/kwh. Without a price increase, operating a discom is clearly a loss-making proposition.

Not surprisingly, the accumulated losses of financial utilities were estimated to be over Rs 2 trillion at the end of 2011-12, from Rs 1.23 trillion at the end of the previous year, according to a CRISIL report. Apart from the losses, the amount of outstanding loans for the utilities, including short- and long-term ones, stood at Rs 1,77,602 crore as of March 31, 2010.

But it isn’t just the lack of a price increase that has caused so much past trauma. An expert who tracks the power sector says apart from no tariff hikes, a reason for the state of affairs is the non-receipt of subsidies by state governments. Regular increases, coupled with some measures, will ease out the problems of the distribution segment, he says. Subsidy from state governments was estimated at 18.94 per cent (Rs 29,665 crore) of total revenue of the state utilities in 2008-09, which had increased from 11.17 per cent (Rs 13,590 crore in 2006-07) and 14.12 per cent (Rs 19,518 crore) in 2007-08. Although subsidies booked have grown at 30 per cent a year, they were received at only 14 per cent, according to CRISIL.

This bleak situation existed even as far back as a decade ago. So much so that in 2001-02, a committee headed by Montek Singh Ahluwalia had to bail out utilities by issuing long-term bonds to be discharged by the state governments. Some experts believe that if the government does not take action on a continuous basis to improve the financial health of discoms, the situation that arose in 2001-02 may recur.

Yet, the improvement seen in the last year has been enough to impress two main stakeholders on whom the discoms are dependant. Rural Electrification Corporation (REC) and Power Finance Corporation (PFC), major lenders to the power sector, are bullish on the progress made last financial year. Both resumed loans to discoms recently. With a current loan book of around Rs 1,02,000 crore, REC’s lending towards discoms stands at Rs 35,000-40,000 crore. “We have resumed short- as well as long-term lending to discoms and there is no restructuring or any default by companies till now,” he said.

PFC, too, has turned on the spigot. A senior PFC official says the company has only a four per cent loan exposure to discoms, but has resumed short-term lending following the new criteria set by the power ministry. Of its total loan assets of Rs 1,30,072 crore, only Rs 5,667 crore goes to the distribution segment. Still, while the loan sanctions by PFC at the end of 2011-12 stood at what seems relatively paltry, Rs 2,664 crore, it was a huge improvement from just Rs 216 crore doled out at the end of 2010-11.

However, it’s not as if the struggle for financial viability is over just yet. These kinds of tariff increases need to happen for the next two-three years continuously in order to make a substantial improvement in the financial position of the discoms, REC’s director of finance, H D Khunteta, tells Business Standard.

Last week, the power ministry also gave the industry a shot in the arm by introducing competitive bidding rules for the short-term purchase of power by distribution companies. These new guidelines aim at introducing transparent processes in the procurement of short-term power, and bringing down the overall cost of power for consumers.

This is important since discoms depend on short-term deals for power to cater to sudden spurts in demand, especially during elections and in summers. These spikes can cripple already debilitated discoms and the above-mentioned guidelines could bolster a weak yet critical industry that is showing encouraging signs of life.
Source: BS

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