Financial bailout of ailing Power Sector

Financial bailout of Power Sector
Vinod Kumar Gupta
India’s power sector is poised for a dramatic change and but can the government wipe out state distribution companies’ losses by 2019 is a million dolor question. The future of NDA government is directly linked with the reforms in the ailing power sector of the country .
The Government has now proposed another financial bailout package for state owned power distribution companies (Discoms ). Centre proposes to convert 75% of loans to Discoms into government bonds and reduce the interest on the remaining 25 % loan to bailout 8 Discoms.
The Power Ministry has come out with a financial restructuring to deal with over Rs 4 lakh crore loans of power distribution companies .70% of the debt is held by utilities in eight states, namely, Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Andhra Pradesh, Jharkhand, Bihar and Telangana and government has planned to bailout these utilities.. The state run Discoms are facing cash crunch and are incurring annual losses of about Rs 60,000 crore.
In September 2012 the UPA government had come out with a financial restructuring plan for the Discoms that came with some conditions. The states were asked to take up half of loan through state-guaranteed bonds in a phased manner. The other half portion was converted into long-term loans with a guarantee from the respective states. Some of the states opted for this financial restructuring but there was no mechanism in place to monitor their performances .
Eight states namely U.P., Haryana, Jharkhand, Tamil Nadu, A.P., Kerala, Rajasthan and Bihar signed financial restructuring plan bailout package with government but could not adhere to the terms and conditions and are again in red. Now most of these state Discoms are again ready to take another bailout package. The tariff increase in the eight States Discoms with highest debt has not been expected lines in last few years. The present average difference between average cost of supply and average tariff is around 90 paise per unit so the financial losses of Discoms are going to increase.
Now Government is once again ready with financial bailout package claiming that this time it will work. Under this plan 50% of outstanding debt as on September 2015 will be converted to state government securities by March 2016 , while the remaining 25% will be converted by March 2017 to solve the troubles at cash starved power utilities. At the end of financial year 2017-18, about 10% of such losses will be included in the state’s fiscal deficit, and by March 2022, 100% losses made by Discoms will be tagged to the fiscal deficit, according to the proposal.
The proposal floated by the government also puts a cap on future borrowings of these Discoms, with fresh working capital loans limited to only 33% of a Discoms annual revenue. This will push these companies to raise tariffs and cut losses, to borrow in a more efficient manner.
This conversion will happen through the issue of special purpose bonds outside the Fiscal Responsibility and Budget Management Act, 2003 limit. So, basically, the Discoms debt will be transferred from banks loan books to their investment books as state government bonds. This seems to be a proposal to reduce the non performing assets of banks rather to improve the working of power sector.
The government now claims that this third bailout plan is not a populist measure on the lines of previous bailouts announced by previous governments but is different in nature. Now if the states fail to cut losses and abide by the financial restructuring, they will have to cope with punitive action in the form of curtailed funds from the central pool. The Centre wants the states to transfer most of these losses over a period of five years. Now the Centre is facilitating technical reforms and pursuing states to take up financial issues such as hiking tariff, bringing down debt and losses, and raising funds from market. This seems to be attempt to put “old wine in new bottle “.
The electricity reforms introduced by the Electricity Act 2003, whose primary goal was to privatize the power sector. The privatization process began with Orissa and Delhi and in both cases only private companies gained at the expense of Government . The CAG Draft Report on Delhi’s Discoms describing the Rs. 8,000 crore loot of consumers. In Orissa the Orissa Electricity Regulatory Commission cancelled the licenses of the three Reliance distribution companies for failing to deliver on any count. This is the face of so called reforms in the power sector. The reason for choosing Orissa and Delhi for distribution reforms were that both had low agricultural loads. Delhi has very little agriculture, and Orissa had done poorly in extending electricity to rural areas.

The present NDA Government announced that it will be able to supply affordable power supply to all the people of country and people will liberty to choose their service providers as in case of mobile companies. This electoral promise of affordable power for all by 2019 will be eagerly awaited as previous governments had failed to deliver what they promised.
The failure of previous governments in pushing the desired reforms lied in the lack of political will to check the menace of power theft , end the free / subsidised supply to agriculture sector and a free hand to electricity regulators to decide power tariffs. This is a reality in most jurisdictions of the loss-making distribution companies irrespective of ruling political party of the state.
Tariff is a state subject and the subsidies need to be paid in advance every quarter. But due to states own financial problems the subsidies are delayed and these delays only add to the inefficiencies of Discoms. Every state governments asks the Discoms to purchase power to bridge the gap between demand and supply without bothering for the financial problems of Discoms.
Now the Regulators have allowed in many states to add fuel charges from consumers every quarter to recover the cost of power purchase .As numerous generating plants have come up in private sector and the states have power purchase agreements with these power providers the state run thermal units have been forced to shut down in name of no demand. The fixed charges being incurred on the state sector generating thermal plants without any generation are forced upon the consumers . Punjab, Haryana and Gujarat are glaring examples in this regard.
The government claims that electricity ( amendment ) bill 2014 after incorporating the standing committee’s recommendations will be tabled in the winter session of Parliament and once the bill is passed the power sector reforms will face no hurdle in future. This is an wishful thinking on the part of government.
Different states suffer from a different combination of problems, including low tariffs, high technical losses and high percentage of subsidized consumers. under such conditions how the proposed amendments in electricity bill will improve the working of Discoms is beyond anyone’s imagination.
The Electricity Act 2003 made it possible for private companies to set up generating stations and supply electricity to the distribution companies. This was followed by providing cheap finances – priority sector lending of the nationalized banks was made available to private sector.

The distribution sector reforms were held to be the much more difficult ones than inducting private sector in generation. The reasons are obvious. They are spread over a much larger area, they have to deal directly with the consumers, and have to distribute electricity to rural areas.
Every politician and bureaucrat has a different solution to the problems being faced by the power sector. But no one is interested in discussing the problems of power sector with engineers and employees who are to implement the decisions taken by the government. The problems cannot be solved by the governments without the help of persons dealing with the sector. The power sector reforms can be successful only when the centre and state governments listen to the views of technocrats .
The financial position of Discoms can be improved only if there is zero difference between per unit revenue received and cost of overall per unit supply with or without subsidy. Most of the state Discoms will go bankrupt once the electricity (amendment ) bill 2014 is implemented.
In the end the whole exercise seems like another attempt to facilitate the privatization of power distribution system .All the state Discoms will become bankrupt after the proposed amendments as per Electricity
(amendment ) bill 2014 is implemented .
Vinod Kumar Gupta
Spokesperson / All India power Engineers Federation

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