Switched off
08/20/2011
By Noor Mohammad

Just a decade after the state electricity boards were saved from a financial collapse, they have again reached the same dead end. The combined losses of discoms are projected to go up to R1.69 lakh crore in the financial year 2014-15 from the level of R74,977 crore in 2008-09. Four states-Uttar Pradesh, Madhya Pradesh, Rajasthan and Tamil Nadu-have already approached the Centre for bailing out their power distribution companies

It's happening primarily because states are indulging in populist measures like supplying free power to the agriculture sector and keeping electricity tariffs artificially low by not allowing discoms to approach the regulator for annual revenue requirement. In most of the cases, state regulators have failed to use their suo motu powers to revise tariffs, the Shunglu committee has said in its draft report.

The Centre has set up the committee to identify systemic issues impacting the financial health of the power discoms. It is expected to submit its final report in September.

"High distribution losses increase power purchase expense, which results into higher tariff. Thus, increasing disparity in tariff widens the gap of cross subsidy between the subsidised and subsidising consumers. This amount needs to be recovered by the distribution licensee in the form of cross subsidy surcharge, which makes open access unviable," says VP Raja, chairman, Maharashtra Electricity Regulatory Commission.

A causality of non-revision of discoms' tariff is the open access provision in the Electricity Act, 2003, which is envisaged to bring competition in power distribution. The provision says post-January 2009 discoms must allow open access to any consumer with electricity demand of 1 mw and above to take power supply from whatever source it wants.

Discoms are allowed to charge higher tariffs from industrial and commercial consumers to cross-subsidise agriculture and consumers from weaker sections. The bulk of discoms' revenue comes from industrial and commercial consumers who are mostly regular in paying their electricity bills.

When a creamy consumer turns to another supplier for meeting its electricity demand, the local discom's tariff structure gets imbalanced. That is the reason discoms are reluctant to provide open access to their existing customers for supply of power from other sources.

"Open access must happen. But if you want open access, you must pay cross-subsidy surcharge. If a customer walks out, tariff structure will change. Other consumers must pay more to restore the tariff structure," Ajoy Mehta, managing director, MSEDCL, said recently at the 12th Regulators and Policymakers Retreat held by the Independent Power Producers Association (IPPAI) in Goa.

States have not shown much interest in reducing cross-subsidy, which is a key hurdle to implementing the open access regime. Then there are issues of standby and wheeling charges. The fact that many states continue to face serious power shortages also makes tying up power for customers at a reasonable price a challenging task.

"Open access remains a mirage. Unless the industry gets power at less than R3 a unit, open access means nothing," says Pramod Deo, chairman, Central Electricity Regulatory Commission. Open access can be used to punish inefficient power discoms, but unfortunately that is not happening in India.

An open access applicant cannot expect a fair treatment from the concerned state load despatch centres (SLDCs) in such cases as the latter continue to remain under the administrative control of discoms.

States are required to separate SLDCs from the discoms so that competition in power distribution could be promoted. However, despite repeated appeals from the Centre, states have failed to implement the reform measure.

The fact that, in India, the power distribution network owner and electricity supplier happen to be the same entity is also a major obstacle to implementing open access in power distribution. Open access has been quite successful in many developed countries mainly because of separation of the wire and power supply business. While distribution network is still owned by monopolies in these countries, there are multiple suppliers using the same network to supply electricity in the area.

There are provisions in the Act for multiple licensing in the same power distribution circle, but regulators have failed to implement them due to practical difficulties like the Right of Way (RoW) for laying parallel networks.

States have the option to privatise power distribution business. Private players have improved power supply in metros like Mumbai. Delhi's public-private partnership model of power distribution has also proved quite successful.

But despite these success stories, there is not much political support for privatisation. Besides, even supporters of power distribution reforms are wary of publicly supporting the cause of reforms.

It happened in Delhi when the Sheila Dikshit government was under pressure from the opposition for its privatisation of the Delhi Vidyut Board. Even the Congress-led government at the Centre did not come to its rescue.

Since privatising power distribution business remains politically difficult, states are trying to check power theft by handing over loss-making distribution circles and zones to private players under a franchisee agreement.

While implementation of the franchisee model has helped bring down commercial losses of discoms in areas like Bhiwandi, states have been quite slow in adopting this model. Besides, the model itself has serious limitations.

While the franchisee model has been successful in combating power theft, it is not effective in improving reliability and quality of power supply, given that the franchisee only distributes power supplied by the discom and collects bills. It does not have its own source to supply power. After the failure of Enron's Dabhol power project in Maharashtra, foreign companies became wary about investing in the Indian power sector. The project was supplying power to the erstwhile Maharashtra State Electricity Board (MSEB) under 'take or pay' agreement. MSEB was to take entire power from the project. But subsequently, the state electricity regulator directed the SEB to limit its power purchase from the plant, which was running on naphtha pending availability of LNG from Qatar. Enron was forced to commensurately reduce its capacity utilisation of the plant, which ended up pushing up significantly its generation cost.

But policymakers have not learnt much from the failure of the Enron project, which made overseas investors wary about putting their money in the Indian power sector.

"While the government is trying to attract private investment in the power sector, there is little realisation of what the private sector wants," rues Harry Dhaul, director general, IPPAI.

Significantly, when an investor puts up a power plant, it brings in only 30% equity, the balance expenditure is financed with bank loans. Lenders extend loans to the project based on power purchase agreements signed by the developer. Similar is the case for transmission lines.

"Power developers can arrange loan on the basis of power supply contracts, but discoms have to borrow on their balance sheets,"says Ramesh Narayanan, chief executive officer, BSES Yamuna.

"If the balance sheet is not robust, the lender can refuse loan to the utility," adds Narayanan. Besides, power distribution business involves direct dealing with retail consumers. That makes tariff revision a politically sensitive matter. In other words, the business of power distribution is much riskier compared to power generation.

Besides, there is an impression that key vacancies in state electricity commissions are being filled with retired government officials who lack the requisite practical experience of how the sector operates. These regulators often work at the behest of state governments. Besides, there is lack of transparency about how they determine tariffs. That leads to tussle with regulators. The way the Delhi discoms and the state electricity regulator differed over tariff revision in recent years is a case in point. "The regulator was expected to rise over political compulsions and act as a mature mentor to the sector. Its orders were to be conciliatory in the ocean of conflicts. However, hopes have not been realised," Mehta says.

As per a CAG report, while the increase in electricity tariff of discoms during 2005-09 was 6.95%, their cost of power purchase increased 11.90%. The minimum tariff required for discoms to break even at the 2008-09 level was 19.43%. And that too assuming discoms' commercial losses at 15%.

Loss-making discoms were supposed to bring down their expenditure gap to less than 20% of their average cost of power supply by 2010-11. They were also required to outline milestones for gradual reduction of cross-subsidy, but most of them have missed the target.

In 2000, the unpaid dues of the SEBs had reached R41,500 crore, about 2% of the GDP. A debt securitisation package prepared by the central government prevented the power distribution sector from precipitating a default crisis. However, about two-thirds of bonds issued at the time are still outstanding.

The Centre has set up a committee under former Comptroller and Auditor General VK Shunglu to study systemic problems in the power distribution sector. Its terms of reference include undertaking review of accounts of SEBs and distribution companies. The committee is also mandated to review their financial position including accumulated and projected losses. It will also examine electricity tariffs. The Shunglu committee has also got the mandate to review organisational and managerial structure of discoms and recommend action plan to achieve financial viability. The committee is expected to submit its final report sometime in September.

In a recent conference of state power ministers in Delhi, states agreed to implement key reform measures to restore financial health of their discoms. Specifically, they have agreed to ensure that the difference between revenue and average cost of power is not only bridged but is positive to generate internal surpluses which can be used for network expansion and maintenance.

States have also agreed to ensure that their discoms file annual tariff revision petition with the regulator every year by December-January of the preceding financial year. They have also agreed to ensure automatic pass through of any

increase in power purchase cost of discoms due to increase in fuel prices. States have also agreed that they will allow their discoms to recover their past under-recoveries. It's now up to the centre to ensure that states translate their commitment

into actions.

Copyright 2011 The Financial Express