India’s power sector has long been riddled with the poor financial health of the power distribution companies (Discoms) despite repeated bailouts from the Central government, the first of which was attempted in 2001. The Ujwal Discom Assurance Yojana (Uday) approved by the Union Cabinet in November 2015 aimed to permanently resolve the financial issues of these companies. While Uday does appear to be a robust attempt by the government to revive their fortunes by making state governments more responsible, it is still early days to evaluate the one-year-old scheme, which has shown mixed results till date.
Woes of Discoms
Discoms have long been starved of essential outlays which has not been the case for generation and transmission utilities. The focus of the power sector has been on adding to the generation capacity and meeting rising electricity demand. However, the distribution infrastructure at the consumer end has often been neglected. This has left Discoms ill-equipped to cater to the composite mix of consumers they are obligated to serve.
Discoms have to deal with multiple challenges: Supplying electricity to a large number of connections with low individual loads, multiple tariff classes with cross-subsidies, power theft and planning for fluctuating. Revenue loss can be attributed to accumulation of regulatory assets, arrears in operational costs, arrears in payments to generation and transmission utilities, interest burdens, etc.
State governments in India also often subsidise electricity tariffs for agricultural and domestic consumers. Delay in disbursement of state subsidies, promised to domestic and agricultural consumers, has added to the financial strain on Discoms. As a result, their debt has burgeoned despite attempted bailouts. As per the government’s 2015 estimates, the accumulated debt of all Discoms reached Rs 4.3 lakh crore. While operational and financial inefficiencies are recognised as the root cause, exact nature of the problem varies across different states and across different Discoms.
Uday aims at improving operational and financial efficiency of state Discoms. It does not promise any grants but voluntarily asks the states to take-over 75 percent of the debt of the respective Discoms. The scheme appears to build on previous financial restructuring schemes (financial restructuring scheme, 2012 and Distribution Management Responsibility Bill, 2013) and on aligning its targets with other ongoing programs in the power sector. Under Uday, states issue non-statutory liquid ratio (SLR) bonds and state development loan bonds, in the market or directly to the respective banks or financial institutions holding the Discom debt to the appropriate extent.
The scheme requires a tripartite agreement between Discoms, the state government and the ministry of power (MoP). So far 21 states have signed MoUs. Jharkhand is the first state to sign under Uday and it cleared historic dues of the state Discom amounting to Rs 5,553 crore. Since then, Jharkhand’s state Discom has accumulated fresh dues of Rs 1,330 crore. On the other hand, the Haryana state Discom, Dakshin Haryana Bijli Vitran Nigam (DHBVN), for the first time ever since its inception recorded a profit of Rs.78 crores, in the first half of financial year 2016-17. Both the Discoms signed for Uday within three months’ gap, Jharkhand in January 2016 and Haryana in March 2016. It would be short-sighted to attribute either of the state’s results to the efficacy of Uday scheme.
The Uday scheme has to be seen from a long-term perspective. The power ministry, in its memorandum of Uday scheme, announced a plan for states to absorb future losses in a graded manner: 5 percent of the previous year’s losses in 2017-18, 10 percent in 2018-19, 25 percent in 2019-20, and 50 percent in 2020-21. This indicates that the scheme has allocated financial restructuring of Discoms, anticipating the timelines for improvement in Discoms performance.
Further, to improve the operational efficiency of Discoms, Uday has identified parameters, based on which ranking of states is undertaken. These parameters call for better metering, consumer indexing, augmentation of networks, quarterly tariff revisions, etc. Participating states may get priority funding through concurrent schemes on power sector development.
Are Discoms entirely to blame?
Despite a history of inefficient operations, the distribution segment has struggled due to a lack of investments, high costs of power procurement, delay in payments from government and under-performing power plants. About 80 percent of the costs of supply of Discoms, in aggregate, is for bulk power purchases. Revenue realisation from sale of power barely touches 80 percent of the overall cost of supply.
Discoms rely on their Annual Revenue Requirement (ARR) – filings, submitted to the state regulators, for any cash surpluses, to invest in additional infrastructure. Given high costs of supply, regulators come under tremendous pressure to minimise increases in ARR, by denying mandated returns to Discoms. The generation and transmission utilities, on the other hand, get high regulated returns. The central public sector generation utilities enjoy heavy post-tax profits, while, in the same sector Discoms are bailed out by various schemes from the government.
(The writer is a researcher at the Council on Energy, Environment and Water – an independent not-for-profit policy research organisation based in New Delhi. He can be reached at firstname.lastname@example.org)
Published Date: Jan 30, 2017 10:32 AM | Updated Date: Jan 30, 2017 10:42 AM