Even as Corona has triggered widespread devastation, a major casualty is the power sector. Following the nation-wide lock-down announced by the Prime Minister, Narendra Modi on March 24, 2020 [this was an absolute must given the hyper-contagious nature of the virus and an overarching need to pre-empt community transmission], most of the industries and businesses besides Railways [passenger segment] have downed their shutters. This has meant complete destruction of nearly 40% of the total electricity demand.
All consumers – be it industries, shops and establishments, households, farmers etc – buy their electricity requirement from the power distribution companies [discoms] [earlier known as state electricity boards (SEBs)]. Mostly owned and controlled by state governments they in turn, source power from independent power producers [IPPs] [a euphemism for generators in private sector], public sector undertakings [PSUs] viz. National Thermal Power Corporation [NTPC] etc besides their own stations. There are some discoms in private sector as well but they too operate as per the directives issued by the state.
When, there are no takers for a good chunk or 40% of the electricity in the supply kitty of discoms, this will lead to huge loss of revenue. The discoms have legally binding contract especially with big companies [which draw electricity in large quantities] with provisions for the latter to pay when they don’t draw. But, in the current scenario, the discoms may not be able to enforce those provisions as the failure to draw electricity is entirely due to factors beyond the control of buyer [read: national emergency] i.e. it’s a force majeure – technical jargon used to describe such circumstances.
It is therefore, very likely that discoms won’t receive any revenue from these users and this will be the case as long as the lock-down continues [the duration will depend on the impact of the various containment measures taken by the authorities and the cooperation or lack of it extended by the public at large]. The impact on revenue and cash flows is also a function of the tariff setting policies followed by the distribution companies.
Under orders from their masters [read: state governments], discoms sell electricity to a certain category of consumers viz. poor households and farmers either at a fraction of the cost of purchase, transmission and distribution or even free. On the units sold to this class, they incur heavy under-recovery. This is exacerbated by the ‘technical and commercial’ [T&C] losses – most of it being plain theft – they incur in the course of transmission and distribution.
In a bid to make up for the under-recovery, discoms sell to industries and businesses at exorbitant tariff that can go up to Rs 10 per unit or even higher against cost of Rs 3-5 per unit. Yet, they are saddled with huge losses year-after-year leading to pile up of unsustainable debt. To keep them afloat, since 2000, the government had given three financial restructuring packages [FRPs] which is a fancy nomenclature for condoning their debt. For instance, FRP [2015] involved takeover of 75% of the debt of about Rs 400,000 crore.
The debt waiver of 2015 helped reduce their loss from Rs 52,000 crore during 2015-16 to Rs 32,000 crore during 2016-17 and Rs 17,000 crore during 2017-18. But, the reversal was short lived even as their loss increased to Rs 27,000 crore during 2018-19. The situation continued to deteriorate during 2019-20. This has also impaired discom’s ability to make timely payments to generators. In February, 2020 [before the Corona – triggered lock-down on March 24, 2020], the former owed a staggering about Rs 88,000 crore to the latter [a payment becomes overdue if it is not made within 60 days].
Now, with the lock-down since 00 hrs of March 25, 2020 and revenue from a major chunk of industries and businesses [call it the ‘milch cow’] touching ‘nil’, discoms have been pushed to the brink. Forget, any chance of their clearing the past dues, they won’t have money to pay for electricity they need to buy for meeting the requirement of the ‘essential sectors’ including healthcare [hospitals, isolation wards/quarantine facilities, ventilators and so on] which needs to be run without interruption even for a moment at this critical juncture.
Can discoms invoke force majeure to get away from making payment to the generators? This is an utterly illogical and perverted interpretation of the clause. The clause applies to a situation wherein a party to the agreement [discom in this case] is unable to lift the electricity units it has committed to buy from the generator [the other party] because of factors beyond its control [say, lock-down] or vice versa i.e. the latter is unable to supply the committed units. But, it can’t be used for not making payments even as the discom continues to draw supplies.
Yet, if discoms – acting under the authority of the sovereign governments who own them – don’t make payment even as they continue to lift supplies from generators, this will aggravate latter’s woes. Already, several power producers are suffering due to delayed/non-payment of past dues even as a good chunk of loans taken by them from banks have become non-performing assets [NPAs]. Suspension of current payments will push them to the brink.
The government and the Reserve Bank of India [RBI] have come out with relief measures for generators which include inter alia three months moratorium on payment of principal and interest to banks, directions to Coal India Limited [a public sector undertaking (PSU) which supplies over 80% of coal requirements] and Railways not to insist on advance payments, relaxing provisions for initiation of proceedings under the Insolvency and Bankruptcy Code [IBC]. These are all band-aid solutions and merely seek to defer the problem.
From August 1, 2019, the government had made mandatory for discoms to open letters of credit [LoC] for getting supply from generators [gencos]. Under the LoC arrangement, the bank guarantees that a buyer’s payment to a seller will be received on time and for the correct amount; in the event that the buyer is unable to pay, the bank will be required to cover the full or remaining amount which in turn, it will recover from the buyer using all available legal means. It has dispensed with this requirement for now. This may ease the pressure on discoms but will be at the cost of generators especially those in the private sector [though PSU behemoths like NTPC may be able to absorb it]. That sounds like ‘robbing peter to pay paul’. Where do we go from here?
Given the unprecedented nature of the crisis, in particular dire need to maintain uninterrupted supply of electricity to run all essential services round the clock, all concerned states should promptly release fund from their budgets to enable discoms clear all outstanding dues. They should also release subsidy dues in respect of free or heavily subsidized supplies made to farmers or poor households under instructions from the government. This will require relaxation of the fiscal deficit target under the Fiscal Responsibility and Budget Management [FRBM] Act which is currently 3% of state GDP. That should be done. Once, semblance of normalcy is restored, the government should get ready to address the core issues facing discoms.
In this regard, apart from August 1, 2019 decision regarding opening of LoC, under the ‘New Tariff Policy’ [NTP], it has proposed a provision for penalty [or surcharge] for delayed payment at commercial rate of interest @18%; capping of tariff hike to 15% of the under-recovered power supply cost; denial of grant or loan if discoms don’t make efforts to reduce losses etc. ALAS! these are all palliatives. These are unlikely to help in bringing about sustainable improvement in their financial position and ability to make timely payments to the generators.
A sustainable solution can emerge only by tackling the fundamental causes which contribute to losses of discoms. The centre and states should put their heads together to do away with sops to farmers and households [subsidy if any, should be given directly to beneficiaries using direct benefit transfer (DBT)] and eliminate theft.
Here, it may be noted that the three FRPs were given on the condition that states will take steps to increase tariff and rein in theft to eliminate the revenue gap. This was not done. Now, even as the government is working on a 4th bail-out, whether or not, the states will act this time around, one can only wait and watch.