The power distribution companies [discoms] are the core of the electricity supply, transmission and distribution chain in the country. Mostly owned and controlled by state governments, the discoms source power from independent power producers [IPPs], public sector undertakings [PSUs] viz. National Thermal Power Corporation [NTPC] etc besides their own generating stations. Yet, these have been in the news for all the wrong reasons in particular, increasing losses, galloping debt and rising dues to IPPs/PSUs etc.
During 2015-16, the combined loss of all discoms was about Rs 52,000 crore even as their debt had reached a colossal about Rs 400,000 crore. Under an unprecedented financial restructuring packages [FRP] orchestrated by the Centre, the state governments took over 75% of this debt and for the balance 25%, they were allowed to raise loans at low interest rate – backed by sovereign guarantee [prior to this also, two FRPs were brought in with the sole objective of condoning their accumulated debt in earlier years].
This debt waiver helped in lowering discoms’ loss to Rs 32,000 crore during 2016-17 and further down to Rs 17,000 crore during 2017-18. But, the reversal was short lived. Since then, the losses have been on a rising trajectory to Rs 27,000 crore during 2018-19 and further up to Rs 30,000 crore during 2019-20. During 2020-21, these are expected to touch Rs 50,000 crore – more or less the level, it prevailed during 2015-16 [according to the rating agency Icra].
When, an entity is incurring loss and perpetually under debt, it is only natural that it won’t be able to pay to its suppliers [read: generators]. The amount due for more than 60 days increased from about Rs 23,000 crore as of March 2018 to Rs 71,000 crore as of November 2019. All dues including those pending for less than 60 days – as on that date – were even higher at about Rs 81,000 crore. By March, 2020, this had already crossed the Rs 90,000 crore mark.
Worried that this will impair their ability to continue purchase from IPP and in turn, maintain supplies at this critical juncture when hospitals, clinics, other medical facilities and all other essential services must run every second, the union government has come up with a proposal to ask sector-specific institutions viz. Power Finance Corporation [PFC] and Rural Electrification Corporation [REC] give a fresh loan of Rs 90,000 crore to discoms. These funds will be released in two tranches of Rs 45,000 crore each, as special long-term loans of up to 10 years. But, there are riders appended to the loans.
The release of the first tranche to each state discom will be contingent on the respective state government (i) undertaking to clear the departmental dues to its discom in three years, and (ii) putting in place a credible mechanism to release the subsidies – meant for the consumers but routed through discoms – in advance.
To receive the second tranche, the discoms will have to furnish evidence of actions taken to implement the initial undertakings, which will include enabling digital payment of electricity bills. They will also have to come up with a plan – duly endorsed by the respective state governments – to reduce their losses.
Thus, the loans are predicated on departments of the government and its agencies clearing their pending dues to discoms [currently about Rs 50,000 crore]; state government guaranteeing payment of subsidy in advance; ensuring timely collection of bills from consumers and a plan to reduce losses. This is a tacit admission that there is complete mess at all levels in the tariff setting and payment system. To understand this, let us look at the basics of how it works.
Under orders from their masters [state governments], discoms sell power to some preferred 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 them, they incur huge under-recovery. This is aggravated by the ‘technical and commercial’ [T&C] losses – most of it plain theft as also the delay or short payment by departments/agencies of the government for the electricity, they draw from discoms. Inflated tariff allowed to IPPs under power purchase agreements [PPAs] taking recourse to ‘gold plating’ [euphemism for claiming higher investment than actual], excessive overheads and over-invoicing of fuel bills etc. also adds to the revenue shortfall.
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. This is because the extra collection from these so called ‘milch cow’ is insufficient to make up for the gargantuan loss caused by the above deadly cocktail.
In the past, each time FRP was given to enable discoms start on a clean slate, this was on the condition that they would implement a calibrated action plan to reduce T&D loss and increase tariff to reduce the gap between average revenue from sale of electricity and its average cost. But, those conditions were never complied with resulting in persistent loss. More FRPs followed leading to vicious cycle of increasing loss, unsustainable debt and more debt waivers.
Meanwhile, the government had taken measures to tighten the noose on discoms. From August 1, 2019, it made mandatory for them 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.
Further, under the ‘New Tariff Policy’ [NTP], it is contemplating 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 and denial of grant or loan if discoms don’t make efforts to reduce losses etc. The government is hitting the wrong target as the problem lies elsewhere.
Whether it is mandatory LoC, penalty for delayed payment, putting a cap on tariff hike or denial of loans/grant, these are all aimed at forcing discoms to pay up. But, what can they do; when departments and agencies of state don’t pay for what they consume; when a lot of electricity goes un-metered, hence not paid; when they are forced to sell below cost or even free to certain consumers [read: households and farmers]; when inflated tariffs are allowed to IPPs.
The amount owed by discoms to generators has continued to gallop even after LoC was made mandatory. Clearly, this payment mechanism has not worked. It is also unlikely that any of the measures contemplated under NTP [the Cabinet is yet to approve the policy] will deliver in the absence of any credible measures to deal with the fundamental factors that make discoms financially weak.
Meanwhile, the 40 days lock-down [now extended by another 15 days with some relaxations] has aggravated the precarious financial position of discoms. This is because downing of their shutters by most of the industries and businesses besides Railways [passenger segment] has meant complete destruction of nearly 40% of the total electricity demand. Put simply, the so called milch cow which thus far protected their revenue is also not available.
Merely arranging a loan from PFC/REC [call it a 4th FRP] to help discoms won’t be of any help in extricating them from the financial morass. Making the loan conditional on the state government clearing all its pending dues including subsidy [on account of sales to preferred customers below cost] is uninspiring. If, the states are really serious, why don’t they release the funds [if, their budgetary position does not permit, the Centre can relax the fiscal deficit cap under the Fiscal Responsibility and Budget Management [FRBM] Act to enable them borrow more] to discoms instead of requiring the latter to borrow from financial institutions, be it PFC/REC or any other.
Giving a loan is just a ‘band aid’ even as the problem keeps on festering beneath. A sustainable solution can emerge only by tackling the fundamental causes which contribute to losses of discoms. The government should (i) do away with sops to farmers and households [subsidy if any, should be given to them directly using direct benefit transfer (DBT) mechanism]; (ii) eliminate theft; (iii) make timely payment for electricity consumed by state and its agencies and (iv) rein in inflated tariff under PPAs.