During the financial year 2018-19, 31 State-run electricity distribution companies [discoms] are reported to have incurred financial losses of Rs 21,658 crore. Coming as it does after a declining trend in their losses during the previous two years [from about Rs 52,000 crore during 2015-16 to Rs 32,000 crore during 2016-17 and further down to about Rs 17,000 crore during 2017-18], this raises concerns.
To understand the reversal during 2018-19, it is important to analyze as to why their losses declined in the previous two years.
In November 2015, Modi – government had launched Ujwal DISCOM Assurance Yojna [UDAY] to revive the ailing discoms. Under it, they were given a financial restructuring package [FRP] that involved takeover of 75% of their outstanding debt of by states and for the balance 25%, they were allowed to issue bonds at lower interest 8.5-9% [against 11% plus paid earlier]. This resulted in significant reduction in outgo on interest about Rs 34,000 crore during the two years till December 2018 for discoms in 16 states.
Further, in lieu of FRP, the discoms were mandated to take steps to reduce the cost of procurement and distribution of electricity on the one hand and increase the realization from its sale on the other so as to fully eliminate the gap between the two by 2018-19. Specifically, they were required to achieve certain milestones in regard to aggregate technical and commercial [AT&C] losses — electricity units lost on account of pilferage [a target of 15% was set to be achieved by 2018-19] and increase power tariff.
During the first two years after launch of UDAY, the states made some efforts to bring about the intended improvement. For instance, in Rajasthan, AT&C losses were brought down from 23.8% in 2016-17 to 19.7% in 2017-18. In Madhya Pradesh [MP], these losses were reduced from 37.3% in 2016-17 to 22.2% in 2017-18. As regards power tariff, while MP increased it by 27.7% during the two years, Rajasthan upped it by 9.5% in September 2016. Improvement in billing also helped in increasing the realization.
For the states under UDAY, the average cost of power purchase [from non-renewable sources] rose by only 1.2% in 2016-17 and 1.4% in 2017-18, compared to a steep hike of 7.5% in 2015-16. The states such as Maharashtra and Andhra Pradesh also achieved lower cost by shutting down of old and inefficient plants and transferring coal allocation to more efficient generating stations nearer coal pitheads under a rationalized coal allocation policy.
The combined effect of all these measures got manifest in reduced losses of the discoms during those years. Thereafter, the companies became lax on all the fronts [prompted by state elections in states such as Rajasthan and MP followed by general elections]. AT&C losses in MP increased from 22.2% in 2017-18 to 31.4% during 2018-19. Ditto for Rajasthan. For 26 states/UTs, the losses were 19.1% at the end of financial year 2018-19 against the target of 15%.
The average realization of discoms from sale of every unit of electricity was short of the cost of purchase and distribution by 25 paise at the end of 2018-19 [up from 17 paise at the end of 2017-18,] as against the target of ‘nil’ fixed under UDAY. No wonder, the declined trend of losses in the previous two years was reversed in 2018-19.
That the losses of discoms are beginning to climb up – despite having been freed from the burden of debt [courtesy, UDAY] – should wake up our political class from the deep slumber. Some of critical areas which need urgent attention are as under:-
First, a major reason behind shortfall in realization from sale is discoms [under instructions from the state government] charging heavily subsidized tariff from farmers [in some states, this is even ‘free’] and poor households. When, required to increase tariff – as per the mandate under UDAY – instead of charging more from these users, they charge more from those [read: industries and businesses] who are already being charged high rates. This is unsustainable.
Second, the states approach to reining in power theft is half-hearted. The government has invested heavily in strengthening the transmission and distribution infrastructure with a view to eliminate AT&C losses. Yet, if these continue to be a high of 19% [in some states 25-35%], this points towards ‘a well organized network of theft by dubious elements enjoying political patronage’. Setting the target at 15% – under UDAY – itself shows lack of political will.
Third, while directing discoms to sell to certain users at below cost or even free, the states promise to compensate them for difference from the state budget as subsidy. But, they delay making the subsidy reimbursements. The states also delay payment for electricity consumed by their departments and undertakings. This adds to discom’s interest cost even as they are forced borrow to fund the dues.
Fourth, the discoms are also forced to pay more and more to the generators including independent power producers [IPPs] on account of various factors such as increase in fuel cost. Duly sanctioned by the electricity regulators as ‘pass through’, such hikes in cost of purchase dents their balance sheet by thousands of crore [e.g. additional bill of Rs 17,000 crore on account of the inability of Coal India Limited to supply the committed quantities to IPPs forcing the latter to make alternate arrangements at higher price].
Finally, the discoms are also forced to bear the brunt of welfare schemes such as SAUBHAGYA Yojna under which the government has already given free electricity connections to over 25 million households. A majority of these being poor families, the collection from them is negligible which aggravates their losses.
It won’t be easy to address the above challenges. Merely announcing schemes such as UDAY won’t be of much help. The way forward is for the government to withdraw completely from the power sector. It should allow full inter-play of market forces, give autonomy to discoms and let them run professionally. The state should restrict its role only to giving subsidy directly to target beneficiaries.
With a resounding mandate to rule for another term, Modi should now crack the whip on this long pending reform.