Discoms will be profitable only when they are unshackled from state controls and electricity distribution is deregulated
Even as the Central government is making all-out efforts to remove the financial distress of power distribution companies or discoms (situated at the core of the power supply chain, they procure electricity from power generating companies or gencos and distribute it to the consumers) and restore them to robust health, actions of the state governments undermine these efforts.
The financial distress of discoms arises fundamentally due to their inability to generate enough revenue to pay for the electricity they buy. For over two decades, they have been incurring losses year after year. They have funded these losses by borrowings from banks and other FIs apart from keeping bills pending. At the end of FY 2021-22, their total debt was Rs 620,000 crore.
Discoms’ inability to generate required revenue has to do primarily with two factors viz. aggregate technical and commercial (AT&C) losses – a jargon for power theft – and shortfall in the average revenue realisation from the sale of electricity vis-a-vis the average cost of supply (cost of purchase, wheeling and distribution), or the ACS-ARR gap. During 2020-21, AT&C losses were 22.32 percent while the ACS-ARR gap was Rs 0.54 per kWh.
Both maladies arise due to constant meddling in the running of discoms by their owners namely the state governments. Power theft on such a massive scale is unthinkable without the complicity of the political establishment. People living in slum settlements/jhuggi clusters being a big vote bank, the party in power encourages unauthorized connections to enable their access to free power.
As for the second malady, the political brass orders discoms to sell a major slice of electricity to households (HHs) and farmers, either at a fraction of the cost of supply or even free (the state electricity regulatory commissions or SERCs which are mandated to fix tariff merely act as rubber stamps). Even as the state government promises to reimburse the differential amount to discoms, most states don’t reimburse or do it partially and after considerable delay.
Given nearly a quarter of the revenue lost due to power theft and a substantial amount in subsidies remaining unpaid, the financial stress of discoms is inevitable. The politics of freebies now deeply entrenched in the system has exacerbated the already grim situation. Let us look at the developments in Punjab. Last year, amongst a host of freebies promised by AAP the most prominent was free electricity to households (HHs) for consumption up to 300 units per month.
Going by sheer common sense, the State should give help only to those HHs who can’t afford to pay cost-based tariffs. The way to go is to identify households whose income is below a threshold. AAP hasn’t gone by this. Could it be presumed that only low-income HHs have consumption of fewer than 300 units? So, in essence, the assistance reaches only to those who can’t afford it. A closer scrutiny would reveal that the approach adopted by the AAP government is mischievous. Its real intent was to give the dole to ‘all and sundry’.
If a household consumes less than 300 units a month, it doesn’t necessarily follow that it is a family with low income. For instance, there would be umpteen number of well-off/high-income old-age couples living alone who consume less than 300 units a month. Even for others, who consume more than this threshold, we see a dastardly trend of consumers applying for multiple connections within the same HH. For instance, a household consuming 900 units a month, gets three meters installed to keep consumption of each under 300 units thereby ensuring zero bill.
Reportedly, more than 100,000 meters have been bifurcated or trifurcated enabling even high-end consumers to avail of the free bonanza. As a consequence, currently almost over 95 per cent of power consumers in Punjab avail of subsidies. The swelling number of connections has increased the subsidy by Rs 125 crore per month on average. As a result, the total domestic subsidy for the current FY is now expected to be Rs 8,813 crore – Rs 1,500 crore higher than the initial estimate of Rs 7,313 crore.
In Delhi, where there is no charge for HHs consuming up to 200 units (HHs consuming between 200 and 400 units get a deduction of Rs 800 from their bill), the possibility of the majority of households availing of access to electricity – free of any charge – is not ruled out. The situation in other states won’t be different. Given almost the entire population of the State – including the rich, millionaires, billionaires and so on, getting to enjoy the free bonanza, the burden of power subsidy is bound to gallop. Faced with budget constraints, the states will take increasing recourse to underpayment and delayed reimbursement of subsidy dues to discoms.
Meanwhile, the Centre is dealing with discoms under a two-pronged strategy (i) forcing them to make timely payments and (ii) helping them cut AT&C losses and reduce the ACS-ARR gap. Under (i), it implemented late payment surcharge (LPS) and related matters Rules, in 2022. The LPS rules made it mandatory for discoms to clear their legacy dues as existing on June 3, 2022, in a time-bound manner in 12 equal monthly instalments (EMI) with the benefit of non-applicability of the LPS after its implementation date. The same rules are also provided for time-bound clearance of current dues failing, which will attract a power supply cut.
The pressure tactics have worked. The legacy dues of all stakeholders in the electricity supply chain viz. power generating companies (gencos) and transmission companies (transcos) from discoms decreased from Rs 1,39,747 crore in June 2022 to Rs 69,957 crore in July 2023. Faced with the threat of LPS, the latter could have used loans taken from PFC and REC (out of Rs 130,000 crore sanctioned under ‘Atmanirbhar Bharat Abhiyan’) to make payments to the former.
As for (ii), under the ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD) launched in July 2021, the Centre has undertaken a massive investment of Rs 300,000 crore to improve the reliability and quality of the power supply and enhance the efficiency of discoms. It has compulsory pre-paid and smart metering components to be implemented across the power supply chain, including in about 250 million households. The Scheme has yielded results.
The AT&C losses of discoms have gone down from 22.32 per cent during 2020-21 to 13.5 per cent during 2022-23. The ACS-ARR gap has also reduced from Rs 0.54 per kWh during 2020-21 to Rs 0.15 per kWh in 2022-23. A 9 per cent cut in AT&C losses is a stupendous achievement. It seems that pre-paid and smart meters have been installed, and power theft is almost eliminated. The Centre is keen that the ACS-ARR gap should be reduced to ‘zero’ by March 2025. This will require making power theft ‘nil’ and timely recovery of all subsidy dues from the States. But, this won’t be possible if states continue with business as usual; it could even lead to erosion of the gains made in 2022-23. Modi’s efforts would deliver only when (a) discoms are unshackled from state controls; (b) States give subsidies directly to the beneficiaries and (c) electricity distribution is deregulated.
(The writer is a policy analyst, views are personal)
https://www.dailypioneer.com/2023/columnists/state-doles-can-put-discoms-at-risk.html
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