Column : Dj vu in the power sector

Written by Saugata Bhattacharya | Updated: Aug 2 2012, 09:29am hrs
The Chief Ministers Conference held in March 2011 discussed the state of the Power Sector and emphasised the urgency of power sector. The Conference noted the large amounts of dues owed by the SEBs to banks was a major impediment to reforms and resolved to constitute an expert group to recommend a programme for medium term capital restructuring and reform of SEBsReport of the Expert Group on One Time Settlement.

OK, this is not entirely truthful. The underlined words are fibs; they should actually read 2001 and Central Public Sector Units (CPSUs). But they also underline the Groundhog Day moment for Indias power sector in 2012.

Even more bizarre, in a Twilight Zone sort of throwback to days current readers will not have the slightest idea about, the last time there was a major grid failure was January 2001, in the same Northern Grid. There was a huge furore then, with lengthy reports analysing the causes, resulting in formulation and refinements of the Electricity Grid Code and deterrent pricing using innovative pricing like Unscheduled Interchange charges. Skip to 2012, with another grid collapsearising more or less out of the same grid indisciplineand the institution of a more or less similar restructuring package to bail out pretty much bankrupt power distribution utilities.

Disconcertingly, both phenomenagrid indiscipline and discoms operational lossesarise of the same underlying problem: the lack of commercial orientation in electricity operations. This is a complex area, which needs to be explored over a series of articles. Consider the latter problem first, since that is at the root of most electricity troubles (we will explore the grid problems later, which are a manifestation of deficiencies in the basic business structure).

A series of articles in FE over the past month have highlighted the dire straits of the state electricity discoms. While there are widespread differences between states (and, indeed, between utilities in a state), the unsettling aspect of the recent performance of state level power utilities is the speed of deterioration in the sectors overall financials, with losses almost tripling to R63,550 crore in 2009-10 in a matter of four years, from 2004-05. Accumulated losses have increased by R88,000 crore. After a period of relative tranquillity, financial losses are back to 2002-03 levels as a percent of GDP. Reduction in commercial losses has lost traction in the last couple of years; after dropping to 27.7% in 2008-09, after reduction from a peak of almost 39% in 2002-03, it has remained at 27% in 2009-10.

The most problematic aspect is that banks exposure to discoms is (reportedly, because there are no documented figures) currently of the order of R2 lakh crore, of which R1.2 lakh crore is short term (presumably working capital). Just about half a year earlier, the Shunglu Committee Report had stated that net losses (after subsidy) over the five years 2004-05 to 2009-10 had been R82,000 crore. Of this, R58,500 crore (71% of the losses) had been financed through bank loans, with public sector banks accounting for 84% of the loans. And 42% of these loans were backed by state government guarantees (R24,600 crore). The report noted that there was little chance that these loans could be repaid. And, inevitably, these are now reportedly on the verge of being restructured.

Details of the proposed solution are not publicly available, but the broad contours are similar to the 2001 one-time settlement scheme, which was a 50% waiver of interest on outstandings, the remaining interest and principal securitised through issuances of tax free bonds, with a tripartite agreement between the states, SEBs and RBI to ensure timely payment of dues. The current restructuring avatar is that existing loans would be securitised, with bank loans to discoms being converted into state government bonds, with a moratorium thrown in to boot. There is no clarity on the interest rates on these bonds, and conditionalities on payments.

What can be done to prevent a recurrence and a third one-time settlement Very little, till incentives to manage operations in a commercial manner change. Electricity distribution is a local (therefore, state) issue, and the Centre, unfortunately, has little by way of credible penalties to enforce discipline. One carrot the Centre had attempted was the Accelerated Power Development and Reform Programme (APDRP was a sensible programme), but which, unfortunately, has had to be restructured a couple of times, with the outcomes arguably not having improved compared to the previous forms. States have been unable to meet many of the required milestones, and offtake from the programme has consequently been much lower than budgeted.

The obvious solution is to address the source of the losses, the gap between the per-unit revenues and cost of supply. Some states have begun to increase tariffs to reduce the quantum of losses, with revisions of up to 38% or more for some categories. However, the extent of increases across discoms is very difficult to ascertain and is a safe conjecture that the tariff increases are nowhere close to what is required to close the gap. However, the justifiability of tariff increases hinges on the efficiency of discom operations, part of which is success in bringing down commercial losses (a large part of which is theft). And this is where the role of structural reforms, resulting in incentives, comes in most strongly. After Orissa and Delhi, there have been no attempts to privatise distribution.

In the absence of initiatives at outright privatisation of the electricity distribution, some states, in an attempt to increase operational efficiencies and enforce commercial discipline, have resorted to concessioning out the distribution function to private sector franchisees. This has expanded the scope of private sector involvement from the earlier outsourcing of functions like billing and collection to the entire business including network management, investment for expansion and upgradation. Bhiwandi in Maharashtra was the oldest, starting in 2007, and reportedly has been a success story. This has been sought to be replicated in other concentrated high density urban areas in Maharashtra and Uttar Pradesh, although the initiatives are still too recent to be able to comment on performance.

The problem could not have better expressed than the 2001 Expert Panel report: These dues have arisen not because of some exceptional event, or because of problems that arose in the past, but because of the continuing non-viability of the current operations of the SEBs. A settlement of the past dues alone would not solve the basic problem facing the SEBs; and unless the current unviability is speedily addressed, overdues would mount again. Touch! As is told in films, the rest will follow.

The author is senior vice-president, business & economic research, Axis Bank. Views are personal