Keeping FRPs on track

Written by Santosh Tiwari | Updated: Apr 2 2014, 02:49am hrs
For the new government assuming charge next month, one of the critical jobs would be to regain and maintain the momentum of power sector reforms, especially the SEB debt recast plan.

The good work done in the past one year or so deviated from its designated direction after Delhis 49-day Aam Aadmi Party government slashed power tariffs. This was followed by cuts in Haryana and Maharashtra, clearly signalling the possibility of the momentum of electricity rate hikes across the country in the last two years getting jolted.

Though Delhi is readying itself for tariff hike, the scenario in the other states is making those associated with the SEB debt recast plan jittery about its success. Considering the current plan has been put in place after extended deliberation with the states, its derailment would mean a major setback in improving the financial health of state power distribution companies.

Tariff hikes are an integral part of the financial restructuring plans (FRPs) for dismantling the R2 lakh crore debt of the state electricity boards (SEBs).

Given the gap between power costs and tariffsa little over R1.1 per unit in FY12resulted in losses of around R93,000 crore for all utilities in the financial year, not hiking tariff today can only mean a higher tariff hike later. But in the election season, ignoring this hard truth seems to be the more popular option.

A Morgan Stanley study of the top-10 loss-making SEBs, pre and post-FRP, shows how the states are losing track. Rajasthan, having the biggest losses, hiked power tariff by 19% in FY13 but in FY14, the raise was limited to 14%. Similarly, Tamil Nadu, ranked second in terms of losses, hiked tariff by 30% in FY13 but it is yet to increase it this year. Uttar Pradesh raised power tariffs by 18% and 40% respectively in FY13 and FY14 but is now considering a cut. Andhra Pradesh, in the process of signing FRP, is in a better situation with hikes in FY13 and FY14 being 12% and 22%, respectively. But Haryana, with its FRP in place, has already rolled back the FY14 hikes. Non-FRP Punjab is also considering a cut after it increased rates by 12% and 10%, respectively, in FY13 and FY14. Another non-FRP state, Madhya Pradesh, too is holding on to the existing rates which were raised 8% in FY13 and 2% in FY14. Jharkhand, yet to sign the FRP, didnt raise power tariff in FY14 after a 16% increase in FY13. The other two non-FRP states, Maharashtra and Delhi, have gone for a 20% roll-back in tariff in FY14 and a 50% cut, respectively.

While the cuts and no-hikes are on the pretext that the state governments would bear it through subsidy, past experience suggests this is a dicey affair.

In FY09, subsidy received by the utilities were just 54% of the subsidy booked and in FY10 too, it stayed at 56%. Even in FY12, the gap was 15%. Reversal and postponement of tariff hikes, therefore, would mean getting into a bigger subsidy trap which in turn increase the losses on the books of the SEBs.

Indeed, thanks to the tariff hikes, the situation started showing signs of improvement after FY12 when losses (without subsidy) peakedit is estimated at R78,400 crore in FY12 and R47,000 crore in FY14. But the way things are because of the elections, if quick corrective steps are not taken by the states in FY15, they would need a bigger bailout package.

In fact, in the states where the financial restructuring packages (FRPs) have been signed, there is already signs of improvement in bank lending to the cash-strapped discoms which has resulted in clearance of long-standing dues of the power producers.

The plan announced in June 2012 has regular tariff hikes, reduction in T&D losses and cross-subsidisation amongst the essential ingredients. Indeed, these measures require both investment and political will, in the absence of which, the current restructuring exercise may also result in a fiasco similar to the one that happened with the FY03s one-time settlement scheme.

The state governments need to realise that in the absence of required adjustments in electricity tariffs now, future hikes will become that much difficult.

The Centres job immediately after the elections would be to help restore the lost momentum.