While anecdotal evidence suggests that most state power distribution companies have barely mended their imprudent ways under a financial restructuring plan (FRP) brought in two and half years ago, the Centre has decided not to wait for Power Finance Corporation (PFC) data on the discoms’ finances that come with a lag and is set to hire third-party consultants to review their performance.
According to official sources, the power ministry, chary about the FRP’s utility, and the Central Electricity Authority (CEA) want the consultants to ascertain the compliance levels of the eight FRP-adopted discoms to evaluate the plan’s progress and estimate the Centre’s likely financial cost to provide the promised incentives to the discoms and state governments.
“In order to ensure that FRP Scheme is implemented in a fair and transparent manner, consultants shall be pre-qualified and appointed by (the) CEA. The consultants will verify achievements and compliance of mandatory conditions under FRP, record AT&C loss reduction with reference to prescribed baseline targets, verify from appropriate commission orders the information concerning ACS, ARR and subsidy etc,” the tender inviting bids from consultants said.
The FRP was launched in September 2012 to mitigate short-term liquidity crisis for the participating discoms, and includes incentives for meeting performance improvement milestones. The distribution companies had accumulated losses of more than Rs 1.9 lakh crore by the end of FY12 with the worst performing five states, all of which signed up for FRP, accounting for 70% of these losses.
The transitional financial mechanism to support the restructuring effort of the state governments and distribution utilities promises that the Centre will pay 25% of the participating states’ principal loan amounts due to banks if they take on 50% of the short-term liability of the respective discoms. The states would also receive grants equivalent to extra energy saved through reduction of aggregate technical and commercial (AT&C) losses, contingent on reduction of gap between average cost of supply (ACS) and average revenue realised (ARR) by 25% against the benchmark year of FY11.
“Some states have done well while others have failed to improve on important parameters. This exercise will help us ascertain the specific areas of improvement for all the states and the central help needed,” a government official told FE. He added that while the current government has criticised the scheme, it was decided not to scrap it and allow it to run its full course. Last year, soon after the new government took charge at the Centre, the Uttar Pradesh government, which adopted the FRP, had written to the Centre, arguing against the scheme, particularly over the strict timeline for meeting the milestones.
The tender document inviting third-party consultants further states that the losses of power utilities posed a serious threat to fiscal consolidation of some states. The financial health of some of the states is not good and they have already breached the limits set under the Fiscal Responsibility and Budget Management Act.
The FRP is based on the principle that the gap between ARR and ACS is eliminated as early as possible; the liability to be taken over by state governments; subsidy not to be funded by banks but to be provided in full by state government as per the Electricity Act; and the average debt service coverage ratio be reduced to at least 1, a government official said. He added that only a third-party verification would correctly reveal the efficacy and loopholes of the scheme.
FE had earlier reported that after showing some discipline to avail of the benefit of the FRP, state-run discoms have again relapsed into their old, financially unsustainable ways. Half a dozen discoms have failed to file the mandatory tariff review petition with the respective state electricity regulatory commissions for FY16.
In fact, the discoms which sought and implemented double-digit tariff increases in FY13 (thanks to the lure of FRP), started degenerating into their old practices in FY14 itself. While most discoms got tariffs hiked in FY14, the increases were marginal in case of many of them, despite their huge accumulated losses. The estimated financial implication for the Centre of the incentives for accelerated AT&C loss reduction is about Rs 1,500 crore for every 1% reduction in the losses over and above previous targets. The estimated cost (to the Centre) post-issuance of bonds/special securities by the states would be Rs 24,000 crore on account of 25% of the principal value of state government bonds.