Since 1996, there have been four bailout schemes for the state electricity distribution companies (discoms) and the recent Financial Restructuring Plan (FRP) keeps with this tradition. The last massive bailout was in 2001 based on the Ahluwalia Committee’s recommendations, which emphasised on operating discoms on commercial terms and improving their efficiency by reducing aggregate technical and commercial (AT&C) losses. Following this bailout, the Electricity Act 2003 came into force and laid down a framework for operationalising competition by way of open access, unbundling of discoms, de-licensing generation, and improving efficiency of the sector. It strengthened regulatory powers by spelling out clear provisions for tariff determination, reduction of cross-subsidy, advance payment of subsidy by state governments, thereby converting the conditions of the 2001 bailout into a binding law.
Unfortunately, despite a decade of reform, discoms are once again in financial distress on account of comparable reasons, and a bailout with similar terms (which are now legally binding) is being proposed. This article argues that the current crisis is a result of the failure of discoms, state electricity regulatory commissions (SERC), central and state governments and, importantly, banks also to ensure implementation of existing legal provisions. While the current bailout may be unavoidable, it does not address the issue of institutional accountability, which is at the root of this crisis. Let us first quickly understand how we (once again) landed in the current situation.
Why discoms are in a soup
The examination of accumulated losses and short-term liabilities shows that a high level of AT&C losses, a high proportion of short-term high-cost power purchases, and delays in payment of subsidies by state governments are three major reasons for discoms’ financial woes. Most debt-affected states have significantly high levels of losses, which act as a big drain on their finances. Power purchase accounts for around 70% of the discoms’ total expenditure and hence failure in procuring low-cost power results in power cuts on the one hand and purchase of high-cost short-term power on the other. The figure shows that the seven defaulting states have a significantly large share of high-cost short-term power in their overall power purchase cost.
State governments’ failure to disburse subsidies on time further worsens discom finances. Planning Commission estimates suggest that uncovered subsidies account for around 34% of accumulated liabilities. The revenue loss is further exacerbated by a lack of timely and adequate tariff revisions. States like Tamil Nadu, Uttar Pradesh and Rajasthan