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 had not increased tariffs for several years, leading to the crisis. In the absence of an increase in revenue from tariff, discoms borrowed heavily from commercial banks to finance their high-cost power purchases as well as daily operations. The banks did not exercise restraint in lending to discoms, even in the face of an inevitable default. The Ahluwalia Committee report presciently identified the risk of moral hazard on part of discoms and banks not exercising financial prudence in anticipation of another bailout. A decade later, this risk has not only become real and apparent but worse is that it may persist as the bailout does not acknowledge this issue. In fact, banks which enabled discoms to accumulate huge losses are the primary beneficiaries of the bailout.
Interestingly, there are clear provisions in the Act and SERC regulations to tackle these situations. Almost all SERCs have empowered themselves to undertake suo motu tariff revision in case the discom does not file a tariff revision petition. Section 65 of the Electricity Act empowers SERCs to demand advance payment of subsidies from state governments, but no SERC has made use of this provision. Under multi-year tariff regulations, almost all SERCs have provisions for formulating and reviewing power procurement plans, making it possible to avoid high-cost short-term power purchases. Thus, failure on part of institutions responsible for ensuring implementation of legal provisions is mainly responsible for the current crisis. However, the proposed bailout package does not address this issue.
Dressing up debt
The FRP requires state governments to take over 50% of the outstanding liabilities of discoms by converting this debt into bonds and discoms are to service the remaining part. If a discom defaults, the state government ensures debt servicing. Banks pay for their folly by simply foregoing penal interest and principal payment for three years,