Discoms slash losses, set to cut them further

Written by Aftab Ahmed | Noor Mohammad | Noor Mohammad | New Delhi | Updated: Dec 30 2013, 05:27am hrs
DiscomsTamil Nadu?s discom has slashed its cash losses by a whopping 64% to Rs 2,887 crore from March 2012 (Reuters)
Helped by the financial restructuring plan (FRP) that mandates timely tariff revisions, power distribution companies in Uttar Pradesh, Tamil Nadu, Haryana and Rajasthan have cut their operational losses significantly and are on track to slash them further.

Tamil Nadus discom has slashed its cash losses by a whopping 64% to Rs 2,887 crore from March 2012. During the same period, UP and Rajasthan discoms cut their respective losses by 46% and 42%. Their losses are estimated at R9,899 and R13,205 crore, respectively, as at the end of March 2012. Similarly, the Haryana discom has reduced its operational losses by 56% to R2,018 crore.

What is more, these discoms are on course to further reduce their losses in the coming fiscal and that too by large percentages. For example, the Tamil Nadu utility is projected to cut its losses 64% to R1,030 crore in 2014-15, UP discoms by 42% to R3,062 crore, Rajasthan 49% to R3,873 crore and Haryana 21% to R1,591 crore.

To comply with the FRP conditions, these states are now making upfront payment of subsidy to discoms on a monthly basis and also paying electricity bills of government departments and agencies on time. Discoms generate 30-40% of their revenues from these two sources.

However, lenders are still cautious. Its too early to say that the FRP has worked for these states. Right now, two things have happened, which are that most of them have revised their tariffs and state governments have issued bonds. But we will be able to judge the process once the repayment of loans start. We will be able to say if it is really working only after six months, said Shubhalakshmi Panse, chairman and managing director of Allahabad Bank.

"The losses have reduced because of tariff hikes and we have funded their interest costs. So there is no interest outgo," she explained.

Further, these states have either converted or are in the process of converting their loans to discoms into equity. While Tamil Nadu and Haryana have already completed conversion of state government loans to discoms into equity, a similar process is under way in UP and Rajasthan. These states have also asked their respective electricity regulatory commission to start the process for liquidation of regulatory assets (deferred revenues). Discoms in these states have hiked electricity tariffs by 20% to 42% since April 2012.

Under the FRP, half of the discoms short-term loans as at the end of March 2012 have been taken over by state governments with the balance rescheduled, significantly increasing utilities cash flows. This is reflected in improved power supply in these states. After restructuring discoms debts, average power supply has improved by 16% and 18% in Rajasthan and Haryana. Similar data are being collected by UP and Tamil Nadu.

In line with FRP conditions, state governments are also required to implement a model legislation in the current fiscal to take responsibility for operational and financial turnaround of their discoms. The Union power ministry has circulated a model bill in September which must be enacted by states within six months from circulation.