Corona pushes discoms to the brink

By: |
April 11, 2020 4:50 AM

Given the nature of the crisis, all concerned states should promptly release funds from their budgets to enable discoms to clear all outstanding dues

This has meant the destruction of nearly 40% of the total electricity demand.This has meant the destruction of nearly 40% of the total electricity demand.

Even as corona has triggered widespread devastation, a major casualty is the power sector. Following the nation-wide lockdown announced by prime minister Narendra Modi on March 24—this was an absolute must given the hyper-contagious nature of the virus and an overarching need to preempt community transmission—most industries and businesses, including the Railways (passenger segment), have downed their shutters. This has meant the destruction of nearly 40% of the total electricity demand.

All consumers, be it industries, shops and establishments, households, farmers, etc, fulfil their electricity requirement from the power distribution companies (discoms)—earlier known as state electricity boards (SEBs). Mostly owned and controlled by state governments, these, in turn, source power from independent power producers (IPPs), public sector undertakings (PSUs), viz National Thermal Power Corporation (NTPC), etc, apart from their stations.

When there are no takers for a good chunk or 40% of the electricity in the discoms’ supply kitty, it can lead to a huge loss of revenue. The discoms have legally binding contracts, especially with big companies, which draw electricity in large quantities, with provisions for the latter to pay when they don’t draw power. But, in the current scenario, discoms may not be able to enforce those provisions as the failure to draw electricity is entirely based on factors beyond the control of buyer (read, national emergency), i.e., it is a force majeure.

It is, therefore, very likely that discoms won’t receive any revenue from these users, and this will be the case as long as the lockdown continues. The impact on revenue/cash flows also depends on tariff setting policies followed by them.

Under orders from their masters—state governments—discoms sell power to some preferred consumers viz poor households and farmers, either at a fraction of the cost of purchase, transmission and distribution, or even free. On the units sold to these groups, discoms incur colossal under-recovery. This is aggravated by the ‘technical and commercial’ (T&C) losses—most of it plain theft. Inflated tariff allowed to IPPs under power purchase agreements (PPAs) also adds to the revenue shortfall.

In a bid to make up for the under-recovery, discoms sell to industries and businesses at an exorbitant tariff that can go up to Rs 10 per unit or even higher against the cost of Rs 3-5 per unit. Yet, they are saddled with huge losses year-after-year leading to a pile-up of unsustainable debt. To keep them afloat, since 2000, the government has given three financial restructuring packages (FRPs)—a fancy terminology for condoning their debt. The FRP 2015 involved takeover of 75% of debt of about Rs 4,00,000 crore.

The debt waiver of 2015 helped reduce their loss from Rs 52,000 crore during 2015-16 to `32,000 crore during 2016-17, and further to Rs 17,000 crore during 2017-18. But, the reversal was short-lived even as loss increased to Rs 27,000 crore during 2018-19. The situation continued to deteriorate during 2019-20. This has also impaired discoms’ ability to make timely payments to generators. In February—before the lockdown on March 24—the former owed a staggering Rs 88,000 crore to the latter.

Following the lockdown and revenue from a major chunk of industries and businesses—call them, milch cow—touching almost nil, discoms have been pushed to the brink. Forget clearing the past dues, going forward they won’t have money to pay for the power they buy for catering to essential services such as healthcare viz hospitals, isolation wards/quarantine facilities, ventilators and so on. Can discoms invoke force majeure to avoid making payment? That may not stand legal scrutiny.

The clause applies to a situation wherein a party to the agreement—discom, in this case—is unable to lift the quantum of units it has committed to buy from the other party (generator) because of factors beyond its control (read, lockdown). But, it can’t be used for not making payments even when the discom continues to lift supplies, even if on a reduced scale. Yet, if they don’t pay, this will aggravate the generators’ woes already suffering due to legacy dues with a good chunk of their loans becoming NPAs.

The government and Reserve Bank of India (RBI) have come out with relief measures for generators which include inter alia a three-month moratorium on payment of principal and interest to banks, directions to Coal India Limited—a public sector undertaking (PSU) which supplies over 80% of coal requirements—and Railways, not to insist on advance payments, etc. These are mere band-aids applied to a person having met with a fatal accident.

From August 1, 2019, the government had made mandatory for discoms to open letters of credit (LC) for getting supply from generators (gencos). Under the LC arrangement, the bank guarantees that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to pay, the bank will be required to cover the full or remaining amount, which in turn, it will recover from the buyer using all available legal means.

Under the New Tariff Policy (NTP), it was also contemplating a provision for penalty—or surcharge—for delayed payment at commercial rate of interest at 18%; capping of tariff hike to 15% of the under-recovered power supply cost and denial of grant or loan, if discoms don’t make efforts to reduce losses, etc. All of this was tough posturing purportedly to force discoms set their house in order.

The corona crisis has forced the government to step back. It has dispensed with the requirement of LC. It may also have to drop its plans under the NTP. What then is the way forward?

Given the unprecedented nature of the crisis, all concerned states should promptly release funds from their budgets to enable discoms clear all outstanding dues. If this requires relaxation of the fiscal deficit target under the Fiscal Responsibility and Budget Management (FRBM) Act, so be it. Once things are back to normal, the government should get down to addressing the core issues.

There is an urgent need to, (i) do away with sops to farmers and households. Subsidy if any, should be given directly to beneficiaries using direct benefit transfer (DBT); (ii) eliminate theft; (iii) rein in inflated tariff under PPAs.

Author is a policy analyst
Views are personal

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