The fear is he’s given states a really long rope
Power minister Piyush Goyal really crunched the numbers to study the causes—and identify solutions—of the power sector’s problems before the Cabinet cleared his plan for turning around ailing electricity distribution companies (discoms). Some were obvious, some not, but all require tremendous monitoring to ensure the plan doesn’t go the way of the other two such bailouts over the last decade or so. With interest costs comprising 10-20% of the costs of power in states like Rajasthan and Tamil Nadu, getting hapless banks to take a huge haircut has been the focus of all discom turnaround plans—at the national level, interest costs add up to over 80% of the Rs 64,000 crore FY14 loss. With transport costs comprising over 40% of coal costs, a big part of Goyal’s plan is to completely rework coal linkages to reduce the mine-to-power-plant distance. Allowing producers like NTPC to move coal to thermally efficient plants can cut costs by 30-35 paise per unit of electricity, forcing Coal India to supply the grades they are charging for—incorrect billing is a chronic problem—can cut costs another 15-20 paise; all told, Goyal hopes to cut coal costs by around 20% over 2-3 years. Cutting aggregate technical and commercial (ATC) losses is critical—lowering losses from 50% to 25% will reduce tariffs by a third—so that is the one number Goyal has hard-wired into his plan.
Previous plans, including the UPA’s R40,000 crore bailout in 2002, put state governments under no real pressure to deliver—except, dues to PSUs like NTPC had to be made, or would be cut from the funds given by the Centre to the states. Goyal has got states to shoulder more of the burden—half of discom debt will be taken over this year itself and, by FY21, half the discom loss will be transferred to the states. This is too long a rope. While states will benefit immediately from the interest cut—they will pay 8% on bonds versus 14% by the discoms today—their interest costs will not be counted in the FRBM obligations till FY18; this means they can run profligate power operations without having to sacrifice other expenditure. Giving states till FY21 to absorb just half the discom loss reduces the urgency to ensure ATC losses are cut and tariffs raised regularly; ATC, in any case, is a nebulous concept—that for UP fell miraculously to under 25% in FY14 from 43% in FY13, and rose equally dramatically to 40% in Q1FY16. Sadly there is little to encourage competition—making open access mandatory in 3 years would have done wonders to raise efficiency—without which sharp ATC cuts are also difficult. While Goyal will have his hands more than full just implementing the plan, as our page 1 graphic makes clear, the plan will fail without regular and large tariff hikes.