Payment discipline in the sector is hitting growth
On the face of things, finances are improving in the power sector. The Power Finance Corporation’s (PFC) latest report shows a definite slowing in the trajectory of losses of all power utilities. From R75,000 crore in FY11, losses rose a third to R102,000 crore in FY12 and then flattened to R105,000 crore in FY13. The Planning Commission’s estimates for FY14, though a different data set from the PFC one, in fact, shows a reduction of losses. The right question to ask, under the circumstances, is whether the data is believable. There are clearly problems with the data, in that the numbers depend upon what has been recognised by the utility. In the case of Delhi, where accounting standards are far superior since the electricity distribution companies (discoms) have been in private hands since 2002, the unaccounted amounts add up to around R25,000 crore—while R13,500 crore of ‘regulatory assets’ have been recognised by the regulator till FY13, the discoms claim another R13,000 crore or so is owed to them. A recent study by credit-rating firm ICRA found, similarly, an uncovered gap of R11,900 crore in Uttar Pradesh. Also, demand has collapsed with GDP slowing and, more important, with state utilities facing a huge cash crunch, several of them are simply preferring to back down their power plants instead of incurring losses running them. Indeed, news reports suggest that states are increasingly buying in the spot markets instead of signing up long-term PPAs, putting at risk around 25,000MW of power plants which are in the process of being constructed. Add to this the power plants that are locked in dispute over tariffs—the Adani and Tata power cases of compensatory tariff are stuck in the Supreme Court—and those that are running at low plant load factors (PLFs) due to unavailability of fuel supplies.
Sorting out this mess isn’t going to be easy since the state electricity regulatory commissions (SERCs) have failed to do their jobs—as compared to 14% in FY13 (this is why losses plateaued in that year), tariffs rose just 7% in FY14 and an even lower 6% in 22 states that have issued tariff orders so far this year. Which is why, at over R1 of losses getting generated for each unit of power produced, the sector is completely unviable. Indeed, it is this lack of responsiveness of the SERCs that has got the NDA government to almost give up on the Financial Restructuring Plan (FRP) that the UPA set store by. The NDA, though, is trying to tighten the rules for SERCs and increase the level of competition in the sector which, ultimately, is the only way to ensure tariffs come down. The NDA is also working on a model, as in Gujarat, to separate agriculture feeders to ensure a better return from this sector—at an all-India level, PFC data shows, agriculture accounts for 23% of sales but just 8% by way of revenues. In the same way that the Montek Singh Ahluwalia committee helped fix the finances of utilities like NTPC by automatically linking the balances of state governments with RBI to their outstanding electricity dues to central PSUs, while the Modi government dishes out more funds to states, it would be a good idea to link these to payments to private sector power producers as well as to banks. Aggressive privatisation also needs to be adopted to reduce ATC loss levels, vital to keep tariffs low—the PFC report shows ATC loss levels have worsened in FY13 for states like Uttar Pradesh and Tamil Nadu and, naturally, so have financial losses.