Power Struggle: Centre’s reform scheme is a mere bailout package for discoms

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March 05, 2021 6:15 AM

The Rs 3 lakh crore channeled via RLRBSD is merely another bailout for discoms. The only obligation placed on them is meeting targets they Should have to met in 2018-19

“We have a unique opportunity to lead the regional power market development and make efforts towards enhancing the energy access and security amongst the neighbouring nations in the region,” S N Goel, chairman and managing director, IEX said.“We have a unique opportunity to lead the regional power market development and make efforts towards enhancing the energy access and security amongst the neighbouring nations in the region,” S N Goel, chairman and managing director, IEX said.

In her FY22 Budget speech, FM Nirmala Sitharaman announced that under the proposed Electricity (Amendment) Bill, 2021, the government intends to delicence the distribution business, bring in competition, and give the consumer power to choose her supplier. She also unveiled the Rs 3 lakh crore electricity distribution reform programme to reduce losses and improve the efficiency of discoms.

Tantalisingly christened ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD), the scheme is aimed at helping discoms trim their electricity losses to 12-15% from the present level and gradually narrow the deficit between the cost of electricity and the price at which it is supplied to ‘zero’ by March 2025. This is sought to be achieved by improving the reliability and quality of the power supply. It will also have a compulsory pre-paid and smart metering component to be implemented across the power supply chain, including in about 250 million households.

The Centre is expected to contribute around Rs 60,000 crore to the scheme’s corpus, and the rest may be raised from multilateral funding agencies such as ADB and World Bank (WB). The Centre’s contribution will be met through the previous commitment of the ongoing schemes, viz. the Integrated Power Development Scheme (IPDS) and the Deen Dayal Upadhyaya Gram Jyoti Yojna (DDUGJY). The funds will be released subject to discoms meeting reform-related milestones.

The aggregate technical and commercial (AT&C) losses—a jargon for power theft—and shortfall in the average revenue realisation from the sale of electricity vis-a-vis the average cost of supply (cost of purchase and distribution), or the ACS-ARR gap, are major causes for losses of discoms and their financial stress. Accordingly, the scheme sets the target for both to be achieved by 2025.

When viewed in the backdrop of UDAY, launched in November 2015, wherein the targets were missed by a huge margin, this scheme does not inspire. Under UDAY, discoms were required to reduce AT&C losses from 20.7% during 2015-16 to 15% by 2018-19. Further, they were to reduce the ACS-ARR gap from Rs 0.59 per unit during 2015-16 to ‘zero’ by 2018-19. Simultaneously, the government gave them a financial restructuring package (FRP).

Put simply, the FRP was nothing but a condoning of discoms’ staggering debt of about Rs 4 lakh crore (while 75% of this was taken over by the states, for the balance, they were allowed to issue bonds at a preferential interest rate). The stated rationale behind giving FRP was to enable discoms to start with a clean slate. In return, discoms were expected to set their house in order by achieving the milestones as specified above. But, they did not deliver.

During 2019-20, their AT&C losses were 18.9% against the 15% target for 2018-19 The ACS-ARR gap during 2019-20, stood at Rs 0.42 per unit against target of ‘zero’ for 2018-19. Against this backdrop, the talk now, of achieving those targets, which should have been achieved by 2018-19, by March 2025—under RLRBSD—is laughable. The focus is clearly not on reforms; instead, the real objective behind the scheme is altogether different. To get a sense, let us look at the current state of discoms’ finances.

During 2015-16 (the year UDAY was launched), losses were Rs 52,000 crore. These declined to Rs 17,000 crore during 2017-18 (courtesy, FRP). Thereafter, discoms did little to improve their working, and their losses increased to about Rs 30,000 crore during 2019-20 and almost doubled to Rs 58,000 crore during 2020-21 even as the pandemic led to severe demand contraction from industries and businesses—the high tariff paying customers.

Correspondingly, their debt galloped and is estimated to touch Rs 4.5 lakh crore by the end of 2020-21 (according to Crisil)—exceeding even 2015 level. The collateral damage is a pile-up of their dues to IPPs and public sector power generators, such as NTPC, to Rs 1.37 lakh crore (in December 2020).

To facilitate payment of all outstanding dues to IPPs/PSUs, under ‘Atmanirbhar Bharat Abhiyan’ announced in May 2020, Sitharaman had provided for a special loan of Rs 90,000 crore from REC and PFC to discoms (the amount has since been raised to Rs 1.3 lakh crore). However, the problem of mounting debt is no less daunting all the more when lenders are in no mood to grant any more forbearance in regard to servicing of loans.

Seen in this light, a mammoth Rs 3 lakh crore to be spent under RLRBSD is merely an attempt to bail out the discoms in dire financial straits (as was done under UDAY), not for improving the transmission and distribution (T&D) infrastructure, e.g. pre-paid and smart metering, etc, as is claimed. That the money is being offered on a platter is clear from virtually no obligation on the discoms (the performance targets set for 2018-19 now gets shifted to 2025).

At the root of persistent and increasing losses of discoms is the orders issued by their masters (read state governments) to sell electricity 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 AT&C losses—most of it plain theft. Inflated tariff allowed to IPPs under purchase agreements adds to the revenue shortfall.

The above three factors are swept under the carpet in any discussion on measures to address discom losses. So, while talking of eliminating ACS-ARR gap, the powers that be never even whisper about charging bare minimum tariff from households or farmers (forget charging a reasonable rate to cover the cost of supply). Likewise, on trimming AT&C losses, they never say ‘there is a need to eliminate theft’. Similarly, PPAs where interests of discoms are compromised rarely, come under scrutiny.

The problem is entirely political. In a bid to win elections (these are held round the clock), almost every political party promises sops which include, among others, power supply to farmers and poor households at throwaway price or even free; they even ignore theft happening in slums/jhuggis that promise votes en masse. They use discoms as ‘guinea pig’ for achieving these populist goals.

As long as this effect of populist politics persists, the discoms will continue to be in the red, needing a bailout at frequent intervals (since 2000, four bailouts—including the one announced in FY22 budget—have been given, and more will follow). This will also forestall any reform in the power sector.

The author is Policy analyst, www.uttamgupta.com

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