Why it is critical to get state electricity regulators to work

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Updated: June 28, 2019 12:36:32 AM

SEB losses rose 44% in FY19, but regulators raised tariff levels by a mere 3% in FY18 and 1% in FY19 and so far in FY20

power, power sectorAccording to an Icra report, while the median tariff hike at the all-India level was 8% in FY15, this fell to 4% in FY16 and FY17, and then to 3% in FY18 and 1% in FY19, a year in which SEB losses rose 44%, to Rs 21,658 crore as compared to Rs 15,049 crore in FY18.

The ministry of power was probably right when it pooh-poohed a Crisil Ratings report that said, at a likely `2.6 lakh crore in FY20, the debt levels of government-owned electricity distribution companies (SEBs or discoms) would be similar to the levels they were at in the period before the Uday reforms. In other words, the Uday reforms had changed little on the ground. The ministry said that, contrary to what Crisil said, the pre-Uday debt was around Rs 3.2 lakh crore; indeed, the ministry said “a deeper analysis of Discom debts would reveal a tighter fiscal management by Discoms… (which) have managed their finances with around Rs 40,000 crores less than what was expected under Uday”.

The problem with this self-congratulatory tone is that it ignores several facts apart from the fact that while AT&C losses of discoms were to come down from around 21% pre-Uday to 15% by FY19, they are currently around 18.3%. And while the gap between the purchase and sale price of power is down from 59 paise to 23 paise in the same period, a lot of this has to do with the fact that, under Uday, banks slashed their lending rates on existing loans from around 14% to around 8.5%. Indeed, despite this great saving, discoms owe power producers around Rs 40,000 crore in regular dues and Rs 18,000 crore in ‘regulatory dues’—these are dues that state regulators have said need to be paid, but the discoms haven’t been able to pay them; had the discoms not been allowed to delay their payments, their debts would indeed be back to near-Uday levels.

At the heart of these dues is the complete failure of state electricity regulatory commissions (SERCs) to increase power tariffs based on actual costs. According to an Icra report, while the median tariff hike at the all-India level was 8% in FY15, this fell to 4% in FY16 and FY17, and then to 3% in FY18 and 1% in FY19, a year in which SEB losses rose 44%, to Rs 21,658 crore as compared to Rs 15,049 crore in FY18. While every SERC was to pass orders on FY20 tariffs by April 1, only 15 states have done this, and this excludes big states like Uttar Pradesh, Maharashtra, Rajasthan, Tamil Nadu, etc—on average, so far in the year, the effective tariff hike is 0.9% according to Icra. SERCs who appear to incorrectly believe it is their job to keep tariff hikes to a minimum do this through creation of what is called a ‘regulatory asset’; this is currently around Rs 135,000 crore and about half of these were created in the post-Uday period. Regulatory assets is jargon for tariff hikes that need to be passed on to consumers, but since the regulator feels consumers won’t be able to pay, he labels this ‘regulatory assets’, gives discoms an interest charge on this; while the plan is to allow tariff hikes in the future that will help reduce the regulatory assets, the low hikes in the past have resulted in a build-up of ‘regulatory assets’. Hardly surprising then, that over 30,000MW of power capacity is in serious trouble because of lack of power purchase agreements or lack of fuel like gas or power; a large number of power plants are also running at lower capacity levels as SEBs don’t have enough money to buy more power, but they are able to make enough to service their debt. Until a way is found to make sure SERC do their job instead of trying to please the political establishment by keeping tariff hikes to the minimum, it is unlikely the power sector will ever become healthy.

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