Fragile Financial Health of Power Distribution Companies

power gridIndia’s power distribution system is historically plagued by high transmission and distribution losses, inadequate maintenance, low plant load factor, inept planning, lack of investment in up gradation, power theft, non-billing, inefficiency of collection, political unwillingness to raise electricity tariff etc. The end result is that the discoms are finding it very difficult to service their debts; raising alarm in the banking sector and the lending community. Even the finance ministry asked banks to stop providing working capital to utilities sitting on huge losses.

The overall loss was about 39 percent in 2001-02 and 24 percent in 2012. The accumulated losses of state power distribution companies (discoms) is estimated at about Rs 2 lakh crores. Non-revision of tariffs, subsidy arrears, the high cost of buying short-term power and high distribution losses are some key reasons for their financial ill-health. Just 7 (out of 28 Indian states) – Andhra Pradesh, Haryana, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh – account for over 70 percent of the losses. Unless action is taken immediately, the discom losses would amount to about 1.2 percent of the GDP in 2014 up from 0.9 percent in 2009.

They have generally availed short-term borrowings from banks and financial institutions to cover cash losses. It has raised serious concern not only for the discoms but also for the banks/ financial institutions that gave them money. State governments also extend support to the discoms through various direct and indirect channels. Budgetary support by the state governments is in the nature of subsidies and grants in lieu of subsidised power provided to certain categories such as agricultural and domestic consumers, and equity/bond investments and direct loans to discoms. Off-budget support is in the form of state government guarantees for the loans obtained by discoms from banks/financial institutions.

Annual Report 2011-12 on The State Power Utilities - Pl. Comm.

Annual Report 2011-12 on The State Power Utilities – Pl. Comm.

The growing concerns over the financial health of discoms in recent years have led to setting up of several committees at various levels to examine and suggest remedial actions. The Expert Group on ‘Financial Health of State Distribution Utilities’ was constituted by the Planning Commission to assess the cumulative losses of the distribution utilities in seven states and work out financial restructuring and turnaround plans for the power distribution companies in these states. Based on its recommendations and its own assessment, the Center has brought out a scheme for the financial restructuring of state discoms. Under the scheme, banks are expected to support the restructuring of debt by waiver of penal interest, moratorium on repayment of principal and restructuring of existing loans.

The restructuring of the short-term liabilities of state discoms to bring about a turnaround in their financial position can be successful only under the following conditions:

(a) Removal of systemic deficiencies of the state discoms;

(b) Elimination of the gap between average revenue realised and average cost of supply as early as possible through periodic tariff revisions; and

(c) Rationalization and better targeting of subsidies.

Therefore, in an attempt to enable the turnaround of state-owned power distribution companies and ensure their long term viability, the Ministry of Power announced a scheme for the financial restructuring of state discoms on October 2012. The scheme aims to eliminate the systemic deficiencies in the working of the discoms and contains various measures required to be taken by state discoms and state governments to improve the operational performance of the discoms.

The Union Government is also planning to bring a State Electricity Distribution Responsibility Bill to hold state discoms accountable for their performance. States would be expected to enact similar legislation with 12 months. This is expected to provide teeth to the financial restructuring scheme.

Rating of Discoms

Distribution function is a crucial link in the electricity chain as it provides the last mile connectivity in the Electricity Sector. Over 90% of the country’s power distribution business comes under the ailing state distribution companies. Hence, achieving improvements in the financial and operational performance of the State Power Distribution Utilities is of paramount importance for the robust overall development of the Indian power sector. The state power distribution sector today presents a grim scenario with mounting financial losses and is plagued by operational and cost inefficiencies besides regulatory infirmities.

With increasing losses, and inadequate support from the State Govt., most of the State Distribution Utilities have been forced to increase their level of borrowings, mostly bank borrowings, beyond their sustainable limits. Banks in the past have generally relied on sovereign guarantees for taking loan exposures to the State Power Distribution utilities and have continued to increase their lending exposure sizably. As on date a major portion of the losses of state distribution utilities are funded by bank borrowings, mostly short term borrowings. With signs of severe financial strain emerging in the distribution sector in certain states, lending institutions, especially banks had become cautious as a result of which the fund flow to the entire state power sector had been affected adversely .

The Ministry of Power developed an Integrated Rating methodology for the State Power Distribution Utilities as a measure of their financial health. The main objectives of developing the integrated rating methodology for the state distribution utilities are:

  • To devise a mechanism for incentivizing/dis-incentivizing the entities in order to improve their operational & financial performance.
  • To facilitate realistic assessment by Banks/FIs of the risks associated with lending exposures to various distribution utilities and enable funding with appropriate loan covenants for bringing improvement in operational, financial and managerial performance.
  • May serve as a basis for Govt. assistance to the state power sector through various schemes like RAPDRP, NEF, etc.

The MoP mandated Power Finance Corporation (PFC) to co-ordinate the rating exercise, which in turn has appointed ICRA & CARE to carry out the rating exercise. The exercise does not cover State Power/Energy Departments and private sector distribution utilities.

Of the 39 utilities from 20 states, all four electricity distribution utilities from Gujarat got A+ rating with Dakshin Gujarat Company Ltd receiving the highest 89%. They were followed by West Bengal and Maharashtra Distribution companies with A grade. The tail end was occupied by the four discoms from Uttar Pradesh with C grade.

Get the Complete Report: Integrated rating of State Distribution Utilities

Read More

Discoms adversely affecting Indian Power Sector

Analyzing the Problems of Discoms

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