Frequent Finance to DisComs

Background:

  • Recently, there was a sharp decline in the dues owed by power distribution companies, discoms, to power generating companies. Discoms have paid off their dues in part by drawing down a liquidity facility arranged by the Centre last year.
  • This rescue package was arranged to prevent the entire power sector chain from suffering because of the discoms’ inability to meet their obligations. In the initial years after the introduction of UDAY some states did, in fact, witness an improvement in their financial and operational indicators.
  • But it wasn’t sustained, there has been a sharp deterioration in several parameters.

Performance evaluation of DisComs:

  • A key metric to measure the performance of discoms is AT&C losses. The UDAY scheme had envisaged bringing down these losses to 15 per cent by 2019. However, as per data on the UDAY dashboard, the AT&C losses currently stand at 21.7 per cent at the all-India level. In the case of the low-income north and central-eastern states — Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh — the losses are considerably higher.
  • On another metric — the gap between discoms’ costs and revenues — the difference, supposed to have been eliminated by now, stands at Rs 0.49 per unit in the absence of regular and commensurate tariff hikes. For the high-income southern states of Tamil Nadu, Andhra Pradesh, and Telangana, this gap between costs and revenues is significantly higher.

Factors responsible behind such situation:

  • The government’s push for ensuring electrification of all have contributed to greater inefficiency.
  • To support higher levels of electrification, cost structures need to be reworked, and the distribution network would need to be augmented — in the absence of all this, losses are bound to rise.
  • With demand from industrial and commercial users falling, revenue from this stream, which is used to cross-subsidise other consumers, has declined, exacerbating the stress on discom finances.
  • A turnaround in the economy will provide some relief, but will not form the basis of a sustained improvement in finances.
  • Even six years after UDAY was launched, various levels in the distribution chain — the feeder, the distribution transformer (DT) and the consumer — have not been fully metered.
  • As a result, it is difficult to ascertain the level in the chain where losses are occurring.
  • Other than discoms in metros like Delhi and Mumbai, there is also limited data on which consumer is attached to which DT.
  • This lack of data makes it difficult to isolate and identify loss-making areas and take corrective action.
  • The continuing absence of political consensus at the state level to raise tariffs or to bring down AT&C losses signal a lack of resolve to tackle the issues plaguing the sector.

Solutions:

  • One of the solution centres around a national power distribution company. Another option is to deduct discom dues, owed to both public and private power generating companies, from state balances with the RBI forcing states to take the necessary steps to fix discom finances. The Centre has linked additional state borrowings to the completion of distribution reforms to incentivise states to act.
  • Short of radical measures — privatisation remains a chimera — it is difficult to see how a sustainable turnaround in the financial and operational position of discoms can be engineered. As the amounts involved rise, minor tinkering isn’t likely to produce the desired results.