Testing times are ahead for state governments on power sector reforms as the accumulated losses of discoms become increasingly unrecoverable. Governments will have to show the political resolve to phase out expenditure like subsidy pay-out for electricity supply to the agriculture sector, which tends to strain state finances.
The losses of power distribution companies are rising threateningly on the back of high fuel costs even as state governments continue to drag their feet over power sector reforms. It is high time that the Centre made a decisive move to push the states on reforms. The cost of inaction would be too high for the country’s financial system to bear.
The example of debt-laden Greece is before us. We must not allow our power distribution sector to become a financial blackhole.
The combined losses of power distribution companies for the current fiscal 2011-12 are estimated to hit R80,000 crore, up from R63,000 crore in the previous year. A tariff hike of 45-60% is unavoidable if states have to bridge their revenue gaps, says a recent report from Citigroup Global Markets.
“Indian SPUs (state public utilities) as a whole need to raise tariffs by 45-60% to recover their costs (without subsidies). Recent tariff hikes have managed to reduce the quantum of the required incremental hikes only marginally. The worrisome aspects are: quantum of required hikes have increased from 35-50% in FY06; cost of supply of power has accelerated in recent past due to rising fuel cost, wages, interest burden and purchase of expensive merchant power; and delay in increase in tariffs will lead to further cost escalation due to debt taken on to fund current losses,” the group said in its India Infrastructure Insights-15.
It is heartening that the Centre has favourably considered the request of states like UP, Madhya Pradesh,Bihar, Rajasthan and Tamil Nadu for financial aid to their discoms reeling under losses.
The Centre has already approved financial packages for UP and Rajasthan. Now these states should move fast on tariff revision. Any delay on tariff hike will further complicate the problem of passing on the increase in power costs to consumers. The state is facing electricity shortfall of 2,000 mw. In the short-to-medium term, it will have to meet its electricity deficit with supply available in the open market. The financial package is expected to ease the cash crunch that the discoms have been facing after banks and financial institutions stopped short-term lending to the sector.
However, the state cannot afford to be complacent on tariff revision. Any complacency on tariff revision could push discoms back into financial trouble.
“High level of cross subsidisation complicates tariff revision process — Domestic (24% of consumption) and Agriculture (24% of consumption) with average tariffs at R2.64/kWh and R0.9/kWh respectively are much lower than Industrial (35% of consumption) and Commercial (8% of consumption) at R4.25/kWh and R5.6/kWh. This suggests that tariff hikes in domestic and agriculture tariffs will have to be much higher than 45-60%. This will severely test the will of the political leadership to pass on costs to domestic and agriculture consumers. SPU financials continue to deteriorate—PAT loss of SPUs without subsidy has increased to R635bn in FY10 while D/E (deb-equity ratio) has increased to 21 times due to erosion in net worth. Subsidy received as proportion of subsidy booked has declined to 56% in FY10 from 94% in FY07. Estimate of losses for FY11 vary from R700bn to R750bn,” the Citigroup report said.
Standard & Poor’s, a global credit ratings agency, is more optimistic about the power sector reforms. “The gathering momentum for adoption of tariff reform is likely to improve the credit quality of distributors over the next two to four years, and that will have a knock-on effect for the industry as a whole,” the ratings agency said in its latest update on the Indian power sector.
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