Analysing the problems of Power Discoms of India

Most of us get electricity in our houses and offices via the power distribution companies run by central and state governments. In India, the share of private sector in power generation has risen substantially over the past few years, but state electricity boards continue to own nearly 95% of the distribution network. Thus, the entire value chain of the power sector in India is dominated by the state owned companies.

These State Electricity Boards or SEBs are in existence for last 5 decades. Over the period of time, they have become unviable and unprofitable due to heavy accumulated losses and liabilities.

The T&D Losses and AT&C Losses

Inefficient planning, lack of investments, inadequate maintenance, low plant load factor, high transmission and distribution losses, erratic supply to consumers and other issues resulted in pathetic services and perennial financial losses. India’s power distribution segment is plagued by two types of losses:-

• Transmission & Distribution (T&D) Losses: These losses are due to inefficiency in transmission sector and has mainly occurred due to feeder metering in the past. Please note that a substantial portion of T&D loss, including theft of electricity gets attributed to agricultural consumption.
• Aggregate technical and commercial (AT&C) losses: These losses refer to the difference between units input into the system and the units for which the payment is collected.

Here we should note that while the T&D Loss do not capture losses on account of non-realisation of payments. As the T&D loss was not able to capture all the losses in the net work, concept of Aggregate Technical and Commercial (AT&C) loss was introduced. AT&C loss captures technical as well as commercial losses in the network and is a true indicator of total losses in the system. AT&C Loss is the clearest measure of overall efficiency of the distribution business as it measures technical as well as commercial losses.

Thus, the reasons of the T&D and AT&C losses are:

• Power Theft
• Non-billing
• Incorrect billing
• Inefficiency in collection
• Leakage in transmission and distribution system
• Lack of investment

The fraction of losses is very high. The T&D losses have been consistently on higher side, and reached to the level of 32.86% in the year 2000-01. Overall AT&C loss was 38.86% in 2001-02 At present (2012) the all-India T&D losses are 24.15 per cent. In 2009-10, the average AT&C loss for utilities selling directly to consumers stood at 27.2%.

Further, one more issue with the power distribution companies is the mismatch between tariffs and cost of generating power.

Poor Financial Conditions of SEBs

• The very high fraction of losses have plunged the financial health of state electricity boards in a distressed state. The high losses affect revenue, insufficient or no revision in tariff is another major factor that has affected performance. Moreover, the distribution arms of SEBs succumb to political pressures and are not able to do tariff revisions. Thus, politicians also have kept the power reforms hijacked.
• The fallout of the poor financial status of the SEBs is that for the discoms, it has become increasingly difficult to service their debts. So, alarm bells started ringing in the banking sector and most lenders became very cautious in extending loans to the power sector as a whole. Then, the finance ministry also asked the banks to stop providing working capital finance to utilities that have large losses.

ARDRP Programme

The Government launched the Accelerated Power Development & Reform Programme (APDRP) was launched in 2001, for the strengthening of Transmission and Distribution network and reduction in AT&C losses. The scheme was launched to bring the AT&C losses below 15% in five years in urban and in high-density areas.

The scheme hardly met with any success. According to the Government claims, the scheme led to reduction in the overall AT&C loss from 38.86% in 2001-02 to 34.54% in 2005-06.Later, the government restructured the ARDRP programme. The Restructured APDRP (R-APDRP) was launched in 2008 as a central sector scheme for XI plan.

R-ARDRP Programme

The major problem of the previous APDRP was the inability to use the grants and failure to upgrade the system. The rechristened R-APDRP was launched with the intention to plug these loopholes and revamp the power scenario, by earmarking strict guidelines. This programme comprise of two main parts-Part-A & Part-B

• Part – A:This part provided assistance to states for preparing the Base-line data for the project area using new technology tools in the project area having more than 4 lakh population and annual input energy of the order of 350 MU.
• Part – B: This part provided assistance for renovation, modernization and strengthening of 11 kV level Substations, Transformers/Transformer Centers, Re-conductoring of lines at 11kV level. In exceptional cases, where sub-transmission system is weak, strengthening at 33 kV or 66 kV levels was also to be considered.

To get assistance under the scheme, the states required to constitute the State Electricity Regulatory Commission and achieve the target of AT&C loss reduction at 3% per year for utilities that have AT&C loss above 30% and 1.5% for utilities having AT&C loss below 30%. The states were also required to commit a time frame for introduction of measures for better accountability at all levels in the project area. The monitoring was to be done by independent agency of Ministry of Power. Power Finance Corporation was designated by MoP as the nodal agency for operationalising the scheme.

The above scheme was launched with a lot of fanfare and optimism, but it could live up to the hype and euphoria. The first thing was that the project moved at snail’s pace. The SERCs were floated, IT companies joined the bandwagon, bids, tendering and re-tendering were all around. Pilot towns were announced. A new crop of IT consultants, GIS Consultants and Billing Consultants came up. When the dust sat down, we find that the AT&C losses were still high. The objective was to reduce the AT&C (aggregate technical and commercial) losses from the current level of over 30 per cent to less than 15 per cent over next five years, by automating and integrating IT. This Herculean task remains undone even today. Then, the NTPC and PGCIL were entrusted with the task of imparting consultancy to the aspiring DISCOMS. Both the organization were novice in the field of distribution of electricity, having no exposure to the complexity of distribution network and working of distribution units with no knowledge of constrains and problems of Discoms. APDRP could not achieve the desired goals within the stipulated time.

V.K. Shunglu Committee

In the backdrop of mounting losses in the power distribution segment, the Union Government approved a high level panel on Financial Position of Distribution Utilities to look into the financial problems of the SEBs/distribution utilities and to identify potential corrective steps, particularly in relation to their accounting practices. The panel was appointed in July 2010 and is headed by former comptroller and auditor general V.K. Shunglu. The committee submitted its report to the government in December last year.

The V.K. Shunglu committee’s terms of reference were as follows:

• Review accounts of SEBs and state distribution companies as on March 31, 2010, or earlier, if updated accounts for the year ended March 31, 2010, are not available.
• Review their financial position as on March 31, 2010, and in particular, losses incurred and projected distribution losses over the period April 2010 to March 2017.
• Review Electricity Tariff including the role of (i) state governments; (ii) state tariff regulator; and (iii) SEBs’/state distribution companies in periodic tariff revision.
• Assess system improvement measures accomplished in distribution of power, in particular, in urban areas as well as future needs/plans.
• Examine geographical and spatial compulsion and determine their operational impact.
• Review organisational and managerial structure, manpower, employed and future requirements/plans.
• To recommend plan of action to achieve financial viability in distribution of power by 2017

This committee restricted its analysis to distribution utilities for, poor operational efficiencies of these utilities end up affecting performance of generation and transmission utilities. It analysed the SEBs of 15 states that account for 91% of total power consumed in the country. It came up with the following recommendations & observations:

• Inadequacies and distortions in tariffs have been caused by actions and inactions of regulators, utilities and indeed the state governments. Power distribution companies incurred a whopping loss of Rs 1,79,000 crore before subsidy during 2006-10 period. These losses were primarily because of the gap of about 0.60/kwh between average cost and average revenue. This loss can not be stoped by soft options and radical action should be taken.
• One primary reason for the distribution utilities not submitting their tariff proposals in time or in acceptable form is the state government’s political sensitivity to any proposed increase in tariffs
• The power tariff should be set on the basis of best available data rather than waiting for auditing reports. There should be a built in formula for retail tariffs and the rise in fuel costs should be passed on to consumers.
• Since T&D losses are not uniform across a state, consumers in an area that has a high default rate should be charged more compared with those consumers in the area of lesser default.
• There should be an integration of operational, commercial and financial data via computerisation in one single system.
• This needs to done to logically delineate functions to be performed by distribution company itself and outsourced company.
• Satisfied customer is a paying customer and satisfaction depends on quality of power supplied, regularity of power supplied and redressal of customer grievances.
• Distribution Franchisee Model would be the way forward on an urgent basis for the utilities to bring down their distribution loss levels significantly, given the advantages over the public-private partnership model and successful implementation of the franchisee model for the Bhivandi Circle in Maharashtra. This should be extended to the states during the next few years to at least 255 towns, which account for over 40% of the consumption.
• A Special Purpose Vehicle should be created that would buy the bank loans of discoms, subject to various conditions. The SPV’s chairperson would be appointed by the RBI.
  • RBI would provide a line of credit to the SPV for buying the bad loans. In the long run, state governments would have to repay the loans to the SPV. This means there would be no write-off of the outstanding loans.
• R-APDRP scheme is a key step taken by the Central Government to reduce distribution losses; and should be extended to the next Plan period with applicability to all towns above a population of 30,000 based on Census 2011.

The SPV Model was not accepted because there was no response from RBI on the matter.

BK Chaturvedi Panel

Planning Commission had also set up a sub-committee headed by B K Chaturvedi to help restore the financial health of the utilities.

• While the VK Shunglu panel had recommended the franchise model for public entities involving private companies in power distribution, the BK Chaturvedi favoured the public private partnership (PPP) mode over the franchise model.
• The reason was that private entity in the franchise model is not required to obtain a distribution licence and, hence, is outside the purview of the State Electricity Regulatory Commission.
• Chaturvedi panel also said that the franchise model is incapable of bringing in adequate capital investments and will not ensure financial stability of the sector.
• The Chaturvedi panel formulated a plan, according to which the state governments will absorb 50% of the debt of discoms and convert them into state government bonds. The other 50% will have to be restructured by commercial banks by extending the tenure for repayment and a possible moratorium on interest. RBI will have to step in and give concessions so that banks can continue to lend to the sector.
• Thus, recently the government has announced a Rs. 1.90 Lakh Crore debt restructuring package that would enable the nearly bankrupt distribution companies to begin a fresh round of tariff increase.

Recent Debt Restructuring Package

Under this plan, 50 per cent of the short-term outstanding liabilities of this distribution companies (Discoms) would be taken over by state governments. The debt will be first converted into bonds to be issued by discoms to participating lenders, duly backed by the state government’s guarantee. Balance 50 per cent loans would be restructured by providing moratorium on principle and best possible terms for repayments.

The package provided immediate relief to the Discoms. We should note that in 2001-02 also, the Centre had to provide a special financial package to save the state power sector from collapse when some of the state electricity boards defaulted on payment to central generators like NTPC and NHPC for power purchased from them. But the states did not learnt from that experience and continue to drag their feet.

Is it time to celebrate?

No. It is not. There are some of the major issues facing the power sector, yet to be resolved. Power producers are still grappling with coal shortage and land, environment clearance. Many companies are mired in legal tangles after having signed power purchase agreements at rates that are of bygone era. However, we have to see whether the state electricity boards learn to be disciplined this time in raising tariffs and curbing transmission and distribution losses. Union Government had also announced recently that it would bring a model State Electricity Distribution Responsibility Bill within a year to hold state discoms accountable for implementing power reforms under the newly-approved debt recast financial package approved by the States. States would have to enact the legislation within 12 months from the date of circulation of model legislation to mandate compliance of the provisions of the financial restructuring package.