India: Inadequate tariff hike, Power theft and loss; Discoms marching to bankruptcy.

State-run electricity distribution companies (discoms) reported a near doubling of their financial losses in FY19, in what reflected a dramatic reversal of the trend of a secular decline in losses in FY17 and FY18 thanks to the UDAY scheme. What caused these entities to digress from the pathway to progress are politically-motivated delays and inadequacies in tariff hikes and state government departments’ failure to pay them in time for the electricity purchased. Another reason for the rise in losses is the Saubhagya scheme for electrification of households. Discoms’ financial losses stood at Rs 28,369 crore at the end of FY19, up 88.6% year-on-year, according to the updated data provided to the power ministry.

The losses were reported at Rs 21,658 crore as at May-end (reflecting 44% annual increase), but several states have since revised their inputs in the Central government’s UDAY portal, revealing that the losses in aggregate were actually higher.

Significant revisions have been made by Tamil Nadu (Rs 9,257 crore versus Rs 4,154.7 crore reported in May), Telangana (Rs 7,609 crore vs Rs 5,703 crore), Madhya Pradesh (Rs 6,331 crore vs Rs 2,735 crore), Bihar (Rs 2,200 crore vs Rs 1,815 crore) and Andhra Pradesh (Rs 1,563 crore vs Rs 1,142.1 crore). Discoms’ financial data, as audited by Power Finance Corporation, is publicly available only till FY16.

Under the UDAY scheme launched in November 2015, governments of 16 states have taken over around Rs 2.32 lakh crore debt of their discoms; this resulted in lowering of the interest rates on these loans to 7-8.5% from around 11-12% earlier. Savings through improvement in billing efficiency also contributed to the loss reduction in FY17 and FY18.

Chhattisgarh discom has now showed loss of Rs 144.6 crore in FY19, against its previous claim of making Rs 83 crore profit. On the other hand, Jharkhand, Assam and J&K have now shown their FY19 losses to be lower than reported at May-end.

Financially-weak discoms trigger a domino effect in the sector, as they become unable to pay power producers on time, who in turn fail to service their debts. Dues from discom to power producers were up 28% at Rs 38,884 crore at May-end. Addressing the issue of irregular payments, the Union power ministry has made it mandatory for discoms to open and maintain adequate letter of credit (LC) as payment security to private power plants.

Delaying payments to generators has however helped discoms manage their working-capital cycles, meet short-term obligations and avoid costly working-capital loans, but CRISIL Research said on Monday that the LC mechanism would deprive discoms of this leeway, and might lead to a further rise in their annual interest burden of Rs 2,500-3,000 crore.

The woes of the discoms can primarily be attributed to Rs 1.35 lakh crore worth of regulatory assets — discom expenses which state electricity regulators acknowledge as pass-through costs, but are not immediately built into tariffs — due to inadequate tariff hikes. Only 17 states had increased their tariffs for FY19, compared with 22 for FY18.

As per rating agency Icra, the median tariff hike for discoms at all-India level had reduced from 8% for FY15 to 4% for FY16 and FY17 and further to 3% and 1% for FY18 and FY19, respectively. Icra also said recently that out of the 14 states which issued tariff orders for FY20, the median tariff hike was as low as 1%. Regulators in five states did not approve any tariff hike for the year and two states even lowered tariff rates.[Courtesy: Anupam Chatterjee ,Financial Express]