In 2012, the erstwhile UPA – government had granted a financial restructuring package [FRP] to deal with a mammoth Rs 200,000 crores debt of ailing state electricity boards [SEBs]. Under it, 50% of the outstanding liabilities were taken over by respective state governments and for balance 50% bonds were issued to public sector banks [PSBs] carrying an interest as low as 9%.
The FRP was conditional on states taking requisite steps to increase tariff in a calibrated manner and reduce transmission and distribution [T&D] losses in order to improve realization from sale of electricity so that it converges to its cost of procurement. The overarching objective was to eliminate losses in 2-3 years and thus ensure that they are no longer in need of succour.
Tragically, that has not happened and SEBs have again piled up a debt of Rs 430,000 crores [includes Rs 380,000 crores on account of accumulated losses alone]. Now, Modi – government has approved a bail-out package – nick named Ujwal Discom Assurance Yojna [UDAY] – that involves states taking over 75% of their debt and for the balance 25% SEBs allowed to issue bonds carrying interest at just 0.1% above the bank’s base rate.
In a bid to ensure that the debt transfer does not destabilize states balance sheets and they continue to get funds for all their needs, the centre has relaxed fiscal deficit targets under the FRBM [Fiscal Responsibility and Budget Management] Act for two years. They will be able to issue bonds backed by sovereign guarantee to raise funds @ 9% as against 13-14% SEBs were paying on their debt.
Like the bail-out package of 2012, this package too is contingent on states agreeing to a set of conditions that should lead them to a situation where realization from sale of electricity equals cost of its supply by 2018-19. If, like last time, states don’t succeed in disciplining SEBs resulting in continued losses then, they will have to absorb losses of preceding year on a progressive scale. The percentage of loss to be absorbed will be 5% in 2016-17; 10% in 2017-18; 25% in 2018-19 and 50% in 2019-20.
Union power minister, Piyush Goyal is pinning hopes on (i) reduction in T&D losses; (ii) efficiency improvements and (iii) tariff rationalization to achieve the goal.
In regard to (i), government has unveiled plans under Deendayal Updhyaya Gram Jyoti Yojna [DDUGJY] and Integrated Power Sector Development Fund [IPSDF] to augment and strengthen power transmission and distribution system, separating feeder lines for supplies to agriculture and comprehensive & smart metering. According to Goyal, this should lead to reduction in T&D losses from current 22% [national average] to 15% by 2018-19.
With respect to (ii), government’s focus is on increased availability of domestic coal at lower prices, rationalization of coal linkages with emphasis on “swap” [re-directing supplies from less efficient plants to more efficient ones under same company] and goading power distribution companies [PDCs] to buy power from cheaper sources following competitive practices. Besides, reduction in interest burden consequent to financial restructuring will also help in lowering the cost of power supply.
Efforts under (i) and (ii) can only lead to incremental results; these do not address the core problem. For instance, bulk of T&D losses are due to theft abetted by those very functionaries who are expected to ensure full payment for power consumed. Unless this is reined in, any degree of strengthening the T&D infrastructure or installation of meters to cover every nook and corner will be of no help in bringing down losses.
Curbing power theft requires political courage and a pledge by establishments in all states that they shall show zero tolerance in this regard. Likewise, tariff rationalization which involves shunning supply of free power [to farmers and households] and increasing rates to reflect cost of power needs political will. If, political establishment does not shun populism, UDAY will meet the same fate as FRP [2012].
The deterrent incorporated in FRP [2015] is half-hearted! In fact, asking states to absorb a meagre 5%/10% of losses or a little higher as in remaining 2 years is no deterrent at all. Having exonerated them completely from the past baggage, one would have expected the centre not to be lenient at all for the future. By avoiding that course, it has allowed states to continue business as usual.
A major factor contributing to losses is “financial irregularities” in running of PDCs. A draft report by Comptroller and Auditor General [CAG] on audit of three PDCs in Delhi has revealed that consumers were charged excess tariff by a staggering around Rs 8000 crores and an equivalent amount of ‘inflated’ regulatory assets [RAs] – a euphemism for previously incurred losses that can be recovered from consumers if allowed by the regulator.
Arvind Kejriwal wanted to leverage the revelations in CAG report to fix accountability, recover the money from PDCs and use it for giving relief to consumers. Unfortunately, his efforts have been dented by a recent judgement of Delhi High Court [DHC] which says that CAG has no jurisdiction to audit PDCs. It also argues that audit was ordered with the sole aim of revising tariff which is essentially the job of regulator and is therefore, not tenable.
DHC may be right in objecting to jurisdiction of CAG as with 49% ownership in 3 PDCs, Delhi government is a minority partner implying they are private entities. But, who will figure out the irregularities if not CAG? The court opines that responsibility for audit lies with the regulator. In other words, it is asking the very entity [read regulator] which allowed/abetted the irregularities to sit in judgement over its own role!
Kejriwal had announced the audit in January, 2014 even as citizens groups had petitioned the court much earlier in 2010. Thus, it took 5 years to reach a stage when irregularities were figured out and quantified. This was the time to act but, DHC verdict has thrown a spanner. It gives a clear message to PDCs that they can continue to indulge in acts of omission and commission with impunity as there is none to whom they could be accountable.
The problems with Delhi PDCs are symptomatic of large-scale irregularities in SEBs/PDCs in various states all over the country and major slice of the accumulated losses piled up by them can be straight away attributed to this factor alone. Yet, this does not find mention in UDAY not to talk of any credible steps to deal with it.
To sum up, SEBs/PDCs are perennially in red because of power theft, low tariffs to certain sections [farmers and households] and financial irregularities, all three oiled by populism and corruption. There is nothing in UDAY to countenance them. Modi needs to catch the bull by horn and start acting now or else, he will neither do good to the economy nor he will gain politically.