One of the major accomplishments of Modi – government during its two years stint has been in alleviating the constraints facing power generation companies/entities. It has done so by increasing production of coal by Coal India Limited [CIL] and filling all voids in the evacuation, transportation and distribution infrastructure to reach supplies to generating stations.
It has also helped gas based power plants by arranging supplies of gas at lower rates enabled by pooling of imported LNG [liquefied natural gas] with cheaper domestic gas. The cost of LNG itself has been brought down drastically by re-working an existing long-term 25 year contract with RasGas [Qatar] to align the formula with its low current international price [courtesy, low crude price].
It has also unshackled power distribution companies [PDCs]/state electicity boards [SEBs] by giving them unprecedented financial relief on one hand and incentives to help them reduce transmission and distribution [T&D] losses besides improving realization from sale of power to consumers [including from farmers] on the other.
Only about an year back, power generators were facing a piquant situation whereby, they had enough electricity to supply but no takers as PDCs/SEBs were unwilling to sign power purchase agreements [PPAs] due to their precarious financial health. This problem too has disappeared for now as the latter are coming forward to sign PPAs and lift power from the former.
No wonder then, at present, there is a palpable sense of exuberance running across all segments of the power sector. But, ALAS! This may not last long as the PDCs/SEBs have merely received what one may describe as ‘band aid’ treatment even as the generic factors that led to their losses in the past have not been addressed.
The ‘band aid’ here is nothing but an act of financial engineering [or restructuring as it is known in common parlance] under the irresistible Ujwal Discom Assurance Yojna [UDAY] launched by Union government last year [till date, 10 states have already joined; the scheme has now been extended to March 31, 2017 to enable more states to participate].
Under UDAY, out of SEBs total debt of Rs 430,000 crores [of this, accumulated losses alone Rs 380,000 crores], 75% has been transferred to states and for balance 25% they are allowed to issue bonds carrying interest at just 9%. At one stroke of the pen thus, their interest liability gets reduced from Rs 56,000 crores [13% of 430,000 crores] to a mere Rs 9675 crores [9% of 107,500 crores].
The transfer of debt [Rs 322,500 crores] to the states won’t create much stress on their balance sheets either as Union government has relaxed fiscal deficit targets under the FRBM [Fiscal Responsibility and Budget Management] Act for two years. So, they can fund by issuing bonds backed by sovereign guarantee @ 9% as against 13-14% SEBs were paying on their debt.
In lieu of this benevolence showered on SEBs/states, the centre wanted them to increase tariff and reduce T&D losses so that proceeds from sale of electricity equals the cost of purchase and distribution. This was to be done in a calibrated manner to ensure that from 2018-19 onward, they would have a zero loss scenario. This has to be taken with a pinch of salt.
In 2012, UPA government had granted a financial restructuring package [FRP] to deal with 200,000 crores debt of SEBs. Under it, 50% of debt was taken over by states and for balance, bonds were issued to public sector banks [PSBs] @ 9%. Then also, SEBs were asked to do precisely what Modi – dispensation is wanting them to do now. But, they did not and their debt has more than doubled!
What is the basis of optimism now? True, the centre has taken steps to enable them source power at cheaper rates [e.g. making more domestic coal available at lower rates, giving more options for purchase etc] which were missing earlier. But, that addresses only the fringe. The real malady afflicting them is selling electricity either cheap [much below cost] or giving free and abetting power theft. Little is being done to address this core problem.
Even as large-scale theft continues unabated [reports from Rajasthan that salary of engineers would be impounded for dereliction of duty are feeble attempts], more and more states are in the race for providing free power. So, after Kejriwal who gives subsidized power for households [up to 400 units a month] in Delhi, now Jayalalithaa is giving it free [up to 100 units a month] to all households in Tamil Nadu.
What is the centre doing to rein in the states? Under UDAY, if state governments don’t mend their ways and SEBs continue to incur losses then, they will have to absorb losses of the 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. This is hardly any penal action.
Requiring 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 to insist on 100% absorption and no relaxation in FRBM. Yet, by providing for only token transfer of the pain, it has allowed the states to continue business as usual.
Ironically, the centre has remained silent on yet another major source of increasing losses of SEBs/PDCs. This one relates to irregularities in their functioning as also of power generators. These result in artificial boost to cost which is either passed on to hapless consumers and to an extent, it cannot, losses mount.
For instance, 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 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.
Likewise, investigations by Finance Ministry and Directorate of Revenue Intelligence (DRI) have revealed over-invoicing of coal imports by 40 companies — both in the public and private sector — to the tune of ₹35,000 crore during the past two-three years. Since, coal costs are pass thru under PPAs, either the consumers end up paying more for higher cost of power or losses of SEBs mount.
Even in respect of power supplied from ultra mega power projects [UMPP] where tariff is shielded from increase in fuel cost [courtesy, tariff-based competitive bidding ‘TBCB’], the regulator viz., Central Electricity Regulatory Commission [CERC]/Appellate Tribunal for Electricity [APTEL] have allowed the concerned generators viz., Tata Power Ltd [TPL] & Adani Power Limited [APL] arbitrary increase in tariff in violation of PPA.
In short, the assault on SEBs/PDCs from all sides viz., subsidized /free supply, power theft and financial irregularities etc [abetted by authorities/regulators] continues unabated. Unless this stops, they will start bleeding once again, necessaiting a 4th bail-out say, in another 4-5 years from now [the first three being 2002, 2012 & 2015].