The special economic and comprehensive package ‘Atmanirbhar Bharat Abhiyan’, unveiled by Finance Minister Nirmala Sitharaman in five tranches during May 13 – 17, 2020, has two components that have a crucial bearing on the fledgling power distribution companies – commonly known as discoms.
The discoms – mostly owned and controlled by state governments – procure power from independent power producers [IPPs] and public sector undertakings [PSUs] such as the National Thermal Power Corporation [NTPC] besides their own generating stations and sell to consumers.
The first component provides for special loan of Rs 90,000 crore from Rural Electrification Corporation [REC] and Power Finance Corporation [PFC] to discoms to enable them to clear their dues to IPPs and PSUs.
But there are riders – discoms bringing in transparency in pricing of electricity supplies to industry and businesses, reducing cross-subsidy [an acronym for charging more from these users to subsidise supplies to farmers and poor households] and implement reforms such as ‘open access’, that is, allowing consumer to draw power from a supplier of his choice and direct benefit transfer [DBT] of subsidy.
The second component relates to hike in the borrowing limit of states from existing 3% of the state gross domestic product [SGDP] to 5% [the 2% hike translates to about Rs 4,28,000 crore]. While, the first 0.5% of additional borrowing space is unconditional, the remaining 1.5% will be permitted subject to the state achieving measurable targets in four areas of reforms – one of these being power.
As per an advisory issued to states by the Union Finance Ministry on May 17, 2020, 0.25% of SGDP borrowing space is linked to power sector reforms. Of this, 0.05% is predicated on the state reducing aggregate technical and commercial [AT&C] losses of its discoms, another 0.05% is linked to their reducing the gap between average cost of supply and average revenue realisation [ACS-ARR gap] from sale of electricity.
To avail of the remaining 0.15% borrowing window, a state will have to formulate a scheme to roll out DBT to all farmers in lieu of free electricity from 2021-22. The scheme should be implemented in at least one of its districts by December 31, 2020. Based on the progress on the above three parameters, the power ministry will recommend to the expenditure department to release the 0.25% by January 31, 2021.
The benevolence showered by the Centre on beleaguered states and their discoms appears to be sumptuous but it is conditional. In fact, the former wants the latter to show on ground zero that they are serious about implementing reforms; or else why would it require the power ministry to monitor the progress and only thereafter, recommend release of borrowing freedom to each state.
However, the big question is: Will the states do it? Can it be done? Is the Centre really serious? To get to the bottom of these niggling questions, let us look at a few hard facts.
Being their sole or dominating owner and controller, the state governments order discoms to do what they should not be doing as a commercial enterprise. They are told to sell power to certain class of consumers – poor households and farmers either at a fraction of the cost of supply or even free. Second, they abet large-scale theft which in jargon is called ‘technical and commercial’ [T&C] losses. Third, under power purchase agreements [PPAs], discoms are made to pay inflated tariff to IPPs using routes such as ‘gold-plating’ [declaring higher investment than actual], over-invoicing of fuel cost, etc.
This leads to a terrible situation whereby the ARR from sale of electricity falls short of the ACS. Indeed, this happens despite discoms charging exorbitant tariff from industries and businesses [this can go up to Rs 10 per unit or even higher] against cost of Rs 3-5 per unit.
The discoms’ financial position has remained fragile for close to two decades. To keep them afloat, since 2000, the government had given three financial restructuring packages [FRPs] – a fancy nomenclature for condoning their debt. The FRP [2015] involved takeover of 75% of the debt of about Rs 400,000 crore. This was at core of the Ujwal Discom Assurance Yojana [UDAY] which ran between November 2015 and March 2019.
Each of these packages required states to take steps to reduce T&C losses and ACS-ARR gap. Under UDAY, discoms were required to reduce AT&C losses from 20.7% during 2015-16 to 15% by 2018-19. Further, they were required to reduce the ACS-ARR gap from Rs 0.59 per unit during 2015-16 to ‘zero’ by 2018-19. The overarching objective behind fixing these milestones was to force discoms set their house in order so that in future, they won’t be need any bail out. But, things have not panned out as planned.
During 2019-20, AT&C losses of discoms were 18.9% while ACS-ARR gap stood at Rs 0.42 per unit. After decreasing from Rs 52,000 crore during 2015-16 to Rs 17,000 crore during 2017-18 [courtesy, FRP under UDAY], the discoms loss increased to over Rs 30,000 crore during 2019-20. Concomitantly, their dues to IPP/PSUs went up to about Rs 90,000 crore by February 2020.
Now, discoms are in dire need for funds so that they can clear their dues to IPPs/PSUs who, in turn, can continue uninterrupted supply of power. These are crisis times. So, the Modi government has promptly agreed to arrange loans from REC/PFC but made it conditional on their implementing reforms. It has also made additional borrowing Leeway to states contingent on the latter taking steps to reduce AT&C losses, reducing ACS-ARR gap, DBT etc.
But it is expecting states/discoms to do the impossible. What they could not do over several years, it wants them to do over few months. Yet, if it has put the riders, this could be merely for public consumption. Given the crisis situation, while both states and discoms will get the money promised to them, reforms will continue to elude the power sector as always.
(The writer is a New Delhi-based policy analyst)
https://www.deccanherald.com/opinion/panorama/power-sector-in-crisis-reforms-a-mirage-857479.html