It is reported by ICRA that consolidated debt of state power distribution companies has reached the level of Rs 6 trillion in FY 2021-22. This is the highest post implementation of debt restructure scheme under Ujwal Discom Assurance Yojna (UDAY). In addition to Rs 6 trillion debt reported by ICRA, State Discoms also owe Rs 1.27 trillion to power generators as on December 2020.
The borrowings of State Discoms may be categorised in 2 categories of asset creation and working capital. Distribution Licensees are governed by a set of regulations specified by State Regulators. Capital expenditure plan of Discom is approved by the State regulator. Regulator allows 70 % asset creation funding through debt. The annual repayment of debt is limited to the extent of depreciation allowed for that year. Interest on such capital loan is allowed in the tariff on the basis of actual loan portfolio. Thus interest payment should not be a problem for Discoms in respect of capital loans. However, repayment of principal amount of debt may not be met through tariff receipts, if it exceeds depreciation amount. State regulator also prescribes norms for working capital based mostly on 2 months billing and inventory added to one month’s Operation & maintenance expenses. Power purchase cost of one month and security deposits are duly adjusted for calculating the working capital requirement. Assuming the collection of billed amount and recoveries of other expenditures, State regulator allows only interest charges on working capital loan. As per regulatory norms the working capital is much less than the limit fixed under UDAY (Ujwal Discom Assurance Yojana) scheme. UDAY allowed working capital loan of upto 25 % of previous year’s annual revenue of Discom. Due to pandemic even 25 % limit was relaxed by the Central Government to disburse working capital loan to Discoms to enable them clearing their dues to generators.
State regulators also fix the normative AT&C (Aggregate Technical and Commercial) Losses. To safeguard the consumers against inefficiency of Discom, power purchase is grossed up based on these normative losses, which are much less than actual AT&C losses of Discoms. This leaves a gap in covering actual power purchase costs. While finances of Discoms were not in a good shape even prior to the pandemic, these worsened further during last one year during the pandemic. Discoms got minor reliefs in terms of reduced delayed payment surcharge payable to the generators/ transmission Company. On the other hand, paying capacities of consumers across the board were seriously impacted by the pandemic. The revenue receipts of Discoms shrank. State Governments and in some cases State regulators provided relief to consumers, such that the consumers did not get disconnected due to non-payment or delayed payment on account of force majeure conditions arisen due to the pandemic. The rising gap between expenditure and income was filled by heavy borrowing in terms of working capital loan. Actually, Discoms are using working capital loan as a deficit financing mechanism, which cannot sustain in the long run. Asset creation based on political considerations rather than sound techno-economic feasibility studies adds to woes of Discoms. If the asset creation loan repayment exceeds depreciation amount, additional borrowing may be required even for repayment.
Discoms are again in a debt trap and they cannot come out of it, on their own. NITI Aayog may consider coming out with a consultation paper on this issue. Finally the Central Government, the State Government and the State Regulator may have to work together to get them out of this mess. A comprehensive financial restructuring plan is needed for Discoms with accountability on key management personnel (KMP). During pandemic, the collection from consumers have gone down for Discoms. The State Governments have increased subsidy payble to give relief to consumers. Some regulators might have done number crunching in tariff orders to give relief to common consumers resulting in increasing the tariff of subsidised consumers or Government consumers. This might have further added to the Government subsidy bill and Government department electricity bills. As a result, the share of revenue of State Discoms from the State Government may range anywhere between 25 to 50 % (Subsidy and Government department bills). Huge dependence of revenue of State Discoms on the State Government is a business risk to Discom.
The Central Government may bring Discoms also under the provision of risk management committee within the framework of Companies Act, 2013 irrespective of not being amongst top 500 listed Companies. Given the present status of financial health of Discoms, there would be hardly any takers for privatisation too. Proposed electricity amendment bill provides for new Distribution Companies. However, these Companies would use distribution network of existing Discoms. If network is not upgraded or maintained by the debt ridden Discoms, the quality of supply to the electicity consumers will be seriously affected. Financial penalty on Discom may not fully compensate and satisfy the consumers in such case. It is yet to be seen whether privatisation of electricity distribution in Union Territories would be scalable to States. Smart meters without close monitoring and analytics may not yield desired results. The Central Government has earmarked funds of Rs 3 lakh Crore to Power sector. However, willpower and commitment on the part of States and Discoms is a must. The Central Government may have to monitor use of funds and performance of State Discoms. State Discom are operating as a Company under Companies Act, 2013, however they are yet to be properly Board managed. The Board structures are neither balanced nor geared up to meet the challenges of the modern days with agility. The combination of Executive and Non-executive/ Independent Directos is not fully in place. Frequent directions from the State Government during exigency such as the pandemic were understandable, however the State Government may slowly refrain from giving frequent directions to the State Discoms. The State Government has nominee directors on Board and the State Government views should be placed on record through these Nominee Directors during meetings of the Board. Nothing will work until the Key Management Personnel (KMP) own up the responsibility of turning around the Discoms.
Life after debt for State Discoms is under threat, unless serious reform and financial restructuring measures are under-taken by the key stake holders.
Views expressed above are the author’s own.
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