Write off power discoms' losses: Ministry to states

In what could be another bailout for loss-making power distribution companies, the Union ministry of power has advised all state governments to write off their cumulative losses.

The losses stood at more than Rs 1 lakh crore (Rs 1 trillion) as of last year.

The ministry wants state governments to take steps to clean the balance sheets of power utilities by writing off the cumulative losses and ensuring cash losses were not incurred subsequently, according to a senior power ministry official.

The modalities had been left to the state governments, which could either issue bonds or take over the losses as loans under their books, the official said.

The development comes exactly a decade after the first bailout package of about Rs 41,400 crore (Rs 414 billion) was extended to the state electricity boards and discoms (distribution companies).

The central government had given a bailout when some of SEBs defaulted on loan payments to central utilities such as NTPC and NHPC. The move was based on recommendations of a committee under Montek Singh Ahluwalia.

The committee had suggested a bailout of the utilities by the issuance of long-term bonds to be discharged by the state governments.

Despite the unbundling of state utilities since then, the financial situation of the distribution power companies is gloomy as they are unable to recover their cost of operation owing to cost-tariff mismatches.

There has been no substantial increase in power tariffs for the past five or six years.

That may have insulated consumers but has made discoms go in the red.

The writing off of losses is a one-off measure though the Central Electricity Regulatory Commission is already pushing states to increase tariffs in line with the power procurement costs.

Asked to comment on the merit of the proposal, CERC chairman Pramod Deo said, "It is a very sound proposal. State governments should write off all the losses of discoms, but this would

not help unless they ask all the discoms to file a tariff petition every year."

He said after the proposal was accepted and implemented, there had to be tariff revisions for three-four years.

Else, losses would further accumulate since 70-80 per cent of the discoms' costs comprised the cost of power, he said.

The companies incurred a whopping accumulated loss of Rs 74,977 crore (Rs 749.77 billion) in 2008-09, Rs 50,503 crore (Rs 505.03 billion) in 2007-08 and Rs 39,444 crore (Rs 394.44 billion) in 2004-05.

By 2009-10, it increased to Rs 1,06,347 crore (Rs 1,063.47 billion), according to estimates by the power ministry.

Earlier, it was expected that the distribution utilities would suffer a loss of over Rs 1.16 lakh crore (Rs 1.16 trillion) by 2014-15.

That is expected to rise if the necessary steps are not taken.

In a recent report on the power sector, Roopa Kudva, managing director and CEO, Crisil, said an improvement in systemic efficiency was required through a reduction in distribution losses, which remained upwards of 25 per cent.

The rating agency estimated tariffs needed to be raised by an average of 50 per cent for state utilities to break even.

With lenders like Power Finance Corporation and Rural Electrification Corporation starting to restrict loans to fund state utilities' losses, the pace of tariff revisions has already increased.

The accumulated losses are on the rise, despite a downward trend in aggregate technical and commercial losses, because of a mismatch in the tariffs and cost.

The average cost of supply stood at Rs 3.41/kwh in 2008-09 from Rs 2.93/kwh in 2007-8 and Rs 2.75/kwh in 2006-07.

However, the average revenue realised on a subsidy basis stood at  Rs 2.91/kwh in 2008-09 from Rs 2.65/kwh in 2007-08 and Rs 2.49/kwh in 2006-07, according to data from the ministry.

Another reason for the high losses of discoms is inadequate subsidy from state governments. Some states fail to release subsidies in advance and continue to default on the release.