Survival of discoms is questionable now: PowerMin to state govts

The Union Ministry of Power has raised questions on the viability of state-owned power distribution companies (discoms) and their mounting loss-and-debt spiral. Even if discoms were to have a tariff hike every year, they would still find it difficult to service their debt obligations, observed the ministry.

This comes at a time when a new Revamped Distribution Sector Scheme for discoms is underway and the Electricity (Amendment) Bill, 2022, has suggested sweeping changes to the power distribution sector.

“Tariff hike year-on year is imminent, but would only suffice to maintain business-as-usual for discoms. Notwith­standing several initiatives by the Government of India, the survival of discoms is increasingly becoming questionable,” the ministry said in its presentation at a recent state power ministers conference in Udaipur.

Business Standard has reviewed the presentation.

Falling down a debt hole

The ministry said that discoms with a high cost-revenue gap would require steep increase in the annual tariff to address the “deteriorating financial health and unsustainable levels of debt exposure”.

According to the data compiled by the ministry, the accumulated loss of state-owned discoms stood at Rs 5.16 trillion as on March 2021.

Five states (Tamil Nadu, Rajasthan, Uttar Pradesh, Madhya Pradesh, and Telangana) contribute to more than 73 per cent of the total accumulated losses; 11 states in the country have a negative networth as on March 31, 2021, it said.

“The increased debt burden has led to increased interest payment. This increased interest payment by discoms further led to worsening of their average cost of supply (ACS)-average revenue realised (ARR) gap, thereby creating a vicious cycle or a ‘debt trap’,” it said.

ACS-ARR gap pertains to the difference between the average cost of supply of one unit of electricity and the average revenue realised from its sale.

State-owned discoms are financially and operationally beleaguered despite four reform schemes in 15 years. The earlier reform scheme — Ujjwal Discom Assurance Yojana — concluded in 2019-20, with most of the states failing to meet their stipulated targets and still in red.

Domino effect of sick supply chain

The financial weakness of discoms is now impairing the supply chain with dues towards generating companies touching a record Rs 1.38 trillion in June. This is regardless of the Rs 1.11 trillion one-time liquidity infusion by the Centre for discoms to clear their dues.

Lack of timely payment, especially from the other government departments in the state, is one major reason crimping the payment ability of discoms.

According to the power ministry data, as on June 30, the total outstanding government department dues are estimated at Rs 65,300 crore. Another reason, the ministry cited, is offering electricity at subsidised rates by state governments but there is significant delay in their disbursement to discoms.

The tariff subsidy booked at the national level increased to Rs 1.32 trillion in 2020-21, from Rs 75,608 crore in 2015-16. The share of tariff subsidy in the total revenue of discoms has increased to 18.53 per cent, from 15.51 per cent over the same period.

“The involvement of state governments in the tariff fixation exercise has also led to non-increase in tariff. The total outstanding subsidy was Rs 76,337 crore as on March 31 this year,” it said.

The buck stops with states

The power ministry, while suggesting strict adherence by discoms to the policies and regulations announced by the Centre, has also suggested state governments redesign the subsidy mechanism in the electricity sector.

The Centre has urged states to provide transparent electricity tariff subsidies to consumers instead of revenue gap financing to discoms. It suggested states have “better targeted subsidy schemes for only needy or marginalised recipients and better tariff design for subsidised categories, and adequate state government budgetary provisions for committed subsidy”.

The Centre’s suggestions to states for reforming their electricity sector come at a time when a Parliamentary Standing Committee is holding stakeholder discussion on the draft Electricity Bill. Opposition-ruled states are not in favour of several suggestions in the Bill, especially those pertaining to private investment in power distribution.