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Link tariffs to costs

An SEB bailout that does not do so postpones the crisis

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Business Standard New Delhi
Last Updated : Jan 20 2013 | 5:29 AM IST

The restructuring programme for state electricity boards (SEBs) approved by the Cabinet Committee on Economic Affairs (CCEA) this week is necessary, but not sufficient. Most importantly, it will not remove but merely postpone the chances of a crisis caused by Indian states’ chronic inability to set rational, market-linked prices for power. The immediate cause of the restructuring is the stress on banks. According to Standard & Poor’s, bank credit to the power sector rose precipitously to Rs 3.3 lakh crore in March 2012 — 7.2 per cent of all bank lending. Meanwhile, many state-run distribution companies have run up staggering losses, casting doubt over their ability to repay and thus over financial sector stability. In the same month, March 2012, the accumulated losses of discoms stood at Rs 2.46 lakh crore; and the short-term debt of the seven states that accounted for 75 per cent of total debt liability (Rajasthan, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Punjab, Haryana and Tamil Nadu) was Rs 1.2 lakh crore. The troubled states have consistently been unable to increase their revenue in tandem with their costs; the gap between the two for the Tamil Nadu board in 2010-11 was 39.4 per cent, for example. For the entire power sector, the gap between the cost of supply and average tariff went up by over 90 per cent to 145 paise a unit in the last decade.

The CCEA has approved a restructuring plan that will remain open, in the first instance, till December 2012. Under the plan, participating states will take over half the distribution companies’ outstanding debt; the remainder will be restructured by lenders. This will worsen the asset-liability mismatch of those lenders, of course, leaving the system stressed. However, the idea is that responsibility will be enforced on the participating states by their passage of a state electricity distribution responsibility Bill, a sort of Fiscal Responsibility and Budget Management (FRBM) for discoms, within the next year. The idea behind the Bill is that it will force states to revise tariffs annually, and to bring in private participation in distribution. While this sounds like an excellent idea in theory, the question remains: who will approve the tariff revision? To what extent will the tariff revision proposal be politically determined? And, unless tariff increases are mandatorily linked to cost increases, subject of course to regulatory supervision, why would the financial health of these irresponsible or politicised distribution companies necessarily improve? Of course, several SEBs have raised tariffs by varying margins in the last couple of years, but these increases are clearly not enough; they need to do more to make gains from the proposed restructuring durable.

It is also worth remembering that distribution companies have been bailed out once before, when they found themselves unable to pay their dues to the power generation companies. Barely a decade later – the bonds issued then have still not been fully paid back – India faces a similar problem, but with slightly different features. On that occasion, the bailout terms focused on ensuring that bills were paid on time and that the grid was expanded. Clearly, that was not enough to force responsibility on state boards and the governments that continue to control them. This time, the focus should be squarely on linking tariffs to costs.

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First Published: Sep 28 2012 | 12:06 AM IST

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