Power sector trips up in Karnataka

NEWS ANALYSIS

It has been nearly two years since the monolithic Karnataka Electricity Board was unbundled to form a transmission company -- the Karnataka Power Transmission Corporation Limited (KPTCL) -- and four electricity supply companies (ESCOMs).

These measures were initiated to improve the poor financial health of the state-owned power utility, overcome power shortages (particularly during peak hours), and ensure reliable and quality power at affordable prices to all consumers.

Although the intention was good and in tune with the times, the balance sheets of KPTCL and the four ESCOMs -- Bangalore Electricity Supply Company (Bescom), Mangalore Electricity Supply Company (Mescom), Hubli Electricity Supply Company (Hescom) and Gulbarga Electricity Supply Company (Gescom) -- are in a mess.

Consequently, power shortages and irregular supply remain the order of the day and the long term aim of privatising at least the better-off distribution companies remains as distant as ever.

In the current year, Bescom, which has the highest commercial potential, is facing a revenue deficit of Rs 100 crore, Gescom is contemplating a deficit of Rs 265 crore, Hescom is tottering under a massive gap of Rs 548 crore and Mescom is looking at a deficit of around Rs 100 crore.

The balance sheets remain weak despite the state government, while undertaking the unbundling, writing off receivables of up to Rs 866 crore and taking over the servicing of Rs 1,050 crore long-term debt of the companies. The first culprit, as elsewhere in the country, is transmission and distribution (T&D) losses. The 10-year target of the government is to bring it down to 14 per cent from around 34 per cent in 2001-02.

Although T&D losses are under control and coming down, the companies are being hit by the cost of power, which is going up substantially. Karnataka Electricity Regulatory Commission Chairman Philipose Matthai said: "KPTCL and ESCOMs have been able to reduce T&D loss from 35.86 per cent in FY02 to 30.7 per cent in FY03 translating into a reduction of 5.15 per cent, which is pretty much appreciable."

But this improvement is being offset by an increase in the cost of power being bought by KPTCL. Karnataka, traditionally dependent on hydel power to meet two-thirds of its requirements, has been severely hit by drought for three consecutive years. Hence, KPTCL has been forced to buy costly thermal power from other states.

As a result of this, the subsidy bill of the state government has shot up to fill the revenue gap of the five companies. Power subsidy has gone up from Rs 1,800 crore in 2001-02 to Rs 2,100 in 2002-03 and is slated to go up to Rs 2,500 in the current year (2003-04).

The second culprit is agriculture consumers, who account for one-third of the total consumption. According to a revenue department official, power supply to agriculture is not properly regulated.

Some areas get power for 12 hours a day, others no more than 2-4 hours a day. The sector is highly subsidised but "subsidy is being released without linking it to collections. Thus, there is an incentive for non-performance."

The State Government, in its Financial Restructuring Plan (FRP), has committed Rs 12,141 crore to the power sector till 2009-10. Said the revenue department official: "This was based on several critical assumptions and achievements such as annual increase in tariff, sales, revenue, 100 per cent collections, annual reduction of losses and restrictions on supply and power purchase from costly resources. But the last three years' experience reveals that the release of subsidy to the power sector has had no bearing on the reduction of losses and improvement in the financial position. On the other hand, the subsidy burden has been increasing year after year. Over the last three years, the requirements of financial support far exceeded the provisions made in the Budget."

The poor performance of the sector, its mounting losses and lack of financial stability is having a very negative impact on government finances. Inability to stick to commitments has prompted the World Bank to stop the disbursement of funds under the adjustment lending programme for two consecutive years. This has further affected the state government's overall financial position.

V G Pandit, financial adviser at Bescom said: "The way to cut T&D losses is by reducing unauthorised installations, controlling theft and category conversions to high tension from low tension transmission. In this process, the quality of power will also improve. Reductions in power purchases should be done through proper load management and by controlling the energy input."

To get a grip on the situation, there is a plan, says the revenue department official, "to make the payment of subsidy to the power sector direct, transparent and linked to the supply of power to farmers".

The state might be adopting the "purchaser-provider model during the next fiscal year which aims to achieve accurate assessment and release of subsidy based on the performance of the ESCOMs".

Under this model, the ESCOMs will be the providers and the government the purchaser. It will determine the quantum of power that it proposes to supply to agriculture during the year and meet the gap in revenue after cross subsidies and agricultural tariffs levied are accounted for.

"It is of importance to regulate power supply, giving priority to consumers who pay their electricity charges promptly. In addition to this, we are working out methods, by which the quantum of subsidy support will depend upon performance and efficiency of ESCOMs," he adds.

The central government has discriminated against Karnataka by not supporting its proposal for a new economic restructuring loan from the World Bank, while supporting the proposal of Andhra Pradesh. Things would not have come to such a pass in Karnataka had it been able to achieve its power sector reform milestones.