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After a series of reform measures initiated by the government in recent months to overhaul the electricity distribution system, the power sector seems to be back in favour with investors.
Historically, the same investors have been concerned about return on investments in projects owing to the financial health of the State Electricity Boards (SEBs) which saw their accumulated losses touch a peak of Rs 240,000 crore last year. But those worries seem to have been tossed aside now, and for good reasons.
The beleaguered SEBs have been broken down into vertically integrated utilities; over the past 16 months, as many as 31 states and Union territories have raised retail tariffs, ranging from 2 per cent (Gujarat) to as high as 37 per cent (Tamil Nadu); four states have, in fact, increased tariffs twice; aggregate technical and commercial (AT&C) losses continue to be on a downward trajectory; and distribution companies (discoms) have started filing regular returns.
All of this has led many to conclude that the distribution segment, the backbone of the power sector, is out of the red and banks and financial institutions have regained their lending comfort. This view has been bolstered by the recent spurt in the creation of fresh generation capacity. The country added 20,500 Megawatt in 2011-12 - more than the capacity created in any Five-Year Plan before the 11th plan - followed by 17,500 Mw last financial year.
Rot runs deep
However, analysis of the operational and financial performance of discoms reveals investors still have plenty to worry about. Experts measure the health of distribution companies by their cost coverage ratio (CCR), AT&C losses, subsidy received from the states and tariff revisions. CCR indicates what part of a discom's expenditure is covered by its own revenues and how much spending is met through debt; AT&C losses indicate how much of its input energy is lost either in technical line losses or theft; and subsidy received from the state is a key determinant of the burden of debt which a discom has to take in order to keep its operations running. When judged on these parameters, distribution reforms still seem to be a distant dream.
Consider the fact that seven states, which alone account for 75 per cent of the total accumulated losses of Rs 240,000 crore, still have a dismal CCR between 56 per cent and 87 per cent. This means that their earnings currently cover only between 56 per cent and 87 per cent of spending-the rest of the expenditure is being met through debt. These states, which house as many as 19 loss-making discoms, include Rajasthan, Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Tamil Nadu and Andhra Pradesh. Not a single of these 19 discoms has a cost coverage exceeding one. Also, only two of the 19 discoms run by these major defaulting states have managed to bring down their AT&C losses below 15 per cent-the national target set by the government five years ago. For the other 17 discoms, AT&C losses vary between 19 per cent and as high as 62 per cent. Further, except two discoms, all the others are suffering from huge delays in subsidy receipt from the state governments. As subsidy build-up in most of these cases is due to purchase of expensive power, these discoms have entered a debt trap.
Given the dismal performance on all major parameters, they key question is would the discoms be able to successfully leverage the gains from tariff increase to improve their finances or would they again slip into the abyss of commercial losses? Past data on factors pulling down the growth of discoms shows two major problem areas: agriculture subsidies and the burden of a huge and inefficient manpower.
The cost of populism
In volume terms, the agriculture sector consumed 136 billion units (BUs), or 22 per cent, of the total 615 BUs of power sold in 2011-12. However, in value terms, the sector accounted for a mere 8 per cent of the revenue realised from sales, thanks to massive subsidies enjoyed by the sector. A further digging into the state-wise data reveals worrisome trends. The farm sector's contribution in revenue realised from power sales was less than 1 per cent in as many as ten of the 28 states. Not surprisingly, the total subsidy for agricultural consumers has grown 37 per cent from Rs 33,363 crore in 2007-08 to Rs 45,561 crore in 2011-12. Agricultural subsidies accounted for the largest chunk- 64 per cent -of the total subsidies of Rs 71,000 crore doled out by states for power sales in 2011-12. To make it worse, subsidies of over Rs 48,589 crore were uncovered, meaning discoms did not receive the committed receivables from the states on this account. States which seem to have championed the cause of subsidised power for farmers are Rajasthan (Rs 7,741 crore), Andhra Pradesh (Rs 7,335 crore), Tamil Nadu (Rs 6,161 crore), Haryana (Rs 4,780 crore), Punjab (Rs 2,499 crore), Madhya Pradesh (Rs 1,963 crore) and Uttar Pradesh (Rs 1,700 crore). It should not be a surprise that these are the same states which account for a bulk of the accumulated losses.
On the manpower front, the picture is equally bleak. The overall cost of power supply for discoms at the national level jumped 20.5 per cent from Rs 4.04 per unit in 2007-08 to Rs 4.87 per unit in 2011-12. The increase in establishment and administration expenses- largely manpower cost-was 24 per cent during the period. After the rise in interest payments, this was the second-highest increase across cost components. The rise in manpower cost surpassed even the increase in power purchase cost and depreciation. The states with the highest manpower cost include Assam, Bihar, Himachal Pradesh, Kerala and Punjab.
The road ahead
At the national level, the accumulated loss of Rs 240,000 crore is the result of the gap between revenue realisation and the cost of supply. With input cost rising due to higher fuel charges and revenue coming under constraints as a result of stagnant tariffs, the gap rose from 76 paise a unit in 1998-99 to 145 paise a unit in 2009-10. The combined debt of all discoms, too, reached Rs 190,000 crore in March 2012 as more and more distributors opted for loans to meet even operational costs. Similar conditions had forced the government to bail-out the discoms in 2001 through a "one-time-settlement" of their dues. As that initiative failed , the centre had in August last year announced a financial restructuring package (FRP) for discoms.
Given the history of discoms' performance, the FRP's success would depend on how well the states are able to adhere to the attached conditions -lowering AT&C losses, timely release of subsidy, annual tariff rationalisation and bringing private participation in distribution.
WHAT AILS THE STATES?
Rajasthan
- Discoms have weak finances as no tariff increase for six years through 2011
- Funding of revenue gap through loans has led to high debt level
- Total losses at Rs 38,000 crore; annual agricultural subsidy at Rs 7,741 crore.
Punjab
- SEB broken down in 2010 into generation, distribution and trading and transmission arms
- Distribution sector reeling under heavy agricultural subsidy
- Sustained net losses and delays in debt servicing
- Accumulated losses at Rs 7,500 crore; agricultural subsidy at Rs 2,499 crore
Haryana
- Two discoms with weak financial profile due to continuous losses, negative net worth
- Low fixed asset creation with a majority of debt utilised in working capital financing
- Accumulated losses at Rs 3,800 crore;agricultural subsidy at Rs 4,780 crore
Uttar Pradesh
- SEB unbundled in phases between 2000 and 2003
- Negative net worth resulting in adverse capital structure.
- Accumulated losses at Rs 42,700 crore;agricultural subsidy at Rs 1,701 crore.
- AT&C losses between 30 per cent and 60 per cent.
Madhya Pradesh
- Unfavourable capital structure as entire asset base funded through debt
- Total losses of Rs 11,500 crore leading to negative net worth; agricultural subsidy at Rs 1,964 crore.
Andhra Pradesh
- Four discoms currently operational.
- Non-receipt of subsidy from state government leading to a build-up of receivables
- Discoms marked by liquidity stress and low cost coverage
- Accumulated losses at over Rs 25,000 crore; agricultural subsidy at Rs 7,336 crore; AT&C losses at 15 per cent.
Tamil Nadu
- SEB broken down in 2010
- Distribution marked by delays in servicing bank loans, low cost coverage, subsidised power schemes
- High financial risk profile due to cash losses, poor capital structure and debt protection measures
- Total losses at Rs 40,100 crore; annual agricultural subsidy at Rs 6,162 crore
