The Power Finance Corporation (PFC) is working out a new set of stringent conditions for the demerged electricity boards, in the form of a revised Operational and Financial Adjustment Programme (OFAP).
The demerger route adopted by states includes adoption of a three-tier structure, where integrated state electricity boards (SEBs) are split into separate generation, transmission and distribution companies.
Udesh Kohli, chairman and managing director of PFC, said among the states for which revised OFAPs were being worked out include Orissa and Andhra Pradesh, where demergers have already been undertaken. Other states like Uttar Pradesh would also be included after the demergers are completed, he said.
Under the OFAP, the electricity corporations or boards are prescribed a set of financial and technical criteria for conversion into viable entities. These include prescribing a minimum return on assets of at least 5 per cent. PFC funding is linked to acceptance of the OFAP conditions. Jammu and Kashmir, Punjab, Himachal Pradesh, Uttar Pradesh, Maharashtra, Goa, Tamil Nadu, West Bengal, Assam and Tripura have already begun restructuring under the OFAP scheme.
These OFAPs are also being extended since the financial viability of some the demerged entities are under question. Some of the states are yet to put in place a tariff reform mechanism, which includes compensation by the state governments for tariff subsidies incurred and a suitable return on capital employed and equity.
At present, the norm for return on equity is about 12 per cent. This implies that some of the tariffs in the states will have to be either hiked or state governments will have to compensate the electricity corporations for the deficit.
Some of the states, however, are yet put in place the OFAP schemes. Consequently, loans to them are likely to be delayed.
States that are hesitant about implementing the scheme to reform the power sector may not be eligible for PFC funding at all, Kohli said.
PFC had recently indicated that state governments would not be allowed to divest from the demerged entities, in view of the changes in the credit risk profile of its loans. Its loans in the past were based on the guarantees provided by state governments as well as implementation of the OFAP under an integrated structure in the form an electricity board.
Demergers will imply that the original adjustment programmes for the integrated entity will also have to be changed, since the asset utilisation and revenue sources of the demerged entities will also change completely.
The revenues of the generation companies will come from the transmission companies and the transmission companies' revenues will accrue from the distribution companies. Only the distribution companies will be receiving revenues directly from the consumers.
