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Power Sector Finances: Deteriorating trend but can be fixed, Shri R V Shahi, Former Secretary, Ministry of Power

Mercados India had organized a day long Conference at Delhi on 11th February, 2011 to discuss the findings of the study they have done on Power Sector Finances. Accordingly, they captioned the Presentation "Mending Power Sector Finances - PPP as the Way Forward". I had the opportunity to respond and make my comments just after the Presentation by Mercados. Following my observations, there were a number of clarifications and questions raised which were appropriately responded. In this Article, I wish to summarise the comments made by me and also cover important questions and clarifications.

Various Agencies have been analyzing the deteriorating trends of financial losses of State Distribution Utilities. Most of them have relied upon the recent studies by PFC, which have been presented in a comprehensive Report.

Some of the agencies have also projected the losses for the future years till 2014-15. The base document for this is the analysis made by Mercados for the Thirteenth Finance Commission.

While these studies have covered the period from 2005-06, it is also necessary to look at the statistics of losses during the period commencing from the beginning of the Tenth Plan in order to understand and analyse the impact of reform initiatives.

Commercial losses without subsidies, for the period 2002-03 to 2005-06, were kept by and large under control. During the year 2002-03, it was of the order of Rs.19,600 crores and during 2005-06, the losses increased marginally to about Rs.21,000 crores as per PFC Report of 2006. If we take 2005-06 as the reference year, which the PFC latest Report has considered, then in the four year period the losses have increased from about Rs. 21,000 crores (2005-06) to Rs. 50,600 crores in the year 2008-09, almost two and half times.

Similarly, if we consider the cash losses before subsidy received, during the period 2002-03 to 2005-06, they remained more or less steady, with only marginal increase from about Rs. 13,000 crores (2002-03) to slightly above Rs. 14,000 crores (2005-06), whereas during the following three year period, the losses increased from over Rs.14,000 crores (2005-06) to over Rs. 44,000 crores (2008-09), more than three times.

The scenario is even more disturbing when we look at the estimates for the year 2009-10 and 2010-11. According to one estimate, commercial losses without subsidies have further increased to over Rs. 55,000 crores in 2009-10 and over Rs. 68,000 crores in 2010-11. The analysis for the Thirteenth Finance Commission extrapolated the projection to be more than Rs. 80,000 crores by the year 2011-12 and more than Rs. 1,16,000 crores by the year 2014-15 (Mercados Presentation).

The Presentation highlights that impact of losses is almost equal to 15% of the India's fiscal deficit for the year 2008-09 and approximately 1% of India's GDP for the same year.

Studies done elsewhere indicate that various measures taken by the Government of India, and a number of better run States which have responded to these initiatives positively, have yielded positive outcomes. Ever increasing AT&C losses got not only arrested with the initiatives and actions during the Tenth Five Year Plan, but they did decline. On All India basis aggregate technical and commercial loss, which was about 39% in the year 2002-03, came down to about 30% by 2006-07. The reducing trend seems to have continued, though at a slower pace, with the figure at 28% in 2008-09.

This is why, the confidence level needs to increase with the conviction that it is a doable case and the problem can be fixed. Efforts have to be mounted again, with much stronger will and determination, to control theft, set right the metering problems, modernize distribution networks aimed at reduced technical losses as well as improved quality of supply. In many States theft control measures during the Tenth Plan were launched with a missionary zeal and a determination that this menace of the electricity sector will have to be not only controlled but eliminated. Ministry of Power went to the extent of monitoring arrests, convictions, setting up of Special Police Stations and Special Courts, to see that salutary punishments became a signal for others not to continue with thieving electricity. The whole idea of strong provisions on theft control in the Electricity Act 2003, which were further amended to strengthen these provisions, aimed at virtual elimination of electricity theft in Indian power sector. All these measures need not only to be reactivated but implemented with vigour and determination. Besides, Carrot and Stick Policy vis-à-vis performing and non-performing States did yield results.

Electricity Act, National Electricity Policy and Electricity Tariff Policy empower the Central and State Regulatory Commissions substantially. The Constitution of the Commission, Tenure of the Members, and many other provisions are such that these institutions can be expected to perform independently and without any fear. Accordingly, these policy instruments expect, and rightly so, that these institutions deliver the outcomes which will not only make the sector vibrant, but also commercially so strong that they are able to service the customers with high levels of reliability and quality standards.

A critical evaluation of the working of the regulatory mechanism in the power sector would, no doubt, generate a number of positive outcomes, but also there are a lot which could have been done but have not been done. Ultimate test of this sector is on one single factor and that is whether this sector stands on its own commercially or it goes on going down, just as it did during the entire period of Nineties, to become again untouchable for developers, lenders and equity providers.

Here I do not wish to elaborate on a large number of good things that the Regulatory Commissions, both at the Centre and in the States, have done. In absence of these, perhaps things could have been worse. But, should that give us the required level of comfort and satisfaction? Obviously, the answer will have to be "NO", if the sector is faced with almost Rs. 70,000 crores of annual loss. I am not of the view that it is already unlendable or uninvestable. But, it is fast reaching that boiling point. In fact, eyebrows are already being raised, whistles are being blown and investors and lenders have started becoming quite concerned. If the trend is not immediately arrested and controlled, power sector may get back to the same situation again as it had reached towards the end of nineties.

I wish to highlight a few things which a numbers of State Regulatory Commissions have been unable to address or address adequately. Some of these are outlined below

1.The Tariff Policy of 2006, obligates the Commissions to rationalize tariff structure in a manner that cross-subsidy is within plus and minus 20% of the average tariff. Two specific stipulations in the Policy require that this range of cross-subsidy should be reached within five years counting from January 2006, when the tariff was notified, and, secondly, the State Regulatory Commissions were required to draw a road map, within six months of the Policy Notification, i.e. by July, 2006, how progressively the cross-subsidies shall be reduced. Most of the States have been unable to implement this provision. It is needless to say that the commercial and financial health of the distribution business, which has been deteriorating, as mentioned above, to a great extent, is directly dependant on implementation of this provision.

2.Multi Year Tariff has been announced by a number of State Regulators while it has not been implemented in a large number of States. Wherever it has been notified, it needs to be stated that all real life practical situations and eventualities have not been fully captured. Unrealistic targets of distribution loss reduction can remain a theoretical exercise, it does not lead to revenue realization. If a State distribution company is faced with the situation of drought resulting in purchase of costlier power to substitute less expensive hydroelectric power, or purchase costlier power to take care of unforeseen outages of their power plants, or fuel prices or freight increase, there are very few States in which the Regulatory Commissions provide automatic or timely remedial measures for these financial burdens. How do we expect the distribution utilities to mitigate such real and unforeseen financial burdens?

3.Under the Electricity Act, if the State Government subsidies certain sections of consumers (like lower tariff or even free power), it is obliged to provide the equivalent amount in the budget and pay to the distribution utilities. While this is being followed, it is doubtful that the extent of subsidy that the State is made to pay to the Distribution Utility really corresponds to the amount of power that is supplied on subsidized basis. It is a tough task for State Regulators, but the challenge of providing proper and adequate compensation to Distribution Utilities has to be addressed by them to ensure that their financial health is not crippled.

4.Re-organisation of State Electricity Boards into Generation , Transmission and Distribution Companies, as provided in the Electricity Act, aims at not only bringing about accountability for these distinct segments of the power sector, but it also aims at professional working and commercial revival. Required Financial Restructuring Plan, which could take care of capital restructuring in terms of equity, debt, writing off of excessive debt burdens of the State etc., could have enabled these entities to perform better. States have a larger role, but State Regulators could make an effective contribution in addressing these issues.

5.During the implementation of the erstwhile Electricity Regulatory Commission Act 1998, which was subsequently repealed, it became evident that while the Commissions were there in a number of States, many of the State Governments successfully neutralized their impact by not allowing the State Electricity Boards, under their control, to even file the tariff revision proposals. Accordingly, in the Electricity Bill 2003, we recognized and suitably addressed this problem, by providing for the empowerment to the State Regulatory Commissions to suo moto take up tariff revision exercise. Unfortunately this important empowerment of the Commission is not being used by many of the Commissions. It is not to say that utilities are doing everything that they ought to be doing for commercial revival. In fact, there is a lot of laxity and accordingly there is a lot of scope to improve. But, it is also a fact that Regulatory Commissions, in many States, have not appropriately captured the need for their role to revive this sector.

6.Prior to Electricity Act 2003, Forum of Regulators was like a Club and it did not have any statutory backing. Electricity Act 2003 made it a statutory instrument and the rules framed therein stipulate very clear roles for this Forum. No doubt, this Forum has discussed a number of issues and tried to arrive at conclusions. But, on the very important issue of commercial sustainability of this sector, the Forum needs to introspect and do a lot more. It is no good saying that if distribution companies had improved their working and efficiency, financial problems would not have been there. What is important for them to understand is the reasons for these distribution companies not coming out of the financial mess. If anyone has to understand this, it is the Regulatory Commissions, that if the distribution sector of this country does not present to be financially sound enough to service the huge capital investments in the entire supply chain, there would be lack of investments, set back to capacity addition and we get back to the old days.

State Governments' inability to appreciate the gravity of the situation, and impact of such financial conditions of the power sector on the long term investments, is also one of the most important reasons for continued lack luster approach of these Governments to take effective measures to help, enable, guide and pressurize the distribution utilities to perform. As a matter of fact, instead of these proactive measures many State Governments are becoming victim of political expediencies and are themselves becoming reasons for such financial mess. Unless this point is emphasized again and again, in all the dealings of the Central Government with them, it is unlikely that many of the state Governments would fall in line.

One of the conclusions, in several meeting with Energy secretaries of the States alongwith the Chiefs of their utilities, during the later part of the Tenth Plan, was that if any town, city or industrial estate is not able to reduce the aggregate technical and commercial losses below 25%, the State should initiate and complete the process of putting them on Franchisee arrangement in a time bound manner. In fact, in some cases it could be an exercise of privatization on the pattern of Delhi Model. This conclusion has practically remained unimplemented, though there are a few cases where success has also been achieved thus vindicating the validity of this Model. Both Delhi Model of privatization and Franchisee Model of Bhiwandi stand fully vindicated on account of their success.

After I addressed the Conference, a few questions were raised. I wish to cover here only two of these questions - (a) "What makes you think that inspite of such huge losses, which have accelerated in last three to four years, it is still doable and can be fixed?" (b) "Which is the main Agency which should take the lead role in fixing this problem - Planning Commission or Power Ministry or State Governments?"

With regard to (a) I mentioned the following :

1.During the nineties, in a period of ten years, the losses had shot up to almost ten times (Rs.3,000 crores to Rs.30,000 crores). The sector always saw increasing losses, and that too very rapidly. But, with several measures and effective monitoring, a large number of States could arrest the increasing trend, and in some cases even brought them down.

2.In fact, in 2001, State Utilities were unable to pay to NTPC and other central public sector companies, more than 75% of their bills, and as a result, these central sector companies had hardly any cash surplus to invest for expansion. We must recognize that from the year 2003-04 till now, that is for last seven years, there have hardly been any default. We may reach that situation, but today we are better, on this score, than we were in 2001. Quite often people think that this could be achieved due to Tripartite Agreement and possible access to RBI fund. It must be clarified that this was not invoked.

3.The capacity of the Central Government, and the clout that it has now acquired, by way of a much larger and stronger NTPC, a wider base of unallocated power capacity, the substantially enhanced capabilities of Power Finance Corporation and Rural Electrification Corporation, the scope of APDRP and the funding by Government through Rural Electrification Corporation, in an aggregated fashion, provides a very sound and strong framework to let the States know that several of these benefits would be available, but in a distinctive and differentiated manner, based on reform and revival initiatives that they take with demonstrative outcomes and results. Such a clear signal would go a long way in motivating and also pressurizing those who need to act and act fast. Such a Carrot and Stick Policy did work in the past and will work in the future.

With regard to (b), I clarified that without any doubt, it is the Ministry of Power which does and would take the lead to co-ordinate with various agencies including Planning Commission, CERC, Forum of Regulators and State Governments. This is so because almost all the ingredients of the Schemes, and the benefits, that I have mentioned above, belong directly or indirectly, to the Ministry of Power. PFC and REC together sanction almost Rs. 100,000 crores of loans annually. Unallocated power of Central Generating Companies, are more than 8,000 MW. APDRP and RGGVY (Village Electrification Scheme) are substantially grant funded schemes. These together constitute a very powerful tool to reward performing States and disentitle those who do not perform. If required, Tariff Policy and even Electricity Act could be amended, based on experience of last seven years, to reinforce provisions which relate to commercial health of the sector.

Obviously, the deteriorating financial health of the power sector, for the reasons mentioned above, is a matter of serious concern. It has, in the recent years, assumed challenging proportion. However, it cannot be said that the situation is already beyond control. Effective measures, some of which have been suggested above, and there could be many more, if coordinated and properly implemented, would be able to fix this problem in next few years. Even now, the sector continues to have interests of developers, lenders and equity providers. It is important that these interests continue. Concrete steps, which would have the potential to restore and finally fix the problem, if taken in right earnest, could definitely ensure that interest and enthusiasm of the stakeholders do not fade away.