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POV : Is government`s decision to put money into Delhi Discoms an equity infusion or a bailout package?

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Industry : Power

Delhi government's decision to put Rs. 500 crore into R-Infra owned BSES is being seen by many as a "bailout package" rather than an equity infusion, as suggested by the concerned stakeholders. The industry experts believe that while the government's step has allayed fears of a mass blackout, BSES has failed in its duty by letting the situation reach such an impasse. The Discom has repeatedly defaulted on its payment to power producers who threatened to pull the plug on their power supplies. While the government was initially not in favour of extending any financial help to the discoms, fear of a mass blackout forced its hands into taking some action.  

To be fair to BSES, Tata Power owned Tata Power Delhi Distribution has also requested for a similar financial measure, however the difference lies in the fact that not only has TPDD never defaulted on its payment to power producers but the discom has also declared dividends and bonus for its shareholders in the past.

InfralineEnergy's Chhavi Tyagi spoke to the two discoms on their respective situations and the Delhi power regulator for its views on the issue.

Lalit Jalan,Chairman,BSES Delhi

The past few years have witnessed an abnormal rise in power purchase cost, close to 280 percent, against a mere rise of 36 percent in retail tariff, thus leading to an under recovery of revenue of around Rs 13,000 crore by the end of FY 2012.

This situation has arisen entirely because of substantial increase in the power purchase costs coupled with the complete absence of a cost reflective tariff regime at the distribution level. Due to this huge discrepancy between cost and revenue, there is a current revenue deficit of nearly Rs. 2 per unit which results in under-recoveries of Rs. 20 crore per day for the all three Delhi Discoms.

DERC (Delhi Electricity Regulatory Commission) recognised this acute crisis only much later when they allowed the increased tariff and introduced Fuel Price Adjustment (FPA) besides recognising the revenue gap which is yet to be passed on to the consumers.

In spite of the above measures the current year tariff levels are not cost reflective leaving an un-recovered revenue gap of Rs. 4,000 crore.

After the recent tariff hike our current revenue is Rs. 750 crore per month and our current borrowing from PSU banks stands at Rs. 6,500 crore. In addition to this, outstanding dues to creditors are to the tune of Rs. 3,000 crore hence creating a total liability of close to Rs. 9,500 crore as of Dec 31, 2011.

As a measure for complete recovery from this situation, the future availability of cost-reflective tariff and Power Purchase Adjustment formula is required at the earliest. We are in the process of filing our Annual Revenue Requirement (ARR) with DERC for next year tariff, as a step to overcome this situation. 

Sunil Wadhwa,Managing Director,Tata Power Delhi Distribution Limited (formerly known as North Delhi Power Limited)

We have requested an additional equity infusion by both the promoters of Tata Power Delhi Distribution -Delhi government and Tata Power -for which the amount will be decided in our next board meeting scheduled for February 3, 2012. The need to inject equity was felt in order to meet the widening regulatory gap arising out of low tariffs and an increasing cost of power supply. Though the power tariff was recently hiked by 22 percent in the Capital yet even the regulatory commission acknowledged the increase was only half of what was actually required - a gap which they have promised to cover in the next tariff order.

We have been financing our regulatory gaps with borrowings but our loans have increased substantially compared to the equity. The reason that we have not defaulted on our payments to the power producers is because we have followed a strategy of a mix of short term and long term loans. If you finance all your regulatory gaps through short term loans the repayment period will come up early and it might happen that the total cost might not have been fully recovered through tariff collection. Since we contemplated that it will take longer to cover these gaps we thought of financing through long term loans thus deferring the repayment over a longer period.

Also, our gaps are much lower than both the BSES companies, owing to a faster reduction of AT&C losses. Though our service areas are equally tough in terms of population concentration like Jahangirpuri, Sultanpuri, Bawana, Narela, Sabzi Mandi and slums apart from industries, we have reduced more than our specified targets. As a result of our continuous efforts not only have we not defaulted on our payments but we have also declared dividend and paid bonus.

However this does not mean that it has been cost effective for us but that we have organised loans on a timely basis with proper structuring of tenures.

The promoter's financial help is going to bring in huge relief to our company. The problem with BSES's approach is that they should have done it on a timely basis before the situation reached this gridlock. If you default first and then go for equity infusion there are all the chances of it appearing as a bailout package rather than what it is - an equity infusion.

We will be using this equity infusion for lowering our debt rating and the regulatory gap.

P D Sudhakar,Chairman,Delhi Electricity Regulatory Commission (DERC)

Discoms are companies formed under the Companies Act and the promoters of these companies are free to bring in equity if and when they wish to. The BSES companies were facing financial problem and they urgently required fund infusion either in the form of equity or loans to meet their outstanding dues.

As far as we are concerned, we asked them to maintain proper power supply and for which they required funds to pay to their suppliers. We did issue a show cause notice to BSES asking them to explain their plan for paying their dues and maintaining an uninterrupted power supply. At that point, they had huge outstanding dues and no funds available to make the required payment.

The proceedings on the notice are still continuing so I cannot pass a judgement on this but they have submitted a plan explaining how they plan to meet their outstanding dues. This plan is based on the loans they will secure from IDBI-led consortium.

(InfralineEnergy thanks Dipesh Dipu, Chandra Bhushan and Coal India Ltd. for sharing their insights. Infraline introduces "Points of View" as an initiative for encouraging dialogue between various stakeholders of the Indian energy sector on contemporary subjects. If you wish to participate in such initiative, please write to feedback@infraline.com)