Power regulators concerned over discoms' financial viability

A comprehensive report prepared by the Forum of Regulators (FoR), titled ‘Assessment of financial viability of discoms’, has revealed that the financial viability of state distribution utilities (discoms) is increasingly becoming a matter of concern. In several states, book losses of the utilities are rising, power purchase costs are increasing, rates are not being rationalised, subsidies are not released regularly to distribution utilities and reduction in transmission & distribution (T&D) losses according to the assigned trajectory is not being complied with.

Even as no utility may have defaulted, the situation is grim and artificial support of financial institutions is prolonging and compounding the problem.

The report, which would come up for discussion at FoR meeting slated for Monday in Mumbai, clearly says that barring a few states, rates have not been increasing vis-à-vis the rise seen in the cost of supply. It is estimated that additional increase, to the tune of 1-39 per cent is required to fully recover the cost of supply. This increase in revenue will either come from increase in rates or through direct subvention/subsidy from state governments.

According to the report, a need for increase in rates is primarily on account of rise in power purchase cost and certain inflationary impact on other input costs. The report is crucial because the Appellate Tribunal for Electricity had recently served notices to all State Electricity Regulatory Commissions (SERCs), asking them to submit report on rate revisions done by them since their inception.

The report says the estimation of distribution loss level remains a concern, considering the large scale of unmetred sale to agriculture consumers in certain states. The estimate for approved loss level is primarily based on the past performance of utilities and the proposed capital expenditure plan, with only a few states undertaking load-flow or scientific T&D loss estimate studies for fixing loss reduction targets.

“After approval of loss reduction targets, some SERCs have revised targets or have considered the actual loss level claimed by the utility. For instance, SERC of Madhya Pradesh has revisited the base T&D loss level, as well as the trajectory over 5 years, and it is now following the targets, as notified by the state government. The SERC of Orissa is following the loss level estimated during the privatisation process, determined in the absence of baseline data and appropriate T&D loss study,” the report adds.

Further, the time lag in rate change (including true-up exercise) is affecting the finances of the utility, leading to higher working capital requirement and accumulation of financial losses that are needed to be recovered through rate increase. A few SERCs, such as those of West Bengal, Haryana, and Tamil Nadu, have created regulatory assets to contain the rate increase. Though tariff regulations provide for approval of carrying cost on the regulatory asset, these SERCs have been silent on this issue while approving the additional revenue requirement.

The report adds, a state government either provides subsidy, as allocated in the state budget, or as determined by the SERC concerned. However, mostly, the subsidy is not received in line with the process stipulated in the Electricity Act, 2003. “Whereas states like Punjab and Karnataka followed the methodology stipulated in EA 2003, UP, Rajasthan, Haryana and Tamil Nadu neither aligned the rates with cost nor computed the subsidy on the basis of consumption of the subsidised categories,” the report concludes.