Tariff hike alone cannot bail out discoms: Care report

Structural improvements and financial discipline are far more crucial for improving the health of distribution companies than depending on tariff hikes, rating agency Care has said.

According to a Care report, which analysed 30 discoms in 11 states, a series of tariff hikes had been effected by these companies in the last three years.

"Tariff hike alone can't bailout the discoms given that there are substantial regulatory assets on their balance sheets," Care Rating said in a report.

The report also said that apart from untreated gap which has left tariffs far from being cost reflective, unsustainable levels of cross-subsidisation with a slowdown in high paying subsidising consumers like commercial and industrial sector and emergence of group captive model wheeling away high paying consumers, have further impacted their financial health.

The report observed that total power demand has tapered this fiscal so far with a slowdown in growth and delay in restructuring state discoms.

According to the study, demand for power grew by only 1.7% in September compared to year-ago period, led by off-take back-down by discoms coupled with continuing load shedding in tier 2-3 cities in northern and southern region.

"For demand to improve, there is a need for companies to go slow on implementing financial restructuring package, buying power from the open market and entering into fresh long-term power purchase arrangements by inviting case-I/II bids," it said.

The Care report pointed out that distribution franchise model was emerging as a preferred model for private participation in the sector.

"Although, privatisation in the sector is initially carried out in order to encourage the public private partnership through licensing model, distribution franchise model is now being preferred due to asset ownership resting with these companies and its acceptance by all discoms, states and consumers on account of same tariff levels in the respective area or circle," it said.

The study further observed the model was far more flexible and could be offered to rural, semi-urban and urban circle, against privatisation in which interest was seen only into urban areas.

Further, there are various types of distribution franchise models developed to suit the needs of discoms and create supporting infrastructure to reduce aggregate technical and commercial losses to sustainable levels of 15% in a time-bound manner, it said.