Timely tariff revision, lower AT&C losses behind UDAY's success

Ambit Research says if states sign this scheme, sharing SEB losses would make them much more accountable

Analysts have said the Centre's Ujwal Discom Assurance Yojana (UDAY) is a big positive for the revival of state electricity boards (SEBs). However, some have cautioned that its success depends on timely tariff revision without political constraints, power purchase by SEBs on competitive principles and consistency by SEBs in lowering aggregate technical and commercial (AT&C) losses.

IndiaNivesh says the discom restructuring plan launched in September 2012 was availed by Tamil Nadu, Uttar Pradesh, Rajasthan, Haryana, Jharkhand, Bihar, Andhra Pradesh and Telangana. ''Discoms were not able to improve their performance mainly due to low tariff hikes, no progress in reducing losses, higher electricity purchase costs and continuous increase in debt. The UDAY will help in raising tariffs frequently to cover costs and lowering transmission and distribution (T&D) losses,'' it says.

RV Shahi, former Union power secretary, told Business Standard, ''Distribution reforms are fundamental to the whole of the power sector. In the last few years, unfortunately, distribution reforms were placed on the back burner, resulting in the chaotic situation for the whole sector."

Ambit says if states opt for this scheme, sharing SEB losses will make them more accountable. They will be forced to find ways to decrease T&D losses and increase tariffs. ''If all the major state governments agree to the scheme this is a positive for banks that are exposed to the power sector,'' it notes.According to Edelweiss, while there will be questions asked about what is different this time, the budgetary discipline being put in place will ensure maintenance of operational milestones. This will usher in structural changes in discoms, helping them to break out of the vicious cycle of operational losses. It suggests banks be directed to stop funding future losses to avoid this problem.

Kameswara Rao, partner, PwC, emphasises the need for tightening of regulatory provisions to ensure the basic viability of discoms, including automated tariff increases to cover inflation. ''Not just debt, but the utilities' operational inefficiencies and deficient regulatory practices are inherited over many years. Repackaging the debt was necessary to improve discom finances and cash flows. But the underlying problem remains, and without a credible regulatory and operational action plan, we will soon revisit this day.''