Accounting flaws in transfer of liabilities to power cos: CAG

While unbundling of erstwhile Punjab electricity board, two new entities -- PSPCL and PSTCL -- were saddled with liability of over Rs 25,000 crore even as the state government had decided to provide clean opening balance sheets to the successor companies, says a CAG report.
"While unbundling the erstwhile Board (PSEB), Government of Punjab placed a financial burden of Rs 25,097.64 crore on the two successor entities -PSPCL and PSTCL - by passing unfunded liabilities to them," said a latest report of Comptroller and Auditor General of India (CAG) on PSUs for 2014-15.
The erstwhile Punjab State Electricity Board (PSEB) was unbundled into two successor companies - Punjab State Power Corporation Limited (PSPCL) and Punjab State Transmission Corporation Limited (PSTCL) on April 16, 2010.

Punjab government had framed 'Punjab Power Sector Reforms Transfer Scheme, 2010, for providing and giving effect to the transfer of functions, undertakings, assets, rights, liabilities, proceedings and personnel of the Board which was amended under the provisions of the Electricity Act, 2003, as per report.
"We observed that liabilities of erstwhile Board (PSEB) amounting to Rs 25,097.64 crore (loss written off of Rs 10,751.64 crore and terminal benefits of Rs 14,346 crore) were transferred to the two successor entities, either by incorrect accounting or by not recognising clear liabilities in the opening Balance Sheet," CAG said.
Though from the time of conception of the scheme of unbundling, Punjab government had decided to provide clean balance sheet to the successor entities and not to transfer past accumulated losses yet the new entities were saddled with huge liability to begin with, noted CAG in its report.

The erstwhile Board had accumulated losses of Rs 10,180.35 crores at the time of unbundling, which did not appear in the balance sheets provided to the two successor companies. This was done by setting off these losses against the capital reserve created by revaluation of land assets held by the erstwhile Board, CAG observed.

"The loss of Rs 10,751.64 crore should have been
funded by the State Government if its intention was to make the successor entities financially viable instead of setting them off against gains arising out of a book adjustment," report said.
The erstwhile Board was not observing a system of accrual based accounting for terminal benefits and followed a policy of "pay as you go".

The liability on account of terminal benefits as on April 16, 2010 of erstwhile PSEB was valued on actuarial basis at Rs 14,346 crore but was not revested in the two successor companies, CAG said.
Punjab government in its reply stated that it was only after reorganisation that the successor entities were required to maintain trust funds and the contribution of the past years was required to be made good, which could be done only over a period of time and could not be accomplished in one go to avoid tariff shock to the consumers.
"Punjab government's reply regarding noncompliance with Accounting Standard 15 is not acceptable as the Government at the time of unbundling should have provided for this liability instead of providing funding through a charge on tariff which has also been disallowed by PSERC," CAG said.