Cracks appear in discom restructuring

Though the government has moved forward on power reforms, there are hurdles in its implementation

Even on those few occasions when the government finds courage to introduce reforms, individual states and political populism prevents its implementation. The power sector is the best example where the government finally woke up to the realisation of bringing in reforms after nearly a decade, but not all states are warming up.

For the power generation sector, access to cheap coal is an issue that still remains unresolved despite a Presidential diktat. Even if coal were to be made available to generating companies, the sector will continue to be plagued on account of financial health of state electricity boards.

Transmission and distribution losses on account of old and badly maintained machinery are as high as 25 per cent. Over and above this is the aggregate technical and commercial (AT&C) losses, which are on account of power theft and non-billing (read free power). AT&C losses are also in the range of roughly 25 per cent.

Though the government has put in place a financial restructuring package (FRP) to improve the health of these electricity distribution companies (discoms), recent developments show that we are still a long way off from finding a workable solution. Even as eight states have given their consent to FRP in its existing form, Punjab and Madhya Pradesh have opted out of the plan.

Poor financial health of the Punjab discom is preventing it from accepting the government’s FRP. As per the FRP respective state governments are expected to take over 50 per cent of short term liabilities of the discoms. The Punjab government has been delaying salaries and pension payment and is thus unable to take over this liability immediately. It has instead asked the centre for 25 per cent upfront payment of the liability that the state will be taking over. Madhya Pradesh on the other hand has rejected the FRP as its losses are manageable.

Apart from this, state governments like Andhra Pradesh which have agreed to the terms of FRP are going back to their populist way. The state governor has said that the government is committed to supplying free power to farmers, who consume nearly 40 per cent of electricity generated. FRP clearly mentions closer monitoring of these subsidies by state governments and awards higher collections.

Where state governments have been courageous enough to increase tariff, people and politicians have started objecting. It started in Delhi and now people in North Karnataka have taken to the streets against tariff hikes. These moves may also restrict the government’s ability to take hard decisions.

At stake is an accumulated loss of nearly Rs 2.4 lakh crore built over the past decade which is on account of a gap between average revenue realisation and the cost of supply. The combined debt of all discoms reached Rs 1.9 lakh crore in March 2012 as more and more distributors opted for loans to meet operational costs.

Even if we are able to manage the existing distribution better and reduce both T&D and AT&C losses, the same amount of fuel will be enough to improve the health of the sector substantially. But for this the key ingredient that is needed is political will, which is as infrequent as electricity across the country.