)
Rajasthan is set to announce a power tariff hike next month as losses of its distribution companies (discoms) have piled up to a staggering Rs 50,000 crore as on April, the highest among all Indian states.
This would be the third straight hike in three years for the state, which exhibits all characteristics of electricity distribution mess - high line losses, frequent payment defaults and an ever widening gap in cost of supply (CoS) and revenue realised.
An analysis of the financial mess of Rajasthan discoms reveals tariff hikes alone may not be the solution for a state, which is neck-deep in debt and doles out Rs 4,500 crore as power subsidy every year. The centre may have pinned its hopes to revive the financial health of discoms on the Rs 1.9 lakh crore financial restructuring package (FRP).
A Business Standard analysis using Rajasthan as a case study, however, shows pulling discoms out of the red would require supplementing tariff hikes, along with consistent reduction in aggregate technical and commercial (AT&C) losses and cut in subsidies.
Rajasthan's peak power availability stands at 8,515 Megawatt (Mw) annually- falling short of the demand by 425 Mw or 4.5 per cent. This is the lowest deficit among all the nine states in the northern region. While this could come as a surprise for a state which is sitting on the highest level of accumulated losses, the reduced deficit is attributed to two recent tariff hikes-22 per cent in 2011 and 18 per cent in 2012- which have given its discoms legroom for higher power purchases and investing in upkeep of assets.
"Each of these tariff hikes has given us a rise in revenue of around Rs 2,000-2,500 crore per annum," a top official from Rajasthan's power department told Business Standard, on condition of anonymity. Despite the revenue gain, state discoms see themselves turning profitable only in 2016 as both consumption and CoS have risen at a faster-than-anticipated pace. "Our CoS is above Rs 6 per unit, but revenue realised is only between Rs 3 and Rs 4 per unit," the official said.
Even after the last two hikes, the gap in CoS and the average revenue realised (ARR) for Rajasthan discoms has increased from as low as 90 paise in 2001-02 when the first FRP was initiated to Rs 2.32 per unit last financial year.
The reason for this mammoth hole in net earnings is not difficult to fathom - the state abstained from the politically sensitive move of increasing tariff for 12 continuous years. The last tariff hike was as early as 1998, followed by a nominal hike in 2005, before the 22 per cent hike of 2011.
While the power department attributes this recent tariff revision spree to the "political resolve of reforms", the move is attributed partly to an Aptel (Appellate Tribunal For Electricity) order of 2011, which mandated tariff revisions, and partly to the realisation within the state government that getting rid of the Rs 50,000 crore liability would require adhering to conditions mandated in FRP.
Under FRP, the state government would issue bonds for 50 per cent (Rs 25,000 crore in Rajasthan's case), of the state's short-term liabilities at a coupon rate of 9.3 per cent. As the current loans of discoms have come with a 12 per cent interest rate, FRP would lead to saving around two per cent (Rs 500 crore) of the Rs 25,000 crore liabilities annually. This explains why the upcoming tariff hike would come even as assembly elections are due in October.
One of the reasons for the state discoms' dire straits are the costly power purchases made during the assembly elections in 2008 and the general elections in 2009. Power was bought at over Rs 8 per unit from the exchanges then. This is in stark contrast with the Rs 2.76 per unit average price at exchanges currently. But thanks to the rise in domestic coal prices, even the routine power purchase is now costing around Rs 4.8 per unit, compared with less than Rs 3 per unit earlier.
State discoms see turning profitable over the next three-four years as AT&C losses have continued to come down from 42 per cent in 2001 to 21 per cent in 2012. The state government has been releasing power subsidies on time since 2011 and tariff hikes are increasingly failing to attract protests as quality power, though costly, is being supplied for a minimum 22 hours. With the state having accepted the Centre's FRP, the principal task is to live up to the commitment of reducing AT&C losses by two per cent annually.
