Power to the market: Public listing may push state utilities to reform

In theory, the plan to list state-owned power utilities — generation, transmission, and distribution — is a good idea. Market listing will enforce transparency and financial discipline on a sector that has been opaque in its functioning and prey to political rather than commercial considerations for decades. It is encouraging that state-owned power utilities have evinced an interest in raising funds through this route, where the requirements of quarterly financial reporting will enforce a level of disclosure that would certainly be novel to these enterprises. Linked to this exercise is the real challenge for state-owned power companies: To subject themselves to the rigours of reforms in pricing and distribution to transform them into viable commercial entities. 

Four companies are said to be testing the waters. Among these, Gujarat Energy Transmission Company (Getco) has begun the process of issuing a draft red herring prospectus. Chhattisgarh has proposed listing its generating utility and distribution company and Haryana has approved the listing of its power-generating company. If these plans go ahead, it will mark the first major push by state government-owned utilities to list. Among these market-bound entities, Getco is an outlier with relatively healthy financials. It recently won a Central Board of Irrigation and Power award for improving key parameters in power transmission. In terms of valuation, however, the sector as a whole remains vulnerable to the political exigencies of the state-owned discoms, which handle roughly 80 per cent of the country’s power distribution and supply to 90 per cent of the consumers. In fact, it is doubtful if discoms aspiring to market listing will attract a sufficient retail-investor interest, given the inherent disadvantage under which they work. 

  These wholly state-owned entities have long been subject to strictures on supplying free or heavily subsidised power to certain groups of consumers, principally farmers. Under recoveries in power tariffs as a result of this policy routinely result in massive losses and large dues to generating companies. Five centrally planned bailout packages over the past two decades have had a marginal impact on discom losses and dues. In 2023-24, accumulated discom losses stood at ₹6.8 trillion. Transmission and distribution losses hardly improved, either, logging a high of 16.87 per cent against a targeted 12-15 per cent. The fact that the gap between cost and revenue remained at ₹0.21 per kWh in 2023-24 against a target of zero set by the bailout schemes shows that state political leaderships hesitate to bite the pricing bullet, which would solve their chronic financial problems.

  This impediment explains why previous attempts to privatise discoms — Union Power Minister M L Khattar spoke on this topic with some optimism last year — have not matched the pace with which private investors have entered the generation space where bulk deals with institutional buyers and operational efficiencies enable them to offset discom dues to an extent. Further, the fact that all these discoms are wholly state-owned is problematic as far as corporate governance goes. Many lack independent directors or the quality of financial oversight required to fulfil shareholder scrutiny. Given these infirmities, market listing will be a challenge for state-owned utilities. However, it may well force a solution to a chronic problem that no amount of bailouts from the Centre can address.