'Financial Institutions with outstanding debt to Discoms should take Equity position under planned restructuring to bring effective Performance Management' says Amulya Charan

Mr. Amulya Charan, Chief Mentor, Power Trading and Advocacy at Tata Power has 22+ years of experience in the Indian Power Sector, spanning Generation, Transmission, Distribution and Trading. With senior Mgmt. roles at NTPC, Power Grid, Tata Power Ltd., he was ex- MD at Tata Power Trading Company Ltd for four years. Mr. Charan shared following views in recent meet with pManifold.

Question 1: What are the Key Issues with our Discoms?

SEB Financial Health – another sub-prime crisis in the making

The cash losses of SEBs have increased 40x FY05-09 to a colossal Rs 284 bn and AT&C losses continue to scare at 28% (All India)
These losses along with theft of electricity and insufficient increase in tariffs have been the reason for staggering financial losses and curtailing their ability to service their customers
The investment by discoms in upgrading the distribution infra is much lower than required due to unavailability or limited availability of cash

High Debt exposure of lenders to the Power Sector

Outstanding debt of state power utilities have grown to a staggering Rs 6 lakh crore or 6% of the GDP. Roughly a third of these are loans taken to fund past losses which cannot be serviced through tariff hikes and, hence, are being considered for a benign restructuring by the Centre. Unless big reforms are undertaken to stem losses and spur revenue streams, these liabilities would grow further to Rs 7.3 lakh crore by March 2013. This looks like a reasonable estimate, given that annual losses (after receipt of subsidy) of discoms in the country were Rs 42,415 crore in 2009-10, up 18% over the previous year.

Weak Power Tariff Structure and Revision

Around 14 states raised tariffs for FY13 ranging from 2% to 37% and are already very high for certain categories such as industrial and commercial users.
In India, the industrial and commercial consumers pay a relatively higher tariff and cross-subsidise the lower end of domestic consumers and agricultural consumers who pay a much lower tariff and also account for mitigating the high AT&C losses partially.
In countries like US, France, New Zealand, Germany etc, the industrial tariffs are lower than domestic tariffs.
Indian Industries have been put at a competitive disadvantage due to the high cost of power and the need for redundant investment in backup generation infrastructure to mitigate the impact of frequent load shedding.
Subsidy from state governments was estimated at 18.94 per cent (Rs 29,665 crore) of the total revenue of state utilities in 2008-09. Although subsidies booked have grown at 30 per cent a year, cash received stood at only 14 per cent. Government Subsidies are often not paid in a timely manner.

Unacceptably high AT&C Losses

The difficulty in tapping latent demand from households in rural/semi-urban regions across India are poor distribution infra and high AT&C losses in that region. Hence, 8% growth in demand for power over FY13-17 is an optimistic scenario considering the practical impediments of poor distribution infra and the reduction in AT&C losses and improvement in financials of discom will be gradual.
The T&D losses in India are substantially greater than in other emerging market countries, highlighting the drag exerted by the power sector on India’s economic prospects. Compared to a number of emerging markets, India’s power sector is substantially more inefficient. For example, the proportion of power output that is lost in India is five times greater than in China. Globally, the losses are between 6-12% whereas in India they range between 30-40% demonstrating an opportunity for drastically improvement.

Question 2: What inefficiencies in current Load Shedding mechanisms and how more accountability can be brought?

At present distribution companies adopt to indiscriminate short term load shedding citing power shortage as the reason, when plenty of power is available to be dispatched. There have been instances in last year where more than 15 GW of power generation was available in the market to be dispatched at a price lower than INR 3/KWH and still several discoms resorted to load shedding. Industries try to tide over this shortage by investing into captive diesel power generation, which costs to the industries over INR 12/KWH, thus putting Indian Industries at a competitive disadvantage globally, and at the same time increases diesel subsidy burden on the government.
Ideally SERC should enforce load shedding protocol putting a limit to the extent of load shedding by the discoms. Also scheduled load shedding and unscheduled load shedding should be monitored and treated differently, where there should be penalties on unscheduled load shedding.
There is a crying need for peaking power to tackle the issue of load shedding during the peak hours. A regulation to encourage peaking power generation in India is already drafted by CERC, and it should be pushed for immediate implementation.

Question 3: How do you see the impact of Open Access to Power Distribution landscape in India?

If the DISCOMs are unable to supply quality power to consumers then there should be a mechanism by which consumers may have access to alternative sources of reliable power.
The same can be achieved by separation of physical infrastructure and services – i.e. separation of the wires & supply businesses. This would enable competition between service providers for both wholesale and retail customers thus increasing efficiency and quality of service. Distribution is in the realm of 29 state governments. Thus, moves related to open access, free power to farmers, privatization of distribution networks, tariff increases et al fall in the area of state-level politics and are, thus, less likely to move either speedily or in an orchestrated manner. Presently, Open access is a step in this direction but it faces a few major issues.
Issues being faced in Open Access:

Apprehension in the minds of Distribution Utilities about losing high revenue cross subsidizing consumers.
States invoking emergency provisions under the Electricity Act, 2003 to prohibit such transactions, quoting acute power deficiency
DISCOMs are unwilling to provide backup power to consumers opting for open access
CIL refusing to sign FSAs with generator which do not sign long term PPAs with DISCOMs

Following steps may be taken to remove impediments in Open Access:

Establishment of Merchant Power Generation capacity should be encouraged
Regulatory and technical barriers for open access need to be reduced for greater assurance to customers
Augmentation of Transmission Network
Reduction in cross subsidy charges
Retail tariff of DISCOMs should reflect the cost of supply by regular tariff revision.

Question 4: Shortage of Fuel is one sighted reason for peaking Electricity demand gap. How do you see it?

The demand for coal is expected rise to 980.50 million tonnes by 2017. The domestic availability of coal has been pegged at 795 million tonnes. This demand-supply gap of around 200 million tonnes is expected to be made up substantially by imports by 2016-17.
A significant amount of capacity is stranded owing to the non-availability of gas. Rising demand and falling domestic production has pushed the share of imported gas to 40 per cent of the current consumption in India.
On the logistics front, serious issues remain on the efficiency and capacity of railways and ports to handle 200 metric tonnes of imported coal. Liquefied natural gas, or LNG, terminals to receive imported gas require augmentation as well as pipelines across the country.

Question 5: How do you see the role of our Regulators? What needs to be changed?

The role of the regulator in India is envisioned as a distinct role with minimal political influence. However, in practice it is seen that there is a significant lag between cost of fuel and tariff realizations due to political pressure to keep tariffs low. The SERCs need to be given further autonomy by the states including separation of finances and availability of funds.
State Electricity Regulatory Commissions (SERCs) must ensure appropriate frequency of revision of customer tariffs (proposed quarterly such that there is no significant lag between cost of fuel and tariff realizations)
SERCs need to provide a roadmap for removing cross-subsidies as part of ongoing tariff rationalization

Question 6: How you propose to bring correction to our Power Distribution utilities performance in India?

Bailout/restructuring of the Discoms that is being discussed, it is suggested that Government of India should ensures that the financial institutions which have outstanding debt to the Discoms should be allowed to become equity holders as part of the restructuring plan. This would then ensure an independent check on the future performance of these discoms.
SERCs must ensure submission of Multi-Year Tariff petition and a comprehensive power procurement plan by discoms based on their demand assessments (suitably verified by external agencies)
Cross subsidy should be eliminated and the consumer segments needing subsidization be given subsidy by way of direct cash transfer by the Government
AT&C losses should be brought down by the use of technology and investment is adequate distribution infrastructure and metering systems
A clear segregation of Aggregate Technical and Commercial losses needs to be furnished by each discom to the concerned SERC demonstrating improvement in efficiency by pursuing metering of all loads including agricultural and prevention of theft by curtailment of supply
SERCs must issue Load Shedding Protocol for discoms and enforce the Universal Service Obligation – discoms need to provide information on planned, actual load shedding and rationale for load shedding daily
State Load Dispatch Centers (SLDCs) must track and report all open access applications made, placing all applications in the public domain and update the status including the objections against any application; it must also set a deadline for approving or disapproving each application and record the same on its website – this needs to be enforced by the SERCs
Government must take immediate steps to introduce competition in distribution by making a supportive framework for viability of discoms, enabling lasting private sector involvement and also by promoting open access route to enable consumers select their supplier in parallel to the privatization efforts
State Regulators must introduce transparency in their own operations, and must continuously monitor, evaluate and publish the performance of the State discoms on both Technical and Commercial parameters including regular monitoring of Finances and Audit of Accounts
Regulator must strive for creating an incentive structure for performance improvements in distribution and there is a need for periodic performance evaluation and regulatory impact assessments for ERCs.