India’s DisCom stress is more than the sum of its past

There must be an overhaul of the regulation of electricity firms and their deliverables using common sense metrics

October 28, 2020 12:02 am | Updated 12:34 am IST

Distribution Companies (DisComs) have been called the lynchpin but also the weakest link in the electricity chain. For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs, the utilities that typically buy power from generators and retail these to consumers. Long gone are the days of scarcity of power; while the physical supply situation has mostly improved, the financial picture has not brightened much — and this was before COVID-19.

More loan than stimulus

The Indian government responded to COVID-19’s economic shock with a stimulus package of ₹20-lakh crore, out of which ₹90,000 crore was earmarked for DisComs ( later upgraded to ₹1,25,000 crore ). While it was called a stimulus, it is really a loan, meant to be used by DisComs to pay off generators. Our recent study on DisComs shows a much graver picture than one that can be solved by a fill-up, even though such a liquidity injection is required (but probably insufficient).

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Newspaper reports abound with stories of how DisComs owe one lakh crore rupees to generators, and without such an infusion the chain will collapse. Unfortunately, the dues to generators are several times higher than this number, and, worse, the total short-term dues of DisComs are multiple times higher, which excludes long-term debt.

Data on liabilities

How did this magic figure of one-lakh crore capture popular imagination? This figure is roughly what the government’s PRAAPTI (or Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal shows for DisCom dues to generators. However, what is not widely appreciated is that the portal is a voluntary compilation of dues, and is not comprehensive. The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were ₹2,27,000 crore, and this is well before COVID-19. It also showed similar Other Current Liabilities. Our analysis shows that what has happened over the years is that DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan. But why do DisComs not pay on time? Conventional wisdom blames the utilities for inefficiency, including high losses, called Aggregate Technical and Commercial (AT&C) losses, a term that spans everything from theft to lack of collection from consumers. However, this is only an incomplete explanation.

To understand what is going on, we have to dig into all the accounts of DisComs. Ideally, they should not incur losses as they enjoy a regulated rate of return. While AT&C losses can explain part of any gap, the first problem starts at the regulatory level where even if DisComs performed as targeted, across India, they would face a non-trivial cash flow gap, which was ₹60,000-plus crore in FY18-19 compared to their then annual cost structure of ₹7.23-lakh crore.

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Then, we have the severe challenge of payables to DisComs. These dues are of three types. First, regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets, which are effectively IOUs, which are to be recovered through future tariff hikes. Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments. Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.

States as defaulters

State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time. On an annual cash flow basis, the shortfall in subsidy payments appears very low — only about 1% — but cumulative unpaid subsidies, with modest carrying costs, make DisComs poorer by over ₹70,000 crore just over the last 10 years.

Also read | Centre relaxes norms for PFC, REC to lend to discoms

This earlier equilibrium of increasing the dues as well as relying on continued subsidies (not to mention extensive cross subsidies between consumer categories) all worked as long as there was steady growth. However, such muddling along cannot suffice. To begin with, COVID-19 has completely shattered incoming cash flows to utilities. While there was a multi-month dip in demand, the revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments. On the flip side, reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower offtake.

We will probably need a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt. Stimulus loans are near market term and not soft loans. If there is a haircut to be taken, all the risk and future obligations should not be placed on DisComs alone. Generators, transmission companies, and lending institutions must all chip in. Else, we risk kicking the can down the road until we may require another future support package if not bailout.

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Unfortunately, we do not have the luxury of time to put the house in order.

Renewable energy beckons

The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage. And as battery technologies mature, their dependence on DisComs may wane entirely. Even without batteries, regulations permitting, they may want to find third party suppliers under competitive models.

So what is the solution other than simply throwing money at the problem? Improving AT&C losses is important, but will not be sufficient. We need a complete overhaul of the regulation of electricity companies and their deliverables. Much of inefficiency is tolerated in the name of the poor but they do not get quality supply. We need to apply common sense metrics of lifeline electricity supply instead of the political doleout of free electricity even for those who may not deserve such support. For the rest, regulators must allow cost-covering tariffs. The financial problems of DisComs have been brewing for many years, and it is unlikely that a silver bullet, even privatisation, can solve the problems overnight. However, if business as usual was not even good enough before COVID-19, it will not be workable for the current national needs of quality, affordable, and sustainable power.

Rahul Tongia and D. Rajasekhar are researchers with the Centre for Social and Economic Progress (CSEP), a not-for-profit think tank, originally established as Brookings India

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