Distribution companies (discoms) in three BJP-ruled states currently make up for nearly 90 per cent of close to Rs 77,000 crore in funds to be recovered from consumers for electricity consumption, but have been unable to do so due to infrequent hikes in tariffs, according to a recent report by India Ratings and Research. India Ratings expects a two per cent growth for the Indian corporate bond market if distribution companies chose to securitise these pending regulatory assets.
As per the latest tariff orders until FY18-FY19, the total amount of these funds, known as regulatory assets, outstanding amounted to Rs 76,963 crore. Uttar Pradesh, Maharashtra and Jharkhand account for around 87 per cent of this amount, said India Ratings.
UP alone accounts for over 50 per cent of the regulatory assets market, with its discoms entitled to over Rs 40,000 crore.
At the same time, the total outstanding amount seems to have reduced from earlier reported estimates of over Rs 1.30 lakh-crore.
Regulatory assets are costs of power consumption that a state electricity regulatory agency allows discoms to recover at a later stage, when the electricity tariffs are increased. This practice leads to lower tariffs at present, but if electricity costs are not increased to match the requirement, the regulatory assets continue to pile up as additional costs that the discoms have had to bear to provide electricity at lower prices.
The report’s findings assume significance as discom losses have been on the rise lately. With the NDA re-elected into power last week, improving the weak financial health of state discoms is an area the government is expected to continue focus on, but it is unclear whether this will actually lead to the required rise in electricity tariffs in these states.
The power ministry last week claimed in an internal note that discom performance has not become unsustainable, and that, with “adequate” tariff recoveries projected by regulators “in future”, debt levels are expected to reduce further.
The inability of discoms to recover outstanding regulatory assets has been a long-standing concern for the government, with the Centre having blamed state regulators in the past for not raising tariffs properly to help recovery.
While the consumer is cushioned from tariff shocks in the short term, the long term implications of this financial burden could be inefficient provision of electricity supply and billing services by state discoms, which have to recover as much as 97 per cent of the present outstanding assets.
As of March, only six state regulators had approved tariff plans for the next financial year.
Discom losses increased 43 per cent to over Rs 21,500 crore at the end of the 2018-19 financial year from around Rs 15,100 crore in the previous financial year.
As per memoranda of understanding that states have signed under the Ujwal Discom Assurance Yojana (UDAY) to improve the financial health of discoms, states were expected to implement regular tariff hikes of 5-6 per cent every year, said ratings agency CRISIL earlier this month. “While discoms enjoyed the benefit of debt reduction, structural reforms have been slow to come by,” it stated, adding that average tariff increases were “a paltry 3 per cent per annum.”