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Thursday, July 29, 2021

Cash-strapped power distribution companies need radical intervention, not another financial aid package

Centre has routinely stepped in to rescue discoms in distress, but dues have continued to rise. Minor tinkering will no longer help.

Written by Ishan Bakshi |
Updated: June 19, 2021 9:09:05 am
Discoms have paid off their dues in part by drawing down a liquidity facility arranged by the Centre last year.

At the end of March, there was a sharp decline in the dues owed by power distribution companies, discoms, to power generating companies. Normally, a decline in dues is a healthy sign — a sign that the financial position of discoms has turned for the better. But it would be a mistake to construe this as such.

Discoms have paid off their dues in part by drawing down a liquidity facility arranged by the Centre last year. This rescue package was arranged to prevent the entire power sector chain from suffering because of the discoms’ inability to meet their obligations. But, such deterioration in finances, or the Centre’s intervention, is not an unusual occurrence. The Centre has routinely stepped in to aid discoms and tackle the problems plaguing the distribution segment. Unfortunately, though, while the sums involved have risen, the end result of such interventions has been along predictable lines — cash-strapped discoms looking for another rescue package.

In the initial years after the introduction of UDAY — yet another central government attempt to turn around discoms — some states did, in fact, witness an improvement in their financial and operational indicators. But it wasn’t sustained. There has been a sharp deterioration in several parameters.

A key metric to measure the performance of discoms is AT&C losses. Simply put, these losses stem from poor or inadequate infrastructure or on account of theft or bills not being generated or honoured. The UDAY scheme had envisaged bringing down these losses to 15 per cent by 2019. However, as per data on the UDAY dashboard, the AT&C losses currently stand at 21.7 per cent at the all-India level. In the case of the low-income north and central-eastern states — Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh — the losses are considerably higher.

On another metric — the gap between discoms’ costs (average cost of supply) and revenues (average revenue realised) — the difference, supposed to have been eliminated by now, stands at Rs 0.49 per unit in the absence of regular and commensurate tariff hikes. For the high-income southern states of Tamil Nadu, Andhra Pradesh, and Telangana, this gap between costs and revenues is significantly higher.

Various factors are at work here.

There is the paradoxical possibility of the government’s push for ensuring electrification of all having contributed to greater inefficiency. As household connections are ramped up, to support higher levels of electrification, cost structures need to be reworked, and the distribution network (transformers, wires, etc) would need to be augmented — in the absence of all this, losses are bound to rise. However, it is reasonable to ask if, at current levels of development, the quest for ensuring power to all — this essentially involves providing electricity to low-income households — is compatible with previously acceptable levels of losses.

Then there is the economic fallout of the pandemic. With demand from industrial and commercial users falling, revenue from this stream, which is used to cross-subsidise other consumers, has declined, exacerbating the stress on discom finances. A turnaround in the economy will provide some relief, but will not form the basis of a sustained improvement in finances.

But at its core, the issue is that, even six years after UDAY was launched, various levels in the distribution chain — the feeder, the distribution transformer (DT) and the consumer — have not been fully metered. As a result, it is difficult to ascertain the level in the chain where losses are occurring. Other than discoms in metros like Delhi and Mumbai, there is also limited data on which consumer is attached to which DT, making it difficult to isolate and identify loss-making areas and take corrective action.

Financing the upgradation of the distribution infrastructure is only part of the problem. While the Union budget had proposed a scheme to facilitate this, stretched finances, claims by a ravaged health sector and demands for greater support for households and firms may leave the Centre with a limited fiscal space to do so.

Above all, this is a matter of political will. The continuing absence of political consensus at the state level to raise tariffs (Opposition parties in Karnataka recently protested against a tariff hike of 30 paise) or to bring down AT&C losses signal a lack of resolve to tackle the issues plaguing the sector. It was hoped that at least in states politically aligned with the Centre, there would have been greater uniformity in the approach to deal with issues that fall in the state and concurrent list, bringing about a stronger resolve to push through contentious measures. But that has not been the case.

Several suggestions have been put forth to alter the status quo. One such solution centres around a national power distribution company. But given that much of the problem stems from inefficient public sector entities, is another government entity a possible solution? Another option suggested in the past is to deduct discom dues, owed to both public and private power generating companies, from state balances with the RBI forcing states to take the necessary steps to fix discom finances. But with Jharkhand having recently exited from such an agreement after its enforcement (a tripartite agreement between the state, Centre and RBI allowed for the debit of dues owed by the state discom) questions have been raised on the feasibility of this option. Also questionable is the extent to which linking additional state borrowings to the completion of distribution reforms can incentivise states to act.

Short of radical measures — privatisation remains a chimera — it is difficult to see how a sustainable turnaround in the financial and operational position of discoms can be engineered. As the amounts involved rise, minor tinkering isn’t likely to produce the desired results.

This column first appeared in the print edition on June 19, 2021 under the title ‘Band-aid for power’. Write to the author at

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