While the country’s power sector has witnessed significant overall growth in the past few years, the distribution segment has been a laggard. The segment continues to be plagued with high levels of aggregate technical and commercial (AT&C) losses and inadequate tariffs. These factors have led to a huge quantum of accumulated losses and debt. The weak financial position of distribution utilities has also constrained investments in system improvements and resulted in heavy reliance on government support. In the past, the government has made several attempts to revive the ailing power distribution segment, but with little success. The latest, and seemingly the most promising, effort has been the launch of the Ujwal Discom Assurance Yojana (UDAY) in November 2015. A total of 27 states and union territories (UTs) have signed up for the scheme and bonds have been issued for Rs 2,325 billion (constituting over 85 per cent of the debt to be restructured under the scheme), pointing towards the strong support that UDAY has garnered and its preliminary success.
Indian Infrastructure takes a look at the performance of the distribution segment and the progress under UDAY…
Financial performance
Between 2010-11 and 2014-15, the total income of discoms (excluding subsidy) increased at a compound annual growth rate (CAGR) of 14.88 per cent, from Rs 2,287 billion to
Rs 3,985 billion. However, on a year-on-year basis, the growth rate has declined during this period. While in 2010-11 income grew at 19.94 per cent, in 2014-15, the growth was around 12.08 per cent only. The expenditure by discoms also witnessed an increase during this period, from Rs 2,998 billion in 2010-11 to Rs 5,025 billion in 2014-15, a CAGR of 13.78 per cent. On a year-on-year basis, growth in expenditure slowed down, from 18.54 per cent in 2010-11 to 9.12 per cent in 2014-15. The decline in the growth rate of expenditure can be primarily attributed to the corresponding decline in the growth rate of power procurement costs, which constitute over 70 per cent of the total expenditure of discoms.
As can be seen from the above figures, cost recovery improved during this period, from 76 per cent to 79 per cent; however, discom losses showed an upward trend. The aggregate losses (without considering subsidy) increased from Rs 723 billion in 2010-11 to Rs 1,044 billion in 2014-15. It is only with the subsidy received from the government that the losses in the books of discoms came down. After increasing in 2011-12 to Rs 726 billion against Rs 496 billion in 2010-11, the losses (after considering the subsidy) declined consistently till 2014-15 to reach Rs 562 billion. Looking at accumulated losses, losses in the balance sheets of discoms stood at Rs 3,607 billion as of March 2015, more than double the losses (Rs 1,551 billion) as of March 2011. States with the highest level of losses, accounting for over 75 per cent of the accumulated discom losses, are Uttar Pradesh, Rajasthan, Tamil Nadu and Madhya Pradesh.
Operational performance
The most important performance parameter of the distribution segment is the level of AT&C losses. These losses have been on a declining trend and came down from around 26.1 per cent in 2010-11 to 23.84 per cent in 2015-16. Another key parameter affecting the performance of discoms is the gap between the average cost of supply (ACS) and average revenue realised (ARR). The ACS-ARR gap, after increasing from Re 0.65 per unit in 2010-11 to Re 0.88 per unit in 2011-12, declined consistently and stood at Re 0.56 as of March 2016. The existing non-cost-reflective tariffs, coupled with inadequate and delayed tariff revisions by the state electricity regulatory commissions, have been the major reasons for this gap.
AT&C losses and the ACS-ARR gap are also the key parameters for measuring operational efficiency improvements under UDAY. The scheme targets the reduction of AT&C losses to 15 per cent and the elimination of the ACS-ARR gap by 2018-19. While these parameters have shown improvement, the progress has been slower than targeted. As of December 2016, AT&C losses were 22.86 per cent against the target of 20.76 per cent. Similarly, the ACS-ARR gap was about Re 0.47 while the target was Re 0.30 per unit. As of May 7, 2017, the AT&C losses and ACS-ARR gap (across 22 states) are estimated to be around 19.95 per cent and Re 0.48 per unit respectively.
With respect to tariff revisions, 25 states filed their petitions for the determination of tariff for 2017-18 though tariff orders have been issued for only 15 states (Bihar, Uttarakhand, Madhya Pradesh, Karnataka, Gujarat, Andhra Pradesh, Chhattisgarh, Manipur, Assam, Meghalaya, Maharashtra, Himachal Pradesh, Telangana, Sikkim and Mizoram). Of these, a hike in tariffs in the range of 2 per cent to 10 per cent has been approved for nine states. Bihar is an exception with a tariff increase of over 50 per cent. Other states, such as Gujarat, Maharashtra, Himachal Pradesh, Telangana, Sikkim and Mizoram did not see any tariff revision.
Progress under UDAY
Since its announcement in November 2015, 27 states and UTs have joined UDAY. These are Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, Punjab, Bihar, Jammu & Kashmir, Haryana, Andhra Pradesh, Madhya Pradesh, Maharashtra, Himachal Pradesh, Telangana, Assam, Tamil Nadu, Meghalaya, Arunachal Pradesh, Goa, Gujarat, Karnataka, Kerala, Manipur, Mizoram, Puducherry, Sikkim, Tripura and Uttarakhand. Besides, Odisha has agreed in principle to join the scheme, but has not been able to sign the MoU because its discoms are partially owned by private players. Of the 27 states/UTs listed above, the first 16 states have joined the scheme for both operational and financial improvement, while the remaining have signed MoUs for only operational improvement.
To reduce the existing debt levels and interest costs of discoms, UDAY anticipates the transfer of 75 per cent of the debt of discoms (that have signed for financial improvement) to state governments and in turn for the issuance of bonds. To this end, the progress has been swift and the UDAY bonds have been able to elicit a positive response from investors. As of April 2017, the 16 states had issued bonds aggregating Rs 2,325 billion. Bonds for Rs 408 billion, about 15 per cent of the total debt to be restructured, remain to be issued.
Apart from AT&C losses and the ACS-ARR gap, other operational parameters covered under UDAY include the metering of feeders and distribution transformers (DTs), providing electricity connections to unconnected households, smart metering of consumers with over 200 kWh electricity consumption per month, segregating feeders and distributing LEDs under the UJALA scheme. While feeder metering is close to completion, progress with respect to other parameters has been rather slow, especially the installation of smart meters. There has been no noticeable progress in smart metering. To facilitate this, the Ministry of Power is likely to take the assistance of the National Smart Grid Mission. The network improvement and electrification targets under UDAY are also being supported by other government programmes such as the Integrated Power Development Scheme and the Deen Dayal Upadhyaya Gram Jyoti Yojana.
UDAY is being seen as markedly different from earlier restructuring schemes since it is accompanied by long-term goals, for both discoms and states, with short-term debt relief in the form of the takeover of discom loans by the state governments. Further, financial losses of the discoms over the next few years will be funded directly by the respective state governments, making them accountable for the discoms’ performance. Another distinguishing feature of UDAY is the multilevel monitoring mechanism being adopted to determine the progress and delays. It comprises a three-tier review structure with monthly reviews at the discom, state as well as central levels. The UDAY dashboard (web portal and mobile app), launched in January 2017, has been the latest development towards increasing the transparency and accountability of discoms.
Conclusion
UDAY has been the centrepiece of all discussions related to the power sector, with all the stakeholders working towards the revival of the distribution segment. While improvement in operational efficiency has been slow, the transfer and refinancing of over 85 per cent of the scheduled discom debt under UDAY has seen remarkable progress. With this, the financial position of discoms is likely to improve, which in turn is expected to boost the demand for power and investments in system upgradation by discoms. UDAY, true to its name, indeed promises a brighter future for the financially ailing discoms. However, the risk of states failing to meet their targets remains a huge challenge and could impact the overall success of the scheme.
