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

Context: Distribution Companies (DisComs) have been called the lynchpin but also the weakest link in the electricity chain.

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).
• It was a loan, meant to be used by DisComs to pay off generators.
• DisComs shows a much graver picture than one that can be solved by a fill-up, even though such a liquidity injection is required.
• The total short-term dues of DisComs are multiple times higher, which excludes long-term debt.

Data on liabilities

• 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.
• Over the years, 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.
• Ideally, they should not incur losses as they enjoy a regulated rate of return.
• 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,
• Then, there are 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.
• 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.
• Increasing dues as well as relying on continued subsidies all worked as long as there was steady growth. However, COVID-19 has completely shattered incoming cash flows to utilities.

Liquidity infusion

• There is a need of much larger liquidity infusion, it must go hand-in-hand with credible plans to pay down growing debt.
• Stimulus loans are near market term and not soft loans.
• All the risk and future obligations should not be placed on DisComs alone. Generators, transmission companies, and lending institutions must all chip in.

Renewable energy beckons

• The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage.
• Improving AT&C losses is important, but will not be sufficient.
• There is a need of complete overhaul of the regulation of electricity companies and their deliverables.
• Efficient and quality electricity supply instead of the political doleout of free electricity is required.
• Regulators must allow cost-covering tariffs.
• Even privatisation, cannot solve the discoms financial problems overnight.
• Reforms are needed for quality, affordable, and sustainable power.

https://www.thehindu.com/opinion/lead/indias-discom-stress-is-more-than-the-sum-of-its-past/article32957608.ece?homepage=true