Edgy over continued waywardness at state-owned power distribution companies, the Centre plans to discipline them by counting their mounting losses towards the fiscal deficit of the respective state.
Accounting discoms’ losses in state balance sheets will drive up their fiscal deficit, impacting their ability to borrow. The Reserve Bank of India sets the borrowing limit for states based on their fiscal deficit figures. The spectre of financial squeeze could, in turn, force states to get cracking on distribution reforms and help contain discoms' losses, it is reckoned.
Union power secretary P Uma Shankar confirmed to FE that the power ministry has already proposed that the finance ministry and RBI lend a helping hand to its efforts to push distribution reforms – a key objective of the Electricity Act – by counting discoms' losses towards the respective state's fiscal deficit. “We have taken up the matter with the finance ministry,” Uma Shankar said, adding a final decision will be taken by the finance ministry and RBI.
In most cases, discoms' losses add up to around 1.5% of state GDP. The RBI has expressed satisfaction over states' target to bring down their gross fiscal deficit to 2.5% in 2010-11 from 3.3% in 2009-10. However, if the power ministry proposal is accepted, states’ fiscal deficit for 2010-11 could widen from 2.5% to 4% and their fiscal consolidation plans could go haywire.
Most state electricity boards (SEBs) are already unbundled and discoms exist as separate entities. Whether the discom's finances are amalgamated with the SEB or not, they are kept outside the state’s balance sheet.
The power ministry's move comes at a time when state governments have already approached RBI for permission to raise their borrowing limit for the current fiscal to about R2 lakh crore.
In the absence of distribution reforms, obligation to subsidise agriculture and household consumption under populist state-level policies, non-revision of tariffs for other consumers for far too long, limited success in reducing AT&C losses and rising fuel prices which have increased cost of power have led to state-owned discoms sinking deeper into losses.
While electricity generation costs have increased significantly in recent years due to high fuel prices, state governments have not allowed their discoms to revise their tariff due to political considerations. This has led to a widening gap between discoms' expenditure and revenue. According to data compiled by the Power Finance Corporation, the average gap in discoms' expenditure and revenue was 50 paise per unit in 2008-09.
The power ministry has also moved the apex electricity regulator, the Appellate Tribunal for Electricity (Aptel), seeking direction to state electricity regulatory commissions to provide information on whether they have used their suo motu powers for tariff revision. Under pressure from state governments, discoms avoid approaching the state electricity regulatory commisisons (SERCs) for annual tariff revision despite rising operating costs.
The Electricity Act, 2003 empowers regulators to revise electricity tariffs on a suo motu basis as well. The Shunglu committee set up by the Centre to examine systemic issues impacting financial health of discoms has slammed state governments for eroding the independence of electricity regulators.
Facing cash flow problems due to non-revision of tariffs, discoms are borrowing heavily to meet their working capital requirements. Discoms' outstanding loans are estimated at R1.53 lakh crore.
Tamil Nadu, Rajasthan, Madhya Pradesh and Uttar Pradesh are among states which have approached the Union power ministry for help to bail out their discoms reeling under unmanageable debts.
In 2001-02, the Centre had to provide a special financial package to save the state power sector from collapse when some of the state electricity boards defaulted on payment to central generators like NTPC and NHPC for power purchased from them. However, states do not seem to have learnt from that experience and continue to drag their feet on power sector reforms.