States scramble to raise power tariffs as bank finance dries up

A recent Reserve Bank of India (RBI) directive to tighten loans for state power distribution companies (discoms) seems to have had the desired effect. The drought in short-term finance has forced at least seven states to raise tariffs and reduce losses for their discoms.

Punjab, Haryana, Rajasthan and Orissa have allowed their discoms to revise tariffs in the last two months, while Tamil Nadu and Uttar Pradesh have assured banks that they would follow suit.

“We have received assurance on tariff revision from Tamil Nadu and Uttar Pradesh. However, the latter has said it will initiate the process after Assembly elections in April-May, 2012,” a senior banker told FE. The two states, which had recently sought bailouts for their discoms, failed to get any assurance in this regard. Both may have to hike tariffs by a hefty 30% each, banking sources said.

Orissa has raised tariff by 19.74%, Rajasthan 20%, Madhya Pradesh 6% and Delhi 22%. Punjab and Haryana have revised tariff by 37 paise and 7 paise a unit respectively. Jharkhand has hiked tariff by 15-50 paise a unit across categories. It has also increased fixed charges by Rs 12-40 a month. States like Madhya Pradesh are planning another revision after the initial modest hike failed to impress banks.

However, industry experts see this as ad hocism. “It should be made mandatory for discoms to seek tariff revision on an annual basis,” said Shubhranshu Patnaik, senior director (energy & resources consulting), Deloitte India.

“These are just temporary measures. Unless there is a change in ownership of discoms, things will not improve,” said Kuljit Singh, a senior energy consultant with Ernst & Young.

Most state-owned discoms are mired in losses, thanks in large part to political opposition to tariff hikes. Combined losses of discoms as of March 2009 are estimated at Rs 74,000 crore. Discoms have been using bank loans to finance their cash losses arising from non-revision of tariffs.

Expecting little risk of default on these sovereign loans, banks and non-banking finance companies have been routinely extending short-term loans to discoms without much due diligence, building a mountain of Rs 1.53-lakh crore debt. With such alarming levels of debt, the Centre asked the RBI to tighten lending norms for discoms to put pressure on states for tariff revision.