Fixing power reforms

Financial bailouts need to be backed by tariff revisions

A proposal mooted by the Union power ministry to revive the financial health of electricity distribution companies in the states has resurrected the debate over what ails the country’s power sector and what remedial measures ought to be taken. The proposal says that the state governments should free their electricity distribution firms from the burden of their accumulated losses by either issuing them bonds or taking over these losses as loans in their books. The ministry also expects the state governments to not allow distribution companies to run up any more cash losses once their balance sheets are cleaned up.

This is easier said than done. Almost a decade ago, a similar initiative was mooted to free the distribution firms from the burden of their past losses. The total losses then converted into long-term bonds, to be discharged by the state governments, amounted to Rs 41,400 crore. Ten years later, the problem has resurfaced. This is largely because power sector reforms in India have been patchy. Though a power regulatory framework with statutory backing has been put in place and restrictions on investments in power generation – including those from foreign firms – have been considerably eased, little progress has been achieved on the power distribution front. Most states have restructured their power distribution utilities by converting them into firms, but have not given them the freedom to fix tariffs. Thus, the gap between their average cost of supplies and average revenue realised has widened. In a period of just three years from 2006-07 to 2008-09, their cost of supplies went up 24 per cent, while the average revenues increased by a lower margin of 17 per cent. This has widened the gap — the cost of supplies was 17 per cent higher than the revenue realisation in 2008-09 compared to 10 per cent in 2006-07. Since the cost of supplies accounts for around 70 to 80 per cent of a power distribution company’s total cost of operations, the losses have mounted and according to the latest estimate for 2009-10 total accumulated losses of power distribution firms in the states have crossed Rs 1.06 lakh crore, more than doubling from Rs 39,444 crore in 2004-05. So, merely converting these losses into bonds may help the electricity distribution firms start on a clean slate, but to make the impact of the move a little more durable, it is necessary that the Centre and the states agree on a set of additional corrective measures to prevent further losses from accumulating.

First, the states must encourage the power distribution firms to regularly file petitions for tariff revision before the electricity regulatory commissions. There are many states where the chief minister would discourage such tariff revision petitions purely for political gains. If necessary, the state electricity regulatory commissions should be adequately empowered to penalise distribution companies that refuse to file for tariff revisions. A more fundamental problem lies in the power distribution companies’ revenue realisation from the agriculture sector. Almost a fifth of their revenues come from farmers and these tariffs are heavily subsidised. The proposal to clean the balance sheets of power distribution firms will make a difference only when the state governments make the bold move of increasing revenue realisation from the agriculture sector.