Revised tariffs not enough to help power distribution firms

A tleast 16 states have ncreased electricity tariffs this fiscal year by 3-24%. But given the magnitude of distribution companies' accumulated losses, estimated upwards of `75,000 crore, these hikes just about manage to stop fresh bleeding. If these companies have to break even, they require further tariff hikes to the tune of 45-60%, estimates Citigroup Global Markets.

While that may come as a shocking figure, it doesn't take rocket science to understand what has transpired in the past few years. In the last six fiscal years, the costs of state power utilities have increased at an average annual rate of 17%, as the chart shows. For the end consumer, power rates have risen 5.4% yearly at the same time.

To be sure, the data related to fiscals 2011 (FY11) and 2012 are estimates. But the previous four years make for worse reading--costs grew 15.9%, while consumer rates rose 2.8%.

The major chunk of the hit for these utilities has been the cost of power. Power purchasing costs as a proportion of the total would have increased to 75% in FY12 from 69% six fiscal years ago, Citigroup estimates. Note that this holds true even for private power distributors such as New Delhi Power Ltd, a unit of Tata Power Co. Ltd.

In FY10, the average cost of power purchased rose 14.5% for the firm.

That is not at all surprising given the surge in fuel prices. Secondly, the huge accumulated losses also mean a pile-up of debt.

Thus, the contribution of interest costs to the total costs of state-owned distribution companies would have increased by 2 percentage points to 8% this year.

What's worse from the point of view of the distribution utilities is that state governments are reneging on subsidy payments. For FY10, these companies received just over half the money they had booked as subsidy in their accounts.

The upshot is that power rates would have to be increased soon and substantially. But the solution is not easy. Industrial and commercial users are already subsidizing domestic and agricultural consumers, who pay ridiculously low tariffs. As utilities file for revising tariffs by the end of this fiscal, protests have already started in various places such as Madhya Pradesh and Chandigarh.

Untangling this knot will go a long way towards influencing future investment in this sector.