Dealing with the disconnect

Gap between cost of supply and revenue realisation widening

Power distribution companies (discoms) are in poor financial health today and have low economic viability. Current retail prices of electricity do not cover the actual average costs of supply. By the PFC report 2009-10, the gap between the average cost of supply and average revenue realised has been widening over the years. In a three-year period from 2006-07 to 2008-09, the cost of supplies went up 24%, while the average revenues increased by a lower margin of 17%. Since the cost of supplies accounts for around 70-80% 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 R1.06 lakh crore, more than doubling from R39,444 crore in 2004-05.

The key reasons for commercial losses are operational inefficiency leading to high AT&C losses; inadequate revision of tariff to cover cost of supply; pilferage/theft of power and non-disbursement of subsidy by state governments to utilities. Technical losses are overloaded networks, inadequate neutralisation of reactive power by capacitors, and load imbalances in three-phase supply. etc. These may be eliminated by improving metering efficiency, proper energy accounting & auditing and more efficient billing & collection. Fixing the accountability of personnel/feeder managers may help greatly reduce AT&C loss.

The Accelerated Power Development & Reform Programme (APDRP) was launched in 2001, for strengthening the transmission & distribution network and reducing AT&C losses. The main objective of the programme was to bring aggregate technical & commercial (AT&C) losses below 15% in five years in urban and in high-density areas.

The programme, along with similar Centre-state initiatives, has led to a reduction in the overall AT&C loss from 38.86% in 2001-02 to 34.54% in 2005-06. Commercial losses of state power utilities reduced during this period from R29,331 crore to R19,546 crore. The loss as a percentage of turnover reduced from 33% in 2000-01 to 16.60% in 2005-06.

The two vital indicators such as ‘reduction in AT&C losses (%)’ and ‘cost recovery (%)’ should be actively pursued. The reduction in AT&C losses shall help monitor the effectiveness of various measures in this direction. The cost recovery will show how many utilities have been able to recover their costs. The states must ask the power utilities to regularly file petitions for tariff revision before the electricity regulatory commissions.

In many states, chief ministers 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 discoms’ revenue realisation from the agriculture sector.

Almost a fifth of their revenues come from farmers and these tariffs are heavily subsidised. The balance sheets of discoms will make a difference only when the state governments make bold moves to increase revenue realisation from the agriculture sector. Turnaround of the power industry will greatly depend on the financial management of power distribution.