A report titled 'Bailout or Blackout: SEBs on borrowed time' by IIFL's Institutional Equities says that the aggregate net worth of state electricity boards (SEBs) has been wiped out. An excerpt is shared here.
The aggregate net worth of state electricity boards (SEBs) has been wiped out and there is little political appetite to defray cost inflation through tariff increases. Worryingly, the states seem to be working on the assumption of a bail-out package similar to the one in 2001. Utilities, especially private utilities with short-term power sales, would be severely tested in the interim. Longer delays may adversely affect loan book quality of institutions such as Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) that have large exposures to SEBs. A ~40 per cent increase in the financial sector's SEB exposure (Rs 2 trillion or $44 billion as at end-FY09), given the estimated losses of Rs 1.08 trillion over FY10-11 is estimated. But is there a way out? A forced consensus would emerge for reforms, but a bail-out might still be needed in the interim, as reforms take time.
The Shunglu Committee on SEBs estimates that losses have more than doubled to Rs 680 billion in FY11. Blended tariffs will have to increase by ~25 per cent if SEBs are to break-even. If Coal India (CIL) increases coal prices for utilities by ~20 per cent, a further ~5 per cent increase in overall tariffs will be required to break-even.
Losses mount as tariffs lag cost increases
With the average blended tariff increasing by only 6.5 per cent over FY07-09 versus the 16.5 per cent increase in the average cost of supply, aggregate cash losses have jumped 4x to Rs 284 billion over FY07- 09. The Shunglu Committee on SEBs estimates that losses have more than doubled to Rs 680 billion in FY11. Cost increases have been driven by the jump in cost of power purchased, which is up 16 per cent over FY07-09.
Sharp rise in power purchase cost the key culprit
Consolidated average cost of supply (ACS) for Indian distribution utilities stood at Rs 2.58/unit, up 16.5 per cent over FY07-09. Power purchase forms the largest proportion of ACS at 62 per cent. This is followed by employee cost (12 per cent) and fuel costs (10 per cent). For distribution utilities, the average power purchase cost increased 17 per cent over FY07-09. The majority of the increase happened in FY09. The adverse demand-supply situation was exacerbated by political compulsions to reduce load-shedding in the run-up to the general elections in the summer of 2009.
Insignificant benefits from slightly lower AT&C losses
An insignificant correction in AT&C losses has not benefited the utilities. These losses remain high, owing to multiple issues such as power theft and collection inefficiencies and most importantly, from a lack of political will to direct the utilities to curb power theft. Internationally, AT&C losses stand at 4-8 per cent in the developed world. Adjusting for inferior T&D infrastructure as compared to developed countries, actual T&D losses in developing countries can be pegged at ~10 per cent. This means that ~18 per cent of the power produced is simply stolen. The cost of stolen power is either borne by the paying consumers or the discoms. The additional cost due to stolen power is partially passed on. Hence, any increase in sourcing cost of power results in larger losses for the discoms.
Tariff increase has not kept pace with cost increases
Tariffs, on the other hand, have largely remained stable over FY07-09. Blended tariff increased by just 6.5 per cent over FY07-09. Average tariff for agricultural consumers has increased from Rs 0.74/unit in FY07 to Rs 0.86/unit in FY09 - a 15.6 per cent increase over the two years. The increase might look high in percentage terms but the pace of increase is woefully slow when compared to the absolute increase in cost of supply. The fact that tariffs are significantly below the cost of supply results in a sharp jump in losses as the cost of supply increases.
The aggregate net worth of state electricity boards (SEBs) has been wiped out and there is little political appetite to defray cost inflation through tariff increases. Worryingly, the states seem to be working on the assumption of a bail-out package similar to the one in 2001. Utilities, especially private utilities with short-term power sales, would be severely tested in the interim. Longer delays may adversely affect loan book quality of institutions such as Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) that have large exposures to SEBs. A ~40 per cent increase in the financial sector's SEB exposure (Rs 2 trillion or $44 billion as at end-FY09), given the estimated losses of Rs 1.08 trillion over FY10-11 is estimated. But is there a way out? A forced consensus would emerge for reforms, but a bail-out might still be needed in the interim, as reforms take time.
The Shunglu Committee on SEBs estimates that losses have more than doubled to Rs 680 billion in FY11. Blended tariffs will have to increase by ~25 per cent if SEBs are to break-even. If Coal India (CIL) increases coal prices for utilities by ~20 per cent, a further ~5 per cent increase in overall tariffs will be required to break-even.
Losses mount as tariffs lag cost increases
With the average blended tariff increasing by only 6.5 per cent over FY07-09 versus the 16.5 per cent increase in the average cost of supply, aggregate cash losses have jumped 4x to Rs 284 billion over FY07- 09. The Shunglu Committee on SEBs estimates that losses have more than doubled to Rs 680 billion in FY11. Cost increases have been driven by the jump in cost of power purchased, which is up 16 per cent over FY07-09.
Sharp rise in power purchase cost the key culprit
Consolidated average cost of supply (ACS) for Indian distribution utilities stood at Rs 2.58/unit, up 16.5 per cent over FY07-09. Power purchase forms the largest proportion of ACS at 62 per cent. This is followed by employee cost (12 per cent) and fuel costs (10 per cent). For distribution utilities, the average power purchase cost increased 17 per cent over FY07-09. The majority of the increase happened in FY09. The adverse demand-supply situation was exacerbated by political compulsions to reduce load-shedding in the run-up to the general elections in the summer of 2009.
Insignificant benefits from slightly lower AT&C losses
An insignificant correction in AT&C losses has not benefited the utilities. These losses remain high, owing to multiple issues such as power theft and collection inefficiencies and most importantly, from a lack of political will to direct the utilities to curb power theft. Internationally, AT&C losses stand at 4-8 per cent in the developed world. Adjusting for inferior T&D infrastructure as compared to developed countries, actual T&D losses in developing countries can be pegged at ~10 per cent. This means that ~18 per cent of the power produced is simply stolen. The cost of stolen power is either borne by the paying consumers or the discoms. The additional cost due to stolen power is partially passed on. Hence, any increase in sourcing cost of power results in larger losses for the discoms.
Tariff increase has not kept pace with cost increases
Tariffs, on the other hand, have largely remained stable over FY07-09. Blended tariff increased by just 6.5 per cent over FY07-09. Average tariff for agricultural consumers has increased from Rs 0.74/unit in FY07 to Rs 0.86/unit in FY09 - a 15.6 per cent increase over the two years. The increase might look high in percentage terms but the pace of increase is woefully slow when compared to the absolute increase in cost of supply. The fact that tariffs are significantly below the cost of supply results in a sharp jump in losses as the cost of supply increases.
SEBs are eschewing expensive power to contain losses
Industry participants and regulators given the poor financial condition of discoms have little inclination to buy expensive power, hence reducing off-take from stations based on expensive fuel sources. For imported coal/gas-fired capacities, there would be brief periods of respite during state/national elections when political compulsions would translate into SEBs being forced to buy even expensive power.
Most states in India heavily subsidise the power for agricultural use by charging higher rates to industrial users. For large states, 31 per cent of the energy sold is used for agriculture. However, revenue from agricultural customers forms only 8 per cent of the total revenue. Industrial customers contribute 46 per cent of total revenues against their share of 34 per cent of total energy sold.
APDRP - useful but not having a significant enough impact
Aiming for a financial turnaround of the distribution sector, the central government had launched the Accelerated Power Development and Reform Programme (APDRP). Under this scheme, central plan assistance was made available to states undertaking distribution reforms in a time bound manner. An incentive scheme was introduced to incentivise utilities achieving cash loss reduction.
The R-APDRP was launched in July 2008 to establish reliable and verifiable baseline data and further reduce the AT&C losses. R-APDRP is focusing on strengthening T&D systems to reduce AT&C losses on a sustainable basis. Overall, Rs 400 bn has been allocated as loans for R-APDRP of which Rs 200 billion will be converted to a grant depending on the extent to which utilities reduce losses.
Overall, the APDRP and R-APDRP programme has resulted in AT&C losses decreasing from 38.9 per cent in FY02 to 28.4 per cent in FY09. While the first few years did see an improvement, the pace of improvement has slowed down significantly. In fact, the Western region witnessed a worsening of AT&C losses in FY09.
So R-APDRP cannot make a significant contribution to improving the financials of distribution utilities. In the absence of sufficient tariff hikes, gains on APDRP would provide little help to distribution utilities. For instance, the Southern region, which has the lowest AT&C losses, is the largest contributor to the increase in book losses as tariffs have remained stable over many years, while power purchase cost keeps increasing.
The slow pace of privatization of distribution is not helping. A key component of the distribution reforms has been the privatization of power distribution. Privatization is being attempted broadly in two ways, sale of a government-owned utility to private enterprise and through appointment of a private distribution enterprise, particularly for a loss-making circle.
Distribution franchising differs from privatization
Distribution reforms are inevitable, owing to mounting AT&C losses and deteriorating health of state-owned distribution entities. However, despite this dire situation, states are reluctant to implement tough reforms. Privatizing distribution is one of the simplest forms of reforms, but it involves transfer of assets and manpower to private entities. Such changes in ownership are often not received positively by the masses, especially employees of distribution firms, who are directly affected by any changes in ownership. Hence, states are reluctant to implement privatization.
Government could finally resort to a bailout (similar to the one in 2001) for SEBs
Apart from subsidized funds for SEBs, the central and state governments could resort to a one-time settlement similar to the one adopted in 2001. The health of state finances is much better than that in 2001. Hence, it would easier for the states to contribute to the funds required for the one-time settlement. In 2001, the accumulated dues of Rs 414 billion had arisen due to the continued non-viability of the current operations of the SEBs. The commission recognized that settlement of past dues alone would not solve the basic problem facing the SEBs. Unless the problem of current unviability is speedily addressed, overdues would mount again.
Industry participants and regulators given the poor financial condition of discoms have little inclination to buy expensive power, hence reducing off-take from stations based on expensive fuel sources. For imported coal/gas-fired capacities, there would be brief periods of respite during state/national elections when political compulsions would translate into SEBs being forced to buy even expensive power.
Most states in India heavily subsidise the power for agricultural use by charging higher rates to industrial users. For large states, 31 per cent of the energy sold is used for agriculture. However, revenue from agricultural customers forms only 8 per cent of the total revenue. Industrial customers contribute 46 per cent of total revenues against their share of 34 per cent of total energy sold.
APDRP - useful but not having a significant enough impact
Aiming for a financial turnaround of the distribution sector, the central government had launched the Accelerated Power Development and Reform Programme (APDRP). Under this scheme, central plan assistance was made available to states undertaking distribution reforms in a time bound manner. An incentive scheme was introduced to incentivise utilities achieving cash loss reduction.
The R-APDRP was launched in July 2008 to establish reliable and verifiable baseline data and further reduce the AT&C losses. R-APDRP is focusing on strengthening T&D systems to reduce AT&C losses on a sustainable basis. Overall, Rs 400 bn has been allocated as loans for R-APDRP of which Rs 200 billion will be converted to a grant depending on the extent to which utilities reduce losses.
Overall, the APDRP and R-APDRP programme has resulted in AT&C losses decreasing from 38.9 per cent in FY02 to 28.4 per cent in FY09. While the first few years did see an improvement, the pace of improvement has slowed down significantly. In fact, the Western region witnessed a worsening of AT&C losses in FY09.
So R-APDRP cannot make a significant contribution to improving the financials of distribution utilities. In the absence of sufficient tariff hikes, gains on APDRP would provide little help to distribution utilities. For instance, the Southern region, which has the lowest AT&C losses, is the largest contributor to the increase in book losses as tariffs have remained stable over many years, while power purchase cost keeps increasing.
The slow pace of privatization of distribution is not helping. A key component of the distribution reforms has been the privatization of power distribution. Privatization is being attempted broadly in two ways, sale of a government-owned utility to private enterprise and through appointment of a private distribution enterprise, particularly for a loss-making circle.
Distribution franchising differs from privatization
Distribution reforms are inevitable, owing to mounting AT&C losses and deteriorating health of state-owned distribution entities. However, despite this dire situation, states are reluctant to implement tough reforms. Privatizing distribution is one of the simplest forms of reforms, but it involves transfer of assets and manpower to private entities. Such changes in ownership are often not received positively by the masses, especially employees of distribution firms, who are directly affected by any changes in ownership. Hence, states are reluctant to implement privatization.
Government could finally resort to a bailout (similar to the one in 2001) for SEBs
Apart from subsidized funds for SEBs, the central and state governments could resort to a one-time settlement similar to the one adopted in 2001. The health of state finances is much better than that in 2001. Hence, it would easier for the states to contribute to the funds required for the one-time settlement. In 2001, the accumulated dues of Rs 414 billion had arisen due to the continued non-viability of the current operations of the SEBs. The commission recognized that settlement of past dues alone would not solve the basic problem facing the SEBs. Unless the problem of current unviability is speedily addressed, overdues would mount again.
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