Broken power cables ahead

Broken power cables ahead

On paper, these discoms have been ‘corporatized’, but in practice they continue to be unionized entities subject to political intervention by state govts

State electricity boards (SEBs) have just been thrown a lifeline, again. On Monday, the Union government announced a scheme for the financial restructuring of state power distribution companies (discoms).

It is no secret that discoms are the weakest link in the power system in different states. Their accumulated losses are close to Rs.2 trillion. Monday’s scheme gives an option to state governments to wipe this slate clean. This is unlikely to help anyone—lenders, consumers and certainly SEBs.

Conceptually, discoms have two problems. One, the balance sheet problem—the accumulated debt, high interest burden and so on and two; the cash flow problem—their inability to realize revenue from the bulk of their consumers in a cost plus manner. The former stands resolved if the state governments agree to the scheme. Fifty per cent of the short-term liabilities will be taken over by the state governments. They will then issue bonds to the lenders who participate in the scheme. The other 50% of the short-term loans will be rescheduled with a three-year moratorium on the repayment of the principal amount. This is quite unfair to the lenders: either way they are hostages—without this scheme they could lose what they have lent; with it, the terms of repayment are not favourable either.

It is the cash flow problem that has not been resolved. As of now, cash-strapped state governments may be agreeable to their utilities revising power tariffs, but there is no guarantee that this will be a continuous process. That is not all: the process of tariff revision—in spite of its approval by state electricity regulatory commissions—is reminiscent of the administered price mechanism of bygone years. These tariff petitions simply raise demands for higher revenues based on the operating costs of discoms. The idea of cost minimization (or profit maximization) is alien to them.

For that to happen, discoms need to face a competitive environment in which distribution and generation are privatized and the transmission network is freely available to all participants in the electricity markets. In spite of all noises about reforms, there is no sign that this will happen anytime soon. For one, state governments are loath to privatize the distribution end of the power system. For another, existing discoms (and other state-sector power companies) are run like sarkari departments. On paper, these companies have been “corporatized”, but in practice they continue to be heavily unionized entities subject to routine political intervention by state governments.

It is this state of affairs that needs to be changed if balance sheet clean-up is not to turn into a routine affair.