Hope for Distressed DISCOMs

Why in news?

The Union Power Ministry’s latest set of rules hopes to improve the financial health of DISCOMs.

DISCOMS are power distribution companies that buys products from the manufacturer and then generally resells them for a profit to a retailer or, in some cases, directly to the customer.
The health of DISCOMs is crucial to keep the wheels of the economy running.
They are regulated entities in India, with almost all consumer prices set by independent state electricity regulatory commissions.

Aggregate Technical & Commercial (AT & C) Losses

It is combination of energy loss (Technical loss + Theft + inefficiency in billing) and commercial loss (Default in payment + inefficiency in collection).
AT&C Losses = (Energy input – Energy billed) * 100 / Energy input.
It provides a realistic picture of loss situation in the context it is measured.

ACS-ARR Gap

It is the gap between the average cost of supply (ACS) and the average revenue realised (ARR).

High AT & C losses- It is arising due to issues with tariff that affects the ability of discoms to buy power to supply to the consumers.
Lack of compliance- There was no legal framework for the reduction trajectory in AT & C losses.
Low utilisation of generation capacity- Inadequate utilisation of generation capacity was the key contributor to power deficit. It is due to
- Shortage of fuel, especially coal, and
- Unviable Power Purchase Agreements.
Differential tariff- Average tariff was highest for commercial and industrial (C&I) purposes and lowest for agriculture consumers.
For example, DISCOMs in the north-eastern states and agrarian states are especially dependent on government subsidies.
Delay in tariff revision- The delay in periodic tariff revision would lead to huge financial loss for DISCOMs.
Increase in borrowing of State owned DISCOMs- The interest cost on the loans worsens the poor finances of state discoms. It affects their ability to buy power, thus leading to power deficits.
Outstanding debts- High level of debt and payments owed to generation companies by the States leads to financial loss.
Impact of COVID- The sharp downturn in demand from high-paying C&I customers during the lockdown negatively impacted the discoms’ finances.

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Steps Taken to Boost the Power Sector

Accelerated Power Development Program- It was launched in 2001 to provide central assistance for renovation of power plants and distribution network.
Accelerated Power Development and Reforms Program- It was launched in 2003 to reduce AT & C losses, to increase revenue collection and improve customer satisfaction.
Electricity Act, 2003- It introduced multi-year tariff, power trading and open access.
National Tariff Policy 2006- It provides power procurement through tariff based bids and to ensure electricity availability to consumers at comparative rates.
Financial Restructuring of State Distribution Companies- It was launched in 2012 which allows DISCOMs to issue bonds backed by State Government.
24*7 Power for All- It is State specific power development plan that provides 24*7 electricity access.
UDAY- Ujwal Discom Assurance Yojana was launched in 2015 that allows state to take over 75% DISCOM debt.
KUSUM- It was launched in 2018 which aims for 10 GW of solar distribution grid.
Saubhagya- It was launched in 2017 to provide universal electricity access.

Mandate- Central Electricity Authority has been mandated to issue guidelines for establishing norms for operation and maintenance of the distribution system
Legal framework- State Electricity Regulatory Commissions have to ensure compliance in reduction of AT&C loss reduction trajectory.
In case of non-adherence, punitive action can be taken by the respective states.
It is also provided that gains or losses accrued to distribution licensee due to deviation from approved AT&C loss reduction trajectory would be shared between the distribution licensee and consumers.
Subsidy payment- The payment of subsidy should be assured at the time of tariff finalisation in order to ensure financial sustainability of DISCOMS.
Submit quarterly report- Distribution licensee should submit the report to the State Government.
Transparency- To ensure the recovery of full costs incurred by the distribution licensee in distributing electricity, all prudent costs of power procurement must be done in a transparent manner.
Reasonable Return on Equity (RoE)- The Rule provides that the RoE by the State Commission would be aligned with the RoE specified by the Centre Electricity Regulatory Commission in its Tariff Regulations.

There is a need to improve the methodology of Annual Revenue Requirement filings, bridge the gap between costs and revenues.
The Centre should ensure more effective cash flow management, and reduce reliance on cost true-up petitions.
There is a need of constant dialogue between all stakeholders to ensure the measures are implemented in their true spirit.

References