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Hope for Distressed DISCOMs

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August 08, 2023

Why in news?

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

What are 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).

What are the issues with DISCOMs?

  • 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.

power-sector

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.

What are the new rules?

  • 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.

What lies ahead?

  • 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

  1. Business Line- Ray of hope for distressed DISCOMs
  2. PIB- Measures by power ministry
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