India’s DisCom stress is more than the sum of its past

Distribution Companies (DisComs) have been called the lynchpin but also the weakest link in the electricity chain.

• For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs, the utilities that typically buy power from generators and retail these to consumers.
• Long gone are the days of scarcity of power; while the physical supply situation has mostly improved, the financial picture has not brightened much — and this was before COVID-19.
• The Indian government responded to COVID-19’s economic shock with a stimulus package of 20-lakh crore, out of which 90,000 crore was earmarked for DisComs (later upgraded to 1, 25,000 crore). While it was called a stimulus, it is really a loan, meant to be used by DisComs to pay off generators.
• Unfortunately, the dues to generators are several times higher than this number, and, worse, the total short-term dues of DisComs are multiple times higher, which excludes long-term debt.

Data on liabilities

How did this magic figure of one-lakh crore capture popular imagination?

• This figure is roughly what the government’s PRAAPTI (or Payment Ratification and Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal shows for DisCom dues to generators.
• However, what is not widely appreciated is that the portal is a voluntary compilation of dues, and is not comprehensive.
• The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were 2, 27,000 crore, and this is well before COVID-19. It also showed similar Other Current Liabilities.
• Over the years, DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan.
• But why do DisComs not pay on time? Conventional wisdom blames the utilities for inefficiency, including high losses, called Aggregate Technical and Commercial losses, a term that spans everything from theft to lack of collection from consumers. However, this is only an incomplete explanation.

Major Issues with DisComs

• The recent study on DisComs shows a much graver picture than one that can be solved by a fillup, even though such a liquidity injection is required.
• The media reports suggested that the DisComs owe one lakh crore rupees to generators, and without the financial infusion the electricity chain will collapse.
• Over the years, the DisComs have delayed their payments upstream (not just to generators but others as well) i.e. treating payables like an informal loan.
• The state governments are the biggest defaulters and responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.
• The pandemic has completely shattered incoming cash flows to utilities. The lockdown disproportionately impacted revenues from commercial and industrial segments. But a large fraction of DisCom cost structures are locked in through PPAs that obligate capital cost payments.

Impact of COVID-19 on Discoms

• The equilibrium of increasing the dues as well as relying on continued subsidies, all worked as long as there was steady growth but the COVID-19 has completely shattered incoming cash flows to utilities.
• The revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments.
• The reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower off take.
• The revenues of power distribution companies have nosedived as people are unable to pay for the electricity consumed while power supplies have been maintained.
• The operations of commercial establishments and industries came to a grinding halt due to nationwide lockdown, which are the major source of revenue for DISCOMs.

Measures to be adopted for Discoms in India

• It is necessary to have a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt.
• The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage and the improvement in AT&C losses is important.
• It is required to have a complete overhaul of the regulation of electricity companies and their deliverables because much of inefficiency is tolerated in the name of the poor but they do not get quality supply.
• The transparency in the disclosure/reporting of off-budget liabilities in the State budgets could be the first step towards recognizing the guarantees as a medium-term fiscal risk.
• Unlike discoms in the states, which fall under the remit of the respective state governments, there is a separate dispensation for discoms in Union Territories, as they are administered directly by the central government.

Way forward

• There is a need a much larger liquidity infusion so that the entire electricity chain will not collapse.
• Regulators must allow cost-covering tariffs.
• An Improving AT&C loss is important, but will not be sufficient. We need a complete overhaul of the regulation of electricity companies and their deliverables.
• The financial problems of DisComs have been brewing for many years and it is unlikely that a silver bullet i.e. privatisation, can solve the problems overnight.
• The power sector liquidity is not expected to improve in the short term, as economic activity and power demand will take some time to pick up and there is an immediate need to infuse liquidity in the sector for continued power supply.
• However, if business, as usual, was not even good enough before COVID-19, it will not be workable for the current national needs of quality, affordable, and sustainable power.