THE WEAK LINK
The Centre is looking to reform the power sector, with better regulation and a new tariff policy. But if state governments do not fall in line, this could prove to be yet another paper-shuffling exercise
The Centre’s plan to reform the power sector could be a futile exercise without the cooperation of state governments
AAmong the more ambitious targets Prime Minister Narendra Modi set for his government in its first term was to take electricity to the farthest reaches of the country. If that drive had a fair degree of success, what continues to hobble India's power sector—and industry that critically depends on it—is reliable supply at competitive rates. It's not very different for the domestic sector, even though notionally India now boasts 100 per cent coverage. On average, Indians put up with about five and a half hours of load shedding every day, even though India has installed capacity to generate about 370 GW of power and has a peak demand of only about 170 GW. According to the Central Electricity Authority, about half of India’s rural population gets only about 12 hours of power a day.
Experts say the bottleneck is in distribution— reportedly, discoms (electricity distribution companies) are either unable to purchase power or are unwilling to do so for fear of under-recovery of power bills. An indication of their battered financial state came on May 13, when Union finance minister Nirmala Sitharaman announced that, as part of the government’s economic stimulus package, discoms would be loaned Rs 90,000 crore to pay off their outstanding dues to gencos (power generation companies). As of April end, discoms owed gencos about Rs 1.17 lakh crore in overdue payments. The accumulated debt of discoms was over Rs 4.5 lakh crore.
On May 16, Sitharaman also announced that Union power minister R.K. Singh would publish a new national tariff policy (NTP) within the next month. Now, Singh says the policy is “ready” and that his ministry will seek the Cabinet’s approval on it. Talking to india today (see ‘You can‘t always throw good money after bad...’), he described it as “taking the bull by the horns” and said, “I’m changing how business is done. This has to be done, or the sector will never become sustainable.”
TRIPPED SWITCHES
There are many problems that power minister Singh has to address. Foremost among them is the financial trouble discoms find themselves in—only a fifth currently have cash flows healthy enough to purchase the power they supply consumers. Other problems include the structural issues that have generated (and continue to generate) this massive debt—issues related to pricing, subsidies, delayed payments and the inability of state regulators to implement policies that could reform the sector.
A big factor that stymies said reforms is cross-subsidies— free power for some at the expense of others. For instance, Punjab, Tamil Nadu, Andhra Pradesh and Telangana all offer free power to farmers. These subsidies are partially paid for by other consumers paying higher-than-grid parity rates for electricity. In Andhra Pradesh, state discoms purchase power at about Rs 7 per unit and sell it to commercial consumers at Rs 12 per unit. This is a template followed across the country—in India there are over 26 discoms that charge consumers more than the grid parity rate of Rs 4.5 per kilowatt-hour (kWh). Nonetheless, most still lose money on the deal—in Andhra Pradesh, because of inefficiencies, discoms lose about Rs 1.45 per unit of electricity supplied, which accumulates to over Rs 8,000 crore of losses per year.
Earlier attempts at solving such problems—such as the 2016 NTP, which required state regulators to ensure that discoms limited cross subsidies to (+/-) 20 per cent of the average purchase price of electricity—have fallen flat. Without pointing fingers at any specific state, former Union power secretary R.V. Shahi says lax regulators are the problem. “Most state regulatory commissions have not been able to implement key provisions of [earlier reforms],” he says, adding that over the past two decades, regulators have been unable to implement tariffs that match electricity purchase costs, leaving discom balance-sheets perpetually in the red. He also says that regulators need to ensure states pay their subsidy bills on time—as of March end, pending state subsidy dues had crossed Rs 57,555 crore.
This issue—of government agencies not paying their bills on time—clearly has an adverse impact on the finances of discoms. Many state government departments have massive pending electricity bills, totalling about Rs 60,377 crore as of March. The top defaulting states include Uttar Pradesh (Rs 13,294 crore), Telangana (Rs 9,320 crore), Andhra Pradesh (Rs 7,064 crore) and Maharashtra (Rs 6,350 crore).
One hurdle to addressing this problem is that state regulators allow these unpaid bills to be parked on discom balance-sheets as ‘regulatory assets’. In May last year, analysts at India
`4.5 LAKH CRORE Cumulative debt of state-owned discoms as of March 2020
` 1.1 LAKH CR Discom dues owed to central pool gencos and transcos
`61,000 CRORE Cumulative discom receivables from various state government departments
Ratings and Research suggested that these ‘assets’ totalled Rs 76,963 crore, with 87 per cent coming from UP, Maharashtra and Jharkhand. Anil Sardana, CEO of Adani Transmission, said in a webinar recently that this total might have crossed Rs 90,000 crore during the lockdown. Explaining the failure of state regulators to ensure that state governments pay their dues and reform their discoms, a former regulator at the Central Electricity Regulatory Commission, speaking on condition of anonymity, says, “regulators look to chief ministers [to guide their actions], not the law.”
There have been several failed attempts in the recent past to reform the sector. In October 2012, the UPA (United Progressive Alliance) government had implemented a ‘financial restructuring plan’. This did not work—accumulated discom losses rose from Rs 82,000 crore in 2012 to Rs 3.8 lakh crore three years later. Then, in November 2015, the Modi government launched its much-hyped Ujwal DISCOM Assurance Yojana (UDAY), under which state governments would take existing discom debt onto their own balance-sheets, funding this expense by issuing bonds. Though there was some early success—annual losses reportedly fell from Rs 60,000 crore before UDAY to Rs 40,000 crore in FY2017—by the end of FY 2019, losses and debts were mounting once again. (In FY2019, annual discom losses are expected to total over Rs 30,000 crore.) Part of the reason for UDAY’s failure is that many discoms used the funding not to clear their balance-sheets but to pay for the Modi government’s promise to provide electricity connections to homes across the country.
Problems like these have left the sector unable to do much more than limp along, with losses eternally piling up. In November 2017, delayed payments from discoms to gencos totalled about Rs 14,447 crore. In April this year, the figure had snowballed to Rs 1.17 lakh crore. So severe is the crisis that in September 2019, Singh had to intervene to get state discoms to pay their bills to private firms in the renewable energy sector—firms that were threatening legal action against discoms at the National Company Law Tribunal.
THE SWITCHBOARD
In this latest bid to reform the sector, power minister Singh is adopting a carrot-and-stick approach to ensure that state governments cooperate. The new NTP is not the only policy document his bureaucrats are working on—also in the works are amendments to the Electricity Act, 2003, and a draft of the Atal Distribution System Improvement Yojana (ADITYA). The provisions in these three documents have reportedly already made state governments uneasy. For one, the latter two limit their ability to take debt from the sector’s non-banking financial companies (Power Finance Corporation and Rural
Electrification Corporation) and spot electricity markets if state discoms continue to make losses and delay payments.
What may work in the Centre’s favour is that state governments have few sources of funding left—for the past five years, banks have refused to lend to loss-making power companies. Further, the COVID-19 lockdown, squeezing all sources of revenue, has left states more dependent than ever on the Centre. Sitharaman tested this dependency recently by allowing state governments to increase their borrowing under the FRBM Act by 2 per cent of GSDP if they would commit to several power sector reforms, including cutting discoms’ AT&C losses (aggregate technical and commercial losses, due to technical problems, theft, payment defaults and inefficiencies in billing and collection) and bridging the gap between the purchase cost and selling price of electricity. Most state governments have agreed.
State governments have few funding sources left—for the past five years, banks have refused to lend to lossmaking power companies
Some of Singh’s proposals that state governments are opposed to include the cutting down of cross-subsidies over the next five years, a larger say for the Centre in the appointment of state regulators and the direct benefit transfer (DBT) of subsidies. Even NDA partners are reportedly wary—Bihar chief minister Nitish Kumar, Tamil Nadu chief minister E. Palaniswami and the Akali Dal’s Sukhbir Badal have all redflagged these provisions, saying that they want more discussion.
However, Shahi points out that it is in the implementation of these laws that the trouble lies. “If state governments do not appreciate the need to reform power distribution, the entire sector will suffer. Regulators should be made more accountable.” This, according to the power minister, is why his policies see a larger role for the Centre—one proposed change in the law is to have the Centre shortlist the members and chairman of state regulatory authorities, rather than allowing state governments to continue doing so. Another proposal involves a new Electricity Contract Enforcement Authority (ECEA) at the national level. These changes may be well intentioned, but will present legal difficulties as get into areas that are under state jurisdiction.
Power disputes are currently adjudicated in civil courts or by regulators. One reason an ECEA has been proposed is the frequent tussles between state governments and power providers and the damage these can do to business sentiment. For instance, in June last year, the newly elected Jagan Mohan Reddy government in Andhra Pradesh scrapped a number of existing power supply contracts with renewable energy companies, creating a huge uproar. In Haryana, solar power com
panies that have already made massive investments in the state's open access projects are battling bureaucrats over grid connectivity. And in Punjab, factions within the Capt. Amarinder Singh government are reportedly forcing the administration to renegotiate existing power supply contracts with private firms. “The renegotiation of contracts for political reasons scares investors,” points out the CEO of a top power generation company.
To pass this legislation through the Rajya Sabha, the BJP will need the full support of its 85 members and 23 allies, as well as the backing of the Biju Janata Dal (BJD), the YSR Congress and the Telangana Rashtra Samithi (TRS). However, this is far from certain—TRS chief and Telangana chief minister K. Chandrasekhar Rao wrote to Prime Minister Modi protesting the proposed amendments, arguing that they were neither in the public interest nor beneficial to state utilities.
MOVING FORWARD
Singh is ready to make a few concessions if it'll help matters move on. On July 3, he told state power ministers he was willing to relax his position on the Centre having a larger say in appointing state regulators, saying that state governments could have their own standing committees to do so, if the committees were headed by sitting high court judges. However, he also said that improvements in efficiency were essential, pointing to Telangana as a specific example—the state did not have a regulator for most of 2019, after power sector veteran I.A. Khan retired in January. It was only in October that year that the state government appointed T. Sriranga Rao as chief regulator. “[Without a regulator], how will discoms get tariffs approved or get directions in other cases?” he asks.
The power minister’s NTP is an improvement on its 2016 version. Among other provisions, it offers a timeline for regulators to cut cross-subsidies over the next five years. States that want to continue providing subsidised electricity to specific communities may continue to do so via DBT, but henceforth, all electricity connections must be metered, even where supply is free. Measures like these are aimed at developing a more efficient power distribution sector, with better data on where electricity is going. “Many states don’t have proper accounts of subsidised sectors,” explains a state finance minister, speaking on condition of anonymity. “This leads to more losses.”
However, many state governments are wary of any moves that affect subsidies for agriculture. At Raipur, in early June, Chhattisgarh chief minister Bhupesh Baghel reportedly said: “If a farmer consumes 1,000 units of electricity to irrigate his farm, he will have to pay Rs 7,000-8,000. This will be impossible for him to pay.” Clarifying this point at a meeting on July 3, Singh said DBT would go directly to beneficiaries’ accounts at discoms and that “there is no question of farmers paying bills of thousands of rupees”. However, he also noted that state governments would have to make provisions for subsidies to be paid upfront: “The benefit should go directly to [the intended beneficiaries], not towards subsidising the inefficiencies of discoms.”
Moving forward, some state governments are also looking to privatise their worst-performing discoms. For instance, the Yogi Adityanath government in Uttar Pradesh has reportedly put the Purvanchal Vidyut Vitran Nigam— which reported losses of Rs 1,550 crore in FY2019, with AT&C losses at 37.9 per cent—up for sale. In doing so, it apparently took cues from the announcement in May by the
Union finance ministry that all discoms in Union territories would be privatised. However, these efforts are not a guaranteed success: in 2018, the state government had offered five cities, including Lucknow and Varanasi, to a private power distribution franchisee. This did not work. However, other state governments have had better luck—in April this year, Tata Power closed a deal to take over power distribution in some circles in Odisha.
Shailendra Dubey, chairman of the All India Power Engineers’ Federation, says he sees Singh’s reforms as forcing privatisation. However, Singh says that he is not concerned with the ownership of discoms: “All I want is for them to cut losses. Else, I will have no choice but to turn off the [funding] tap.” Sanjay Banga, president of Tata Power’s transmission and distribution business, says the best way to improve discom efficiency is to privatise. “States need to decide whether they want to use taxpayers’ money to finance the inefficiencies of discoms. Private firms can bring down losses dramatically.” Shahi supports Singh’s efforts, saying, “Institutional reform in distribution through private sector participation is the right strategy and is overdue. Consumers deserve much better than most discoms have been able to deliver.”