Distribution sector reforms imminent with rising discom debt and dues to gencos


The electricity distribution segment remains the weakest link in the power sector value chain owing to longstanding issues of the state-owned discoms related to weak operating efficiencies, inadequate tariffs and subsidy in relation to cost of supply, delays in receiving subsidy and delays in pass-through of cost variations to consumers in the form of higher tariffs. The Government has so far launched four support packages over the past two decades to revive the distribution segment. The latest has been a liquidity relief scheme announced in May 2020 and prior to that, Ujwal DISCOM Assurance Yojana (UDAY) was launched in November 2015. The UDAY scheme involved a debt takeover by the state governments (Rs. 2.32 lakh crore bonds were issued by state governments and discoms towards debt takeover), focus on improvement in the operational efficiencies of discoms and a reduction in the cost of power purchase. While the discoms were able to bring down their book losses with the debt refinancing, the progress in meeting the targets set for AT&C losses remained less than satisfactory. The AT&C loss level at the all- India level remained high at 22.0% in FY2019, against the target of 15.0% by FY2019 set under the UDAY scheme. This is owing to inefficiencies in metering, billing and collections. Also, the delays in issuance of the tariff orders and inadequacy of the tariff revisions persisted in some of the key states. The delay in issuance of the tariff orders was prominent in key states like Rajasthan, Tamil Nadu and Uttar Pradesh, which accounted for a bulk of the debt taken over by state governments under the UDAY scheme. Moreover, the tariff hikes proposed by the discoms and approved by the SERCs for the past four years across the states have remained lower than what was agreed under the UDAY MoUs, as reflected from the low median tariff hike. The exception being the discoms in Haryana, which have been able to turn around and report profits in FY2018 and FY2019, by reducing the AT&C losses and raising tariffs by 5.0% in FY2018.

Within the various states, the losses are relatively high for discoms in the states of Andhra Pradesh, Madhya Pradesh, Tamil Nadu, Telangana and Uttar Pradesh, accounting for more than 90% of the all India discom losses. On the other hand, the performance of the discoms in Gujarat remains healthy with sustained profitability. Also, the discoms in the states of Haryana, Maharashtra and Karnataka have reported profits at a net level in FY2019. The continued high losses for discoms in turn resulted in an upward trend in dues from discoms to power generation companies. While the provision of a letter of credit (LC) or advance payments by discoms to IPPs/GENCOs has been made mandatory w.e.f. August 1, 2019, the implementation of the same has been mixed so far and does not address the issues pertaining to recovery of old receivables.

Further, the imposition of lockdown restrictions in Q1 FY2021 amid the Covid-19 pandemic has adversely impacted the electricity demand (down by 16.2% in Q1 FY2021 on a YoY basis) from the C&I customers and in turn the revenues and collections for discoms. This, along with the lack of tariff revisions for discoms across most states for FY2021, is estimated to widen the revenue gap for discoms at the all-India level by more than Rs. 300 billion. While the discoms would be able to claim the revenue gap from the decline in the volume sales under the cost- plus tariff principles at the time of true-up, the timely realisation of the same remains to be seen in the subsequent tariff orders. In the interim period, this decline in revenues and collections for discoms during FY2021 led to a further build-up in dues from discoms to power generation companies from Rs. 0.99 trillion as on March 2020 to about Rs. 1.27 trillion as of December 2020, based on the data from PRAAPTI portal. In this context, the Government of India, under the Atmanirbhar Bharat package, announced a liquidity support of Rs. 900 billion (increased subsequently to Rs. 1.25 trillion) for the state power discoms, in the form of loans against receivables, from the Power Financial Corporation (PFC) and the Rural Electrification Corporation (REC). These loans are to be backed by state government guarantees and are to be used to clear the pending dues to power generating companies, as on June 2020.


While the non-state government debt of the state-owned discoms witnessed a sharp decline from Rs.3.61 billion as of March 2015 to Rs. 2.59 billion as of March 2017 following the debt takeover by state governments under the UDAY scheme, the non-state government debt levels have again increased to Rs. 3.87 billion as on March 2019. Also, the gross debt for state-owned discoms increased to Rs. 4.78 billion as on March 2019 from Rs. 4.04 billion as on March 2015.The increase in debt levels is driven by discoms in the states of Tamil Nadu, Uttar Pradesh, Kerala, Madhya Pradesh and Telangana. Apart from capex-related debt, the increase in debt levels in these states is towards funding the losses, RA and receivables from state government (subsidy) and state government bodies (electricity bills). The large loss levels have also resulted in a negative net worth of Rs. 806 billion as of March 2019 for state- owned discoms at the all-India level. Further, the leverage ratio (total debt to OPBDITA) for the state-owned discoms at the all-India level remains high at 23.9 times in FY2019 and coverage ratios remain weak with interest coverage ratio of 0.4 times in FY2019.


The subsidy dependence for discoms is estimated to remain high at more than Rs. 1.2 trillion constituting 16% of the discom revenues at the all-India level, given the continuing free power supply to agriculture pump sets in most states and highly subsidised supply to certain sections of domestic consumers. This in turn exposes the discoms to delays and inadequacy of subsidy payments from the state governments. The subsidy dependence has been increasing over the years, owing to the lack of tariff revision despite an increase in the cost of supply. The subsidy dependence remains relatively high for discoms in the states of Andhra Pradesh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh. The discoms remain exposed to delays in realisation of subsidy from the respective state governments and the inadequacy of the subsidy in relation to the cost of supply.Apart the subsidy support from the state government, the tariffs to domestic and agriculture consumers are also cross-subsidised by higher tariffs to industrial and commercial consumers. The National Tariff Policy stipulates that the regulators and discoms should progressively rationalise the tariffs to keep the retail tariffs across consumer categories within +/-20% of the average cost of supply. However, as seen from the exhibit here, the cross subsidisation remains at more than 120%, especially with respect to the tariffs charged to the commercial customers. While the cross-subsidisation is below 120% for HT industrial consumers in few states, the cross-subsidisation remains at or more than 120% across all the states. The average billing rate for the HT industrial customers remains above Rs. 7-8 per unit across the states and the average billing rate for commercial consumers remains above Rs. 9-10 across most states. This in turn adversely impacts the competitiveness of the tariff offered by the discoms against the tariff offered by third party power generators under the open access route, especially in the context of declining tariffs for solar power generation. A reduction in cross-subsidy/tariff rationalisation would require the discoms to either increase the tariff charged to domestic and agriculture consumers or recovery higher subsidy from the state government.


In contrast to the weak performance of the state-owned discoms, the performance of the distribution utilities owned by private corporates remains healthy over the years. This is supported by superior operating efficiencies as reflected from the lower-than-normative distribution losses and healthy collection efficiencies. As shown in the exhibit here, the distribution losses in the licence area operations of Tata Power Delhi Distribution Limited (TPDDL) (Delhi), Torrent Power Limited (TPL) (Ahmedabad, Gandhinagar & Surat) and CESC Limited (Kolkata & Howarh) have remained less than 10% against the all-India AT&C loss level of more than 20%. In fact, the distribution losses for Torrent Power Limited remain at less than 5.0% in the Ahmedabad, Gandhinagar and Surat areas in FY2020. These utilities have been able to lower the distribution losses over the years supported by improving the metering, billing and collection mechanism, along with upgrading the distribution infrastructure.


Given the less-than-satisfactory progress shown by most of the state-owned discoms in improving the operational and financial performance of discoms, the Union Government proposed privatisation of the discoms as a measure to revive the distribution segment, along with other measures like direct benefit transfer for subsidy and smart metering programme. In line with this, the Government of India announced privatisation of discoms in Union Territories (UTs) in May 2020. Thereafter, tenders were issued for privatisation of discoms in UTs of Daman & Diu (D&D), Dadra & Nagar Haveli (DNH) and Chandigarh. Torrent Power has emerged as the highest bidder for majority stake in discoms of D&D and DNH, quoting a bid of Rs. 555 crore for a 51% stake, as per industry sources. The discoms in these two UTs have high operating efficiencies with distribution losses remaining below 5.0% and a proportion of C&I customers remaining above 90%. In the recent past, the state government of Odisha had privatized its four discoms through the public private partnership (PPP) model to The Tata Power Company Limited. Under this bid, Tata Power will hold 51% stake in the new licensee and the balance 49% is owned by the Government of Odisha. Given the high prevailing AT&C losses of more than 30%, the loss reduction remains one of the key objectives of the privatisation process. The exhibit here shows the AT&C loss trajectory commitment provided by the winning bidder for one of the discoms in Odisha, wherein the losses are projected to reduce from prevailing level of more than 35% to less than 15% over a 10-year period. Apart from the AT&C loss reduction, the bidders quoted the premium over the reserve price for acquiring the 51% stake in the new licence. The comparison of the quoted equity value for 51% stake in the new licensees of DNH plus D&D and Odisha is provided in the table below. One can note that the equity value per unit sale in the distribution area is much higher in case of the DNH and D&D discoms against the Odisha discoms, considering the superior operating efficiency and profitable operations in DNH and D&D areas.


The state-owned discoms in the interim, could look at multiple measures to achieve a reduction in loss levels including reduction in distribution losses through use of smart meters, use of distributed solar projects for supply of power to agriculture consumers to lower the cross-subsidisation and raising tariffs in a gradual manner without any tariff shock to the consumers.


As illustrated in the exhibit here, a 5% reduction in distribution losses along with the use of distribution solar projects for supply to agriculture consumers to the extent of 30% of their consumption requirement is expected to yield savings of close to Rs. 350 billion. This assumes solar power tariff of Rs. 2.5 per unit, in line with the tariff discovered for such a programme in Andhra Pradesh. Also, a similar programme is being implemented by Energy Efficiency Services Limited (EESL: joint venture of four power sector PSUs of Government of India) in the states of Maharashtra and Goa. EESL is setting up small scale solar power plants on the surplus land available with the state power utilities, with the objective to supply this power to agriculture feeders. Apart from savings in power purchase cost (PPC), the distributed solar projects would also yield savings through lower T&D losses. The installation of smart meters at the all-India level would require an investment of Rs. 1.2 trillion. The Union Budget for FY2022 announced that a revamped reforms-based result- oriented scheme would be launched for discoms with an outlay of over Rs. 3 lakh crore to be spent over five years. A major part of this outlay is expected to be towards smart meters and upgrading distribution infrastructure. This investment can be recovered through savings in T&D losses over a period.

Credit profile of state-owned discoms in most states constrained by weak operating efficiencies, inadequate tariffs in relation to cost of supply and large regulatory asset position

  • ICRA has 12 ratings in the power distribution segment comprising 11 state-owned discoms and one private distribution utility. Within the 11 ratings for state-owned discoms, four ratings are based on the guarantee from the respective state government.
  • All the ratings in the power distribution segment are in the investment grade. The ratings in the AA category constitute four discoms in Gujarat and one private discom in Delhi, supported by healthy operating efficiencies, cost reflective tariffs and timely pass-through of cost variations to consumers.
  • The ratings in A category constitute one discom in Karnataka on a standalone basis and the state-owned utility of Tamil Nadu backed by the state government guarantee. The ratings in the BBB category constitute two ratings for Karnataka discoms on a standalone basis and three ratings for discoms in Rajasthan backed by state government guarantee. The unsupported ratings for the utilities in Tamil Nadu and Rajasthan are in the non-investment grade. Despite the monopolistic nature of the business, the ratings for state-owned discoms (except in Gujarat and few discoms in Karnataka) are constrained because of inadequate tariffs in relation to the cost of supply leading to large accumulated losses and regulatory asset position and higher than regulatory approved distribution losses.
  • Over the past six years, the sector witnessed nine upgrades primarily for the discoms in Gujarat and one discom in Karnataka. On the other hand, the downgrades have remained low at three, which is related to the state-owned discom of West Bengal, wherein the rating has been withdrawn now. While there are no upgrades or downgrades in this segment in 10M FY2021, the outlook on the long-term rating for two discoms in Karnataka was revised to Negative, considering the built-up in receivables and regulatory assets along with the adverse impact of Covid-19 on collections in Q1 FY2021.

Click to download:ICRA-Power-Sector-Outlook-for-Power-Distribution-Segment-March-2021.

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  1. I am glad to learn this valuable information


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