Tariff increases offer a ray of hope for Discom’s

Two recent articles highlight the changes taking place in Discom’s. The article in Business Standard mentioned that last year, some Disocm’s were able to raise tariffs to an extent that was not seen in the past.
 

 
This is very encouraging for many reasons – a healthy Discom will be able to work towards providing adequate and quality power – a simple change that we believe will have a knock-on effect on the economy of the state. This is also very good news for the REC markets – we have always said that the key stumbling block in enforcing RPO regulations will be the financially troubled Discoms. If that situation were to be remedied, it will be very good for the renewable energy sector in general and REC markets in particular.
The article also provides some interesting data:

According to data from the power ministry, the average cost of supply (ACS) for all power companies has clearly far exceeded the average revenue realised on a subsidy basis. In 2008-09, the average costs stood at Rs 3.41/kwh versus revenues of Rs 2.91/kwh; in 2007-8, costs were Rs 2.93/kwh versus revenues of Rs 2.65/kwh; and in 2006-07, costs were Rs 2.75/kwh compared to revenues of Rs 2.49/kwh

A note of caution is needed here – these increases are just a beginning and it’s a long way before Discoms turn back into the black. This has been mentioned by CERC in the past, and also by the Business Standard in the article:

However, it’s not as if the struggle for financial viability is over just yet. These kinds of tariff increases need to happen for the next two-three years continuously in order to make a substantial improvement in the financial position of the discoms, REC’s director of finance, H D Khunteta, tells Business Standard.

And:

On account of the cost increases, the tariff would be required to increase at a CAGR of six per cent over the next five years, according to a report by CRISIL.

The second article ran in the Times of India. It mentions a recent restructuring of the loan to Discom’s. The center has approved a scheme of restructuring that will require the state governments to take on the entire burden of Rs 1.5 lakh crore. According to the article:

Instead, the finance ministry is insisting that states, which are responsible for the mess, do their bit by infusing equity and taking over the liabilities. In addition, they have to agree to reducing losses due to theft and raise tariffs to reflect the real cost of electricity. For states, this is a second lifeline in less than a decade as they had earlier issued bonds to power generation companies and promised reforms. Given their track record, the Centre is not keen that banks be forced to take a haircut.
The restructuring was necessitated as discoms were under financial strain and unable to pay their dues to the lenders. State governments have not been permitting an increase in electricity tariffs, while cost has gone up, resulting in stagnant revenues and losses.

We hope that it works. As the article in the Business Standard points out, this approach has been tried in the past with only limited success:

This bleak situation existed even as far back as a decade ago. So much so that in 2001-02, a committee headed by Montek Singh Ahluwalia had to bail out utilities by issuing long-term bonds to be discharged by the state governments. Some experts believe that if the government does not take action on a continuous basis to improve the financial health of discoms, the situation that arose in 2001-02 may recur.