State-owned power generation firms have to become commercially viable: Crisil

Aggregate external debt of State-owned electricity distribution companies (discoms) is set to increase to pre-Ujwal Discom Assurance Yojana (UDAY) levels of Rs. 2.6 lakh crore by the end of this fiscal, according to Crisil’s analysis of discoms in 15 States, which account for 85% of the aggregate losses.

With most States having limited fiscal headroom, continuous financial support to their discoms may be difficult. So discoms have to become commercially viable through prudent tariff hikes and a material reduction in aggregate technical and commercial (AT&C) losses, said the Crisil statement.

As per the MoUs States had signed under UDAY in fiscal 2016, their discoms were to initiate structural reforms by reducing AT&C losses by 900 basis points (bps) to about 15% in fiscal 2019, and also implement regular tariff hikes of 5-6% per annum. In lieu, State governments took over three-fourths of discom debt, thus reducing the interest cost burden. While discoms enjoyed the benefit of debt reduction, structural reforms have been slow to come by.

For instance, AT&C losses reduced by only 400 bps by December 2018 from pre-UDAY levels and the average tariff increase were a paltry 3% per annum.

‘Potential for losses’

“Further improvement in operations may face challenges because the focus on new rural connections without adequate tariff hikes can increase losses,” said Subodh Rai, senior director, Crisil Ratings.

“Add to that the funding needs for budgeted capital expenditure, and the external debt of discoms would balloon to about Rs. 2.6 lakh crore by the end of fiscal 2020.” That arithmetic is based on the assumption of average tariff increase of 2%, and partial funding of losses through State grants.