The operating gap is likely to turn positive post restructuring, but the key lies in implementation
Moneylife Digital Team
The estimated the losses for state distribution companies (Discoms), before accounting for government subsidy, in the country is around Rs80,000 crore in FY12, up from around Rs63,500 crore in FY10, according to ICRA research. Hence, the restructuring the debt of Discoms was approved by the Cabinet Committee on Economic Affairs (CCEA). The scheme lists various measures required to be taken by Discoms and state governments for achieving the financial turnaround of the Discoms by restructuring their debts with support through a Transitional Finance Mechanism by the central government.
Nomura expects an operating break-even for most ‘problem’ Discoms post the restructuring plan. According to its research on the recently published FY11 financial statements and the FY13 tariff orders of SEBs (state electricity boards) the brokerage expects that the operating gap for a majority of the Discoms (Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Punjab and Haryana), is likely to turn positive due to a combination of lower interest expense derived from the FRP, tariff hikes and fixed cost rationalization. According to the research firm, Power Finance Corporation and Rural Electrification Corporation, which have committed to extend Rs17,000 crore each of transition loans to tide over losses in the interim, would be the biggest beneficiaries. However, implementation is the key.
Read analysis of other Nomura reports here. In addition to the tariff hikes done in FY12 and FY13 so far, tighter control on the delivered cost of power (largely fixed costs) is mainly responsible for reductions in the Discoms’ operating gaps, says the report. However, the actual delivered cost of power could vary compared to the tariff order and the gap has become manageable for most states.
Rajasthan will need a longer trajectory to close its operating gap, UP is expected to see a tariff hike over the next few weeks, according to the report. The financial restructuring plan links the central government’s incentives to a trajectory of 25% gap reduction every year with FY11 as the benchmark year and the FY13-15(F) as the eligible years. UP shows a much larger deficit compared to the target gap for FY13, which could potentially get addressed post the impending tariff hike. Assuming all states adhere to the trajectory for FY14F and FY15F, only Rajasthan, UP and TN would likely report operating losses post subsidy.
The main reason for the losses is either limited or absence of tariff revision for prolonged periods besides inability to control distribution loss levels in some of these states. In an earlier report ICRA research observed that tariff revisions have been carried out for discoms across many states for FY12. However, the quantum of hikes is well short of what is required for full recovery of costs in most states and is also accompanied by significant delays. Even with respect to tariff petition for FY13 and true-up for past periods (up to FY11).