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Power sector reforms could make consumers pay more for electricity

Consumers will have to fork out more for using electricity from next year as power sector reforms kick in to bail out loss-making utilities run by state governments.

S.P.S. Pannu | September 22, 2012 | Updated 13:36 IST

Consumers will have to fork out more for using electricity from next year as power sector reforms kick in to bail out loss-making utilities run by state governments.

The proposal, expected to be cleared by the Cabinet Committee on Economic Affairs on September 25, makes it mandatory for cash-strapped state governments wanting to avail of the financial restructuring package to raise tariffs in order to bridge the gap between the average cost of supply of electricity and the average revenue realised so that power sector becomes economically viable.

According to the proposal, a copy of which is available with MAIL TODAY, state electricity regulatory commissions must allow the state discoms to revise tariffs on the 1st of April every year "so that the impact of tariff revision is fully realised during the financial year".

The Central government proposes to put up a war chest of Rs 28,500 crore to help state governments wanting to come onboard.

The proposal also provides for an incentive for cutting aggregate technical and commercial (AT&C) loss due to pilferage which will cost the Central government about Rs 1,500 crore per annum at an all-India level. This scheme will be available for three years and will entail an allocation of Rs 4,500 crore.

State governments that participate in the scheme will get a capital reimbursement of 25 per cent on the repayment of the principal amount as an incentive from the Centre for which around Rs 24,000 crore will be set aside.

REVIVAL PLAN FOR SECTOR

  • Proposed power reforms make it mandatory for cashstrapped state governments wanting to avail of the financial restructuring package to raise tariffs in order bridge the gap between the average cost of supply of electricity and the average revenue realised
  • State electricity regulatory commissions must allow the state discoms to revise tariffs on the 1st of April every year so that the impact of tariff revision is fully realised during the financial year
  • The proposal also provides for an incentive for cutting aggregate technical and commercial loss due to pilferage which will cost the Central government about Rs 1,500 cr per annum at an all-India level
  • Eligibility for the grant will arise only if the gap between the cost of supplying electricity and the tariff charged from consumers is reduced by at least 25 per cent during the year
It will provide a grant equal to the additional energy saved through a reduction in AT&C loss.

However, eligibility for the grant will arise only if the gap between the cost of supplying electricity and the tariff charged from consumers is reduced by at least 25 per cent during the year.

This will translate into higher charges for consumers.

The proposal envisages state governments taking over 50 per cent of the outstanding short-term liabilities that power distribution companies (discoms) owe to banks, officially estimated at around Rs 1.9 lakh crore as on March 31, 2012.

The debt will be first converted into bonds issued by the discoms to participating banks duly backed by the state government guarantee.

Commercial banks will then restructure the remaining part of the 50 per cent debt to enable the discoms to repay their loans on easier terms, which will include a three-year moratorium on the principal amount. Banks will extend the best possible terms for rescheduled loans to improve the economic viability of the discoms.

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The bailout proposal also provides for a separate arrangement for Rajasthan, Tamil Nadu, Haryana and Uttar Pradesh for financing the operational losses and interest for the first three years in these focus states.

The rationale behind the bailout is that the fragile health of the discoms and the systemic flaws in their functioning has the potential of adversely impacting not only the power sector but the financial sector as well since most of the loans have been extended by public sector banks.

Thus, there is a need for immediate and short-term measures where the discoms and the state governments take direct responsibility in ensuring that they are nursed back to health, and bank loans do not turn into non-productive assets (NPAs).

The state governments should also be able to furnish a commitment to discharge their debt service obligation in the long run.

The states are expected to take over the 50-per cent liability during the next two to five years by issuing special securities in favour of banks in a phased manner keeping in mind the fiscal space.

The state governments are also expected to provide full support to discoms for repayment of interest and principal amount to banks.

The power ministry in consultation with the finance ministry will set up a transfer finance mechanism in support of the restructuring effort of the state government.

However, the proposed restructuring of loans is to be accompanied by concrete and measurable action by the discoms and states to improve the operational performance of the distribution utilities without which the proposed exercise may turn out to be a mere temporary measure.

The proposal makes it clear that if the discoms and the state governments do not meet the conditions, they cannot avail of any grant under the scheme.

Courtesy: Mail Today

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