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Govt's help to power distribution companies needs states support

K.R. Balasubramanyam     July 31, 2012
A majority of the power distribution firms in India - owned mostly by state governments - are unable to recover costs and are saddled with mounting losses . Together, the utilities are staring at a debt of close to Rs 2 trillion.

The Centre has now put its best foot forward to rescue the distribution companies and prevent their collapse. But its financial restructuring plan (FRP) comes with riders. As part of the proposed deal, the state governments will have to take over half of the short-term loans of their distribution firms by issuing bonds to lenders that can carry a maturity period of 15 years. Banks and financial institutions will reschedule the rest of the loans, repayable in seven years, with a moratorium on payment of interest and principal in the first three years. A state accepting the FRP offer, however, will need to revise electricity tariffs to realistic levels and bring down distribution losses. The whole exercise is aimed at ensuring that the average recovery from consumers stays above the cost of supply.

{quote}"The exercise will be meaningful only if the states show commitment to save their utilities from further bleeding. We must remember we are also dragging the banking system into the debt trap," says Kameswara Rao, Executive Director at audit and consultancy firm, PWC India.

The Council of Power Utilities (COPU), an association of all power utilities, argues that most of the problems of distribution companies are on account of costs over which they have no control. "There are many costs such as those related to the Pollution Control Board, law and order, irrigation etc, which increase a utility's costs. If other ministries too share these costs, it will ease the burden on distribution companies," argues COPU Director General C.V. Jagannatha Varma. Almost a third of the power generated is used by irrigation pumpsets and the ministries concerned could share a part of these costs, he says.


Ten years ago, the Union government had taken a similar initiative when the losses accumulated by distribution utilities were just about Rs 10,000 crore. This time though the Centre has done its homework and is prodding the states to revise tariffs and curb losses. If the states fall in line and agree to restructure power sector loans, it could well pave the way for the entry of more private players into electricity distribution and lead to the much needed overhaul of the sector. But it remains to be seen how many ruling political parties rise above populism to accept the Centre's deal and cede control over distribution companies.

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