Waning hope for UDAY!

Although state discoms have managed to leverage UDAY by paring financial losses from Rs.51,589.51 crore in FY16 to Rs.34,826.87 in FY17, a marginal decrease in AT&C losses seems to be the bone of contention, as what has been envisaged has not been achieved yet, barring bailing-out non-performers.

Electricity is a concurrent subject under the Constitution of India. However, the responsibility to provide electricity to consumers primarily rests with the states. Thermal power (coal, gas, oil) is the major source of electricity generation in India (68.3 per cent of power generation in FY17). Private sector participation in power generation increased to 42.36 per cent in March 2017 from 20.7 per cent in January 2011. Power sector in India has undergone many changes since independence, but over the past one and a half decades these changes have mostly been associated with the financial viability of the sector. As a result, the power sector witnessed a number of bail outs since 2002, the latest being the Ujwal Discom Assurance Yojna (UDAY).

Since independence, the sector policies barely witnessed any change until 1991, when India initiated a wide range of economic reforms. In 1991, the Electricity Supply Act was amended to allow private players, including foreign investors, to enter power generation and long-term power purchase agreements with utilities. However, nothing was done to address and rectify the reasons causing distress in the power sector. Thereafter, the Electricity Regulatory Commission Act was passed in 1998 paving way for setting up the Central Electricity Regulatory Commission (CERC) and to bring regulatory consistency across the states by setting up the State Electricity Regulatory Commission (SERC).

However, comprehensive power sector reforms were introduced in the country mainly with the enactment of the Electricity Act 2003. The Act mainly focussed on rationalising tariff and lowering cross subsidisation, increasing competition and protecting consumer interests. Unbundling of the state electricity boards (SEBs) into separate entities responsible for generation, transmission and distribution ( T&D) to increase efficiency, and reducing AT&C losses through multi -year tariff fixation approach by state power regulators were other salient features of the Act.

Most states have now unbundled their SEBs, but these entities have largely remained state government entities. Only a handful of discoms have been privatised. Power sector reforms initiated after the Electricity Act 2003 had varying degrees of impact. However, Aggregate Technical & Commercial (AT&C) losses reduced to 24.62 per cent in financial year 2015 (FY15) (FY03: 36.64 per cent). Experts believe reduction in AT&C losses benefited the sector and economy. However, the pace of reduction has been slow and there is ample scope for quicker reduction of these losses. Meanwhile, tariff increase can provide an initial push to stabilise discoms' finances, however, in the long-run, efficiency gain from AT&C loss reduction, and improvement in billing and collection efficiency would provide structural stability to discoms' finances.

Recently, Minister of State (IC) for Power and New & Renewable Energy, Raj Kumar Singh, in a written reply to a question in Lok Sabha on whether UDAY has been successful in reducing discoms' financial losses, informed that as per the data furnished by the participating States of UDAY scheme, financial losses of UDAY states have trimmed from Rs 51,589.51 crore in FY 16 to Rs 34,826.87 crore in FY17. However, reduction in AT& C losses does not seem to be encouraging. As per the data submitted by states, participating states have achieved an improvement of just one per cent and Rs 0.17 a unit in the gap between Average Cost of Supply (ACS) and Average Revenue Realized (ARR) in FY17.

Financial Support to SEBs
Private sector participation in the power sector is limited with only a handful of projects floating in public-private partnership mode. Privatisation is limited to discoms and generation and transmission of erstwhile SEBs largely rests on state entities. State governments are continuously providing assistance to state power utilities through state budget. In September 2003, state governments issued power bonds aggregating Rs 28,900 crore to central public sector undertakings to clear the outstanding dues of their respective SEBs. These power bonds remained on the books of state governments and were liquidated only by April 2016.

The second package, FRP1 for state discoms was approved by the Cabinet Committee on Economic Affairs on 24 September 2012. Although the state power utilities were servicing the loans taken from Power Finance Corporation (PFC) and Rural Electrification Corporation by 2015, discoms failed to service loans taken from banks in a timely manner, demonstrating the failure of the 2003 scheme and also the 2012 FRP. As a result, the Ministry of Power launched UDAY, which was approved by Union Cabinet on November 5, 2015.

State support to power utilities mainly consists of subsidies, subventions, contribution to equity, direct loans and guaranteeing loans raised by state power utilities. State support through capital outlays, loans and advances and current expenditure during FY01-FY17 (budget estimate, BE), increased at a CAGR of 14.4 per cent. On an average, state support to power sector during FY01-FY17 was 1.19 per cent of GDP. Following the launch of UDAY, state government's support to power sector has increased further.

Bond with the best
As on September 30, 2015, total outstanding liabilities of discoms were around Rs 4,30,000 crore. Excluding debt relating to restructured accelerated power development and reforms programme (R-APDRP) and FRP (2012 package), total debt stood at Rs 3,96,000 crore.

Under UDAY, state governments were to convert 75 per cent of the amount into state bonds and the remaining 25 per cent was to be converted by discoms as state guaranteed bonds, or have it repriced by financial institutions. As of FY17, 27 states and four union territories (Puducherry) joined UDAY.

Their aggregate debt of Rs 3,82,000 crore accounted 97 per cent of the total discom debt. However, of Rs 3,82,000 crore, only Rs 2,69,000 crore qualified for restructuring as the balance debt was restructured under R-APDRP and FRP. Till FY17, the total bonds issued by the state governments and discoms stood at Rs 2,33,000 crore. Of this, Rs 2,09,000 crore was issued by 15 states and Rs 23,860 crore was issued by discoms of Bihar, Rajasthan and Uttar Pradesh, implying 86.50 per cent of the debt of 15 states qualifying under UDAY, has already been issued.

So far, Bihar, Chhattisgarh, Jammu and Kashmir, Jharkhand, Madhya Pradesh and Uttar Pradesh have issued bonds for the entire amount qualifying under UDAY (refer to state-wise bond issuances on page no 32). By FY17, the bond issuance amount of the nine states pending under UDAY was Rs 36,278 crore. These bonds will either be issued by discoms or by state depending on fiscal space available to each state as per their respective Fiscal Responsibility and Budget Management Act.

Of the states that signed UDAY but not issued bonds are Arunachal Pradesh, Goa, Gujarat, Kerala, Manipur, Mizoram, Puducherry, Sikkim, Tripura and Uttarakhand. These states joined UDAY for operational improvement. The remaining two states are Assam and Karnataka. While the debt of Assam Power Distribution Company as on September 30, 2015 stood at Rs 1,510 crore (entire debt was from the Government of Assam), debt of Karnataka discoms stood at Rs 9,838 crore (Rs 62 crore from the Government of Karnataka and Rs 9,776 crore from financial institutions). Even in case of Puducherry, power department had debt of Rs 4 crore as on September 30, 2015, but since the department is an arm of the state government, this debt was already part of state government's debt.

'Nagaland, Andaman &Nicobar Islands, Dadra & Nagar Haveli and Daman & Diu joined UDAY on 20th Nov2017 while Chandigarh, Lakshdweep and Odisha are going to join soon,' says Vikas Gaba, Partner- Strategy and Operation, IGH, KPMG. In case of Nagaland, power is handled by the power department, and therefore, its debt is already part of the state government's debt. In FY15, Nagaland had a debt of Rs 328 crore from financial institutions. Odisha and West Bengal - each have three discoms. However, two discoms of West Bengal are private companies. Combined debt of discoms/power department of the aforesaid states from financial institutions, was Rs 12,820 crore.

Perform or perish
A comparison between target and actual achievement of financial and operational performance of discoms under UDAY suggests varying degree of success by different discoms with reference to the targets. The scheme envisaged an improvement in financial and operational performance through efficiency gain (reduction in AT&C losses) and monitoring (setting up of monitoring framework and action plan). Although 31 states joined UDAY in FY17, these states do not have an action plan yet (as at FY17); five states were yet to appoint a nodal officer and 14 states yet to constitute a state level monitoring committee.

Andhra Pradesh, Karnataka, Gujarat and Maharashtra are overall top performers till Q1FY18. Goa, Gujarat and Rajasthan achieved their AT&C loss reduction target in the 9MFY17. Of the 10 states, which joined UDAY in FY16, AT&C loss reduction trajectory of six states - Bihar, Chhattisgarh, Jammu and Kashmir, Punjab, Uttar Pradesh and Uttarakhand do not inspire confidence (refer state-wise performance of AT&C loss reduction page no 35). Only Gujarat and Rajasthan have been able to achieve AT&C loss reduction trajectory in 9MFY17. In fact, the AT&C loss of six states - Bihar, Chhattisgarh, Jammu and Kashmir, Punjab, Uttar Pradesh and Uttarakhand in 9MFY17 was higher than FY16. Haryana and Jharkhand although reduced AT&C losses in 9MFY17, it still was higher than the nine-month target.

According to Kameswara Rao, Partner, PricewaterhouseCoopers, discom finances have certainly improved post UDAY, with relief coming in both, interest costs and in repayments. The larger question is whether this sufficiently addresses the problem or not. Considering that the saving in interest costs (47 p/kWh average) are only a part of the total gap of 170 p/kWh that discoms today suffer, the current actions are not sufficient. That said, for Rao, the bigger issue is that the actions necessary to reduce AT&C losses to 15 per cent (resulting in savings of about 85 p/kWh) have not happened in a comprehensive or consistent manner. As a result, the accumulated financial losses will continue to grow to the extent not bridged by government subsidy.

Impact analysis
UDAY has impacted discoms' finances favourably, both on the cost and revenue front. Interest cost is over 8 per cent of discoms' cost; it is estimated that UDAY has resulted in Rs 11,989 crore savings in interest cost in the ninth month of financial year 2017 ((9MFY17). At the same time, savings in power purchase cost is estimated to be Rs 2,100 crore for Andhra Pradesh, Bihar, Assam, Haryana and Jharkhand. CSPDCL turned profitable in the first quarter of FY17 (1QFY17), Gujarat increased profitability in 9MFY17, DHBVN turned profitable in 2QFY17 and UHBVN turned profitable in 3QFY17. While Gujarat was profitable and Chhattisgarh had low losses, turnaround of Haryana discoms (DHBVN and UHBVN) marks the success of UDAY.

However, the scheme's success will depend on the turnaround's pace in discoms of Andhra Pradesh, Haryana (maintains), Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh.

Below par achievements
According to Devika Malik, AnalystùPublic Finance, India Ratings (Ind-Ra), one of the reasons for below par achievements in reduction of AT&C losses and ACS - ARR gap is less than 50 per cent achievement in six of the 10 crucial operational parameters. While performance of feeder metering both in rural and urban areas is close to 90 per cent and more, the same for smart metering needs concentrated effort for improvement. Industry analysts believe improvements in under-performing parameters such as smart metering, distribution transformer (DT) metering (rural), DT metering (urban) and usage of LED bulbs is vital for achieving operational and the consequent financial success under UDAY.

Tariff hikes alone will have a limited impact on the financials of discoms. On the contrary, a steep tariff hike often acts as an incentive for non-payment. Of the 31 states and union territories that have joined UDAY, only two states (Kerala and Uttar Pradesh) have so far not filed their multi-year tariff (MYT)/aggregate revenue requirement for FY18. While tariff orders have been issued by the regulators for 15 states, it is yet to be issued for 11 states. Arunachal Pradesh did not propose any tariff hike for FY18. Average tariff hike in Bihar, Karnataka, Madhya Pradesh and Uttarakhand is higher than the tariff hike proposed in their respective UDAY memorandum of understanding (MoUs).

Bihar electricity regulatory commission has approved a tariff hike of about 55 per cent for FY18 as against 84 per cent tariff hike proposed by two discoms in their aggregate revenue requirement filing to the regulator. However, average tariff hike will be 28 per cent, if the state government extends subsidy support to below poverty line families and rural consumers as proposed in UDAY MoU.

Here, Vivek Sharma, Senior Director, Energy & Natural Resources, CRISIL Infrastructure Advisory believes that tariffs are a politically sensitive issue. 'Rajasthan had to roll back its increase for agricultural consumers by almost 25 paise leading to additional burden of Rs 500 crore on the state. Similar demands were raised in Uttarakhand to roll back tariff increase of five per cent. Given that many elections are due next fiscal, adequate tariff increases are doubtful, which may result in additional under-recoveries for discoms,' he reasoned out.

State and discom performance
Based on the achievements of states and discoms on various parameters versus commitments made in UDAY MoUs, states and discoms are ranked (subject to data availability) on their quarterly performance. As on March 31, 2017, Gujarat, Karnataka, Maharashtra, Telangana and Himachal Pradesh secured the top five positions. The bottom five positions were occupied by Kerala, Jammu and Kashmir, and Uttar Pradesh (joint 19th rank), Jharkhand and Tamil Nadu. Individual discom ranking has a significant impact on the overall ranking of the state. For instance, Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) ranked 24th as against 17th rank of Dakshin Haryana Bijli Vitran Nigam Limited (DHBVNL) pulled down Haryana states ranking to sixth position. Similarly, Jodhpur Vidhyut Vitran Nigam Limited (JdVVNL) which is ranked 34th dragged Rajasthan to the 10th position.

The taking over of discom's debt by the state government in their own books and converting them as equity, loan or grants to discoms has indeed played out in favour of discoms. However, it has not yet shown any tangible improvement in financial operations. Of 40 discoms (information on outstanding dues of which is available (as on 31 March 2017), 25 have payable outstanding exceeding 90 days for power purchased. Only 15 discoms have succeeded in doing so. However, receivable position of discoms has shown improvement, and 19 discoms have receivable (outstanding dues as a percentage of yearly turnovers) of less than 90 days.

Impact of UDAY
Restructured debt of discoms was mainly from banks. After issuance of UDAY bonds, they were  moved to banks' treasury portfolio from lending portfolio. Benefit to banking sector from UDAY is in the form of freeing up of capital. Ind-Ra believes an estimated Rs 22,000 crore is potentially freed up, thus equipping banks to bolster their balance-sheets.

On the profit and loss side, banks have had both positive (improved asset quality) and negative (interest income loss) impact on their balance-sheets.
Apart from improved asset quality, the banking sector will also gain from the improved cash flow of independent power producers and lower delinquencies from them. According to Ind-Ra's calculation, the average coupon on UDAY bonds is 8.11 per cent as against the interest rate of 12 per cent-14 per cent charged by banks, resulting in interest income loss. However, if the banks hold the UDAY bonds in Held-for-Trading or Available-for-Sale categories, they may benefit from the mark-to-market gains.

- Rahul kamat


Best practices
Although it is too early to assess the overall impact of UDAY scheme on operational and financial health of the discoms, if successful strategies are adopted across the region, it will increase the chances of faster operational and financial turnaround of discoms. Some of these successful strategies are:

Prepaid meters - Manipur
The Manipur State Power Distribution Company Limited (MSPDCL) has installed prepaid metering to improve operational efficiency. The monthly revenue collection nearly doubled to Rs 14.66 crore in FY16 (FY13: Rs 7.38 crore). The MSPDCL is using name and shame campaign to bring down AT&C losses.

Spot billing - Bihar
Bihar discoms have implemented their own billing software both in rural and urban areas, and have initiated spot billing through web-based mobile application with meter-reader's picture on electricity bill for consumer satisfaction.

Mhara Gaon Jagmag Gaon and Urban Feeder Sanitisation - Haryana
Under Mhara Gaon Jagmag Gaon (MGJG) scheme, launched on 1 July 2015, in 173 rural feeders (target 519 feeders), electromechanical meters were replaced by electronics meters and bare conductors were replaced by AB cables. Subsequent to the MGJG scheme, losses on 106 feeders have reduced. A similar process is being implemented under urban feeder sanitisation scheme and this has resulted in losses in urban areas declining to 21.17 per cent in FY17 (FY16: 27.64 per cent).

Public Private Partnership - Rajasthan
Rajasthan has started providing electricity distribution franchises to private sector. Distribution franchise for Kota, Bharatpur and Bikaner city is awarded to CESC and Ajmer to Tata Power. RFP for Bhilwara city for meter, billing and collection model is under the bidding process to be followed by Jodhpur.