Photo: Indranil Bhaumik/Mint
Photo: Indranil Bhaumik/Mint

Govt to states: Increase power tariff, cut theft

Suggestions aimed to prevent utilities being bailed out by state govts from slipping back into losses

New Delhi: The Narendra Modi government has urged state electricity regulators to increase power tariffs and ensure that power distribution companies cut power theft and operational costs to prevent utilities being bailed out by state governments from slipping back into losses.

Power utilities in states such as Rajasthan, Haryana, Jharkhand, Punjab, Tamil Nadu, Madhya Pradesh and Uttar Pradesh, where power is now provided below the cost of generation and delivery, will be asked to pass on about 30% of the per-unit losses to consumers through tariff increases. There would also be massive campaigns in these states to arrest power theft in order to reduce the remaining substantial gap between power cost and the price charged from consumers, central and state government officials said.

Tariff revisions and steps to boost efficiency in power distribution are covered by the tripartite agreements being signed by states, their power utilities and the Union power ministry under the Ujwal Discom Assurance Yojana (Uday), a rescue package for indebted power utilities.

The power ministry has in a presentation to the forum of state electricity regulators recently highlighted that the outstanding loan liabilities of state-run power utilities of 4 trillion are ultimately being borne by tax payers with interest, an outcome of the inefficiency of distribution companies and delays in tariff revision.

“We have sensitized the state regulators about the need for timely tariff revision. Delays in this lead to stress in other sectors of the economy too, especially banking," said a government official privy to the development.

The central government has told regulators that state governments are taking a massive risk by taking over debt of power utilities, which in many cases, more than doubles the “theoretical fiscal deficit" of states and could eat into their funds meant for development.

Sanjay Agarwal, principal secretary (energy) of the Uttar Pradesh government, said that about 30-40% of the 1.76 difference in the cost of power and the price charged to consumer for every unit of power in the state have to be brought down by tariff revisions. The remaining gap would be reduced to zero through other efficiency improvement measures by 2019-20, he said. Uttar Pradesh took over 75% of the outstanding loan liabilities of five loss-making state-owned power utilities amounting to 39,900 crore on Saturday. In Rajasthan, power distribution companies like the Jaipur Vidyut Vitran Nigam Ltd and its counterparts in Jodhpur and Ajmer have to bring down to zero the existing difference of 3.6 per unit between their cost of power and the price charged from consumer. The success of the state’s takeover of 60,500 crore of debt incurred by three state utilities, announced last Wednesday, depends on achieving this milestone.

“There is difference of 3.6 per unit between our power delivery cost and price realization. Out of this, 1.7 accounts for interest payments. With the debt restructuring, we will be spared of this cost. However, we have to remove the remaining difference by tariff revisions and improvements in efficiency," said an official from one of the distribution companies. According to central government estimates, Rajastan’s “theoretical" fiscal deficit as a percentage of state GDP will go up to 9% from 3% now on account of taking over the debt and converting it eventually into equity or grant.

Under the Uday scheme, the central government will only count states’ extra interest payment liability on the taken over debt in calculating their fiscal deficit, not the principal amount of debt taken over. States are mandated to maintain a 3% fiscal deficit, which indicates their borrowing limits. However, bond dealers often take into account offline items too, rather than going by the fiscal deficit figures projected by states. Also, after a five year moratorium on loan repayment, states will have to find the resources for squaring off this liability. Rajasthan’s interest outgo as a percentage of its total revenue receipts is expected to go up from about 10.5% to 14% after the debt takeover.

Power distribution, mostly done by state-owned utilities or electricity boards, has so far been a loss making business as states are reluctant to pass on the entire cost of power to the consumers, resulting in huge liabilities for utilities, besides power cuts. Chhattisgarh and Jharkhand are the other states that have so far announced debt takeover of utilities under the Uday scheme.

Experts said that state power utilities ought to use the debt takeover scheme provisions and the recently revised power tariff policy to improve performance.

“Regulators must analyse their licensees’ tariff filings more diligently to ensure distribution companies are taking steps to capture these efficiency gains. Also, governments must introduce private participation in at least 25% of the distribution circles. This will create benchmark competition and push the state owned areas improve service delivery and performance," said Kameswara Rao, leader of energy utilities and mining at PricewaterhouseCoopers (PwC) in India.