Power distribution company reforms seem to be gathering steam. At a conference in July, state governments promised the Centre to cut losses by computerizing accounts, allowing annual tariff revisions and clearing outstanding dues to utilities, and pay subsidy upfront. Now, states are hiking power rates simply because they don’t have much of a choice.

For one, power costs are zooming due to dearer fuel, and increasing personnel and maintenance costs. Motilal Oswal Financial Services Ltd estimates that 56% of cost increases for distribution firms came from power costs alone in fiscal 2009 (FY09).

Secondly, with the fiscal deficit reeling out of control, the Centre may not bail out state electricity boards (SEBs). The Reserve Bank of India has also clamped down on banks’ short-term financing for loss-making SEBs, the Motilal Oswal report said.

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Sure, the Centre restructured SEB debt in 2001 after many of them defaulted on payments to power generators. However, the focus now seems to be on structural reforms, even if several of these measures have origin in the Electricity Act of 2003 and have been a long time in coming.

Graphic by Yogesh Kumar/Mint

But more importantly, 18 states now allow the pass-through of fuel cost increases without regulatory approval. The states have also accepted model tariff guidelines, an IIFL group report said. These include introducing differential tariffs, higher rates for loss-making areas, state electricity regulators deciding to take up changing power rates on their own accord (instead of waiting for a distribution company appeal) and so on.

Distribution companies made a combined loss of some 66,900 crore in FY11. Some estimates put accumulated losses at 1 trillion. Their inability to pay has led to ballooning receivables in the balance sheets of power generators and one of the key reasons for the latter’s poor performance. These losses will take quite some time to be wiped off, even with recent hikes.

However, in an environment where capacity is still being added slowly and fuel is scarce, a quick implementation of these reforms could provide some boost to power stocks.

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