Low international coal prices, auction of coal fields and the government’s target to produce one billion tonnes of the fuel by 2019-20 may help build a favourable environment for the Indian electricity sector. Analysts have started seeing light at the end of the tunnel, according to a report by brokerage Religare. To be sure, all these measures will come to naught if the state electricity boards do not clean up their acts. As the Religare report underlines, “Concerns at the distribution-end are the most serious."

The eight states that account for more than 80% of the accumulated distribution losses and had opted for the bailout package have failed to meet the performance criteria, according to Religare Institutional Research. These are Uttar Pradesh, Tamil Nadu, Rajasthan, Haryana, Bihar, Jharkhand, Andhra Pradesh and Telangana. “Power tariff hikes in these eight states have been a modest 4-10%. On an overall basis as well, the average tariff hike in the country has been (around) 5% in FY15 as against 14% and 7% for FY12 and FY13, respectively," it said in a note. According to the brokerage firm, the state boards are estimated to incur a cumulative pre-subsidy loss of around 1 trillion each in the current and previous fiscal years.

Despite the massive losses on selling power far below cost, the electricity boards are not making serious efforts to rectify them. Not only are tariff petitions delayed, the price hikes being sought by them for the 2015-16 are not sufficient to fill the revenue gap, says ratings agency Icra.

“Aggregate unrecovered revenue gap projected (including the gap arising out of true-up for the past period) as per tariff petitions filed by the distribution utilities in 11 states is estimated at 253 billion ( 25,300 crore), of which 86% is attributed to the utilities in the states of Andhra Pradesh, Bihar, Haryana, Punjab, Odisha and Telangana," Icra said in a note. “Even assuming the amortization period of five years for unrecovered revenue gap, additional tariff hike required to recover such revenue gap varies from 2% to 9% across these utilities, which is over and above the tariff hike being sought by the utilities."

The revenue gap is only part of the problem. Several electricity boards are yet to have the fuel and power purchase cost adjustment framework in place, Icra says. With fuel costs seeing frequent rises, the issue has been, of late, a bone of contention for many companies.

The writing on the wall has been there for some time now—reform the state electricity boards or risk undoing all the good work in the power sector. The good news is the task is not that difficult. The boards of Sikkim, West Bengal, Delhi, Punjab, Uttarakhand, Kerala, Gujarat and Maharashtra have been profitable in 2012-13. All that’s required is to follow their example.