New Delhi: The National Democratic Alliance (NDA) government is exploring a radical plan to help bring financial discipline to state electricity distribution companies (discoms) by limiting state governments’ borrowing.

The move comes against the backdrop of a crisis at discoms due to their poor financial health, which has led to delayed payment to generation utilities. According to the broad contours of the plan, the finance ministry may withhold permission to the state to borrow to the extent of electricity losses not funded by the respective state governments.

“The idea is to make discoms’ borrowing conditional to their performance," said a senior Union government official, requesting anonymity.

Under the Fiscal Responsibility and Budget Management Act, states must limit their borrowing to 3% of gross state domestic product. As of September 2015the total debt of all state-owned discoms was around 2.45 trillion, with 80,000 crore serviced by the states. Also, the annual discom losses in FY16, FY17 and FY18 were funded through borrowings.

According to government information reviewed by Mint, “Shortfall of subsidies and other reasons such as regulatory deferral of revenues and lack of adherence to aggregate technical and commercial losses are leading to losses of discoms. These losses have to be funded through discom bonds backed by state guarantee or state development loans bonds as per the Ujwal Discom Assurance Yojana (UDAY)." UDAY was launched to turn around debt-ridden state discoms.

Discoms are the weakest link in the electricity value chain, plagued by low collection, increase in power purchase cost, inadequate tariff hikes and subsidy disbursement, and mounting dues from government departments. This has resulted in discoms having poor payment records.

Combined with a plan to limit discom loans of Power Finance Corp. Ltd (PFC) and REC Ltd to capital expenditure projects, the idea is to prompt state government departments such as police and other essential services to make timely payments to discoms. PFC and REC are India’s largest power sector lenders, with reported assets of $43 billion and $37 billion, respectively.

“Government department dues getting delayed lead to cash losses of discoms, even though (these) get accrued as booked income. However, this causes problem in cash flow management in discoms, increases the requirements of working capital and leads to delay in payment of gencos (power generation companies). Therefore, such delays on part of one state have repercussions on the complete power sector value chain and in entities beyond the boundaries of their own states," said the information reviewed by Mint.

Given the delay in tariff orders by the respective State Electricity Regulatory Commissions leading to revenue shortfall of discoms, the Union government is also of the view that such shortfalls should be bridged by states’ subsidies. If the shortfall is not being taken care of by the respective state governments, the finance ministry may withhold permission to the state to borrow to the extent of such shortfalls.

“We are looking at ways and means through which state government and discoms get their act right," said a second Union government official, requesting anonymity.

In an attempt to ensure timely payments by states to electricity generation utilities, the government has already made it mandatory for state discoms to offer letters of credit as part of the payment security mechanisms in power purchase agreements. Also, the NDA government wants state power regulators to ensure regular tariff revision and put an end to creating so-called regulatory assets, as it seeks to enforce financial discipline at state electricity discoms.

In addition, the government plans to convert all electricity meters into smart prepaid meters by 2022.

A regulatory asset is created when the regulator accepts certain expenditures but does not factor them in while determining the present tariff. The expenditures are adjusted with future tariffs and, in the interim, are accounted for as regulatory assets.

Queries emailed to the spokespeople of the ministries of finance and power on 6 August remained unanswered.

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