Financial deficit of power distribution sector at highest ever: PFC

Annual rating reveals absolute cash-adjusted losses increased by 10% in the sector between FY19 and FY21

The financial health of the power distribution companies (discoms), which improved slightly in recent years, has been hit again, the annual rating of discoms by financing agency Power Finance Corporation (PFC) revealed. The financial deficit in the sector is “larger than previously recorded” and is widening because of declining profitability of discoms, it said.

The absolute cash-adjusted gap of the power distribution sector averaged around Rs 1.04 trillion and is nearly 1.4 times the recorded losses.

The report highlighted that sustained losses of the discoms have led to a liquidity crunch in the power distribution sector. It said the discoms’ current liabilities are nearly twice their overall liquid current asset value in financial year 2020-21 (FY21).

“Currently, discoms’ liquid assets are sufficient only to cover their generation, transmission, and operational liabilities. Clearing their lender obligations will take liquidating their non-liquid assets,” it said.

The report, which evaluates the financial and operational performance of discoms, has for the first time included privately-owned discoms. The discoms are rated primarily on account of their ACS-ARR (cost-revenue) gap, aggregate commercial & technical (AT&C) losses (operational losses), billing and collection efficiency, debt position and liquidity. Financial performance has the highest weighting, followed by operations and external impacts.

According to the report, absolute cash-adjusted losses increased by 10 per cent in the sector between FY19 and FY21. This was predominantly because of increasing per unit cash-adjusted ACS-ARR gap. In FY21, discoms on an average made a loss of Rs 0.93 per kWh (kilowatt-hour). It was Rs 0.83 per unit in FY19.

“This widening gap can be primarily attributed to stagnant AT&C losses and lack of cost-reflective tariffs in the sector,” the report said.

On AT&C losses, the PFC observed a stagnation after years of gradual decrease, which it said is especially concerning as it reflects the worsening of discoms’ operations.

After falling by an average of 0.9 per year over FY16-FY19, the national average AT&C losses have remained unchanged at 21 per cent for three years now.

The loss vortex in the power distribution sector has now infected other parts of the electricity supply chain with dues of discoms to power generating and transmission companies at a record high.

The dues rose to Rs 2.73 trillion or close to 174 days payable in FY21. In the previous fiscal, total debt in the sector stood at Rs 5.89 trillion, an increase of 19 per cent from FY19.

The PFC said a majority of the debt and payables in the sector are held by the worst performing discoms, many of which also have a declining performance trajectory.

All the discoms of Gujarat hold the top five positions on the rating metric, for 10 years now. They are now followed closely by Adani Electricity Mumbai, Torrent Power Ahmedabad, and Noida Power Company. The discoms of Uttar Pradesh, Madhya Pradesh, Tamil Nadu, Andhra Pradesh, and Bihar are in the bottom 10. Most privately-owned discoms have made it to the top 20.

State-owned discoms across the country are financially and operationally beleaguered despite the introduction of four reform schemes in the past 15 years. The earlier reform scheme, UDAY, concluded in FY20 with most of the states failing to meet their stipulated targets and they are still in the red. It had targeted to reduce national average AT&C losses to 15 per cent by FY21 and ACS-ARR gap to be in the negative with 100 per cent billing and collection efficiency. Those targets have been achieved.

The Union Budget last year announced a new scheme – the Revamped Distribution Sector Scheme (RDSS) – which seeks to improve the operational efficiencies and financial sustainability of all discoms/power departments (excluding private sector discoms) by providing conditional financial assistance.

The scheme has an outlay of Rs 3.03 trillion with an estimated gross budgetary support from the central government of Rs 97,631 crore. All the existing power sector reforms schemes would be subsumed into this umbrella programme.