Need to deal with discom losses on a state level: Expert

Sonia: We have been documenting how the health of the distribution companies (DISCOMs) has been so weak but the only numbers we have are as of 2013 state DISCOMs seeing a loss of almost Rs 1 lakh crore. What is the situation as of FY15, how much have the losses increased to and how long do you think it would take for any of them to come into the black, we spoke with the energy secretary of Andhra Pradesh a couple of weeks ago and he said it will take at least two-three years for the AP DISCOMs to get into the black?

Khurana: My idea is each DISCOM will take its own time because there are different realities for DISCOMs. Today approximately the accumulative losses of all the companies amount to over Rs 3 lakh crore and they are bleeding for about Rs 80,000 crore every year.

Question is we may have financial restructuring plans (FRPs) and all that but unless we are able to remove the inefficiency in the system and have cost reflective tariff, there is no way we can improve. They have been through two restructuring programmes so we need to now decide what is the way out and each state has to carve out its own plan and be serious about it. Frankly speaking it is not an issue of money, it is not an issue of technology, it is the issue of sustained political will to ensure that losses will come back.

If you are making 40 percent aggregate technical and commercial (AT&C) losses, no way you can run system over there. That is inhibiting them to buy power. If you see in the month of May last month we are the worst of the summer but plant load factor (PLF) went down, it has gone down from last year of 67 percent to 63 percent. 4 percent fall in PLF is basically because of their financial health and as Sanjay Sagar rightly said economic slowdown. If you analyse, we have spoken about consumption of one trillion units in 2014-2015 but if you analyse the consumption pattern over there, you will see industrial and commercial consumption has come down in the same year. Therefore, they are the subsidizing customers, they pay more to cover the losses of agriculture and the household consumers. When their consumption goes up and the losses increased to double because DISCOMs are not getting money from the better paying customers and they are supplying more to a loss paying customers. Therefore the aggregate difference between the revenue and the cost increases.

Latha: Can you give us some number for that industrial and commercial consumption fall, how much has demand from the industrial commercial segment fallen you think?

Khurana: I don’t have numbers available with me but we have checked it up only yesterday. The Central Electricity Authority (CEA) figures clearly show a fall in numbers of industrial and commercial in one trillion units. Therefore absolute number they may have increased, in percentages they have come down.

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Sonia: Do you have the number for how much is the loss that the states are incurring on every unit of power produced as of today?

Khurana: Average about Re 1 loss.

Latha: For the last 24-months or 12-months do you have some data on how much of new power generation went onstream and how much of new power demand came via power-purchase agreements (PPAs)? I think Sanjay Sagar gave us the impression that PPAs are zero except from one from the Andhra Pradesh state electricity board (SEB) which is now in the market but I am asking you for the last two years?

Khurana: In last three years - there is a CRISIL report -- we have added about 30,000 megawatt of power and we have had PPAs only for 8,500. As on today, the system has approximately 16,000-17,000 megawatt of power and another 4,000 of mine linkage power where they have the coal, they have achieved the COD, they do not have the PPA and they are stranded for want of PPAs.

Latha: What is the current position in terms of going above the heads of the DISCOMs and selling it to private parties, some state like Tamil Nadu allow that, is that the only state?

Khurana: Every state will allow you to sell directly to vendour but issue is of the charges. You have a cross-subsidy charge, you loading of losses then you have additional charge. When you add this four A, B, C, D components, the tariff becomes unviable and then there are constraints of transmission. When you combine all this, open access remain only in theory except for some states which are encouraging open access. We need to evolve a system, we said earlier, the cross-subsidy will progressively be reduced and become zero in five years, it has become more than 12 years cross-subsidy is still there and increasing because if you analyse, even the power tariff increases, which the states have done, the tariff increases have taken place at the cost of commercial and industrial not for subsidised customers. Therefore, that cross-subsidy difference also increases. The quality of tariff increase has not been appropriate. So we need to sit down and say how much of cross-subsidy can be given, fix upper limit and then ensure in next three-five years, it will become zero. So that every customer at least pays for cost reflective tariff and those who are vulnerable, who are poor, are subsidized state by the budget.

Sonia: How long do you think will this contraction in electricity output continue because what we are seeing is quite painful especially because for most of 2014 when we were in the middle of a slowdown almost every month there was double digit growth?

Sagar: The electricity output is directly sort of related to an uptick in the general economy of the country and it is expected that the efforts being made by the government are likely to sort of bear fruit in the second half of this fiscal and that is the time when we will start seeing a revival of growth in the demand and that in turn is going to see the revival in the electricity output. Without uptick in the general economy, I don’t see a demand revival taking place.

Latha: What is your sense in terms of when do we see at least this downturn of the power demand receding because now it is not one central government which moves, it is 28 state governments that we have to take along with us, you may see a one-odd Gujarat SEB and as we now spoke to the AP SEB which maybe turning the corner but how do you take along 27 other guys?

Khurana: My idea is that we have persuade the states and centre has to use its stake over there by withholding the funds but demand will only pick up when the economy picks up. If the economy remains tepid, the demand of power will remain tepid over there and then no DISCOM will hold back demand or will not buy power for industrial customers that they are paying. In fact, whenever they don’t buy power, they do not buy power when they will supply to household customers. So if industry demand picks up, commercial demand picks up, you will see electricity demand will pick up and the lag will become less.

Question is the PPAs. We have ourselves tied in the knot by public policy framework, we say you cannot supply power unless you have long-term PPA. There is no enabling framework in the system which ensures that PPAs are there. We added 20,000 megawatt capacity this year which is the largest since independence and we are going to add another about 16,000-17,000 next year but question is where are the buyers, where is the enabling framework by which these generators can go and supply directly to consumers if need be or to DISCOMs. We need to find a way out of this PPA problem because if you recall, recently the developers who won the operational mines, they can start mining the coal and supplying power of that approximately 4,000 megawatt without PPAs. What is their fault? So the government of India in consultation with state government need to find -- in case the bidding framework is not coming through, go for regulated framework because if NTPC with 35,000-38,000 megawatt can supply under section 62 why cant the private people go and supply in section 62? That reduces the risk.

Latha: What is section 62?

Khurana: We have two mechanisms of tariff determination. One is the price discovery through market, one is regulated. Price discovery through market will yield a very good rate if the competition is even and we do not have a regulated areas of fuel stock, transmission and the retail distribution. If you factor in all these risks like it generated today when he puts in a bid, he factors in the worst case scenario. In the first wave of bidding, he went very aggressive -- now he has become risk averse so it factors in all and if you see the bids of Tamil Nadu, Kerala, Rajasthan, UP, you will find the input cost is increased because generator is factoring 30 year worst case scenario. No one can take market risk, quantity risk, supplier risk for 30 years. Regulated tariffs take care of those risks and regulator adjust the tariff accordingly. There will be a drop of not less than Re 1 to Rs 1.35 paisa between the bids we are receiving now and the regulated because here the developer will know that in case situation goes adverse, he will be covered.

All regulators think that way today but we need to make government of India also think seriously on going back to section 62 till you have the scarcity conditions of coal and oftake and transmission.