SEBs need a recharge

India's power distribution sector, which mainly comprises the State electricity boards (SEB), is going through a turbulent phase yet again. But the troubles this time around seem to be far bigger. Current losses for these companies, before accounting for the state subsidy, are approximately Rs 70,000 crore. Much of losses were due lower tariffs not matching the rise in cost of procurement of power and high transmission and distribution (AT&C) losses.

The distribution sector's troubles will have adverse spill-over effects on various stakeholders in power. We look at the impact of these deteriorating financials on segments such as power generators and financiers such as banks and other infrastructure finance companies.

Owing to political pressure, SEBs have refrained from hiking tariffs frequently, though their cost of procuring power was rising. According to Power Finance Corporation's report on performance of power distribution sector, these companies are losing close to Rs 0.85 paise on every unit of power consumed. Higher transmission losses that stand at 30 per cent have also added to this loss.

On a positive note, many of the state distribution utilities have revised their tariffs in recent times. Though this hike in tariff may not be sufficient to turnaround utilities, it will give temporary respite. Over the long term, the Shunglu committee recommendations, if implemented, will also significantly improve the SEBs financial position.

So what is the way out for SEBs?A tariff hike every year or reduction in AT&C losses sharply would considerably alter the SEBs' financial position.

For instance, a fall of 5 percentage points in AT&C losses would earn Rs 12,000 crore revenues more for SEBs. This accounts for almost 40 per cent of the book losses of SEBs in March 2010.

Power generators' troubles

Even as the total installed capacity has risen by 41 per cent from March 2007, the SEBs are increasingly depending on private power producers such as Adani Power, Lanco Infratech and JSW Energy, which is increasing the power costs.

In addition to this, rise in fuel costs applies upward pressure on costs of power. The cost of supply of power has gone up from Rs 2.76 per unit in 2006-07 to Rs 3.54 per unit in 2009-10.

Since 2010, the costs have gone up higher. For instance, the average realisations for NTPC (which accounts for close to a quarter of overall power generation) has gone up to Rs 3 per unit in the December 2011 quarter from 2.6 per unit during the same quarter in the preceding year.

Given that the cost of buying power is on the rise, the tariff hikes are clearly not sufficient with the loss gap widening. SEBs are, therefore, resorting to load shedding to cut costs. Load-shedding doesn't augur well with power generation companies which may see fall in load factor.

NTPC, for instance, witnessed marginal decline in power generation during the nine months in spite of adding capacities during this period. Power generators are also not able to take the ‘merchant power' route since it has also lost its sheen. The merchant power (selling power other than long-term power purchase agreements) tariffs are close to half of what was witnessed in 2008-09.

SEBs' mounting receivables are also taking a toll on power generation companies' cash flows. The debtor days of NTPC has increased from 45 days in December 2010 to 77 days in December 2011. The situation is worse with SEBs that are buying through merchant route.

Some power generation companies have also locked-in at low tariffs through competitive bidding. These companies are trying to negotiate with SEBs for purchase price revision to reflect rise in cost of generation. But SEBs are unwilling to comply.

Going forward, the tariffs in competitive bidding will be more realistic.

Impact on power financiers

Major financiers for power distribution sector are public sector banks, PFC and Rural Electrification Corporation. According to the Shinglu committee report on distribution sector reforms, banks' loan exposure to the distribution sector increased almost 780 per cent to Rs 72,185 crore in 2010 from 2005.

This accounts for around 2 per cent of the current loan book of all banks put together.

The committee report also points out that State government guarantees around 42 per cent of these loans.

To this extent, the book is protected. Therefore, the default of couple of SEBs will not in itself increase the risk for banks; the risk comes from other customers also being affected by issues with distribution companies.

Delayed payment by distribution companies can put the finances of generation companies in trouble. This is a risk for banks and financial companies which are already resorting to restructuring loans due to execution delays and rising interest costs.

Secondly, a few private projects which have locked-in at low tariffs will also be incurring losses.

Power financiers such as PFC and REC have more long-term loans; however, strict implementation of reforms proposed by the Shunglu committee would only reduce risk in their case. It is important for SEBs to put their act together soon as around Rs 13.5 lakh crore of investments are expected to be made in power sector during the 12{+t}{+h} Plan.

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