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DISCOMS: Why Do They Need A 90,000-crore Bailout?

To provide respite, the government undertook initiatives such as the 2015 UDAY (Ujjawal Discom Assurance Yojana). However, the DISCOMs were still running into loss. This is primarily due to three reasons:

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Earlier this year, Rs. 20 lakh crore stimuli were announced by Prime Minister Narendra Modi in response to the economic shock of Covid-19. Out of this, 90,000 crore were designated to DISCOMS (Power Distribution Companies). This is a significant amount for a single domain for our country. Why did the DISCOMs need such a massive bailout?

DISCOMS are the utilities that purchase from power generating companies and retail it to customers. Electricity generation, electricity transmission to industries, commercial establishments, agriculture consumers, and homes is a long-drawn process, which involves multiple stakeholders. Firstly, electricity is supplied by public sector players such as NTPC Ltd. or NHPC Ltd. or by the private sector energy producers such as TATA Power, and Adani Power. The electricity then moves through a transmission grid system, which is dominated by state-owned companies such as PowerGrid and state transmission utilities. The last mile is where the DISCOMS step in. They are operated mainly by state governments. However, in cities like Delhi, Mumbai, Kolkata, and Ahmedabad, and a few tier two cities, private companies own the distribution network. 

DISCOMS sign a Power Purchase Agreement(s) with generation companies on a long-term basis and have obligations to pay for the energy they use and fixed cost for the plant’s capacity charges. DISCOMs in turn recover the total costs from the end consumers. The fact is that DISCOMs are unable to recover full costs and have been unable to meet their contractual financial obligations. The poor financial condition of DISCOMs has a debilitating and cascading impact upstream on the financial health of the transmission companies, the power generation companies, manufacturing industry, fuel supply companies, and overall energy infrastructure. Consequently, it affects the end consumers, and they suffer due to poor quality of power and lack of assured and continuous supply of electricity. 

Despite having a system in place, DISCOMs have been in poor financial condition and there are historic reasons for this situation. Power being a concurrent subject, it has been buffeted with political interference for decades. Electricity as a commodity has often being employed to win favors from a section of society, either given for free or at throwaway prices. This has impaired the DISCOMs ability to recover without receiving a heavy dose of financial support from the central government.

To provide respite, the government undertook initiatives such as the 2015 UDAY (Ujjawal Discom Assurance Yojana). However, the DISCOMs were still running into loss. This is primarily due to three reasons:

  1. The electricity in India is cross-subsidized by industries in the agriculture and domestic domain as well as establishments like shopping arenas. This adversely affects the competitiveness and efficiency of the industry.
  2. There is the endemic problem of high A&T (Aggregate Transmission and Distribution Losses), including electricity theft along the transmission route. In developed countries, these would be below 5-7% whereas in India the national average would be a whopping 30%-35%.
  3. Unpaid consumer bills of Rs 1.8 lakh crore and mounting.

Further, the DISCOMs have also been at the receiving end of the pandemic. With a decline in electricity consumption at offices, they have incurred an 80% loss of revenue. The revenues have fallen to Rs. 12,000 crore from Rs. 55,000 crore in the billing cycle last year. To add insult to injury, the government's PRAAPTI (or Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal shows that DISCOMs owe about Rs 87,000 crore to power generators. 

The financial strain of DISCOMs have not only hit power producers but have also added stress to the banking sector. The stimulus will be given in the form of a loan, which will thus include interest payment. Though the state governments are expected to provide a guarantee for such loans, it does not address the fundamental problems. Besides the history of DISCOMs handling finances does not generate confidence. The banks will have to face the burden of supplying money to DISCOMs, in addition to the already crippling burden of the Non-Performing Assets that they must deal with.

Kandarp Patel MD & CEO of Adani Electricity, said “Given the present situation of power producers and consumers, 90,000 crore seems to be a rational investment but only a stop-gap solution. Supporting the positive move by the government”.

He added, “Distribution Sector losses are substantive in nature with impact of both external challenges and poor performance. These funds are sufficient to give relief to the Distribution companies but need to be coupled with sustained & substantive efforts on part of the Distribution companies to improve their performance parameters.”

This move will thus help DISCOMS clear their dues with electricity generating companies, who in turn can clear their dues with suppliers. Consequently, it will ease the working capital woes of the manufacturing industry, suppliers, vendors, and even Coal India Limited and contract miners. The entire cycle of electricity generation and consumption will hope to look for viability again for all stakeholders involved, including the end consumer.

To prevent this kind of financial burden to become endemic, the government has decided the DISCOMs should be privatized, and the beginning will be made by privatizing the DISCOMS of the Union Territories. They will also serve as a model for other states to follow suit. While this is a positive step, there are many more things the government can do. The focus should be on reducing transmission and distribution line losses, by targeting them to reach a level of 10% from the present 30-40% in some states. We need a complete overhaul of electricity companies and their deliverables. The government must also reconsider subsidies on electricity and try to bring them in line with the macroeconomic situation. 

In light of this thought Patel further stated: “Subsidy is always an interim measure and can never become a permanent solution. Accordingly, in India as well Subsidy has served its purpose in supporting those in need. In the long run as well, cross-subsidies shall not cease to exist but shall seek to serve only those in need. Having said that, there is an immediate scope for rationalizing Cross-Subsidies.”

While the government is offering a substantial amount to DISCOMs, one must keep in mind that it is ultimately the taxpayer’s money. The government must ensure such blunders do not recur and the money is used judiciously.

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