State-government controlled power distribution companies had accumulated debt of Rs 1.9 lakh crore, as of March 31, 2011. This was primarily due to the non-revision of tariffs, which increased the gap between the cost of supply and average tariff to 145 paise a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998-99. "The scheme will tie states to a particular reform path and enable utilities to become technically, operationally and financially efficient, and recover their cost of operations," P Umashankar, Union power secretary, said.
Half the short-term debt of the distribution companies will be taken over by state governments over a two- to five-year period. The modus operandi will be: first the debt will be converted into special bonds. The distribution firms or electricity boards will issue the bonds to their creditors which are banks and financial institutions. The bonds will have state government guarantee.
Later, the debt will be transferred to states. On their part, the states have to ensure that the bonds are issued within the targets prescribed in the Financial Restructuring and Budget Management Act and also within their net borrowing ceilings set by the 13th finance commission.
The remaining half of the debt will have a three-year moratorium on repayment of principal. But the distribution companies cannot use fresh loans to repay the loans.
The centre will create a transitional finance mechanism to the support states with cash grants in their task to restructure the power distributors' debt.
The restructuring and rescheduling of loans would require concrete and measurable action by the distribution companies and the states to improve the operational performance of the utilities, said a government statement issued after the CCEA meeting. To monitor the progress of the turnaround plan, two committees at the state and central levels are proposed to be formed.
The Centre would put in place a transitional finance mechanism for states that have an accelerated reduction in aggregated technical and commercial losses. "If one per cent of the losses are reduced, it will correspond with a central outgo of Rs 1,500 crore as incentive," said Umashankar. Though the move was welcomed by power producers, Ashok Khurana, director general, Association of Power Producers, said, "The loss reduction and tariff increase plans would need to be monitored very strictly so that the utilities are able to break even in the next three-four years. In the interim, they need to be provided adequate transition finance."
Rajasthan, Tamil Nadu, Haryana and Uttar Pradesh are expected to avail themselves of the scheme, which will be effective once notified and remain open till December 2012, unless extended by the Union government.
States will be eligible for transitional finance only if the gap between the average revenue realised and cost of supply is cut by at least 25 per cent during a year over 2010-11. A nodal bank will be nominated for every state or discom.