The Delhi Government's decision to slash electricity user charges could impact its financial position unless the Arvind Kejriwal Government undertakes a drive to ensure 100 per cent metering simultaneously to cut the losses related to leakages in distribution. Subsidies and inefficiencies in the power sector are among the biggest causes of concern in State finances. The Government's decision to subsidise half the price of 400 units per metered connection goes against the advice of power and State finance experts at the Centre.
"The States need to address the problem of losses in the power sector in a time-bound manner," was one of the major recommendations of the Thirteenth Finance Commission (TFC). "The power sector in most States is beset with high technical and commercial losses, irrational power tariffs and inefficient distribution and transmission infrastructure, resulting in huge losses... Most of the State Power Utilities (SPUs) have negative financial flows," the TFC report had noted adding that "subsidy for the power sector is the largest component of State Government subsidies".
The TFC had made recommendations on Centre-State finances for the period 2010 to 2015. Its report was released in December 2009.
The TFC had also commissioned a study to ascertain the impact financial performance of SPUs has on States' finances. As the SPUs are owned by States, their finances have a direct bearing on States' finances. According to the findings of the study, the aggregate impact of the support to SPUs on State finances amounted to about Rs. 30,000 crore in 2007-08. Out of this, direct subsidy provided by State Governments amounted to about Rs. 18,000 crore. Guarantees extended on loans raised by the power sector constituted 36 per cent of the total guarantees extended by State Governments in 2007-08.
A Planning Commission report on the power sector for the 12 Five Year Plan says that the total borrowings of State Distribution Companies or DISCOMs touched Rs.1,77,602 Cr as on 31.03.2010 and total interest charged from State utilities in 2009-10 was Rs.15,651 Cr. A major recommendation of the report is that 100 per cent metering should be ensured.
The Reserve Bank has also taken cognizance of the difficult financial situations of DISCOMs and their attempts to bridge cash losses using short-term borrowings. In order to bridge the gap between revenue and expenditure and to service interest on borrowing, States resort to short-term borrowing and even divert long-term loans to bridge cash losses.
"It is seen that the tariff is not appropriate to meet the cost of supply of electricity," the Planning Commission report says. "This hinders the sustainability of distribution companies."
It recommends that issues that need to be addressed are default in payment, non-metering of consumers, no proper energy accounting/ auditing, inadequate upgradation of the distribution system. "State Governments may have to examine the possibility of increasing the tariff in respect of agriculture and domestic sector or providing adequate revenue subsidy," the report says.
Mr. Kejriwal's Government has also indicated that the Comptroller and Auditor General of India (CAG) could be requested to audit the two private sector power DISCOMs in Delhi. The CAG had earlier carried out a study of the issues impacting the financial performance of Power Distribution Utilities in India. The study had covered 24 utilities. The issues identified included cross subsidies (by industrial users of agricultural users) and tariff not being rational. "Unless the tariff are made rational and losses are not contained, DISCOMs will reach at break down level due to financial imprudence," the CAG had found.
Commercial viability of the distribution companies can be restored by eliminating the gap between Average Revenue realised (ARR) and Average Cost of Supply (ACS), several government committees have recommended.
The gap between the Average Cost of Supply (ACS) and Average Revenue Realised (ARR) is widening and has increased to Rs.0.73 per unit in 2009-10 from Rs.0.37 per unit in 2007-08 on subsidy realized basis, according to Power Finance Corporation report on "Performance of State Power Utilities" for the year. The cash losses of utilities selling power directly to consumers increased from Rs.17,620 Cr. in 2007-08 to Rs.42,415 Cr. in 2009-10, according to the report. The cumulative book losses of the State utilities increased from Rs.79,339 Cr. as on 31.03.2009 to Rs.1,06,247 Cr. at the end of year 2009-10.