ICRA expects the overall absolute level of subsidy dependence for power distribution companies (discoms) on an all-India basis to increase to estimated Rs. 60,000 crore for the 12 month period ending March 31, 2014, despite the positives, that come along with the implementation of Financial Restructuring Package (FRP) and overall cash flow/liquidity profile for the utilities which is expected to improve over the next 2-3 years as also the fact that Cabinet Committee on Economic Affairs' (CCEA's) approval for fuel supply mechanism would allow pass-through of cost for imported coal.
The increase in the overall subsidy dependence is attributed to a rise in the approved cost of supply for discoms by SERCs across the states on account of an increase in power purchase expenses and other fixed expenses. -Another factor would be, continued low tariffs for certain sections of consumers (mainly agricultural consumers) which remain heavily subsidized, including a free power policy in some states.
Importantly, although SERCs have allowed sharp tariff hikes in FY 2013-14 for subsidized consumer categories of utilities in states like Rajasthan, Tamil Nadu & Uttar Pradesh as a part of the tariff rationalization process so as to reduce cross-subsidy requirements, this has in turn led to increased subsidy dependence for the utilities in such states as state governments have borne the burden of tariff hike for such consumers. Also the power sector remains increasingly vulnerable to both INR-USD exchange rate & international coal price levels.
The State Electricity Regulatory Commissions (SERCs) in 21 states have issued tariff orders for FY 2013-14, and tariff hikes have been moderate ranging between 5 to 14%, thereby rendering tariff rationalization progress slow. Further, utilities in many states continue to delay filing for fuel and power purchase adjustment petitions , despite the principles of FPPCA in place and approved by SERCs.
Source - ET