Financial restructuring of Sate DISCOMs

Power tariffs set to rise as govt. clears restructuring package

Power tariffs across the country are set to rise as the government on Monday cleared the much awaited proposal to restructure the debt of state electricity boards (SEBs) and power distribution companies (discoms), which have accrued losses to the tune of Rs 1.9 lakh crore (as of March 31, 2011).

• The plan, which has been approved by a cabinet panel headed by Prime Minister Manmohan Singh, includes measures such as regular revisions in power tariffs and state governments taking over half of the short-term debt of distribution companies, most of which are owned by state governments.
• According to the contours of the restructuring package, half of the outstanding short term liabilities upto March 31, 2012 will be taken over by State Governments.
• This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Governments guarantee.
• The rest of the discoms` debt will be restructured by rescheduling loans and the discoms will be provided a moratorium on the principal and the best possible terms for this restructuring to ensure viability of this effort.
• It may be noted that in order to look into the issues of State Discoms and to suggest a strategy for the turnaround of the distribution sector, the Planning Commission constituted an Expert Group under the chairmanship of B K Chaturvedi, Member (Energy), Planning Commission.
• The approved scheme is formulated based on the report of the Expert Group and deliberations in the PMO and Ministry of Finance.

Mandatory conditions

In an attempt to restore the power purchasing capacity of the debt ridden discoms and also to enable Banks to recover their loans, the Cabinet Committee on Economic Affairs has brought a list of mandatory conditions that need to be followed by all state governments. These are as under:

• State Governments will have to convert all their loans to equity.
• All outstanding energy bills of the state departments or agencies as on March 31, 2012 are to be paid by November 30, 2012.
• Elimination of the gap between average cost of supply (ACS) and average revenue requirement (ARR) within the period of moratorium of the bonds.
• Involvement of private sector in state distribution sector through franchisee arrangements or any other mode of private participation to be prepared within a year by the Discoms.
• Tariff orders will be notified by April 30 of each financial year.
• Fuel cost adjustment will be allowed as directed by APTEL.
• FRP is to include targets for progressive reduction in Short Term Power (STP) purchase by the State Discoms.
• Subsidy should be paid upfront by the State government.
• Prepaid meters will be installed by March 31, 2013 for all Government consumers.
• The audited accounts for and up to FY 2010-11 are to be finalized by September 30, 2012 and of FY 2011-12 by December 31, 2012.

Salient features of the bailout package

The salient features of the debt restructuring scheme are as follows:

• 50 percent of the outstanding short term liabilities upto March 31, 2012 will be taken over by State Governments. They will be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Governments guarantee.
• Takeover of liability by State Governments from Discoms in the next 2-5 years by way of special securities and repayment and interest payment to be done by State Governments till the date of takeover.
• Restructuring the balance 50 percent Short Term Loan by rescheduling loans and providing moratorium on principal and the best possible erms for this restructuring to ensure viability of this effort.
• The restructuring/reschedulement of loan is to be accompanied by concrete and measurable action by the Discoms/States to improve the operational performance of the distribution utilities.
• For monitoring the progress of the turnaround plan, two committees at State and Central levels respectively are proposed to be formed.
• Central Government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under RAPDRP and capital reimbursement support of 25 percent of principal repayment by the State Governments on the liability taken over by the State Governments under the scheme.
• Ministry of Power will bring out a draft model legislation on State Electricity Distribution, Responsibility bill, after due inter-ministerial consultation within a period of twelve months from the approval of the Scheme.
• States will enact the legislation within twelve months from the date of circulation of model legislation by Ministry of Power to mandate the compliance of the provisions of FRP.