Anatomy of DISCOM Losses in India

 

As per RBI report on state finances (State Finances- A risk analysis, June 22, Chart 9, RBI bulletin) below is the financial performance of DISCOM in terms of losses, long term debt, State wise break down of debt and overdues to Generating companies (Gencos).



Figure 1: Financial health of DISCOMs

Source: Reserve Bank of India - RBI Bulletin

The combined Distribution Company (DISCOM) losses amount to Rs.59,000 Cr in FY 2022 (ETenergyworld report, Jun 2022, ETenergyworld.com) and the total debt of DISCOMs in FY 21-22 is Rs. 6.2 lakh cr (i.e. ~3% of GDP) excluding the amount it owes to power generators as of Dec 2020 (ET Bureau, April 2023, The Economic times). Average cost of supply (ACS) to Average Revenue Realized (ARR) is Rs. 0.57 (ETenergyworld report, Jun 2022, ETenergyworld.com per unit).

The State governments has bailed out many DISCOMs through taking over debt or through equity infusion. The size of the bailout has been up to 5.2%2 (State Finances- A risk analysis, June 22, Table 7, RBI bulletin) of GSDP (FY 20-21) for some states.

 The Figure below (State Finances- A risk analysis, June 22, Table 7, RBI bulletin) represents that various state governments have in the past tried to bail out the DISCOMs multiple times by infusing more equity and giving long term debt, however the losses have not really contained after bailout. On the other hand, it has been a huge pressure in the state finances. The amount of the bailout amounted to 2.3% of GSDP of state on an average and for state like Tamil Nadu it is 5.2% of GSDP.


Figure 2: Impact of Bailouts in State finances

Source: Reserve Bank of India - RBI Bulletin

 4. Anatomy of DISCOM losses:

Before getting into the alternative, it is important to understand the mechanism of tariff setting and how it impacts the operational viability of DISCOMs. Tariff is set by State electricity regulatory authority (SERCs) and Central electricity regulatory authority (CERC) for various states and UTs respectively. The regulatory body are supposed to be autonomous, but the government plays a crucial role in appointment/termination of SERC and CERC officials. 

At the heart of the analysis is a departure from accrual-based accounting that DISCOMS follow to a cash-based accounting which reflects the true cash position. The accrual-based accounting takes into consideration promises of subsidy, trade receivables etc. which almost never tells the operational challenges of DISCOM5 (Tyagi and Tongia, Jun 2023, CSEP Impact paper).

A cash based analysis of DISCOM revenues and cost for the FY 19 reports (last audited report available) across 60 DISCOMs (Nikhil Tyagi and Rahul Tongia 2023, CSEP) shows that the tariff setting ex ante at the start of a fiscal year is actually cost reflective. However, the issues arise Ex-Post. The Ex Post cost rises by ~19% along with a fall in revenue. This changes the Ex ante tariff yielding 0.5% profit to a 22% gap in cash flow. This gap is partially funded by grants by govt. but still a 14% gap exists.

The figure below explains the composition of the gaps (Tyagi and Tongia, Jun 2023, Figure ES 1, CSEP Impact paper).



Figure 3: Composition of cost escalation and revenue shrinking from ex ante at the start of an FY to Ex Post at the end 

Source: Getting India’s Electricity Prices “Right”: It’s More Than Just Violations of the 20% Cross-Subsidy Limit - CSEP


As one can establish, there is a marginal surplus of Rs 0.04/KWh Ex ante. However, the cost escalation after initial Tariff setting on account of escalating cost of power purchase, operation and financial cost increase and distribution losses increases the cost to by Rs.1.19/KWh. Along with this, collection losses, change in bill rate and unpaid subsidy accounts for a decline in revenue by Rs.0.51/KWH. Overall, the net gap is Rs.1.64/Kwh which is offset by grants of 0.63/KWH leading to a net gap of Rs.1.01/KWh. Moreover, it is essential that the Ex-ante tariff needs to be trued up time to time during the FY to reflect the cost escalations and revenue shortfalls. The True Ups instead are not done for 2 years in a row leading to creation of regulatory asset and often they are not even cost reflective.

Given we understand the tariff setting and issues related to it, let us now look at the component wise operating gap in DISCOM books. 

The figure below represents component wise break up of DISCOM losses (Tongia, Devaguptapu, May 2023, Figure ES 2, CSEP, Impact paper):

 


Figure 4: Composition of operating Gap

Source: Breaking Down the Gap in DisCom Finances: Explaining the Causes of Missing Money - CSEP

As Tongia and Devaguptapu (2023, CSEP) points out in the figure above, billing and collection losses account only for 30% of the operating gap. Moreover, it is worth noting that between 33%-50% of outstanding billings are from government entities. Unpaid subsidy and works out to be only 13% of the losses. A striking 59% of the total losses are residual and almost entirely attributable to the tariff setting.

Given this, it is impossible to turnaround DISCOM balance sheet without turning around the DISCOM operating cash flow.


Lastly let us also understand the consolidated operating cash flow break up of DISCOMS to understand the magnitude of operating gap for all DISCOMS put together (Tongia, Devaguptapu, May 2023, Figure ES 1, CSEP, Impact paper)



 

Figure 5: DISCOM Cash flow and net operating gap

Source: https://csep.org/impact-paper/breaking-down-the-gap-in-discom-finances-explaining-the-causes-of-missing-money/ 

As the figure suggests, the revenue gap is INR 104,091cr consolidated for all DISCOMs.

This was an attempt to articulate how the electricity tariff system has created a systemic viability concern for DISCOM with the current commercial model accumulating loss every year for just operating. A overhaul in the Tariff designing and DISCOM ownership is the need of the hour.

References:

1)

2)    RBI report, June 2022, State finances-A Risk Analysis, RBI bulletin (Reserve Bank of India - RBI Bulletin)

3)    ETenergyworld report, Jun 2022, Power discoms' losses widened to Rs 59,000 crore in 2021-22: Report, ETenergyworld.com (Power discoms' losses widened to Rs 59,000 crore in 2021-22: Report, ET EnergyWorld (indiatimes.com)

4)    ET Bureau, April 2023, Discom debt surges 24% to Rs 6.2 lakh crore in 2021-22, The Economic times (india: Discom debt surges 24% to Rs 6.2 lakh crore in 2021-22 - The Economic Times (indiatimes.com)

5)    Nikhil Tyagi and Rahul Tongia, Jun 2023, Getting India’s Electricity Prices “Right”: It’s more than just violations of the 20% Cross-Subsidy limit, CSEP Impact paper (Getting India’s Electricity Prices “Right”: It’s More Than Just Violations of the 20% Cross-Subsidy Limit - CSEP)

6)    Rahul Tongia and Rajasekhar Devaguptapu, May 2023, Breaking down the gap in DISCOM Finances: Explaining the causes of missing money, CSEP Impact Paper (Breaking Down the Gap in DisCom Finances: Explaining the Causes of Missing Money - CSEP) 


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