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SHUNGLU COMMITTEE REPORT ON POWER DISTRIBUTION
SECTOR
q The Shunglu committee report has stressed on the need to reduce the
persistently high T&D losses. It has highlighted the franchise model in
Bhiwandi as a preferred mode for reduction in T&D losses.
q Given the issues with the sector, the committee does not see meaningful
reduction in T&D losses in the foreseeable future.
q For debt restructuring, the committee suggested setting up of a SPV to
buy out loans from SEBs.
q The outlook on the sector continues to remain negative in view of the
supply crunch of indigenous coal, decline in rupee further increasing the
cost of imported coal and deteriorating financials of the SEBs. In such a
scenario we remain largely cautious and prefer NTPC over the private sector
counterparts.
Unbundling of SEBs fail to produce the desired results -
The committee observed that for the purpose of reviewing the accounts of SEBs
(state electricity boards), it has ensured completion of accounts till Mar 2011 for
most utilities. However, the same could not be achieved in case of Bihar, Jharkhand
and UP as these utilities still retain the old structure (ie distribution, transmission and
generation remain under one entity). It notes that the unbundling of functions under
separate entities remains in form and not in substance as the management and financial
control remains centralized.
Losses masked under current assets:
The committee observed that significant increase in current assets from Rs 610 bn
in 2005 to Rs 1550 bn in 2010. The report hinted that part of the losses was shown
as increase in current assets (debtors and other current assets).
T&D loss reduction as important as tariff rationalisations
During the period 2005-2010, aggregate financial losses of SEBs were Rs 1790 bn
before subsidy due to gap of Rs 0.6/ unit between average cost and average revenue.
The committee believes that this gap could have been bridged through managerial
and operational improvement. Basically, the losses would have been manageable
had there been a meaningful reduction in technical and commercial losses
(T&D losses) even at the present tariff levels.
The committee observed that there was wide disparity between the T&D losses reported
across various areas within the state. Hence it has been suggested that the
regulator impose a surcharge over the basic tariff based on actual losses in a particular
area. Such surcharges would vary from area to area.
The committee observed that several regulators avoided sharp increase in tariffs (tariff
shocks) despite having validated the costs incurred. The gap is made good by the
regulator in the form of regulatory assets (to be converted into cash in due course of
time). This gap has reached significant proportions in states like TN, WB and
Haryana. The committee has recommended an end to this practice.
On R-APDRP, the committee observed that the R-APDRP is comprehensive and addresses
all the issues that need to be taken into account for seeking loan disbursals.
However, time taken in addressing preliminary issues is so long that actual capex at
Rs 30 bn for period ending Mar 2010 remains well below the desired levels. Also
billing information in several cases has been in sharp variance to the ground reality.
Franchise as the preferred model for loss reduction
The committee observed that the franchise model was more successful in implementation
as well as loss reduction. In case of Bhiwandi Franchise model, the committee
reported that loss reduction had been effected through better management practices
and improved surveillance as also due to better service to customers.
The franchise model scored over the PPP model (PPP) in that the former is based on
competitive bidding. Since several players are involved in the fray, the entire process
is transparent. In the private ownership model, it become difficult to value the assets
due to inadequate data and subjectivity involved in valuation of assets. Hence franchise
model should be the way forward, the committee opines.
Borrowings continue to be overwhelmingly financed by the banking sector. Given
the weakening debt repayment ability of the SEBs and the state governments alike,
the committee suggested the formation of SPVs to be set up as a corporate entity
consisting of a Chairperson appointed by the RBI. This SPV will be entitled to purchase
loans of banks provided the state govt meets certain conditions requiring
timely tariff revisions and improvement on technical and commercial fronts. The RBI
would provide for a line of credit to the SPV to purchase the loans of the banks.
Outlook on Power sector
The outlook on the sector continues to remain negative in view of the supply crunch
of indigenous coal, decline in rupee further increasing the cost of imported coal and
deteriorating financials of the SEBs. In such a scenario we remain largely negative
and prefer NTPC over the private sector counterparts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SHUNGLU COMMITTEE REPORT ON POWER DISTRIBUTION
SECTOR
q The Shunglu committee report has stressed on the need to reduce the
persistently high T&D losses. It has highlighted the franchise model in
Bhiwandi as a preferred mode for reduction in T&D losses.
q Given the issues with the sector, the committee does not see meaningful
reduction in T&D losses in the foreseeable future.
q For debt restructuring, the committee suggested setting up of a SPV to
buy out loans from SEBs.
q The outlook on the sector continues to remain negative in view of the
supply crunch of indigenous coal, decline in rupee further increasing the
cost of imported coal and deteriorating financials of the SEBs. In such a
scenario we remain largely cautious and prefer NTPC over the private sector
counterparts.
Unbundling of SEBs fail to produce the desired results -
The committee observed that for the purpose of reviewing the accounts of SEBs
(state electricity boards), it has ensured completion of accounts till Mar 2011 for
most utilities. However, the same could not be achieved in case of Bihar, Jharkhand
and UP as these utilities still retain the old structure (ie distribution, transmission and
generation remain under one entity). It notes that the unbundling of functions under
separate entities remains in form and not in substance as the management and financial
control remains centralized.
Losses masked under current assets:
The committee observed that significant increase in current assets from Rs 610 bn
in 2005 to Rs 1550 bn in 2010. The report hinted that part of the losses was shown
as increase in current assets (debtors and other current assets).
T&D loss reduction as important as tariff rationalisations
During the period 2005-2010, aggregate financial losses of SEBs were Rs 1790 bn
before subsidy due to gap of Rs 0.6/ unit between average cost and average revenue.
The committee believes that this gap could have been bridged through managerial
and operational improvement. Basically, the losses would have been manageable
had there been a meaningful reduction in technical and commercial losses
(T&D losses) even at the present tariff levels.
The committee observed that there was wide disparity between the T&D losses reported
across various areas within the state. Hence it has been suggested that the
regulator impose a surcharge over the basic tariff based on actual losses in a particular
area. Such surcharges would vary from area to area.
The committee observed that several regulators avoided sharp increase in tariffs (tariff
shocks) despite having validated the costs incurred. The gap is made good by the
regulator in the form of regulatory assets (to be converted into cash in due course of
time). This gap has reached significant proportions in states like TN, WB and
Haryana. The committee has recommended an end to this practice.
On R-APDRP, the committee observed that the R-APDRP is comprehensive and addresses
all the issues that need to be taken into account for seeking loan disbursals.
However, time taken in addressing preliminary issues is so long that actual capex at
Rs 30 bn for period ending Mar 2010 remains well below the desired levels. Also
billing information in several cases has been in sharp variance to the ground reality.
Franchise as the preferred model for loss reduction
The committee observed that the franchise model was more successful in implementation
as well as loss reduction. In case of Bhiwandi Franchise model, the committee
reported that loss reduction had been effected through better management practices
and improved surveillance as also due to better service to customers.
The franchise model scored over the PPP model (PPP) in that the former is based on
competitive bidding. Since several players are involved in the fray, the entire process
is transparent. In the private ownership model, it become difficult to value the assets
due to inadequate data and subjectivity involved in valuation of assets. Hence franchise
model should be the way forward, the committee opines.
Borrowings continue to be overwhelmingly financed by the banking sector. Given
the weakening debt repayment ability of the SEBs and the state governments alike,
the committee suggested the formation of SPVs to be set up as a corporate entity
consisting of a Chairperson appointed by the RBI. This SPV will be entitled to purchase
loans of banks provided the state govt meets certain conditions requiring
timely tariff revisions and improvement on technical and commercial fronts. The RBI
would provide for a line of credit to the SPV to purchase the loans of the banks.
Outlook on Power sector
The outlook on the sector continues to remain negative in view of the supply crunch
of indigenous coal, decline in rupee further increasing the cost of imported coal and
deteriorating financials of the SEBs. In such a scenario we remain largely negative
and prefer NTPC over the private sector counterparts.
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