Financial health of State Electricity Boards (SEBs) touched a new low in FY12.
Consolidated losses of state electricity distribution companies (DISCOMs)
without subsidies were kissing US$15bn, and for the first time in a decade the
combined net-worth entered negative territory. Tough measures were called for. A
stern ruling from the Appellate Tribunal of Electricity (APTEL) saw states
pushing through even up to two rounds of rather steep tariff hikes since. Basing
our analysis around PFC's FY12 annual report for state power utilities published
in Oct-13, we conclude that the gap between revenue (without subsidy) and cost
for DISCOMs has reduced over 25%, to ~Rs0.78/kWh in FY14. We estimate
FY14 losses ex-subsidy at US$10bn, still high but healing.
Plug the leaks, as simple (difficult) as that! Aggregate technical and
commercial (AT&C) losses reduced 360bps to 27% over FY07-12 (in fact
increased 100bps YoY in FY12). The leak is big and repair work still slow. In
our analysis the 27% leak can be broken up into: inefficiencies in metering
installation, meter reading and theft of electricity (18%), billing inefficiencies
(3%) and collection inefficiencies (balance 6%).
The logical (and not so logical) conclusions: (1) Discipline in tariff hikes is
an imperative for loss reduction; (2) Low AT&C losses correspond to low
DISCOM loss. Uttar Pradesh, one of the loss leaders among SEBs, has 45%
AT&C leak and accounted for 17% of pan-India loss. West Bengal and MP
are other high AT&C loss, high power demand states in India. (3) States
where tariffs are higher counter intuitively have lower power theft and thus
lower losses. These states could have benefited from lower populism by
respective governments or an empowered regulator, in our view.
Devil is in the detail, we see possible challenges to a steep reduction in
losses. We deduce that amid weak macro the share of industrial consumption
(~32% of total in FY12) may have tapered and this raises the challenge of
cross-subsidizing agricultural and residential consumers. Higher interest rates
and fuel cost than what the regulator bargained for while awarding tariff hikes
may be difficult to ‘pass through’ in SEB topline. Finally can government
subsidies (US$4bn in FY12) keep pace with tariff hikes? (Or should they even
try to?)
SEBs backing down on power procurement, why? Despite our estimated
loss reduction for SEBs, over the last couple of quarters the distribution
utilities have refrained from buying expensive power, in a bid to contain their
loss levels. In our view, the lenders have the upper hand among stakeholders
and may not be willing to fund working capital required to sustain such a high
run-rate of losses annually.
Conclusion. DISCOM financial health is a structural risk for generation and
transmission utilities. Over FY07-12 the creditor days in SEB balance sheets
increased from 60 to 150. This is on a slow mend. Yesterday 3 more states –
AP, Jharkhand and Bihar – have been entitled to opt for the ST liability
restructuring scheme. We maintain OW on PGCIL, NTPC and JSW Energy
among IPPs – companies which have been able to manage debtors better.
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Consolidated losses of state electricity distribution companies (DISCOMs)
without subsidies were kissing US$15bn, and for the first time in a decade the
combined net-worth entered negative territory. Tough measures were called for. A
stern ruling from the Appellate Tribunal of Electricity (APTEL) saw states
pushing through even up to two rounds of rather steep tariff hikes since. Basing
our analysis around PFC's FY12 annual report for state power utilities published
in Oct-13, we conclude that the gap between revenue (without subsidy) and cost
for DISCOMs has reduced over 25%, to ~Rs0.78/kWh in FY14. We estimate
FY14 losses ex-subsidy at US$10bn, still high but healing.
Plug the leaks, as simple (difficult) as that! Aggregate technical and
commercial (AT&C) losses reduced 360bps to 27% over FY07-12 (in fact
increased 100bps YoY in FY12). The leak is big and repair work still slow. In
our analysis the 27% leak can be broken up into: inefficiencies in metering
installation, meter reading and theft of electricity (18%), billing inefficiencies
(3%) and collection inefficiencies (balance 6%).
The logical (and not so logical) conclusions: (1) Discipline in tariff hikes is
an imperative for loss reduction; (2) Low AT&C losses correspond to low
DISCOM loss. Uttar Pradesh, one of the loss leaders among SEBs, has 45%
AT&C leak and accounted for 17% of pan-India loss. West Bengal and MP
are other high AT&C loss, high power demand states in India. (3) States
where tariffs are higher counter intuitively have lower power theft and thus
lower losses. These states could have benefited from lower populism by
respective governments or an empowered regulator, in our view.
Devil is in the detail, we see possible challenges to a steep reduction in
losses. We deduce that amid weak macro the share of industrial consumption
(~32% of total in FY12) may have tapered and this raises the challenge of
cross-subsidizing agricultural and residential consumers. Higher interest rates
and fuel cost than what the regulator bargained for while awarding tariff hikes
may be difficult to ‘pass through’ in SEB topline. Finally can government
subsidies (US$4bn in FY12) keep pace with tariff hikes? (Or should they even
try to?)
SEBs backing down on power procurement, why? Despite our estimated
loss reduction for SEBs, over the last couple of quarters the distribution
utilities have refrained from buying expensive power, in a bid to contain their
loss levels. In our view, the lenders have the upper hand among stakeholders
and may not be willing to fund working capital required to sustain such a high
run-rate of losses annually.
Conclusion. DISCOM financial health is a structural risk for generation and
transmission utilities. Over FY07-12 the creditor days in SEB balance sheets
increased from 60 to 150. This is on a slow mend. Yesterday 3 more states –
AP, Jharkhand and Bihar – have been entitled to opt for the ST liability
restructuring scheme. We maintain OW on PGCIL, NTPC and JSW Energy
among IPPs – companies which have been able to manage debtors better.
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