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India Power Sector
Serious measures proposed to overhaul state
distcoms
In a recent conference of state power ministers in New Delhi, chaired by the
Union Power minister, a set of drastic measures were proposed, to mend
SEB finances and reduce distcom losses. The moves are aimed at: 1)
Improving cash flows via prompt tariff escalations for power purchase cost
and automatic pass-through of fuel cost increases. 2) Improving state
government and distcom accountability and get the whip cracking on
chronic delays in auditing, tariff hike petitions and making subsidy
payments. 3) Reducing AT&C losses to 15% via the distribution
franchisee model and diligent implementation of R-APDRP and 4)
Improving SEB bankability: conversion of state govt. loans to equity to be
looked into.
Strong message to all parties, we think: To regulators: do not hold back
legitimate tariff increases (e.g. Mumbai, Delhi), in the pretext of avoiding
tariff shocks to consumers. To state distcoms: do not delay audited accounts
and tariff review petitions. To state governments: accept the blame, pay
subsidies on time, convert loan to equity to improve SEB capitalization and
buck-up on loss reduction – privatise urban distribution. It is notable that
there is no ‘one-time bail-out’ package proposed: instead, there is an
emphasis on sustainable solutions.
The backdrop: total losses by all state distcoms for FY09 were US$7B,
while accumulated loss was US$19B. AT&C loss averaged 28%, while
NDER was a staggering 8.2x. This situation clearly renders power sector
investments unviable and raises serious questions about distcoms’ ability to
pay for power generated by private IPPs
Stock implications: We view these measures as necessary (though not
sufficient). In our view, it is still early to celebrate, as the actual execution
and impact is yet to be evident. Recent update on R-APDRP disbursement,
at Rs39B (compared to eventual target of Rs500B) suggests that the loss
reduction process still has a long way to go. Potential beneficiaries include
1) IPP space (top picks Adani, TPWR), 2) Utilities (E.g.: Power Grid,
RELI), and 3) Distribution franchisee, if widely adopted, could be a business
opportunity for experienced players (RELI, TPWR, Torrent, CESC).
Drastic measures proposed to overhaul
state distcom losses
In a recent conference of state power ministers in New Delhi, chaired by the Union
Power Minister, a set of drastic measures have been proposed, to mend SEB finances
and reduce distcom losses. The resolutions, each of which has far-reaching
ramification, include:
Actions towards prompt tariff escalations for power
purchase costs and automatic pass-through of fuel cost
increases
The Annual Tariff Revision Petition would be filed before the SERC, keeping in
view the increase of the Power purchase cost (which accounts for nearly 70-80%
of the cost of supply); states will ensure that the difference between ARR and
ACS is not only bridged but is positive to generate internal surpluses, which can
be used for network expansion and maintenance.
The state governments would ensure automatic pass through in tariffs for any
increase in fuel cost by incorporating the same in the regulations, as provided in
Section 62(4) of Electricity Act, 2003. (State Governments can issue directions to
SERCs under Section 108 of the Electricity Act, 2003).
Actions towards the prompt filing of annual tariff review
petitions
The states would ensure that the distribution utilities file their Annual Tariff
Revision Petition every year, by December-January of the preceding financial
year to the State Regulators, as stipulated by the National Tariff policy.
Prompt audit of accounts and computerization
The state governments would ensure that the accounts of the utilities are audited
up to the year 2009-10 and also ensure that the accounts of a financial year are
audited by September of the next financial year, henceforth. Computerization of
accounts would be undertaken on priority, if not done already.
Actions towards improving state government accountability
The state governments would not only clear all the outstanding subsidies to the
utilities, but ensure advance payment of subsidy as per the Section 65 of the
Electricity Act, 2003 in future.
The state governments would ensure payment of all outstanding dues from
various departments of state government and institutions to the distribution
utilities or release payments from the state budget directly.
The state governments would consider converting loans due from the state
governments to the distribution utilities as state government equity to ensure
capital infusion and improvement in net worth of utility.
Steps to reduce AT&C losses to 15%
States would immediately initiate steps to appoint distribution franchises in urban
areas through competitive bidding
The eligibility criteria for inclusion of towns under R-APDRP assistance with
population of 30,000 (10,000 for special category states) should be reduced to
15,000 (5,000 for special category states). All district headquarter towns in
special category states should also be covered under R-APDRP, irrespective of
their population
The state governments would take effective steps to reduce AT&C losses to less
than 15% by administrative measures, curbing pilferage of electricity and by
setting up special police stations and special courts to deal exclusively with
power theft related cases, if not done already
Steps to ensure power availability for all
States would immediately invite bids for meeting the uncovered generation
capacity gap viz-a-viz the requirement in their states by the end of 12th Plan. The
process will be completed by March, 2012.
States would create a unit in their states for integrated planning of generation,
transmission and distribution to meet the future requirement of their states.
R-APDRP: a background and current
status check
In another recent meeting of the consultative committee of power, the Union Power
minister gave the following update on R-APDRP: as on March 11, cumulative
sanctions are Rs218B and disbursements are Rs39B (vs the eventual target of
Rs500B). From these numbers, we think the process of loss reduction has a long way
to go. While the above proposals are necessary to improve SEB finances, a
reasonable AT&C loss is the sufficient condition for a robust power sector.
Backdrop: huge losses in the distcom
space
State distcom losses have increased from US$3.3B in FY07 to US$7B in FY09 (after
accounting for subsidies usually given by state governments to agricultural
consumers). AT&C losses declined only 220bps between FY07-09 to 28.4%. Even if
the current pace is accelerated, state distoms will be loss making for next few years,
in our view. We calculate a gap of ~45paise/unit between the DISCOM power
purchase price and realization in FY09. As of FY09, the consol SEB balance sheet
had a D/E ratio of 8.2x, debt of US$53B and interest costs of US$4.15B. As per our
calculations, FY09 DISCOM loss of US$11B was ~34% of fiscal deficit of all states
combined.
Please click the link (Risk in the last mile Risk for the power sector value chain)
to see our detailed report on poor health of the State Distribution Companies
(DISCOMs) which account for over 90% of total power supply in the country.
Stock valuations and views
We do not see investor appetite returning soon for the power sector. Concerns on
fuel, execution and cost of funds will remain overhangs, in our view. We think it is
still early to celebrate, as the actual execution of these measures to overhaul state
discoms and its impact is yet to be evident. Potential beneficiaries include: 1) the
IPP space (top picks Adani – better execution, TPWR – exposure to coal); 2)
Utilities (e.g. Power Grid, RELI), and 3) Distribution franchisees, if widely adopted,
could be a business opportunity for experienced players (RELI, TPWR, Torrent,
CESC).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Power Sector
Serious measures proposed to overhaul state
distcoms
In a recent conference of state power ministers in New Delhi, chaired by the
Union Power minister, a set of drastic measures were proposed, to mend
SEB finances and reduce distcom losses. The moves are aimed at: 1)
Improving cash flows via prompt tariff escalations for power purchase cost
and automatic pass-through of fuel cost increases. 2) Improving state
government and distcom accountability and get the whip cracking on
chronic delays in auditing, tariff hike petitions and making subsidy
payments. 3) Reducing AT&C losses to 15% via the distribution
franchisee model and diligent implementation of R-APDRP and 4)
Improving SEB bankability: conversion of state govt. loans to equity to be
looked into.
Strong message to all parties, we think: To regulators: do not hold back
legitimate tariff increases (e.g. Mumbai, Delhi), in the pretext of avoiding
tariff shocks to consumers. To state distcoms: do not delay audited accounts
and tariff review petitions. To state governments: accept the blame, pay
subsidies on time, convert loan to equity to improve SEB capitalization and
buck-up on loss reduction – privatise urban distribution. It is notable that
there is no ‘one-time bail-out’ package proposed: instead, there is an
emphasis on sustainable solutions.
The backdrop: total losses by all state distcoms for FY09 were US$7B,
while accumulated loss was US$19B. AT&C loss averaged 28%, while
NDER was a staggering 8.2x. This situation clearly renders power sector
investments unviable and raises serious questions about distcoms’ ability to
pay for power generated by private IPPs
Stock implications: We view these measures as necessary (though not
sufficient). In our view, it is still early to celebrate, as the actual execution
and impact is yet to be evident. Recent update on R-APDRP disbursement,
at Rs39B (compared to eventual target of Rs500B) suggests that the loss
reduction process still has a long way to go. Potential beneficiaries include
1) IPP space (top picks Adani, TPWR), 2) Utilities (E.g.: Power Grid,
RELI), and 3) Distribution franchisee, if widely adopted, could be a business
opportunity for experienced players (RELI, TPWR, Torrent, CESC).
Drastic measures proposed to overhaul
state distcom losses
In a recent conference of state power ministers in New Delhi, chaired by the Union
Power Minister, a set of drastic measures have been proposed, to mend SEB finances
and reduce distcom losses. The resolutions, each of which has far-reaching
ramification, include:
Actions towards prompt tariff escalations for power
purchase costs and automatic pass-through of fuel cost
increases
The Annual Tariff Revision Petition would be filed before the SERC, keeping in
view the increase of the Power purchase cost (which accounts for nearly 70-80%
of the cost of supply); states will ensure that the difference between ARR and
ACS is not only bridged but is positive to generate internal surpluses, which can
be used for network expansion and maintenance.
The state governments would ensure automatic pass through in tariffs for any
increase in fuel cost by incorporating the same in the regulations, as provided in
Section 62(4) of Electricity Act, 2003. (State Governments can issue directions to
SERCs under Section 108 of the Electricity Act, 2003).
Actions towards the prompt filing of annual tariff review
petitions
The states would ensure that the distribution utilities file their Annual Tariff
Revision Petition every year, by December-January of the preceding financial
year to the State Regulators, as stipulated by the National Tariff policy.
Prompt audit of accounts and computerization
The state governments would ensure that the accounts of the utilities are audited
up to the year 2009-10 and also ensure that the accounts of a financial year are
audited by September of the next financial year, henceforth. Computerization of
accounts would be undertaken on priority, if not done already.
Actions towards improving state government accountability
The state governments would not only clear all the outstanding subsidies to the
utilities, but ensure advance payment of subsidy as per the Section 65 of the
Electricity Act, 2003 in future.
The state governments would ensure payment of all outstanding dues from
various departments of state government and institutions to the distribution
utilities or release payments from the state budget directly.
The state governments would consider converting loans due from the state
governments to the distribution utilities as state government equity to ensure
capital infusion and improvement in net worth of utility.
Steps to reduce AT&C losses to 15%
States would immediately initiate steps to appoint distribution franchises in urban
areas through competitive bidding
The eligibility criteria for inclusion of towns under R-APDRP assistance with
population of 30,000 (10,000 for special category states) should be reduced to
15,000 (5,000 for special category states). All district headquarter towns in
special category states should also be covered under R-APDRP, irrespective of
their population
The state governments would take effective steps to reduce AT&C losses to less
than 15% by administrative measures, curbing pilferage of electricity and by
setting up special police stations and special courts to deal exclusively with
power theft related cases, if not done already
Steps to ensure power availability for all
States would immediately invite bids for meeting the uncovered generation
capacity gap viz-a-viz the requirement in their states by the end of 12th Plan. The
process will be completed by March, 2012.
States would create a unit in their states for integrated planning of generation,
transmission and distribution to meet the future requirement of their states.
R-APDRP: a background and current
status check
In another recent meeting of the consultative committee of power, the Union Power
minister gave the following update on R-APDRP: as on March 11, cumulative
sanctions are Rs218B and disbursements are Rs39B (vs the eventual target of
Rs500B). From these numbers, we think the process of loss reduction has a long way
to go. While the above proposals are necessary to improve SEB finances, a
reasonable AT&C loss is the sufficient condition for a robust power sector.
Backdrop: huge losses in the distcom
space
State distcom losses have increased from US$3.3B in FY07 to US$7B in FY09 (after
accounting for subsidies usually given by state governments to agricultural
consumers). AT&C losses declined only 220bps between FY07-09 to 28.4%. Even if
the current pace is accelerated, state distoms will be loss making for next few years,
in our view. We calculate a gap of ~45paise/unit between the DISCOM power
purchase price and realization in FY09. As of FY09, the consol SEB balance sheet
had a D/E ratio of 8.2x, debt of US$53B and interest costs of US$4.15B. As per our
calculations, FY09 DISCOM loss of US$11B was ~34% of fiscal deficit of all states
combined.
Please click the link (Risk in the last mile Risk for the power sector value chain)
to see our detailed report on poor health of the State Distribution Companies
(DISCOMs) which account for over 90% of total power supply in the country.
Stock valuations and views
We do not see investor appetite returning soon for the power sector. Concerns on
fuel, execution and cost of funds will remain overhangs, in our view. We think it is
still early to celebrate, as the actual execution of these measures to overhaul state
discoms and its impact is yet to be evident. Potential beneficiaries include: 1) the
IPP space (top picks Adani – better execution, TPWR – exposure to coal); 2)
Utilities (e.g. Power Grid, RELI), and 3) Distribution franchisees, if widely adopted,
could be a business opportunity for experienced players (RELI, TPWR, Torrent,
CESC).
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