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UBS Investment Research
India Power Utilities
D istribution losses are a priority for govt
Event: states to address power distribution losses?
In a conference organised yesterday, the Union Power Minister and Deputy
Chairman of Planning Commission have highlighted the need to bring down
distribution losses to state power ministers. This is in line with our view that the
Central Government, Ministry of Power and Planning Commission have become
more proactive in addressing the key issues of cutting power distribution losses and
improving the availability of domestic coal.
Impact: Power Ministry and Planning Commission are only advisors
We believe that ultimately it is the willingness and proactive measures taken by a
state that would decide the future of distribution reforms in the country. Hence, the
role of the Central Government is limited in this regard. Overall, we believe that
even at the state level, there have been positive changes in the past six months in
the form of tariff hikes and progress on reforms.
Action: no quick fix, we prefer companies with regulated returns
We believe that the key issues of state electricity board (SEB) losses and coal
supply require a structured approach from various stakeholders including central
and state governments. We also think that there has been progress on this. Overall,
we prefer companies with regulated returns (Power Grid, NTPC, Reliance Infra).
Our top pick: Power Grid, rated Buy
We prefer Power Grid and Lanco. We also have Buy ratings on NTPC, Tata Power
and Reliance Infra.
State ministers adopt resolution to cut SEB losses
The State Power Ministers’ Conference on “Distribution Sector Reforms”
organized in New Delhi yesterday agreed upon a set of measures to bring down
the distribution losses. These are as follows:
1. 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.
2. 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.
3. 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) and 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.
4. The state governments would ensure automatic pass through in tariff 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).
5. 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.
6. The eligibility criteria for inclusion of towns under R-APDRP assistance with
population of 30000 (10000 for special category states) should be reduced to
15000 (5000 for special category states). All district headquarter towns in
special category states should also be covered under R-APDRP, irrespective of
their population.
7. 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.
8. 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.
9. 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.
10. States would immediately initiate steps to appoint distribution franchises in
urban areas through competitive bidding.
11. 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.
12. States would create a unit in their states for integrated planning of
generation, transmission and distribution to meet the future requirement of their
states.
Why we think this is good for the sector?
This development highlights our view that the Central Government, Ministry of
Power and Planning Commission have become more proactive in addressing the
key issues of cutting power distribution losses and improving the availability of
domestic coal.
However, we also understand the role of the Power Ministry and Planning
Commission is largely advisory. We believe that ultimately it is the willingness
and proactive measures taken by a state that would decide the future of
distribution reforms in the country.
Overall, we believe that even at the state level, there have been positive changes
in the past six months in the form of tariff hikes and progress on reforms
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