Experts debate how the franchise model in power distribution and Open Access will help or hamper the financial condition of state distribution companies.Excerpts from the 2nd Power Today Round Table.
Experts
Amod Khanorkar, General Manager & Rating Head, Care Ratings
Amritanshu Mohanty, Deputy Vice President, Axis Bank
Ashutosh Dravid, Assistant Vice President Business Development, Power Exchange India
Behram Ardeshir, President, Cooper Corporation
Hiren Shah, Head, Corporate Strategy & Global Sales, Global Wind Power
MK Deore, Director (Projects), Maharashtra State Electricity Distribution Co Ltd
Rajeev Ketkar, Assistant Director PR & Membership Cell, Indian Electrical and Electronics Manufacturers' Association (IEEMA)
Ramesh Kelkar, General Manager, Union Bank of India
Shishir Tamotia, Vice Chairman and MD, Sumer Energy
Tejas Bakhai, Director, Triangle Simulation
Umesh Agrawal, Associate Director, Advisory–Grid, PwC
Yashpal Singh, Vice President Project Advisory & Structured Finance, SBI Capital Markets
Moderated by Power Today's Group Executive Editor Shashidhar Nanjundaiah
Nanjundaiah
December's Rs 500 crore bailout package announced by the Delhi Government to the Reliance owned discoms in that state has proved that it won't just be the publicly owned ones that face financial crisis.We are all probably aware of the humongous numbers Rs 75,000 crore worth of bad debts from SEBs, which may escalate to Rs 125,000 crore in the next two years.
On the one hand, state after state has blatantly shown losses year after year, and banks have continued to finance them. It is only late last year that the banks presumably as agents of the central government have pulled up their socks and mandated that states should clear the red marks on their balance sheets and project how their reveÂnues will help them make both ends meet. On the other, this move can only be effective going forward, so will it be fair to expect everything to fall into place immediately?
Is one time bailout package that is expected for the ailing discoms therefore warranted?
Deore
The first question is losses, the second is how to improve services for customers, and third is how to turn my company around. The worst threat is the increasing cross subsidy or free supply to agricultural customers. In our state we are supplying power to agricultural customers for only 20 p per unit below 3 HP and 50 p per unit for above 3 HP. In Punjab they give free power and in Andhra Pradesh they give seven hours of free power per day.
Second is that banks and financial institutions are wary of lending to discoms.
Third, the question of whether discoms will survive or not: A major threat at the present state is Open Access to the high value consumers more than 1 MW.
To address these issues, the Shunglu Committee has suggested the franchise model. In India franchise was first implemented in Bhiwandi. Pre franchise losses stood around 60 percent. Torrent, the franchisee, has done an excellent good job and the losses have come down to 20 percent over the last 4 5 years.
With this experience of Bhiwandi model we have done franchises at Nagpur and Aurangabad. These two are also doing well but they are having financial trouble. No bank is ready to finance these distribution franchisees, although the franchisees are merely akin to contractors.
Nanjundaiah
I was hoping that the discom here would say that states do need a one time bailout but it seems it doesn't need one!
Singh
This problem has accumulated over time for nearly last 10 years.We had a bailout in 2001 and SEBs dues to the extent of around Rs 40,000 crore were settled and government came out with other schemes.It was implied that with this corrective action the sector will now perform well. But in a decade's time, we are back to the same stage. Another important factor why sector has come to this stage is the non revision of tariffs.So we strongly feel that a bailout package or some support to discoms is necessary this will also help other segments dependent on the discoms.But such conditions should be imposed on discoms and related entities so that this sector becomes viable on its own.
Kelkar
So far banks have been blindly suppÂorting discoms by extending loans but were indirectly financing their losses. Tariffs have to increase, subsidisation has to be reduced and huge distribution losses have to be reduced otherwise whatever steps are taken will again be futile.
Even if banks extend loans again, they will need to be repaid. How? The loans can be restructured and instead of immediate payment the term can be extended up to 10 12 years.
Mohanty
A bailout situation is about restrucÂturing or refinancing of existing loans.Banks have lent approximately Rs 50,000 crore to discoms. Banks are not in a posiÂtion to take up new exposures in the power sector.
Discoms are in a problem because of which the transÂmission and generation companies are also in a problem. Banks also have huge exposure to generation companies.Because of mismanagement or non recovery of bills or reduction of AT&C losses, discoms are defaulting on payment to generation companies.
Banks have funding lines which are being given to generation companies, which are unable to recover this money. They have already given money for capex and are now looking at funding working capital requirements. It is a messy situation where not only the banks money is trapped in capex but we are also looking at a situation wherein we have to fund the working capital and we also have huge amount of exposure to the discoms.
So I don't think bank financing in a major way is the way out.
Agrawal
Instead of a financial bailout, we need a reform in policy, by bringing in performance and increasing tariffs, then the sector will become self sustainable on a long term basis.The right bailout package should be more to incentivise discoms, rather than giving them financial assistance.
Tamotia
There are two responsibilities lying with the distribution company today: wire and retail.There is a scope of at least 20 retailers in Maharashtra.When we have retailers separated from the wire industry, things will improve automatically.
Nanjundaiah
So will the PPP or franchise model work to cut losses and make revenues?
Ardeshir
Between PPP and franchise model, we may need to use either or both.The franchisee cannot change power tariffs whereas in the PPP model the generator has the right to change tariffs.You may have a situation in a particular state where there are different locations with different tariffs, impacting the power situation differently.
Khanorkar
Unless there is improvement at the grassroots level nothing is going to work.The issue is of a couple of things. Executing what really needs to be done and a political will with some spine to take things forward. What is the real benefit we have witnessed from splitting electricity boards?You split them and we are back at the same issue.
Deore
The PPP model will not work [in Indian power distribution segment].In Mumbai we have MSEB, MSEDCL, BEST, Tata Power and Reliance Infrastructure, all with different tariffs.Tata Power is supplying at a cheaper rate, then BEST, then MSEDCL and then Reliance.
Tamotia
There should be a discom company to manage wires and there should be a separate company which can be retailers. Andhra Pradesh has five distribution companies and are better managed than Maharashtra.
Dravid
Parallel licensees also mean that the customers who wish to opt for supply from competition can very well opt from the same wire.
Nanjundaiah
Would different states need different models?
Kelkar
Franchise in power distribution is only a contract for collection.PPP in road projects have been most successful. Distribution losses can be reduced if we arrive at how the tariff will be cost related and market related.
Agrawal
The franchise model is unique to the Indian situation.Franchise is probably the immediate solution the privatisation process takes at least 3 4 years for preparation.Franchise can be prepared in six months' time, a transaction done and handed over to the private party. You improve performance, bring it to a world class loss level and sell it.
Mohanty
In PPP, the conflict is that you transfer not only the assets but also the liabilities.When you transfer the assets and liabilities are you actually assessing the assets correctly? The asset valuation must be actually true. When they get transferred to a private company, that is the biggest issue bankers may have.
Singh
Most banks have come to lending for generation sector in the last 3 4 years and most of these projects are now coming on stream.Construction risk can be mitigated to some extent but post construction is a huge risk because you are unsure about coal supply and you never know which discom may default.
Nanjundaiah
How will Open Access help discoms?
Ketkar
We are keen on open access. It is very easy to flow power from one zone to other zone.The transmission line sector will get more benefit from that.Transmitting power from heavy generating states like Orissa and Chhattisgarh to the West and South will help the national power grid, UMPPs, and the one nation one grid concept.
Dravid
In Punjab it is also an energy efficient mechanism evolved out of their practice. They have shifted their activity to night where power is in surplus. In Punjab everyÂday if you see on the exchanges around 1,000 MW per hour is being guzzled by open access customers. So they have shifted their entire production activity to night time. So this should be seen as an opportunity for SEBs.
Deore
In Punjab about 192 consumers have shifted from SEBs to open access.Their bankers and financial institutions must think on this issue.The condition of SEBs or distribution companies will worsen if all these consumers over 1 MW go for open access. If this sector goes away from the distribution company the losses in India will go over 60 percent.
Shah
I can speak from a renewable energy standpoint. Our customers would like open access so they are not dependent on the local state utility. Windmills are set up far away from where the consumption is so we do not have a choice but to rely on a grid to take power over there. Why is there not a question that why can we not extend the grid to where it is needed?
Bakhai
Open access will aggravate the problem that we are here to discuss today and that would not help. One of the things we need to cover is the legal implication. It may be detrimental since it may increase the cross subsidisation gap.
Nanjundaiah
We've had a very interesting debate.On the question on bailout there needs to be restructuring and even if there is a bailout it has to be done in a careful manner.On whether we need a PPP or a franchise model, we might be the first forum to discuss outside the government. It is not one or the other and in some cases we may need both and in some neither.Open access was another interesting angle to this debate of how it will impact the discoms' health.The discoms' health will be affected in a certain way. However, in the long term because of competition everybody will stand to gain including the SEBs because the whole idea is to narrow the gap between agricultural and hoarding consumers who pay the maximum.
This may be the first public forum, apart from the government, to debate if there is a need for PPP or franchisee and while in some cases we may need one or the other, in some cases we may need both and in others we may need neither.
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