Why Shunglu panel’s proposals won’t cut power sector’s massive losses

The  much-awaited Shunglu panel’s recommendations are likely to disappoint the markets and the power sector.
While the panel, which had earlier pegged the losses for power distribution companies (discoms) at a whopping Rs 1,79,000 crore for the period between 2006 and 2010, noted that these companies need radical action urgently and suggested a slew of measures — including regular rate reviews, management rejigs and a special purpose vehicle (SPV) to absorb the losses of discoms — its proposals  are unlikely to offer any real benefits.
For one thing, most of the proposed measures in the report on the Financial Position of Distribution Utilities are long-term and will take at least a few years to be implemented. Until then, the losses of distribution companies seem set to continue.

The panel said the net loss of discoms for FY 2009-2010 after subsidies stood at Rs 27,000 crore. Reuters

It is also likely that with impending elections in several states and the General Assembly election in 2014, politicians will be extremely averse to attempting tariff hikes.
Even the panel report acknowledged that much of the political inaction over raising tariff hikes was driven by the desire to appease their vote banks.
“One primary reason for the distribution utilities not submitting their tariff proposals in time or in acceptable form is the state government’s political sensitivity to any proposed increase in tariffs,” the report said.
After an analysis of discoms in 15 states that account for 91 per cent of total power consumption in the country, the panel said the net loss for the financial year ending March 31, 2010, after subsidies stood at Rs 27,000 crore.
The losses for the period 2006-10, was even more staggering, with distribution companies incurring a gargantuan loss of Rs 1,79,000 crore before subsidies and Rs 82,000 crore after.
VK Shunglu, chairman of the panel and former Comptroller and Auditor General of India, cited an immediate need to revive the fortunes of discoms and blamed the inadequacies and distortions in tariffs on the “actions and inactions” of regulators, utilities and state governments.
“During the five years (from 2006 to 2010), losses were Rs 1,79,000 crore before subsidy and Rs 82,000 crore after subsidy. These losses were primarily because of the gap of about 0.60/kwh between average cost and average revenue,” the panel said in its report.
The recommendations of the panel, which was set up by the Planning Commission in July last year, against the backdrop of huge financial losses incurred by most power distribution companies, a scenario which has also raised strong concerns about loan defaults.
Other recommendations of the panel included:
• More autonomy to state electricity boards (SEBs). While they were unbundled and divided into generation, transmission and distribution based on their functions, SEBs have not attained autonomy in the real sense.
• The implementation of an Accelerated Power Development and Reforms Program (APDRP) to enable SEBs to raise tariffs regularly and according to market requirements.
• Regular and timely reviews and determination of retail rates for proper revenue realisation.
• Distribution losses should be minimised if not completely eliminated.
• Distribution of the financial information about discoms should be improved and made public to present a true and fair picture of their state.
• The state government, being the owner of distribution companies,  should take the responsibility of providing further funds to meet the losses made by discoms as well as to repay bank loans.
• Chief executives of  power utilities should be appointed through an all-India selection process.