The limited tariff hikes so far by SERCs for FY 2014-15, coupled with rising subsidy dependence to the tune of ` 72,000 crore for the sector as a whole, remains a concern for sector experts.
The turf war over imposition of anti-dumping duty (ADD) was limited to the fight between solar manufacturers and solar power developers. Now, it has indirectly pulled in two important ministries of the Government of India-Ministry of New and Renewable Energy and the Ministry of Commerce-which are currently at loggerheads.
It is now inevitable that those discoms who have not increased tariffs so far, will have to go for a hike owing to increase in fuel cost, railway freight, doubling of clean energy cess and rise in custom duty on coal.
Says Debasish Mishra, Senior Director, Deloitte Touche Tohmatsu India, "We expect that the utilities across the country will have to increase tariffs by 14-15 paise on an average to offset the overall increase in costs arising from the recent railway freight hike, doubling of coal cess and increasing customs duties on coal from 2 to 2.5 per cent."
Umesh Agrawal, Associate Director - Energy, Utilities & Mining, PwC opines, ¨Much has been written about this issue, but only because this continues to be the weakest link in the power sector´s ´chain´.¨ When asked about how a few discoms are not going for tariff hike despite respective SERC directions, he adds: ¨The preconditions of the Financial Restructuring Package (FRP) availed by state discoms - annual tariff revisions, recovery of past losses and reduction in network losses - must be tightly supervised across the board.¨
While the filing of tariff petitions by the distribution utilities for FY 2014-15 has been done in most of the States, State Electricity Regulatory Commissions (SERCs) in 16 out of 29 States have issued tariff orders for FY 2014-15 so far. Delays in issuance of tariff orders by SERCs could be attributed partly to the General Elections held in April-May 2014. Out of these 16 States where SERCs have issued tariff orders for FY 2015, SERCs in seven States namely Arunachal Pradesh, Bihar, Gujarat, Jammu & Kashmir, Odisha, Uttarakhand and Madhya Pradesh have not approved any tariff revision for the distribution utilities, while the SERC in Himachal Pradesh has approved a marginal tariff decline as a result of tariff rationalisation. In case of eight other States, tariff revision allowed by SERCs has been moderate, i.e., in the range of 5-10 per cent (except in Meghalaya where tariff revision was at 15 per cent). Importantly, among the discoms which have implemented the financial restructuring scheme (FRS), SERCs are yet to issue tariff orders for utilities in the States of Tamil Nadu, Rajasthan and Uttar Pradesh - which is a deviation against the terms of FRS - and thus remains an area of concern for the sector.
Limited tariff hikes
Tariff hikes by SERCs for FY15 have been very modest in some of the States like Haryana and Karnataka, wherein SERCs have estimated the revenue gap at current tariff; however, such revenue gap has not been recovered through tariff revision in full and this in turn has led to an unrecovered revenue gap in the form of regulatory assets. For example in case of utilities in Haryana, SERC has allowed regulatory assets to the tune of Rs. 66.7 billion which includes unrecovered FSA for FY 2011-12 and regulatory assets brought forward as per the previous tariff order for FY 2013-14. While regulatory assets for utilities in Haryana are significant and may increase further in case of any true-up variation allowed for FY 2013/ FY 2014 which is still pending. The SERC has also not mentioned any time-bound recovery plan for such RA. In case of tariff order for discoms in Karnataka, SERC has approved regulatory assets of Rs 1,200 crore as on March 2014 which is allowed to be recovered over a two-year period.
Subsidy dependence for State-owned distribution utilities for FY 2014-15 is estimated in the range of Rs 72,000 crore, which is estimated to have increased at a CAGR of 16 per cent since FY 2010. According to an ICRA report, the overall subsidy dependence for FY 2014-15 for distribution utilities in the 16 States (based on the allowed subsidy levels in tariff orders) has also shown an increase by 17 per cent over the previous financial year, mainly on account of upward pressure on cost of power supply and continued subsidised nature of tariffs for agriculture consumers. Among all the utilities, subsidy dependence for the discom in Maharashtra is estimated to increase sharply by about 55 per cent on y-o-y basis in FY 2015 as a result of tariff subsidy of 20 per cent announced by the State Government for 11 month period (Jan - Nov 2014) and also for Jammu & Kashmir where the subsidy burden is projected to increase by 51 per cent due to continues support for funding the high transmission and distribution (T&D) losses, while the same for utilities in other States is estimated to increase by 8 to 20 per cent in FY 2015 as compared to FY 2014. This implies that the timeliness and adequacy of subsidy support to utilities from their respective State Governments remain extremely crucial.
Delays in implementing FPPCA framework
Implementation of the fuel and power purchase cost adjustment (FPPCA) framework has still remained absent in States such as Tamil Nadu, Uttar Pradesh and Rajasthan and has seen a significant lag in recovery of FPPCA in many other States. This itself remains an area of concern for the distribution sector, given that power purchase cost is an uncontrollable expense and contributes about 80 per cent of cost of supply for any distribution utility. Also, the principles vary across the States, which include ceiling (10 per cent/20 per cent) imposed by SERCs on recovery of FPPCA in a few States, while the same has been discontinued in the last fiscal by SERC in Andhra Pradesh. ICRA hence notes that the cost reflective nature of tariff determination with timely recovery of FPPCA, time-bound recovery of the regulatory assets by SERCs and efficiency improvements remains critical for the utilities to improve their financial position in a sustainable manner.
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