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Budget | March 2012

A bailout to discoms is necessary

2nd Power Today Round Table: “A bailout to discoms is necessary”

But conditions should be imposed so that this sector becomes viable on its own, says Yashpal Singh, V-P, Project Advisory & Structured Finance, SBI Capital Markets. R Srinivasan reports.

Beginning the debate on Do our discoms need a bailout? about the need for a bailout at the second Power Today Round Table discussion at IMC, Mumbai, and mentioning the threats to discoms, MK Deore, Director (Projects), MSEDCL, said, “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 paise per unit below 3 HP and 50 paise per unit for above 3 HP. In Punjab they give free power and in Andhra Pradesh they give 7 hours free power. Second is infrastructure which needs to be revamped. Banks and financial institutions are wary of lending to discoms. Third is the question of whether discom will survive or not. A major threat at the present state is Open Access to the high value consumers more than 1 MW. We have these three threats. For these threats the Shunglu committee has suggested the franchisee model. In India franchisee was first done in Bhiwandi where losses were around 60 per cent and now (due to Torrent) losses have come down to 20 per cent. With this experience of Bhiwandi model we have done franchisee of Nagpur and Aurangabad town. These two are also doing well but they are having financial trouble. No bank is ready to finance these distribution franchisees. But these are franchisees and not discoms. They are like contractors and will collect money from consumers in any way.”

To this, Shashidhar Nanjundaiah, Group Executive Editor, ASAPP Media, and the moderator quipped, “I was hoping the discom here would say states do need a one-time bailout but here we have one saying that we don’t need one.”

About a bailout as an option, Yashpal Singh, Vice President - Project Advisory & Structured Finance, SBI Capital Markets, said, “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 10 years’ time we are back to the same stage. Another important factor why the sector has come to this stage is the non-revision of tariffs. So a bailout package is necessary which will also help other segments that are dependent on discoms. But conditions should be imposed on discoms so that this sector becomes viable on its own.”

Ramesh Kelkar, General Manager, MSME, Union Bank of India: 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 will they repay? So the loans can be restructured and instead of immediate payment the term can be extended up to 10-12 years and banks can assist discoms in this way.

Amritanshu Mohanty, Deputy Vice President, Axis Bank: Banks also have huge exposure to generation companies. The generation companies should be able to recover money from discoms and return it to the banks. The gencos are unable to recover this money. Banks have already given money for capex and are now looking at funding the working capital requirements. It is a messy situation where not only the bank's 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 is the way out over here.

Umesh Agrawal, Associate Director, Advisory – Grid, PwC: Instead of a financial bailout, if you do a bailout in terms of policy, in terms of bringing in performance and increasing tariffs, then the sector will become self-sustainable on a long-term basis. That is more important. The right bailout package should be more to incentivise discoms, rather than giving them financial assistance.

Shishir Tamotia, Vice-Chairman and MD, Sumer Energy: Unfortunately in our country we restructured transmission, distribution and generation but we did not restructure retail. The main part is collection. There are two responsibilities with discoms. One is wire industry and another is retail. He is responsible for both and that is not the right thing to do. Maharashtra has a single discom. There is scope of at least 20 retailers in Maharashtra. When we have retailers separated from the wire industry automatically things will improve.

Nanjundaiah: Will the PPP or franchise model work to cut losses and make revenues?

Behram Ardeshir, Consultant (PR, Media and Marketing) Cooper Corporation: If you want to restructure, bailout or have a new system [PPP or franchisee model], if the overall system still has defects, none of this will be successful. What we need to do is come down to the basic facts, where does the problem lie and how are we going to address those problems. Once you have identified them and know what you are going to do with them then you can take a decision on what model is more suitable. You may need to use both. There may be different circumstances where in one case franchisee may be more useful or in another case the PPP. You may have a situation in a particular state where there are different locations with different tariffs. So we need to consider all these things.

Amod Khanorkar, General Manager & Rating Head, Care Ratings: Unless there is improvement at the grass-root level nothing is going to work. There has to be political will and some spine shown by a lot of people to take things forward. Today, you can bailout then later you are going to throw good money after bad. When you speak to electricity boards, now most of them have been split. A few years ago they used to say that those who have been split see where they are. So what is the real benefit of splitting them [electricity boards] up? You split them and we are back at the same issue.

Tejas Bakhai, Director, Triangle Simulation: Deore says that the farmer gets electricity for 20 paisa. The cost is Rs 3.90. There are 32 lakh pumps in Maharashtra and there was a point in time there was a state-level decision whether we should change the freebies. Even the Rs 50,000 crore for discoms should not come without strings attached.

Deore: The PPP model will not work in India. In Mumbai four companies have different tariffs. So there must be uniform tariff for all customers… Also I do not agree that 20 or 40 licenses should be in a state.

Tamotia: There should be a discom company to manage wires and there should be a separate company which can be retailers. AP has five discoms and they are better managed than Maharashtra.

Deore: I do not agree. Maharashtra is better managed.

About open access, Rajeev Ketkar, Assistant Director- PR & Membership Cell Indian Electrical and Electronics Manufacturer’s Association (IEEMA): As a representative of IEEMA, we are keen for open access. The transmission line sector will get more benefit from that. So we are looking from a positive point of view. Transmitting power from heavy generating states like Orissa and Chhattisgarh to West and south then perhaps people will gain. It also has to help the national power grid and the one nation-one grid concept.

Ashutosh Dravid, Assistant Vice President – Business Development, Power Exchange India (PXIL): We [Power Exchange] have seen a couple of advantages of open access. The first advantage in a power shortage scenario, the country is bleeding. There is no power that any SEB can give to all industrial customers. In Maharashtra there is a one day power holiday and in Tamil Nadu in peak hours they are giving only 10 per cent of their contract demand. So in such a scenario customers should be allowed to get power from outside so that they can keep their economy running. In Punjab they have shifted their activity to the night time where power is in a surplus state. So this should be seen as an opportunity for SEBs.

Khanorkar: Open access is clearly a signal to SEBs that they should improve their performance. Once there is reliable supply at an attractive cost the need of industrial consumers to move out of the grid is going to keep coming down.

Nanjundaiah: You have a technology which can be usefully applied to off-grid (referring to Bajikar).

Mohan Bajikar, Owner, Fetchusbee: We have over 650 sugar mills and around these mills nearly 50,000 – 1 lakh acres have gone completely saline where you cannot generate a single crop. My target is that area with a crop that tolerates salinity and with that we can produce biogas, electricity, cattle-feed and ethanol. Sugar beet can give you in excess of lot of methane content and the ethanol content is high. Also the size of the digestor becomes smaller and your capex is reduced.

Tamotia: Off-grid applications are a poor man’s solution. Open access to me is a given.

Hiren Shah, Head, Corporate Strategy & Global Sales, Global Wind Power: Our customers would like open access so that they are not dependent on the local state utility. Wind mills 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 and that would not help. We need to cover the legal implication. He added that it may increase the cross subsidisation gap.

Singh: Open access is needed to introduce competition at distribution and retail level. My only request to discoms is not to create a hurdle by charging huge surcharges.

Nanjundaiah: We had a very interesting debate on the financial health of discoms - with perspectives from finance to technology, and all the way to wind generation. Even if there is a bailout it has to be done in a careful manner. We might be the first forum to discuss, outside the government, whether we need PPP or franchisee. In some cases we may need both and in some neither. Open access will impact the discoms’ health but in the long term due to competition everybody will gain including SEBs. The question of off-grid as solutions to supplement the discoms efforts to reach electricity to remote areas is also welcome.

The debate began as a financial one but revealed that it also contained elements of technology and policy.

(A detailed version of this article is available at our website: www.powertoday.in)
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