A

Dr. M.K.Iyer, Member Central Electricity Regulatory

Commission

November 17, 2015

1

TURNAROUND OF DISCOMS

ACCELERATES NEXT STAGE REFORM

OUTLINE OF PRESENTATION

• What is Turnaround ?

• Role and Responsibilities of Discoms under the Act

• Performance of Discoms – Post 2003

• Pull Factors responsible for Poor Performance

• Policy Initiatives to improve performance

• Turnaround of Gujarat Discom : Case study

• Approach by GoI for turnaround of Discoms

• Accelerates next stage reform

BUSINESS TURNAROUND

“Turnaround” connotes the financial recovery of a organization that has been performing poorly for an extended time”

“Business Turnaround” is the reversal falling results – sales and profits – through fundamental change. -----------------------------------------------------------------------------------------------------

• Turnaround is time dependent, it varies with the time• Turnaround strategy varies with the situation and time to time

StrategiesIn order to implement “turnaround”, an organization must acknowledge the problem, develop and implement problem solving strategy. The problem and solution can be either due to:

• External Factors – Policy and external measures (uncontrollable)• Internal Factors – Management and operational level measures

BUSINESS TURNAROUND

Situation/Problem Assessment

Factor Identification (External & Internal)

Problem Solving Strategy

Rollout Plans ( Pilot basis/Holistic

basis)

Result Monitoring and adjustments

Sustainability – Internal

Reform

TURNAROUND STRATEGYTurnaround strategy could be either :

A) External Measures:• Policy Rationalization• Business environment

B) Internal Measures :• Management Reforms• Financial Reform• Administrative • Technological Adoption• IT enabled management

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TURNAROUND OF DISCOMS

POST ELECTRICITY ACT,2003

• Provision for Open Access• Procuring Power - Competitive bidding • Multiple distribution licensees

Bringing Competition

• Establishing SERC and APTEL • Unbundling of the Power Sector and Reorganization of

DiscomAccountability &

Transparency• Tariff Setting – Cost of service principle• State Government Subsidy -to bridge gap

Commercial Viability – Tariff

Principles • Universal Supply Obligation (USO)• Rural electrification – Government Scheme

Access to Network

• Standard of Performance• Consumer Grievance Redressal• Reduction in T&D losses

Quality & Affordability

• Mandatory RPOs• REC mechanism

Renewable Energy –

Obligations

OBJECTIVES OF THE ACT AND POLICIES – DISCOM

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PERFORMANCE OF DISCOMS

POST ELECTRICITY ACT,2003

OPERATIONAL PERFORMANCE OF DISCOMS – POST 2003

Gap in Average Cost of Power Supply and Average Tariff Realised.

High AT&C losses.

Source : Planning Commission Annual Report 2013-14 on the Working of State Power Utilities & EDs

All India AT&C Losses

2011-12 26.63%

2012-13 25.45%

2013-14 22.7%

PERFORMANCE OF DISCOMS – POST 2003

( Annual Losses in Crore)Source : powermin.nic.in * estimated

figure

Losses have been increased from 2010 onwards;

Higher losses is due to increase in per unit cost and inability to control losses.

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PULL FACTORS FOR

PERFORMANCE OF DISCOMS

PULL FACTORS RESPONSIBLE FOR POOR PERFORMANCE -DISCOM

High Transmission and Distribution (T&D) Losses High Aggregate technical and commercial (AT&C) losses

Commercial losses was Rs 16,666 Cr in 2007-08, Rs 37,836 Cr in 2011-12 and now estimated @60000 cr 2014-15

(cont/-

PULL FACTORS RESPONSIBLE FOR POOR PERFORMANCE -DISCOM

Mismatch between the tariffs and cost of generating power: Cost of supplying electricity increased at a rate of 7.4% annually between 1998-99 and 2009-10 and average tariff was increased at the rate of 7.1%.

After 2007-08 onwards, the gap of average cost of supply and average tariff increased significantly:

Year Unit CostAverage

Tariffper Unit

Gap betweenCost and

Tariff

Gap as % ofUnit Cost

2007-08 4.04 3.06 0.98 24%

2008-09 4.60 3.26 1.34 29%

2009-10 4.71 3.27 1.44 30%

2010-11 5.06 3.67 1.39 27%

2011-12 5.70 4.39 1.31 23%

PULL FACTORS RESPONSIBLE FOR POOR PERFORMANCE -DISCOM

Debt Spiral: Working Capital have consistently increased due to high losses

and liquidity problems

Banking sector’s short term exposure to Discoms is quite substantial, and was about Rs. 1.5- 1.7 trillion as on March 2012, which is 3-3.6% of banking credit and 45-52% of total power credit

Banks reluctant to fund these losses – in turn stretching payments to their creditors

Subsidy :• Discoms on an all-India basis is about Rs. 43,000 Cr in FY 2012,

which represents an increase of 13% from FY 2010. There are issue in realizations.

ISSUES IN DETERMINING RETAIL TARIFF

Policy Directives ( specific tariff for BPL consumers,

agriculture consumers etc.)

Cross – subsidization within the category of consumers

Capacity to pay (consumer)

High power purchase cost

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FINANCIAL RESTRUCTURING

PLANFOR DISCOMS

FINANCIAL RESTRUCTURING PLANKEY FEATURES

Cabinet Committee on Economic Affairs (CCEA) approved the much awaited scheme for Financial Restructuring of State Distribution Companies (Discoms) on September 24, 2012:

Key Features:• Proposed to restructured debt worth Rs 1.9 Lakh Crores• 50% of the outstanding short-term liabilities (STLs) of Discoms as of March 31,

2012 will be taken over by state governments.• First converted into bonds to be issued by Discoms to participating lenders,

backed by a state government guarantee.• Balance 50% of STL will be rescheduled by lenders and serviced by Discoms

with a principal moratorium of three years

Eight States -Tamil Nadu, Uttar Pradesh, Rajasthan, Haryana, Jharkhand, Bihar, Andhra Pradesh and Telangana availed the scheme.

Most of these states have failed to meet the performance criteria specified in the scheme.

FINANCIAL RESTRUCTURING PLAN DEFECTS

Though FRP provides immediate relief to Discoms- but it was temporary and not designed with long term solutions

There were major unresolved issues facing the power sector, such as:

Coal shortage Land, environment clearance Regulatory Transparency Tariff hikes Operational inefficiencies Subsidy dependence Free power to some sections of the population

EFFECTIVE TURNAROUND PLAN SYNERGY WITH ADDRESSING PROBLEMS

Debt Restructuring(Short Run Solutions)

• Debt support from Government• Internal resource generation improving efficiency and tariff pricing suitably

Resolve the Problems(Long Run Solutions)

• Coal shortage• Land, environment clearance• Regulatory Transparency• Tariff hikes• Operational inefficiencies• Subsidy dependence• Free power to some sections of the population

Effective and bold measures to address the problems for long term solutions and debt restructuring for short run solutions Turn around of the Discoms

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TURNAROUND OF GUJARAT

DISCOMS: A Case Study

Gujarat Power Scenario in 2002

State’s installed capacity: 8756 MW Peak deficit: 20% Power cut / Load shedding of 4-5 hrs Low voltages due to inadequate transmission network and substations Erratic power supply due to mixed load of agriculture and villages T&D losses as high as 34.20% - rampant power theft Severe voltage fluctuations and transformer failure Retail tariff – not cost reflective Poor billing and collection efficiency Loss of Rs 2543 Crs in 2000-01 Accumulated losses Rs 8286 Crs before unbundling

Steps for Turnaround

GEB unbundled on 01.4.2005 into 7 Companies in segments for better administration, efficiency & consumer services

1 Holding & Co-ordinating Co. 1 Generation Co. 1 Transmission Co. 4 Distribution Co. each in South, Central, North & West

Gujarat

Aggressive capacity addition- In 2009, Gujarat becomes surplus state

Unbundling of the Sector

Growth of Installed Capacity

2002 2014 2017

8756

23883

30179

Growth of Installed Capacity (MW) (conventional + Non Conventional)

Addition of 6296 MW

Steps taken – Distribution

Investment made from 2002 onwards – Rs 16,550 Crs More than 500% rise (up to 2001-02 – Rs. 3340 Crs)

Feeder Segregation – Jyoti Gram Yojana – Rs. 1300 Crs

Highest cash incentive of Rs 1100 crs under APDRP

Revenue rise from Rs 7,274 Crs to Rs 29,000 Crs – 11 % CAGR

Average tariff rise from Rs 1.93 to Rs. 4.68 – 7 % CAGR

Specially Designed Transformers (SDT) on Agricultural Feeders for 1- phase power to farmers living on farms

Execution in just 30 months (March 2006)

Jyoti Gram Yojana (24x7 Supply)

Prior to JGY After JGY with SDT

• 8 to 14 hours 3-ph power • 10 to 12 hrs single phase • 4 to 5 hrs no power supply

• 24 hrs 3-ph power on JGY feeders• Minimum 8 hrs 3-ph continuous power on Agriculture

feeders• 1-ph with SDT for balance period on Ag. Feeders

Load Management with JGY

Distribution Initiatives

Use of XLPE Coated and Aerial Bunch Conductor Bifurcation of overloaded feeders Replacement of old meters with precision meters Metering at Transformer centres Automatic Meter Reading for H T System Improvement, Metering & Energy Accounting Extensive installation checking Vigilance drives to curb power theft

Distribution Initiatives

Strict penalty for power theft including imprisonment 100 % billing & collection efficiencyDisconnection for default in payment of energy bills34 Designated Courts & 5 Police StationsChecking drives in tough areas with police for unauthorized

use & theftPrompt theft assessment, compounding and prosecution

Cost Minimization measures

Debt Restructuring reduced Interest cost by Rs. 363 Crs Re-negotiation of PPAs reduced power purchase cost by Rs.

559 Crs Long term power 7615 MW tied up at competitive prices (Rs.

2.25-2.89) Power purchase as per Merit Order Protocol Intra State ABT – April 2010 Surplus power sale ( 7284 Mus - 2013-14 )

Sector Turnaround Sector turnaround from Rs 2,543 Crs loss in 2000-01 to a profit of Rs 203 Crs in 2005-06

-2543

203539 583 634

-4000

-2000

0

2000

2000-01 2005-06 2012-13 2013-14 2014-15

Profitability (Rs Crs)

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TURNAROUND OF DISCOMS

FOR FUTURE

APPROACH OF GOVERNMENT OF INDIA

ADDRESSING PROFITABILITY OF DISCOMSA) Internal Measures: Government approach is to bring the performance

of Discom on track by focusing on:• Improvise Profitability of Discom• Lowering cost of supply• Operational efficiency• Cost reduction from central support

B) External Measures:Government has introduced debt restructuring plan indicating permanent approach to address the funding of commercial losses

IMPORTANT ASPECTS WHILE IMPLEMENTING TURNAROUND

STRATEGIES(FOLLOWING DONT’S MAY BE CONSIDERED)• Pilot project approach :

There are many “pilot project” solutions implemented but did not succeed. Pilot project approach may be done away and direct implementation may be adopted.

• Carrot and Stick approach: The solution for reduction of AT&C losses will not only work through stick approach (using section 136 and

126 of the Act). Suitable strategy may be adopted.

•PILOT Enabling quarterly tariff increase• Operational Efficiency• Lowering Cost of power• Reduction in overall cost in entire chain• Addressing fuel issues – certainty of fuel• Land related issues – Land bill• Co-operativne federalism• IT enabled solutions

ACTIONS OF GOVERNMENT OF INDIAADDRESSING PROFITABILITY OF DISCOMS

• UDAY (Ujwal DISCOM Assurance Yojana) aims at permanent resolution of DISCOM issues through:

• Enabling quarterly tariff increase• Operational Efficiency• Lowering Cost of power• Reduction in overall cost in entire chain• Addressing fuel issues – certainty of fuel• Land related issues – Land bill• IT enabled solutions

WAY FORWARD/SUGGESTION TO ENSURE SUSTAINABILITY OF

TURNAROUND• Internal Reform are essential to ensure the sustainability of the turnaround of Discoms through :

• Operational efficiency • Effective strategy to reduce AT&C losses• Organization functions should be on sound

commercial principle• Skilled and motivated workforce• No more Pilot Projects • Use of efficient and IT enabled technology• DSM is to be taken in a big way

WAY FORWARD/SUGGESTION TO ENSURE SUSTAINABILITY OF

TURNAROUND• MYT – 5% increase in should be allowed subject to true up• Framework for disincentive for not controlling T&D losses

within limit• Extensive use of smart metering and implementation of smartgrid• DSM is to be taken up in larger scale

REGULATORY SUPPORT• GERC has consistently allowed tariff revision to the

distribution sector varying from 2.47% to 8.34% during last five year apart from the FPPPA pass through on a quarterly basis every year.

NEXT STAGE REFORM(TURNAROUND WILL FACILITATE NEXT STAGE

REFORM)

• Increase investment in Renewable• Electricity Amendment Act, 2003

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Thank you