India Ratings and Research (Ind-Ra) has published a ready reckoner on the financial health of 29 distribution utilities (discoms), which highlights their leverage, profitability, operational efficiency, liquidity position and historical tariff hikes. This is the second research report by Ind-Ra to present some vital statistics of discoms in an easily understandable infographics form. The agency trusts this report will act as an analytical handbook and enable stakeholders to take informed decisions. Ind-Ra has used colour codes and graphical representation to highlight the strongest and the weakest performance parameters throughout the report for quick and easy interpretation.

Discomsform a crucial link in the power sector value chain as they collect paymentsfrom multiple categories of consumers against the energy sold to providenecessary cash flows to the generation and transmission sectors to operate. Theviability of the power sector spectrum hinges on the financial health andoperational efficiency of state distribution utilities. The widening of averagecost of supply (ACS)-average revenue realised (ARR) gap, the huge pile-up of accumulatedlosses and the dismal operational performance of distribution utilities hasexacerbated the financial situation of power generators, especially the privateindependent power producers.

Giventhe central government’s ambitious target of installing 175GW of renewableenergy capacity before FY22, it is crucial to understand the financial healthand behaviour of discoms. That said, the data on discoms is scattered acrossvarious platforms, creating a dire need to collate and represent it to enableanalytical interpretation.

Thecounterparty risk for generation companies is generally considered to be aweaker link in any energy project, especially in India. A deep and efficientinfrastructure bond market requires predictable and stable counterparty behaviourwhen it comes to honouring contractual arrangements. Therefore, the ability toanalyse the predictability and timeliness of revenue forms the pivot of aproject finance transaction, especially renewable energy projects that have fewother externalities. Also, given the investment interest from governments,financial investors, funds, multilaterals and other development agenciestending to substitute fossil fuels with renewable energy, the analysis ofcounterparties (mainly discoms) is gaining traction and internationalattention. 

Themultitude of activities in the power sector including Ujwal Discom AssuranceYojana (UDAY), auctions for buying renewable power by state and centralagencies, efforts to re-negotiate tariff, and resolution process for stressedthermal assets create a sense of urgency in understanding and analysing thefinancial and operational performance of discoms. 

Eventhough the book losses of discoms have declined on an overall basis in FY18compared with that in FY17, severe financial stress in the distribution sectoris evident from the detailed analysis presented in the report. The financialprofiles of discoms have been adversely impacted due to the lower-than-expecteddecline in AT&C losses and widening of ACS-ARR gap, as the increase inpower purchase costs on one end of the spectrum have not been consistently matchedby the cost reflective tariff hikes on the other end. 

Inadequateor even nil tariff hikes by many discoms have led to revenue under-recoveries,resulting in a huge pile up of regulatory assets. In Ind-Ra’s analysis of 29 discoms, only 14 hiked tariff in FY20 and only 13 in FY19. Moreover, there islimited upside available for discoms for revenue growth as subsidisingconsumers (commercial and industrial categories) are already burdened with exorbitantlyhigh tariffs. With alternatives such as power exchange (markets) and cheaperpower from captive renewable generation available, discoms are in imminentdanger of losing such consumers who essentially subsidise domestic andagricultural category consumers, thereby affecting their long-term financialsustainability. 

Onlyfour discoms – Dakshin Gujarat, Madhya Gujarat and Uttar Gujarat and Bengaluru ElectricitySupply Company Limited have outperformed their UDAY’s AT&C loss target inFY18. Furthermore, in FY18, the actual AT&C losses of six discoms – EasternPower Distribution Company of Andhra Pradesh, discoms of Telangana, North EasternElectricity Supply Company of Odisha, Dakshin Vidyut Vitran Nigam Limited of UttarPradesh and Uttrakhand Power Corporation Limited – were higher than that ofFY17.

Discoms’performance with respect to ACS-ARR gap reduction has seen a marginalimprovement. In FY18, the discoms of Gujarat, Haryana, Uttarakhand, MaharashtraState Electricity Distribution Company Limited, Bengaluru Electricity SupplyCompany Limited and Mangaluru Electricity Supply Company Limited were able to earnmore than they spent per unit sold. While 20 discoms were able to reduce thegap from FY17 levels, the gap for nine discoms of Rajasthan, Bihar, WestBengal, Dakshinanchal Vidyut Vitran Nigam Limited of Uttar Pradesh, Hubli ElectricitySupply Company of Karnataka and North Eastern Electricity Supply Company ofOdisha further widened from FY17 levels. Clearly, the under-achievement byseveral discoms in AT&C losses and ACS-ARR gap from targeted level is acause of concern and requires urgent reconsideration of strategy.

Figure 1


Figure 2                                                                                                       Figure 3

Figure 4

Key Performance Indicators ofLeaders & Laggards


Note: For generating this report, Ind-Rahas sourced data from annual reports of discoms, tariff orders from stateelectricity regulatory commissions, tariff filings with state electricityregulatory commission and Power Finance Corporation’s latest report on theperformance of power sector utilities. Based on best available data sources,the agency has released the report. 

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Analyst Names

  • Ashwin B

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
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    Shakthivel Saravanan

    Analyst
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    Divya Charen C

    Senior Analyst
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    Siva Subramanian

    Director
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