<div>The present debt restructuring scheme is essentially a bailout of financial institutions (FIs), and also provides relief to distribution companies (discoms). The recast of discoms’ debt was long overdue and if we had acted two years ago, we would not be staring at a loss of Rs 1.9 lakh crore. The move became necessary as discoms had failed to manage their finances properly and regulators had not revised tariffs at regular intervals. As a result, acute distress was caused to FIs. We had to find a way by which FIs could recover their money, and discoms could find the required working capital to handle their daily purchase of power and ensure improvements in the system.<br /> </div><div>Over the years, matters came to a head; there was no option left for FIs whose loans ran the risk of turning bad and the distribution entities were so deep in debt that they could not raise any more funds. In the power triad, distribution is the last stage, the one that puts money back into the system; generation and transmission recover their funds from the distribution sector. If there is a cash problem in the distribution sector, it will impact the other two sectors.<br /> </div><div>One of the reasons for the dire financial situation of SEBs is that, in many cases, the subsidies that they were to receive from the state governments were not disbursed on time or in full. That led to a situation where utilities had to take short-term loans to buy power. Additionally, revenue collection was postponed in the hope that any shortfall would be made up for in the future. This is a serious flaw on the part of the regulatory authorities. I hope this will now be set right. <br /> </div><div>Distribution being entirely in the state sector, the restructuring scheme will serve as a reminder to state governments to assume ownership of utilities as the states are required to take over the loans as equity, and securitise the bonds to be issued by the discoms. FIs have been asked to provide a moratorium on loan repayments so as to give the discoms some time to get their act together and avoid penal interest. The move would also require strict discipline on the part of states because they are already guided by the overdraft constraints mandated by the Fiscal Responsibility and Budget Management (FRBM) rules. The states will then have no option but to resort to an increase in tariffs as they will be obligated to pay interest on the bonds they issue. However, it is better to increase tariffs than to have a power crisis.<br /> </div><div>Debt apart, the extent of aggregate technical and commercial (AT&C) losses is unacceptable, even if we assume the national figures to be 27 per cent. The figure should be brought down to at least 15 per cent over the next two years and, in cities, this should come down to single digits, as is the norm in the developed world. <br /> </div><div>The restructuring exercise is also expected to lead to an improvement in the corporate governance of discoms with lenders likely to nominate their representatives on the boards of discoms. Considering the large stake that FIs have in them, this will be a welcome step, with lenders keeping an eye on the discoms’ reforms agenda. <br /> </div><div>The power minister is reportedly drafting an Electricity Distribution Responsibility Bill for enactment by states. If all these measures to work, fuel supply must be assured to generating companies so that they achieve maximum capacity utilisation. There is also need for consumers to be regularly educated on the economics of the power business. <br /> </div><div>We should move away from populism. Power is a business and whoever invests in it has a right to expect a reasonable rate of return on his investment. The consumer needs to understand that power supply comes at a cost that has to be paid. A true cost of power will also encourage efficiency in use.<br /> </div><div>There should be 100 per cent compulsory metering for all consumers. Free power should not be provided to anyone unless the state governments can provide for it. Are they going to make up for it by raising taxes elsewhere? If state governments cannot come out with a plausible solution, free power should not be allowed.<br /> </div><div>An increase in tariffs would have to be matched by improvements in customer care and supply. The discoms would need a cash infusion to make their operations more efficient and smart.<br /> <br />Smarter grids can bring back “unpaid” power into the “paid” mode. If we are successful in bringing back 30-35 per cent of unpaid power from some states into the system for people who pay for it, tariffs might not go up to the extent feared. By and large, most states are aware of the reforms prescription. The need now is to perform.</div><div> </div><div><em>The author is former secretary, Ministry of Power. <br /><br /></em></div><div><span style="color: rgb(34, 34, 34); font-family: arial, sans-serif; font-size: 13px; line-height: normal; ">(This story was published in Businessworld Issue Dated 08-10-2012)</span></div>