Government Covers Some Ground on Power Sector Challenges - India Ratings

New Delhi, January 15, 2014: India Ratings & Research (Ind-Ra) says that green shoots are emerging in the power sector due to the Indian government’s FY13 and FY14 policy measures towards solving two key issues - fuel risk and poor financial health of state power utilities (SPUs).
FY11-FY13 were the worst years for the sector due to the weak financial health of state power utilities on account of non-cost reflective tariffs, high reliance on short-term power, high aggregate technical and commercial losses and non-timely receipt of subsidy. Power entities also suffered due to high debtors for players across the value chain, non-availability of fuel, high interest rates, foreign exchange losses and regulatory risk leading to low investor interest.
Since FY13, the government has initiated measures and modified and formulated policies to revive investor interest in the sector. A slew of measures including the presidential directive issued to Coal India Limited (CIL) for signing fuel supply agreements (FSAs) with power producers, fast-track mine clearances and action on non-serious captive coal block developers would ensure higher coal availability to power plants. Also, fuel price risk is likely to be manageable with the formulation of a new standard bidding document for case II bids with fuel pass-through, compensatory tariff for select competitive bids and suitable modifications to allow pass-through of imported coal costs in CIL linkage-based FSAs. The government is also working towards bringing greater transparency in the sector through the constitution of a coal regulator and formulation of a coal block auction mechanism.
State electricity regulatory commissions have allowed substantial across-the-board tariff hikes to distribution companies (discoms) over FY13 and FY14, a gradual recovery of regulatory assets and monthly variable cost adjustments. Moreover, cabinet committee approved a financial restructuring package (FRP) for SPUs aimed at improving their financial health. These measures would release the much needed liquidity into the system.
Liability restructuring as part of the FRP has been successfully completed for discoms operating in the states of Haryana, Uttar Pradesh, Rajasthan and Tamil Nadu and Himachal Pradesh. This comes with certain pre-conditions like regular tariff rationalisation and a reduction in aggregate technical and commercial losses. Ind-Ra believes this will alleviate the risks posed by weak SPUs over the long term.

(Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)