Tuesday, March 20, 2012

>India Infrastructure Insights - 15: State Power Utilities Need Tariff Hikes of 45-60% - But It Is Not That Simple!

 Required tariff increase of 45- 60% — Indian SPUs as a whole need to raise tariffs by 45-60% to recover their costs (without subsidies). Recent tariff hikes have managed to reduce the quantum of incremental required hikes only marginally. The worrisome aspects are (1) quantum of required hikes have increased (from 35-50% in FY06); (2) cost of supply of power has accelerated in recent past due to rising fuel cost, wage cost, interest burden and purchase of expensive merchant power; (3) delay in increase in tariffs will lead to further cost escalation due to debt taken on to fund current losses.

 High level of cross subsidization complicates tariff revision process — Domestic (24% of consumption) and Agriculture (24% of consumption) with average tariffs at Rs2.64/kWh and Rs0.9/kWh respectively are much lower than Industrial (35% of consumption) and Commercial (8% of consumption) at Rs4.25/kWh and Rs5.6/kWh respectively. This suggests that tariff hikes in domestic and agriculture tariffs will have to be much higher than 45-60%. This will severely test the will of the political leadership to pass-on costs to domestic and agriculture consumers.

 SPU financials continue to deteriorate — PAT loss of SPUs without subsidy has increased to Rs635bn in FY10 while D/E has increased to 21.0x due to erosion in net worth. Subsidy received as proportion of subsidy booked has declined to 56% in FY10 from 94% in FY07. Estimate of losses for FY11 vary from Rs700bn to Rs750bn.

 Key problems highlighted by the Shunglu Committee — Influence of State Government in the working of SPUs/ state regulators, lack of good quality financial and operational data, trifurcation of SEBs (which has been done only in name and not in substance), lack of open access, interference of State Governments in tariff setting process, regulators not exercising powers to ensure financial health of DISCOMs, and lack of progress in improving operational and technical aspects of distribution.

 Key recommendations — The committee has suggested (1) measures to ensure independence of regulators; (2) timely tariff increases; (3) measures to improve quality of reporting; (4) increasing scope of R-APDRP to reduce losses; (5) setting up of SPV to buy out loans given to SPUs under the condition that State Governments commit themselves to a time bound implementation of reforms; (6) emphasis on distribution circle franchisees.

 India Utilities top picks — PGCIL, Jindal Steel & Power, CESC and JP Power.

To read full report: INDIA INFRA INSIGHTS