State Electricity Boards are living on borrowed time, says a report from IIFL Institutional Equities. An IIFL research report has it that the aggregate networth of the SEBs has been wiped out and there is little political will to defray cost inflation through tariff increases.
Aggregate cash losses of SEBs and distribution companies (discoms) at Rs 28,400 crore have jumped 4.4 times over FY07-09.
Blended tariffs (mix of sales through merchant and power purchase agreements) have increased by 6.5 per cent versus a 16.5 per cent rise in cost of supply over the same period.
Shunglu Committee estimates
The Shunglu Committee on SEBs estimates that losses have more than doubled to Rs 68,000 crore in FY11. The blended tariffs will have to increase by about 25 per cent if SEBs were to break-even. If Coal India increases prices for utilities by about 20 per cent, a further five per cent increase in overall tariffs would be required to break-even.
More worrisome was that the States seemed to be working on the assumption of a bail-out package similar to the one in 2001 the report said. IIFL said utilities, especially those in private with short-term power sales would be severely tested in the interim. The report said longer delays might adversely affect loan book quality of institutions such as Rural Electrification Corporation and Power Finance Corporation that have large exposures to SEBs.
IIFL estimates that there will be about 40 per cent increase in the financial sector's SEB exposure Rs 2 lakh crore , given estimated losses of Rs 1.08 lakh crore over FY10-11.
On the way forward, IIFL believes that a forced consensus would emerge for reforms, but a bail-out might still be needed in the interim as reforms take time. However, despite the mounting losses, State utilities have not curbed their capex. Over FY06-09, consolidated capex for all State utilities increased from Rs 26,100 crore to Rs 52,200 crore.
Transmission and distribution spend target have been missed primarily due to delays in generation facilities.
Their stretched balance-sheets had not adversely affecting the T&D capex, as financial institutions were still willing to lend. This apart, there are grants from the Central Government as well. However, IIFL cautioned that the T&D vendors would see payment cycles lengthening.
Erratic power purchases from State-owned discoms would severely test private utilities that plan to sell short-term power.
IIFL said integrated utilities that have complete control over fuel sources own distribution operations and less exposure to state-owned discoms and merchant markets were better placed.