Rating Discoms: Gujarat and Uttarakhand ranked among the top five utilities

Gujarat and Uttarakhand ranked among the top five utilities

The government’s vision to provide 24×7 affordable and environment-friendly “Power for All” requires a revamp of the distribution sector. To this end, the government has launched several programmes, such as the Ujwal Discom Assurance Yojana (UDAY), the Deendayal Upadhyaya Gram Jyoti Yojana and the Integrated Power Development Scheme, which are aimed at achieving a financial and operational turnaround for discoms and increasing investments in distribution infrastructure. However, the deep-rooted problems of high aggregate technical and commercial (AT&C) losses, corruption involving suppliers and users, inadequate metering, poor recovery of dues and lack of consumer orientation continue to hamper growth. While some discoms, have shown better growth than the overall sector performance, a lot still needs to be done.

The Ministry of Power (MoP) and the Power Finance Corporation in collaboration with ICRA and CARE have announced discom ratings to incentivise discoms to improve their operational and financial performance, facilitate realistic risk assessment by banks and financial institutions and serve as a basis for central government assistance to discoms. Released in May 2017, the Fifth Annual Integrated Rating for State Power Utilities excludes power departments and private discoms. Key highlights of the latest ratings report…

Key features

  • The latest ratings pertain to financial year 2015-16 and cover 41 distribution utilities across 22 states. Based on a review of the rating methodology, the MoP had approved certain modifications in February 2016, providing higher weightage to operational parameters. The latest ratings have been carried out as per the revised methodology.
  • The key parameters, pertain to operational and reform measures, financial performance and external factors such as regulatory environment and government support. The operational and reform parameters, which include AT&C losses, efficiency of power purchase cost and customer interface, carry the maximum weightage of 47 per cent. This is followed by financial parameters (33 per cent) like cost coverage ratio, and timely submission of audited accounts, and external parameters (20 per cent). Until the third edition of the ratings, financial parameters carried the maximum weightage (63 per cent) followed by regulatory environment (15 per cent).
  • Non-compliance with certain parameters carried negative scores. These included the unavailability of audited accounts (minus 12 per cent), non-filing of the tariff petition (minus 5 per cent), untreated revenue gap (minus 5 per cent), increase in AT&C losses (minus 4 per cent), non-formation of a state transco (minus 3 per cent), presence of regulatory assets, non-allowance of carrying costs by the regulator (minus 5 per cent), lack of true-up order, non-implementation of the automatic pass-through of fuel costs and return on equity norms prescribed by the Central Electricity Regulatory Commission (each up to minus 1 per cent), default to banks/financial institutions (minus 2 per cent), and non-provision of employee-related liabilities or statutory dues in the accounts (up to minus 1 per cent).
  • Based on the above parameters, ratings have been categorised into six grades ranging from A+ to C. The top five utilities with an A+ rating (score of 80-100) are the four discoms of Gujarat – Dakshin Gujarat Vij Company Limited, Madhya Gujarat Vij Company Limited, Uttar Gujarat Vij Company Limited (UGVCL) and Paschim Gujarat Vij Company Limited – and Uttarakhand Power Corporation Limited (UPCL). Significantly, Gujarat discoms have retained their leadership position for the fifth consecutive year.
  • The six utilities with a rating of A (score of 65-80) are three discoms of Karnataka – Chamundeshwari Electricity Supply Corporation Limited, Bangalore Electricity Supply Company Limited (BESCOM) and Mangalore Electricity Supply Company Limited (MESCOM) – and Himachal Pradesh State Electricity Board Limited (HPSEBL), Maharashtra State Electricity Distribution Company Limited and Eastern Power Distribution Company of AP Limited (APEPDCL).
  • Meanwhile, the bottom seven discoms with a C rating (score of 0-20) are three discoms of Uttar Pradesh – Madhyanchal Vidyut Vitran Nigam Limited (MVVNL), Purvanchal Vidyut Vitaran Nigam Limited (PuVVNL), Dakshinanchal Vidyut Vitran Nigam Limited (DVVNL) – and Meghalaya Power Distribution Corporation Limited (MePDCL), Manipur State Power Distribution Company Limited, Jharkhand Bijli Vitran Nigam Limited and Tripura State Electricity Corporation Limited.
  • Eight discoms were given a B+ rating (score of 50-65), indicating moderate financial and operational capability. The remaining 15 discoms had a rating of B (10 discoms, score of 35-50) or C+ (5 discoms, score of 20-35). Overall, almost 50 per cent of the discoms under study had below average to very low operational and financial capability.

Key findings

  • Most discoms were not able to recover costs on account of non-cost-reflective tariffs and a substantial increase in expenses. This is indicated in the cost coverage ratio, which remained below 0.9 for most entities (25 out of 41 rated discoms or 61 per cent). During 2015-16, the median cost coverage at 0.87 improved marginally from 0.85 in the previous rating exercise. Gujarat and Himachal Pradesh were the best performers in terms of cost coverage.
  • Overall, 23 discoms showed improvement in their cost ratios, with six recording an improvement of over 10 per cent. Of the 14 discoms that reported a decline in cost ratio, three witnessed a fall of over 10 per cent. The four discoms that recorded an improvement of over 15 per cent are Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO), Kanpur Electricity Supply Company Limited (KESCO), MVVNL and Jodhpur Vidyut Vitran Nigam Limited (JDVVNL).
  • In terms of AT&C losses, 26 discoms (63 per cent of the rated discoms) showed improvement during 2015-16 over the previous year. The median loss level declined consistently to reach 22.92 per cent from 24.82 per cent, 25.08 per cent, 26.19 per cent and 26.55 per cent in the previous four years respectively. Overall, 30 per cent of the discoms had AT&C losses of less than 15 per cent.
  • Fourteen discoms that reducted their AT&C losses by 10 per cent are APEPDCL, Southern Power Distribution Company of AP Limited, HPSEBL, UPCL, MESCOM, BESCOM, Hubli Electricity Supply Company Limited, Gulbarga Electricity Supply Company Limited, Chamundeshwari Electricity Supply Corporation Limited, TANGEDCO, KESCO, JDVVNL, MVVNL and PuVVNL.
  • The six utilities that recorded an increase of over 10 per cent in AT&C losses are UGVCL, Southern Power Distribution Company of Telangana Limited, Paschimanchal Vidyut Vitran Nigam Limited, MP Madhya Kshetra Vidyut Vitran Company, MePDCL and DVVNL.
  • In terms of the regulatory environment, the number of utilities, for which tariff orders were not issued for 2016-17, increased to eight across the states of Kerala, Rajasthan, Tamil Nadu, Assam, Jharkhand and Tripura. In the previous edition, tariff orders were not issued for utilities in the states of Kerala, Rajasthan, Tamil Nadu and Tripura while for the states of Assam, Jharkhand, Maharashtra, Uttar Pradesh and West Bengal orders were issued, albeit with significant delays.
  • Only 14 utilities filed their tariff petitions for 2017-18 on time during the current rating exercise. The corresponding numbers were 12, 15, 21 and 7 in the previous four rating exercises respectively.
  • Thirty utilities or 73 per cent submitted audited annual accounts for 2015-16 as against 26 utilities during the previous rating exercise.
  • A key positive is the existence of state electricity regulatory commissions in all the 22 states covered by ICRA and CARE in the report. This indicates regulatory clarity in the sector.

The ratings reveal varied performances. The impact of central schemes, particularly UDAY, is expected to reflect over the next couple of years, which would improve the overall sector rating. However, this requires the state discoms to fast-track reforms and improve their commercial viability and consumer experience.