Performance Review

Over 50 per cent of discoms register a decline in their annual ratings

In July 2021, the ninth annual integrated rating for state power distribution utilities was released by the Ministry of Power (MoP) and the Power Finance Corporation in collaboration with ICRA and CARE. An annual assessment of discom performance against various technical and financial parameters has been carried out based on an MoP-formulated integrated rating methodology since 2012.

The annual exercise serves several purposes. First, it helps benchmark the performance of the discoms, and incentivises them to improve their operational and financial performance. Second, it serves as an indicator of creditworthiness, and facilitates a realistic assessment by banks and financial institutions (FIs) of the risks associated with lending exposures to various discoms. Finally, and most importantly, it serves as a basis for central government assistance. This has become more relevant in the context of the recently approved reforms-based and results-linked revamped distribution sector scheme, which stipulates an annual appraisal of discom performance to be undertaken against predefined performance trajectories as a precondition for central funding.

Under the latest rating exercise, as many as 22 of the 41 state-owned discoms (excluding power departments and private discoms) assessed witnessed a slide in their ratings from the seventh edition (released in October 2019), while only three discoms saw an improvement. The remaining 16 discoms retained their previous ratings. Despite several reforms undertaken by the central government through various schemes, electricity distribution, dominated by state-owned utilities, continues to be the weakest link in the sector value chain. That said, there have been some stellar performances. The top rating of A+ has been given to five discoms – the four Gujarat discoms and Dakshin Haryana Bijli Vitran Nigam Limited (DHBVNL). At the other end of the spectrum, with a C rating, are eight discoms from the states of Andhra Pradesh, Rajasthan, Meghalaya, Jharkhand, Manipur, Tripura and Tamil Nadu.

Going forward, the plan is to publish separate annual consumer service-based ratings for discoms along with new editions of the integrated ratings. The former will assess the customer-centricity of a utility on parameters such as duration and quality of electricity supply, billing and collection efficiency, and grievance redressal. Significantly, some of these parameters have been removed from the integrated rating methodology in the current edition, to be included in the comprehensive set of consumer service ratings. For the new ratings, REC Limited will be the nodal agency. Together, the two ratings will help in the overall reform of the distribution segment.

Power Line presents the key highlights of the recent ratings report…

Key features

  • The latest ratings are for financial year 2019-20. Based on its review of the integrated rating methodology, the MoP approved certain modifications in May and July 2021, and a revised method was developed for power purchase costs with the incorporation of corporate governance, interest coverage ratio, total debt to net worth and extent of subsidy realisation parameters. The latest ratings have been carried out as per the revised methodology.
  • The key parameters based on which ratings were assigned included operational and reform parameters, financial performance, and external factors such as regulatory environment and government support. The operational and reform parameters carried the maximum weightage of 43 per cent. These included aggregate technical and commercial (AT&C) losses, power purchase, cost efficiency, renewable purchase obligation compliance and corporate governance. These were closely followed by financial parameters (42 per cent), such as financial ratios, sustainability, payables, receivables and timely submission of audited accounts; and external parameters (15 per cent).
  • Non-compliance with certain parameters carried negative scores. These included the extent of subsidy realisation (up to minus 15 per cent); unavailability of audited accounts (up to minus 12 per cent), non-filing of the tariff petition (up to minus 5 per cent), untreated revenue gap (5 per cent), increase in AT&C losses (up to minus 3 per cent), non-formation of state transco (minus 3 per cent), presence of regulatory assets for over three years and non-allowance of carrying costs by the regulator (up to minus 3 per cent), negative net worth (minus 2 per cent), default to banks/FIs (up to minus 2 per cent), lack of true-up order, non-implementation of automatic pass-through of fuel costs and return on equity norms prescribed by the Central Electricity Regulatory Commission (each minus 1 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 were categorised into six grades ranging from A+ to C. The top five utilities with a rating of A+ were the Gujarat discoms – Uttar Gujarat Vij Company Limited, Dakshin Gujarat Vij Company Limited, Madhya Gujarat Vij Company Limited (MGVCL) and Paschim Gujarat Vij Company Limited – and DHBVNL. Notably, Gujarat discoms retained their leadership position for the ninth consecutive year.
  • The three discoms with a rating of A were Uttar Haryana Bijli Vitran Nigam Limited, Punjab State Power Corporation Limited and Maharashtra State Electricity Distribution Company Limited. Meanwhile, 10 discoms were assigned a rating of B+, indicating moderate financial and operational capability.
  • The remaining 23 discoms received a rating of either B (6 discoms), C+ (9 discoms) or C (8 discoms). Thus, over half of the discoms studied showed either below average or low operational and financial capabilities. The eight discoms with the lowest rating were Eastern Power Distribution Company of AP Limited, Jaipur Vidyut Vitran Nigam Limited, Meghalaya Power Distribution Corporation Limited, Jharkhand Bijli Vitran Nigam Limited (JBVNL), Manipur State Power Distribution Company Limited, Tripura State Electricity Corporation Limited (TSECL), Tamil Nadu Generation and Distribution Corporation Limited, and Jodhpur Vidyut Vitran Nigam Limited.
  • Notably, the overall ratings of discoms of Rajasthan, Karnataka (except for one discom), Andhra Pradesh, Telangana, Tamil Nadu, Uttarakhand, Himachal Pradesh, Chhattisgarh, Bihar and Assam slid from previous years’ levels.

Key findings

  • Most discoms were not able to recover costs owing to non-cost-reflective tariffs and a substantial increase in expenses. This is indicated by the cost coverage ratio, which remained below 0.90 for most entities (20 out of 41 rated discoms).
  • The median cost coverage during 2019-20 improved marginally to 0.87 from 0.86 in the previous year, but declined from 0.91 in 2017-18. Overall, only 16 discoms showed an improvement in their cost ratios, with six of them witnessing an improvement of over 10 per cent. Of the 22 discoms that reported a decline in this ratio, four witnessed a fall of over 10 per cent.
  • In terms of AT&C losses, 20 of the rated discoms showed an improvement during 2019-20 over the previous year. The median loss level declined to 21.16 per cent from 21.85 per cent in the previous year. However, they were marginally higher than the 20.06 per cent achieved in 2017-18. Overall, only nine discoms recorded AT&C losses of less than 15 per cent.
  • Fifteen discoms achieved more than 10 per cent reduction in AT&C losses. These included discoms of Andhra Pradesh, Tamil Nadu, Karnataka, Madhya Pradesh, Uttar Pradesh, Manipur and West Bengal.
  • The 11 utilities that recorded a deterioration of over 10 per cent in this parameter were MGVCL, Kerala State Electricity Board Limited, Punjab State Power Corporation Limited (PSPCL), Telangana State Southern Power Distribution Company Limited, Bangalore Electricity Supply Company Limited (BESCOM), Maharashtra State Electricity Distribution Company Limited (MSEDCL), Uttarakhand Power Corporation Limited, Assam Power Distribution Company Limited (APDCL), Northern Power Distribution Company of Telangana Limited, JBVNL, and South Bihar Power Distribution Company Limited.
  • Twenty-nine utilities exhibited a positive interest coverage ratio (ICR) in 2019-20. Gujarat discoms exhibited an ICR of over 5, while seven other discoms had an ICR of over 2 including APDCL, MP Paschim Kshetra Vidyut Vitaran Company Limited, Mangalore Electricity Company Limited (MESCOM), West Bengal State Electricity Distribution Company Limited, DHBVNL, Jaipur Vidyut Vitran Nigam Limited, and BESCOM.
  • Sixteen discoms recorded a positive debt to net worth ratio (D:E), of which 10 had a ratio of less than 2, indicating sound support from the respective state governments. These were the Gujarat discoms (which had the minimum D:E ratio), the Bihar discoms, PSPCL, MESCOM, MSEDCL, and TSECL.
  • In terms of the regulatory environment, tariff orders were not issued for five utilities for the year 2020-21 across the states of Rajasthan, West Bengal and Tamil Nadu.
  • Further, 14 utilities were yet to file their tariff petitions for 2021-22 including the discoms of Telangana, Rajasthan, Uttar Pradesh, Manipur, Kerala, Tripura and Tamil Nadu at the time of the study.
  • Thirty-five utilities submitted audited annual accounts for 2019-20 while the remaining six discoms submitted provisional accounts.
  • The existence of state electricity regulatory commissions in all 22 states covered in the report is an indicator of better regulatory clarity in the sector.
  • The report notes that most of the utilities showed greater cooperation in terms of submitting information and facilitating meetings and discussions, indicating that discoms are open to transparency.

Net, net, the latest ratings of the state power distribution utilities are a mixed bag of varied performances. The central government is making renewed efforts to revamp the distribution segment, which holds the key to the viability of the electricity sector. Given that central funding assistance will be performance linked, the annual discom ratings have gained significance. Discoms will have to make tangible improvements to enhance their ratings and business.

Swarna Kesavan

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