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Analyzing the latest tariff petition filed by the distribution utilities for FY2014-15, rating agency ICRA considers this move as positive signal for the power sector as majority of states have already filed tariff filings in a reasonably timely manner and that some of these states have proposed fairly hefty tariff hikes in an election year.
While discoms in states such as Andhra Pradesh, Gujarat, Odisha and Uttarakhand have proposed fairly stiff tariff revision in the range of 15%-26%, those in other states such as Haryana, Punjab, J&K and Madhya Pradesh have not proposed any tariff revision for FY 2014-15.
The revenue gap projected for FY15 has been quite significant by the utilities in few states and the common factors observed include mainly a) increase in cost of power procurement and other O&M expenses as proposed for FY15 and b) impact of additional cost estimate arising from final true-up of cost incurred in the previous periods (FY 11-13) based on the availability of audited accounts. This revenue gap is proposed to be met both through a mix of tariff revision and provision of regulatory asset for tariff recovery through future periods.
"The subsidy dependence projected by the utilities for FY15 continues to remain significant across majority of the states, varying from 13% to 26% of the ARR projected by the utilities," the rating agency said in a report.
In ICRA's view, overall subsidy dependence for the utilities for FY15 is likely to be higher than ICRA's estimate of about Rs 60,000 crore for FY14, given that tariff hikes could remain limited in the election year (FY15) across the states as well as recent announcements for tariff subsidy by state governments in Delhi, Haryana and Maharashtra, which could be emulated by other states.
With rising subsidy dependence, the timeliness and adequacy of subsidy support remains extremely crucial for the distribution utilities from their cash flow perspective. Also, since the committed subsidy is normally released as per the budgetary allocation (which is decided before the beginning of the financial year) by the state governments and this often tends to remain lower than the actual subsidy claims, distribution utilities often face a build-up of subsidy dues, which further results in pressure on their liquidity.
Also, the power purchase cost per unit proposed by discoms across the states is higher than the cost approved by SERCs for FY14 and the proposed increase in power purchase cost per unit for FY15 varies across the states depending upon the fuel source mix for procurement of power (i.e. with 1~4% increase for discoms in Uttarakhand, Odisha, J&K,and Uttarakhand procure a major portion of their power requirement from hydel sources & in turn have minimal y-o y increase in cost of generation, availability of hydel power also remains exposed to volatility in hydro-generation associated with the monsoon trends.
However, for discoms in other states which are dependent on procurement from thermal generation units, the power purchase cost is projected to increase relatively at a much higher rate, owing to increase in the fuel costs arising out of higher dependence on costlier imported fuel as well as rise in domestic coal cost.
In case of distribution loss levels, actual losses for utilities across majority of the states have remained higher than the loss trajectory approved by the SERCs and such higher losses have been disallowed by SERCs, while approving the truing up of costs. Further, the distribution losses projected by utilities in some states for FY15 remain higher than the approved loss trajectory and such higher losses are unlikely to be allowed by SERCs. Under these circumstances, ability of utilities to speedily reduce their losses so as to approach the approved loss trajectory will remain critical.
ICRA notes that the cost reflective nature of tariff determination as well as time-bound recovery of the regulatory assets by SERCs, remain to be seen, especially for the utilities which have now projected a significant revenue gap either with limited or without any proposal for a tariff revision for FY15. Further, any non-adherence of the conditions
especially related to subsidy payout by State Government as well as timeliness in filing of tariff petitions & tariff determination by SERCs as agreed in the terms of financial restructuring package (FRP) will remain a serious concern for the sector.
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