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Can UDAY succeed in reviving cash-starved discoms?

The government last week tried to usher in a Diwali for the power sector by announcing a scheme called Ujwal Discom Assurance Yojana (UDAY, which seeks to improve the finances of the loss making power distribution companies (Discoms).

However, is UDAY a fool proof plan to control discom losses for is the big question and to get an answer to this question CNBC-TV18’s Latha Venkatesh caught up with two former power secretaries, R V Shahi and P Umashankar. She also spoke to Ajay Jain, energy secretary for the state of Andhra Pradesh and Sanjay Sagar, Joint- MD & CEO, JSW Energy.

According to experts the plans needs constant monitoring and one can not expect the scheme to succeed just because the plan is in place.

They also think there is no way that the centre can ensure AT&C losses or the power theft will come down because it is still dependent on the discoms and the state governments implementing it in good faith.

Experts believe quarterly revision of tariffs must be ensured, so that the tariff revisions don’t become big. If they are quarterly the revisions are likely to be small. There is no clout with the centre to ensure that this process is not politicised.

Banks can be are a very powerful way to ensure that this quarterly revisions take place, say experts

More importantly, Coal India should ensure that it provides the coal at a cheaper price because currently, its RoE is much higher than the RoE of power distribution companies, which the centre needs to think carefully about.


It is for the third time in the last 12 years that the government is making an attempt to improve the state of distribution companies. 

India’s power distribution companies or discoms have accumulated losses of Rs 3.8 lakh crore today and the banking sector’s exposure to them stands at Rs 4.3 lakh crore. They had financial recasts in 2003 and in 2013 but slipped back into losses, one mainly because of huge transmission losses due to power theft and two, because the state governments refused to let them raise power tariffs.

However, the Central Government is now trying to plug all these holes with its latest UDAY scheme.

Main features of the scheme are as follows

1. State Government will take over 75 percent of the discom debt and the balance 25 percent will be converted to discom bonds, which aims at bringing down the discoms interest costs.

2. States have to commit to smart metering to reduce the aggregate technical and commercial (AT&C) losses from 22 percent to 15 percent.

3. Starting FY18, state governments will have to take over discom losses as part of their deficit. 5 percent of the losses will be part of their deficit in 2018, 10 percent in 2019, 25 percent in 2020 and 50 percent in 2021.

4. Finally, banks have been told not to fund discom losses.

According to a Crisil report if the scheme is implemented for the 8 financial restructuring plan (FRP) states, it has the potential to wipe out losses of discoms in Haryana, Andhra Pradesh and Telangana by FY18. For discoms in Tamil Nadu, Rajasthan, Uttar Pradesh, Bihar and Jharkhand, losses will reduce but total elimination can happen only by achieving milestones on operational efficiencies lest they regress into the debt trap, it said.

Interview transcript on next page

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