State Discoms' Operating Losses to Remain High Despite 15-20% Drop: CRISIL

09 Oct 2024

Crisil Ratings reports that operating losses for 30 state power distribution companies (discoms), indicated by the difference between the average cost of supply (ACS) and the average revenue realised (ARR) per unit of power, are expected to remain significant at 40 to 45 paise per unit this fiscal year, despite a year-on-year decrease of 15-20%.

Rising supply costs and limited tariff increases have sustained high operating losses, resulting in increased borrowings to cover these deficits. Consequently, this will maintain weak credit profiles for discoms, making them dependent on prompt government assistance.

"Despite attempts to narrow the ACS-ARR gap, adjustments to tariffs have historically lagged behind rising costs. For example, while the ACS increased by over 90 paise in the past two fiscal years due to a significant rise in power costs amid high demand, the ARR only saw an increase of 60 to 70 paise," said Ankit Hakhu, Director at Crisil Ratings.

There are several factors contributing to the sluggish growth in annual revenue requirement (ARR). First, even at the national level, there have been delays in releasing tariff orders, despite some improvements. For instance, in 10 out of 36 states and union territories (UTs), the tariff orders for fiscal year 2024 were either delayed or not released at all. This pattern has persisted, with 14 states and UTs experiencing similar delays for fiscal 2023 and 22 for fiscal 2022, according to Crisil's analysis.

Second, regulatory support mechanisms like automatic pass-through have been adopted in only 15 states and union territories. Third, improvements in billing efficiency have been gradual and continue to fall short of 90%, affecting discom revenues and maintaining the ACS-ARR gap at 40-45 paise per unit this fiscal year. This will mark only the second time in the past five fiscal years that the gap has fallen below 50 paise per unit.