Centre Moots Reform-Based Scheme for Discom Debt Restructuring

At the latest 5th meeting, chaired by Union Minister of Power and Housing & Urban Affairs, Manohar Lal, the Group of Ministers addressed key issues related to the viability of electricity distribution utilities. The move comes shortly after the recent Supreme Court verdict on regulatory assets, where the court has directed liquidation of such assets by April 2028. Also, fresh regulatory assets cannot be created for more than 3 years now. Regulatory assets, which have been used extensively to defer costs by many discoms, have no place in a normal balance sheet in any case.  

During the meeting, it was deliberated that Regulatory Commissions must issue full-cost tariffs, and the State Governments may provide subsidies if required. It was also deliberated that, to ensure the timely resolution of issues and discourage motivated litigation, measures to encourage mediation mechanisms should be introduced in the regulations. In view of the gravity of the debt situation, there was a felt need to recognise the debt of the distribution utilities as the liability of the State Governments.

Steps needed to be taken:

• Increasing the role of State Governments and Regulators.
• Ensuring cost-reflective tariffs and timely payment of subsidies and government department dues.
• Expediting smart metering works and increasing the use of data analytics to improve power purchase optimisation and demand forecasting.
• Drafting the broad contours of the new scheme to be proposed by the GoM for debt restructuring of distribution utilities.

Key Takeaway

1. High cross-subsidy:

He further informed that the high cross-subsidy being levied has resulted in higher manufacturing costs, affecting competitiveness. Additionally, prevailing losses of distribution companies have made the sector less attractive for private investment. He proposed key reform measures, based on the deliberations and on the considerations of the member States, to ensure that improvements in the sector are irreversible.

2. Center-State Collaborative Efforts: 

Union Minister of Power and Chairman of the Group of Ministers, in his address, highlighted the importance of the operational and financial health of distribution utilities in ensuring quality power supply to the public. He remarked that collaborative efforts by the Central and State Governments, along with Regulatory Commissions, are required to implement necessary reforms to ensure the viability of the power sector.

Recently, a report by Primus Partners emphasized a similar reform, suggesting, "India’s discoms face accumulated losses of more than ₹6.77 lakh crore (~$82 billion). Financial restructuring, tariff rationalization, and direct benefit transfers for subsidies are essential to improve cost recovery and ensure timely payments to renewable energy developers."

He emphasised the early installation of prepaid smart meters in all Government establishments. The minister also urged the states to reaffirm the commitment of “Power for All, at All Times,” in an efficient, environmentally sustainable, and cost-effective manner.

3. Overcoming Debt Trap

The Secretary (Power), GoI, in his opening remarks, highlighted the need for reform measures to restore the financial viability of distribution utilities. He urged to structure of the reforms in a manner that ensures improvements are irreversible and the situation of a debt trap does not arise again. He mentioned that the GoM has been constituted for this purpose and aims to identify the requisite reform measures.

The Additional Secretary, Ministry of Power, GoI, also made a presentation on the proposed Electricity (Amendment) Bill, which could create an enabling environment for improving the financial viability of utilities, facilitating Ease of Living & Doing Business, promoting energy transition, strengthening the regulatory framework, and optimising distribution network utilisation.