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ET-REVIEW 5 states face big power cuts as FIs stop lending to distributors

Friday ,dated 26.aug.2011 page.11

By: Shailendra Singh Thakur EX-PGDM 2011-12 Roll no.11020468013

Power sector
Power sector consists of: 1.power generation 2.power transmission 3.power distribution

Loss generation
Financial institution decided to stop lending to power distribution companies, in all these distribution companies losses exceeded 5000 crore. Estimated losses by 2014-15 will be 150,000 crore for state electricity boards, creating an alarming situation for electricity producers & consumers.

Why situation arises?

Though there is no defaults yet but some of the power distribution companies failed to installments on due dates causing a concern to the lending institutions like oriental bank of commerce, bank of baroda,corporation bank & state bank of India.

States: going to affected

Tamil Nadu Punjab Haryana Uttar Pradesh Haryana All financial institutions decided to stop lending money to the utilities of power distribution of these states.

For what states asking

These five states are asking for more & more subsidies. Permission to raise the tariffs. Otherwise they will fall short of working capital requirements & ultimately fall down.

Leads to
Borrowing money as short term loans as high as 14-15% to meet their debt obligation. Weak finances not allow distribution utilities to purchase power & restoring to load shading. Power generation not finding takers for their produce.

Non approval of expenses by state regulators on account of non achievement of efficeniecy targets & lack of capital investments by utilities due to poor financial health has become a vicious circle. Need to be broken down with through appropriate inventions such as advancing efficiency & other improvement programs

New power tariff regulation 2009-14

Increase in rate of equity from 14% to 15.5% (incentive of 0.5% for early commissioning of projects.) Opposite reactions from the consumers has been shown as they think that hike on ROE will ultimately be borne by them only, want to cut down from 14% to 12% only. Investment pattern under electricity act is 70:30 i.e. debt equity.

Advantages for high ROE

If the rate of equity is high then there will be higher investment in the form of equity which allows utilities to bargain with financial institutions over interest rates to complete the obligation of debt. Acc.to electricity act 2003 the rate of equity should be so that it is not only attract the investors but also take care of the consumers.

Reforms to encounter power shortages

Large scale involvement of private sector investors in generation & distribution of power. creation of central regulation to regulate bulk tariffs & a state regulator for small generation & end user tariffs, with central remain the dominant regulator. Liberalization in generation, transmission & distribution of electricity. Improvement in the coordination between central & state governments in planning & developing the sector.

Thank You