The weak financial profile of discoms is the primary cause of stress for state power utilities. They posted Rs 29,500 crore worth of losses in fiscal 2009-10 against Rs 7,000 crore in fiscal 2005-06.
"This means that under the "cost-plus" tariff, generation and transmission companies are able to push their costs to the discoms, which are unable to recover the same from their consumers," Salil Garg, Director in Fitch's Asia Pacific Utilities team said.
Cost-plus tariff means that the discoms will get to charge a price that includes their cost and a certain return.
While the substantial increase in losses of discoms is widely known, Fitch notes that such a macro view masks the presence of healthy and well-performing discoms.
There are 12 states where losses of discoms increased in financial year 2009-10 compared to fiscal 2007-08, and nine states where profits decreased.
Eight states had discoms with losses greater than Rs 1,000 crore in fiscal 2009-10. Of these eight states, discoms in five states - Tamil Nadu, Uttar Pradesh, Madhya Pradesh, Jammu & Kashmir and Haryana - contributed Rs 22,000 crore (80%) to the net aggregate loss in fiscal 2009-10.
"Discoms with high loss have been affected by an unfavourable combination of consumer mix, pricing, aggregate technical and commercial losses (ATC), subsidy and high power purchase costs. Vivek Jain, Analyst in Fitch's Asia Pacific Utilities team said.
A curtailment of fresh loans by banks and financial institutions to discoms could trigger defaults by the latter.
Delayed payments by discoms can have a cascading effect on the value chain, with delayed payments to generators leading to delayed payments to coal and equipment suppliers, stretching their working-capital cycles and affecting their credit profiles.
Source- Business standard