Despite over a 40 percent hike in base tariff and heavy monthly and quarterly fuel price adjustments, the circular debt keeps on growing. Reportedly, the deviation of circular debt from what is agreed with the IMF is north of Rs700 billion in the fiscal year so far. It appears that the increase in tariffs has resulted in the loss of recovery by power distribution companies.
Reportedly, the recovery of discos has reduced from 93 percent to 83 percent in the Jul-Sep quarter. And the T&D losses have increased from the targeted 15.8 to 17.4 percent. The deviation was Rs400 billion in 3 months and now it has crossed Rs700 billion in 5.5 months. This implies the losses of discos are likely to remain high in the second quarter as well.
There are other reasons for the build-up of circular debt such as delays in increases in tariffs, and subsidies to exporters and farmers; but predominately, it is the loss in recovery that is the prime cause. There are two factors for lower recovery. One is the falling ability of consumers to pay due to higher tariffs and adjustments. And the other is lower recovery and T&D losses in flood affected areas. Channel checks confirm that growth in defaults is the prime culprit.
It is intuitive that the defaults increase with the higher cost of electricity. The base tariff is up by around 45 percent. There were very high fuel price adjustments in Jul and Aug. This coupled with high food and other inflation at a time when incomes are not increasing is making it extremely hard for consumers to manage budgets. Some of them must have defaulted on electricity payments while the use of Kundas might have increased as well.
The other reason for lower recovery is a higher monthly adjustment in July and Aug bills based on the consumption in May and June -as it is applied with a lag of two months. In May and June, the summer was at its peak and the newly formed Prime Minister had a desire to live on his reputation of super speed. He did not listen to his finance minister and decided on importing RLNG (on spot) and Furnace Oil at peaking prices without realizing that this cost must be recovered from consumers.
When domestic and commercial consumers skyrocketed bills in July and Aug, many failed to pay. Some went to court. Others defaulted. And in the case of consumers below 300 units, the government took the surcharge back. Rs9-10 FSA per month was a big number. And non-recovery from this component must have resulted in the loss of recovery in July-Sep.
However, FPA in Oct and Nov was very low and there were no issues with it. Based on this, the recovery should have improved lately. Yes, there is some improvement; but still very high recovery losses as compared to last year, sources confirmed.
Here the role of governance comes into play. The situation in KE is different from what is happening in the rest of the country. There is a dent in KE jurisdiction as well – recovery is down from 92 to 88 percent in domestic and commercial segments while it’s almost 100 percent from industrial clients – overall recovery is down from 95 to 93 percent with no dent in T&D.
The company has earmarked areas at PMT levels and has increased load shedding in areas of falling recovery in addition to making timely disconnections on grounds of defaulters. In the case of commercial connections, the company introduced installment plans and other forms of negotiations to avert defaults. Dealing with non-payers is necessary to ensure that consumers don’t become habitual defaulters. Such a form of governance is missing in discos.
Now the remedial solution prescribed by authorities (as per news reports) is to increase electricity tariffs and surcharge – the highest increase is proposed at Rs32/unit. This is ironic i.e., to curb losses due to non-payment (which is due to an increase in tariffs) is to increase tariffs more. This would reduce the recovery further. It is a loop.
The other problem with higher tariffs is the reduction in demand, which is down by 10 percent from what was expected. Further increase in tariff to compress demand further. There is a higher element of capacity payment in power tariffs which consumers must pay irrespective of electricity use. The lower the demand, the higher would be the capacity charge per unit.
The optimal outcome is to improve governance which is imperative for better recovery and growth in paying consumers. Unfortunately, in the current governance structure, that is simply missing in discos. The impact of a 10 percent loss in recovery at last year’s consumption level with a 40 percent increase in tariff is computed at Rs323 billion in the full year. This implies, out of the Rs700 billion increase in circular debt so far, Rs150 billion is due to low recovery. This must improve, and for that better governance is required at discos.
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