UDAY Scheme: Its role in waxing of DISCOM’s Fortunes

Power distribution is the only revenue generating part of the entire power sector value chain. However, power DISCOMS in India are still registering huge losses since their inception on account of high technical as well as commercial losses. In spite of several attempts through various policies to check the revenue leakages and bring down financial losses, the situation has remained same or worsened with time. In this context, Ministry of Power (MoP) initiated a scheme called Ujjwal Discom Assurance Yojna (UDAY) in 2015, with the aim of improving financial state of power distribution utilities.

The main agenda of UDAY has been to restructure the Utilities’ debt which had aggregated to INR 4 Lakh Crores at the time of scheme’s launch. With this restructuring it is stipulated that the interest costs will reduce by 4-5% to a more manageable levels. Under UDAY, state government assumes the liability of up to 75% of the utility’s debt thereby reducing the serviceable debt of utility to 25%. In this respect, a tri-partite MoU agreement has been signed among Ministry of Power, Power DISCOM and State Government. This agreement dictates the terms of debt restructuring as well as performance improvement plan of utility. The scheme has set targets for each of the participating utility to achieve higher operational efficiency through, i) reducing AT&C losses below 15%; ii) reducing ARR and ACS gap to zero; iii) augmenting metering infrastructure at consumer, DT and feeder in rural as well as urban areas; iv) adopting energy efficiency measures such as incandescent/CFL bulb replacement with LED; v) improving transparency by monitoring and measuring quarterly performance and reporting the same at a centralized portal; and several others. The yearly/quarterly targets have been proposed by the utility officials and calibrated so as to achieve the absolute targets of UDAY scheme by 2019. At present, a total 32 states and union territories have joined the UDAY scheme leaving only Odisha and West Bengal out of the mix.

Existence of DISCOMS can be traced back to the passing of Electricity Act in 2001 which mandated segregation of erstwhile State Electricity Boards into separate entities based on their functional aspects such as generation, transmission, and distribution. In the past one and a half decade of operations (give or take some years due to varied implementation of Electricity Act among states) instead of becoming profitable, DISCOMS continue to function as a tool of electorates’ appeasements by their political masters. Before UDAY, DISCOMs were in dire need of infrastructural, organizational and financial reforms in view of mounting losses endangering lakhs of crores of Non-Performing Assets (NPA) for state banks and institutional lenders such as REC, PFC, etc.

It would be unjustified to say that the previous administrations failed to take note of the precarious situation of DISCOMS but the measures taken in response were cursory and precipitous. As a result, DISCOMS were not able to improve efficiency and their financial crisis deepened.

UDAY scheme has addressed key issues plaguing DISCOMS by reducing the financial burden of utilities through decisive debt restructuring measures. In the last two year, the annual losses of DISCOMS has reduced by over 70% which is an unprecedented improvement. The overall AT&C losses have also decreased by 5% to a more palatable level from national average of 25% about two years back. Similarly, the average ACS-ARR gap among the DISCOMS has reduced by 57% since 2015. To summarize, utilities have achieved remarkable operational improvement under GoI’s flagship scheme, UDAY.

Although it is important to highlight the positive achievements, a pragmatic approach is necessary to analyze the performance results and ascertain the success of UDAY scheme in revitalization of power distribution sector. Following are some of the critical factors which should be considered for a more reasonable analysis:

1. Data validity: Utilities have been submitting interim performance data on a quarterly basis on UDAY portal. However, the actual, consolidated and audited data may turn out to be different than the current one. Also, it is important to note that several utilities have failed to file tariff petitions in a timely and accurate manner since 2012 ruling of Forum of Regulators (FOR). Similarly, several of the regulatory commissions have failed to release tariff order, consisting of audited financial and performance data, in a timely manner. Therefore, the accuracy and validity of data submitted by utilities on a quarterly basis may be debatable.
2. Target achievement: As per the latest UDAY scheme data, majority of the utilities have failed to meet their targets in spite of showing remarkable improvement. In some cases, the performance has varied in the two years of implementation. As a result, only subdued benefits may be realized at the end of UDAY scheme’s tenure.
3. Recrudescence of debt: From a skeptic point of view, it is possible that even after restructuring of debt, the utilities fail to revive their operational efficiency and again start accumulating bad debts. Therefore, without a strong scheme monitoring framework, this vicious debt cycle may continue in future too.

Keeping aside the portrayal of UDAY as panacea for power DISCOMS, this scheme may turn out to be a short term solution providing enough impetus for utilities to sail through the next 4-5 years after which a multi-billion rupees figure will be readily squeaking for “a new scheme”.