The restructuring package for the State Electricity Boards (SEBs) has to be supported by tariff hikes, a timely and adequate financial support by the state governments and better regulatory process and disclosures to yield results.

The most dangerous condition is that involvement of private sector in state distribution sector through franchise arrangements or any other mode of private participation to be prepared within a year by the Discoms.

The debt-restructuring plan is based on the report of Shunglu Committee. The Shunglu Committee had come to the mistaken conclusion that distribution franchise was the only solution to the ills of power sector. Further the sweeping conclusion that reduction in AT&C losses is not possible until the distribution companies are under state control. This loss reduction could be achieved only under private sector for which input based distribution franchise must be introduced throughout the country.
Shunglu Committee overlooked the fact that the distribution companies working in state sector in Andhra Pardesh, Tamil Nadu, Punjab and Karnataka, the AT&C losses had been reduced significantly in the range of 15%. In Punjab, PSPCL has brought down the AT&C losses from 22.5 per cent to 17.6 per cent.

It may be mentioned that in 2002-03, a financial package had been introduced by implementing the Ahluwalia Committee Report by which outstanding dues of state electricity boards of about Rs.43, 000 crore were securitized by the State Governments through the issue of bonds. As the cost of power supply was always more than the average revenue realized, the SEBs of the country again went into the red.

The Government has never tried to diagnose the problems faced by power sector but only tried to treat the symptoms. The experimentation in power sector continues only to benefit the private players at the cost of taxpayer’s money. Franchisee system in power distribution means beginning of end of role of state Discoms.

Under political pressure to sell below cost and losing more than a quarter of power supply to theft and decrepit networks, distribution companies have been borrowing for years to fund their losses. Further years of populism, corruption and mismanagement are the main reasons for Discoms’ losses.
The franchise/ privatization system resulted in higher tariff on the consumers, which was required for ensuring high profit margins for the private franchisee. The government has become a willing partner to increase the tariff every year for the benefits of franchisee companies.

Fitch, an international rating agency commenting on debt restructuring said that strong political will be needed to achieve meaningful reforms. It should allow the entities to upgrade their infrastructure, curtail inefficiencies and improve credit profile. However, the long-term benefits will only materialize if the SEBs meet their milestones on tariff rise and reduce the large operational inefficiencies that lie at the core of the problem.

Just seven of the country's 28 states - Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Punjab, Madhya Pradesh and Andhra Pradesh account for 70% of loans and these states are awaiting eagerly for the bailout package. The bailout plan for power sector has indeed not addressed the country's long-term energy problems and may only drag government lenders deeper into the trouble.