India’s DISCOM Ratings Show Signs of Improvement on Paper

The Ministry of Power (MoP) recently released its seventh annual integrated ratings for the state distribution companies (DISCOMs).

The Investment Information and Credit Rating Agency (ICRA) and Credit Analysis and Research (CARE) were the designated rating agencies. This year DISCOMs saw a significant increase in rating upgrades; there were 20 upgrades and only one downgrade.

The upgrades were broadly attributable to the fact that 28 of the rated power distribution entities have shown an improvement in their aggregate technical & commercial (AT&C) loss levels during FY 2018 (19 over the previous year), filed timely tariff petitions for FY 2020, and demonstrated greater cooperation in terms of submission of information and facilitating meetings and discussions. Also, regulatory clarity is gradually appearing in the state power sector with state electricity regulatory commissions in place across all 22 states covered by ICRA and CARE.

DISCOM Ratings by Year

Out of the 41 utilities covered in the report, seven received the highest grade ‘A+.’ Four of these were from Gujarat: Dakshin Gujarat Vij Company Limited, Uttar Gujarat Vij Company Limited, Madhya Gujarat Vij Company Limited, and Paschim Gujarat Vij Company Limited.



Uttarakhand Power Corporation Limited also remained at the top of the list of credit ratings. Two utilities from Karnataka also received A+ ratings – Bangalore Electricity Supply Limited and Mangalore Electricity Supply Company Limited, these were new additions to the list of the highest credit rating category.

There was a significant increase in the number of utilities that were rated ‘A.’ Last year Mercom reported that there were only two utilities that received an ‘A’ rating – this year a total of nine DISCOMs have been rated ‘A.’ The new additions in this list were DISCOMs that belonged to Karnataka, Haryana, Himachal Pradesh, Maharashtra, Andhra Pradesh, Madhya Pradesh, and Punjab.

Of the remaining 25 DISCOMS, nine were rated B+ (down from 13), eight received a rating of B (down from 11), five utilities received C+ rating (up from two), and seven DISCOMs were rated C (up from five).

The evaluation parameters cover current levels of performance as well as relative improvement from year to year. The operational and reform parameters include AT&C losses, efficiency of power purchase cost, customer interface, and carry weightage of 52 percent. The financial metrics include the cost coverage ratio, payables, receivables, and timely submission of audited accounts carrying weightage of 33%. External parameters relate to regulatory environment, government subsidy support and carry assigned weightage of 15%.

Here is a snapshot of the top five solar states in the country (All data as of Q2 2019) and their updated credit ratings:

Karnataka:

Cumulative Large-scale solar installations: 6,182 MW

Under development: 1,993 MW

Karnataka DISCOMs

Karnataka DISCOMs saw the highest number of rating upgrades with four out of five utilities upgraded to ‘A’ or ‘A+’, these were – Bangalore Electricity Supply Company Limited (A+), Mangalore Electricity Supply Company Limited (A+), Chamundeshwari Electricity Supply (A) Corporation Limited, and Gulbarga Electricity Supply Company Limited (A).

The upgrades were based on low AT&C loss levels in FY 2018, regulatory clarity in the state, with presence of multi-year tariff regime along with regular tariff filings and tariff order issuance and a significant improvement in the cost coverage ratio in FY 2018 supported by the realization of past receivables under the program approved by the state government.

According to the report, power purchase cost remains relatively high in the state and has increased over the past three years. The growing dependence of subsidies is also mentioned as a concern.

The report recommends the Karnataka’s DISCOMs to continue to focus on reducing losses, power purchase costs, and improving subsidy collection levels and clearing pending subsidy claims for the state government.

Rajasthan:

Cumulative large-scale solar installations: 3,471 MW

Under development: 2,114 MW

Rajasthan DISCOMs

All the DISCOMs in Rajasthan remained at a ‘B’ rating. Two of the utilities had been upgraded last year from a ‘C+’ rating. The lack of upgrades in Rajasthan was attributed to concerns about the low-cost coverage ratio, low collection, billing efficiency, and high power purchase cost.

The report recommends the Rajasthan DISCOMs to focus on reducing AT&C losses even more. Timely issuance of tariff order is also a recommendation for some of the DISCOMs

Telangana:

Cumulative large-scale solar installations: 3,455 MW

Under development: 236 MW

Telangana DISCOMs

Telangana DISCOMs did not see an upgrade in rating this year, and this was mainly due to moderate AT&C loss, low collections, and low-cost coverage ratios.

The Southern Power Distribution Company of Telangana Limited performed well in terms of billing efficiency and power purchase planning. However, high-power purchase cost was a concern along with non-filing of tariff petition on time. Losses have been incurred for the past three years due to low cost coverage. Collection and payable timeline are long with over 107 days and 220 days respectively.

The Northern Power Distribution Company of Telangana Limited’s AT&C losses increased by almost 8% year-over-year with a high-power purchase cost of ₹ 5.35 per unit in FY 2018.

Andhra Pradesh:

Cumulative large-scale solar installations: 3,371 MW

Under development: 1,692 MW

Andhra Pradesh DISCOMs

The ratings of DISCOMs in Andhra Pradesh were stable due to low to moderate cost coverage ratio, low level of AT&C losses, moderate collections, and healthy collection efficiency. Key concerns such as the non-receipt of entire subsidy for FY 2018, high payables period of 119 days in FY 2018, and non-approval of true-up claims, and no automatic pass-through of fuel costs, remain in the state.

Investors will most likely not take these ratings seriously considering the recent power purchase agreement renegotiation issues from this year, which is not reflected in the report.

Tamil Nadu:

Cumulative large-scale solar installations: 2,679 MW

Under development: 1,179 MW

Tamil Nadu DISCOM

Tamil Nadu’s DISCOM also did not witness any change in rating as it already had relatively low AT&C loss levels at 18.49% in FY 2018, and receivable days remained consistently low and stood at 39 days. However, concerns such as slippages in regulatory timelines with regards to filing of tariff petitions, closure of annual accounts and continuing serious audit qualifications and default during FY 2018 existed. Tamil Nadu DISCOM’s dependence on tariff subsidy from the state government has increased substantially.

Tamil Nadu is another state that investors are wary of doing business in, primarily due to its reputation for delayed payments and curtailment issues.

This report is good to get a general overview of Indian power utilities but does not truly reflect the realities on the ground.

Mercom recently reported on payment delays for solar and wind project developers in Andhra Pradesh, Tamil Nadu, and Telangana. Some instances in Madhya Pradesh and a DISCOM in Karnataka were also blamed for long payment delays to developers. However, most of these DISCOMs have been rated higher in this report.

A top executive told Mercom in May that solar and wind developers of all sizes are facing payment delays. He blamed Andhra Pradesh, Tamil Nadu, and Telangana as the main culprits. In some instances, payment delays in Tamil Nadu have exceeded more than a year. In Telangana, the delay has been about ten months, and in Andhra Pradesh, the delay was about seven to eight months.

“DISCOMs are the primary reason for what ails the power sector in India. They avoid raising power tariffs for consumers based on actual costs and instead revert to power cuts and delay payments to power producers. Fixing DISCOMs can singlehandedly turnaround the power sector and investor sentiment,” commented Raj Prabhu, CEO of Mercom Capital Group.

The full list of ratings:

Seventh Integrated Rating for State Power Distribution Utilities (DISCOMs) - Utility-wise Grades

According to the  Central Electricity Authority’s (CEA) recent report, the total payment due for 513 renewable projects now amounts to ₹97.356 billion (~$1.356 billion) as of July 31, 2019, thus showing an increase of nearly ~ ₹15 billion (~$0.21 billion) compared to the previous figure of ₹82.3 billion (~$1.14 billion) for the same period.

In August 2019, Mercom had reported that payment dues were for projects spread across the states of Andhra Pradesh, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Odisha, Tamil Nadu, Rajasthan, Telangana, and Uttar Pradesh.