Financial Viability

Capital Structure

FINANCIAL VIABILITY

1. Financial viability of the State Electricity Boards has been discussed in various National Forums for quite some time. In 1964, the Venkatraman Committee had recommended that the State Electricity Boards should earn a return of 9.5% on capital base after providing for operational expenses and depreciation charges. However, most of the SEBs failed to generate this surplus. Section 59 of the Electricity (Supply) Act, 1948, was amended in 1983, effective from 1.4.1985, requiring the SEBs to achieve such surplus as may be prescribed by the State Government concerned, but not less than 3% of the value of the net fixed assets, at the beginning of the financial year. The World Bank has also been insisting on financial viability and generation of surpluses by SEBs as one of the eligibility criteria for World Bank assistance for power projects.

2. By incorporating a new section, 12-A in the Electricity (Supply) Act, 1948, in the year 1978, the State Governments were authorised to declare the State Electricity Boards as a body corporate with an initial equity capital not exceeding Rs. 10 Crores which could, however, be enhanced in terms of other provisions of the Act to such an extent that the increased maximum limit of the capital does not exceed the aggregate of outstanding loans of the Board.

3. Since the Electricity Boards have been incurring revenue deficits (Losses), the World Bank Asia President while criticising India's Power Sector, has recently blamed the technical as well as financial performance of the State Electricity Boards. He also stressed that some corrective steps are called for before considering further World Bank loans. He further observed that the power sector in India is institutionally a complex one in terms of financing, origin of power, transmission, management and distribution. Some of the State Electricity Boards were particularly weak with low rates of tariff and poor efficiency.

4. It is an acknowledged fact that generation projects have very long gestation periods. In view of the ever-increasing demand for power in the State, a number of generation projects would always remain under execution. The Board would not, therefore, be in a position to bear the interest liability of these generation projects during the period of construction or immediately thereafter, since the power rates continue to remain low. As the generation projects are in the larger interest of the State, maintaining adequate equity base and reduction in interest burden are essential in the public interest.

5. With the continuing cost escalation, adequate tariff increase is unavoidable and imperative. Though the board is competent under the Act to fix the tariff, prior approval of the State Government is necessary under the directives issued long back by the State Government. Despite unprecedented over all price increase, agriculture tariff has been kept low as agriculture is the mother industry. As a result, the existing tariffs are not adequate to off-set all the operational costs and heavy interest liabilities.

6. By the aforesaid amendment in the Electricity (Supply) Act, 1948 Section 59(1) "The Board is required to adjust its tariffs so as to ensure that the total revenue in any year of account shall, after meeting all expenses properly chargeable to revenue, including operating, maintenance and management expenses, taxes (if any) on income and profits, depreciation and interest payable on all debentures, bonds and loans leave such surplus as is not less than three percent, or such higher percentage, as the State Government may by notification in the official gazette, specify in this behalf, on the value of the fixed assets of the Board in service at the beginning of such year."

7. Inspite of the statutory stipulation of 3 per cent surplus as mentioned above, most of the State Electricity Boards have been running into heavy commercial losses and like other Electricity Boards, the losses of RSEB have also been mounting. The accumulated losses of the RSEB which were Rs. 257.41 crores upto 31st March, 1986, increased to Rs. 529.49 crores upto 31st March, 1993. The position of losses upto the end of 1996-97 is given below:

(Figures in Crores)

8. The financial performance of the State Electricity Board has been engaging attention of the State Government for quite some time. The State Government declared the Rajasthan State Electricity Board a Body corporate vide Gazette Notification No. F.7(2) Energy/85 dated 29.5.1989 (published on 31.05.1989) with an initial equity capital of Rs. 10 crores.

The Government of Rajasthan and RSEB have taken the following steps to improve the financial working of RSEB to enable it achieve the statutory rate of return of 3% on net fixed assets for the year 1991-92 and onwards. The steps taken by the State Government are:-

1. Conversion of Government loan amounting to Rs.1027.59 crores, into equity, which  resulted in reduction of annual interest liability .

2. Providing of subvention amounting to Rs.162.81 crores from 1991-92 on words to achieve 3% rate of return as detailed below.

3. Approving increase in tariff for the supply of electricity with effect from the billing month of January, 92. The increase in tariff in different categories of consumers varies from 5 paise/unit to 20 paise/unit. The weighted average increase in tariff with effect from billing month of January 1992 is 11%. With this increase, tariff for agricultural service rose to 42 paise per unit(gross). The increase in tariff is expected to yield an additional revenue of about Rs.100 crores/annum.

4. Approving increase in tariff from the billing month of September,1992. The increase in tariff was 10 paise per unit in respect of all categories except for agriculture (metered) where it was 8 paise only. The gross rate of agriculture tariff now is 50 paise/unit.

5. Further increase in tariff from the billing month of June, 1994. The increase in tariff is 15 paise to 70 paise per unit in respect of all categories except for Agriculture (Metered) where it is 5 paise only.

6. Providing subvention amounting to Rs.281.58 crores during 1992-93 by adjustments against interest.

9. In respect of the loans from the State Government, no terms of repayment of loan have been prescribed by the State Government. The rate of interest on State Government loan levied during 1990-91 was 11.5% which has increased to 14.25% during 1996-97.

10. Details of loan from other financial institutions as outstanding on 31.03.1997 with period of loans, rate of interest payable are given below :-

Year wise proportion of capital receipts of Govt.loan vis-a-vis institutional finance is as under in Crores of Rupees

CAPITAL STRUCTURE OF RSEB:

The Equity Capital and Loans to the RSEB which, upto the financial year 1980-81 stood at Rs.663.56 crores have now risen to Rs.5339.30 crores (4311.71 +1027.59) on 31-3-1997  as detailed below:-

5.12 COST OF ESTABLISHMENT

i) The comparative position of revenue receipts of the Board for the year 1985-86 to 1996-97 (B.E.) and the establishment and administrative charges for these years is given in the following table:-

(Rs. in Crores)

ii) The increase in the employees cost is mainly on account of normal increase under establishment charges and the provision for two DA instalments in a year.

5.14 REVENUE ASSESSMENT AND OUTSTANDING DUES

(i) The table below shows the position of revenue assessed,realised and outstanding within the State and percentage of outstanding with reference to revenue assessed for the years 1987-88 to 1992-93.

(ii) Out of the outstanding of Rs.577.31 crores at the end of 1996-97, an amount of Rs.42.08 crores pertain to Court cases and Rs.20.97 crores relate to permanently disconnected consumers. In addition some amount of revenue remains un realised because of billing cycle. As a percentage of revenue assessed, the outstandings have come down from 27.51% at the end of 1987-88 to 15.87% at the end of 1992-93.

(iii) After excluding the amount of court cases, the amount of regular outstandings falls well within the requirement of World Bank of not exceeding the 60 days revenue.

The Board has been alive to the need for reducing the outstandings and the following steps have been taken:-

1. Arrear Recovery Cells have been created in every circle and it has been directed that the outstandings should be reduced progressively every month.

2. Settlement committees have been set up at the circle, Chief Engineer and Board's level for settling disputes with consumers. These committees function as quasijudicial authorities and have been responsible for settlement of disputes which are not complicated enough for being referred to Courts of Law.

3. Incentives have been declared for effecting recoveries in respect of disconnected consumers. Where the recoveries are to be made under Electricity Undertakings Dues Recovery Act, it has been provided that 10% of the recoveries would be paid as incentive.

Considerable difficulty is being faced in bringing down outstandings owing to the fact that the defaulting consumers are not or cannot be subjected to prompt and timely disconnection as they frequently approach the Courts and are often able to obtain interim orders of stay against disconnections. In the S.B.Civil Second Appeal No.172 of 1977 - Single Judge of Rajasthan High Court has held that if any person neglects to pay any charge for energy to the Board and payment is not made on due date, his connection can be cut only after serving on him a notice in writing addressed to the consumer delivered by hand or pasted at his premises or sent by registered post and that the printed condition mentioned on the bill itself that if the amount is not deposited within the given time, the supply will be disconnected, is of no avail and cannot be treated as a notice for disconnection under Section 24(1) of the Indian Electricity Act, 1910. The Special Leave Petition (Civil) No.5596 of 1987 against judgment has been disposed off by the Supreme Court Bench affirming the views by the learned Single Judge of the High Court.

The practical difficulty in following the procedure laid down by this judgment, for about 37 lakhs consumers being served by the Board, has caused delay in disconnection and hence increase in outstandings of revenue. With a view to finding a solution to these RSEB has been advised to consider:

• The possibility of statutorily creating a special tribunal for a fair and proper disposal of disputes arising out of the bills and notices of disconnection served by the Board on its consumers. In making a legislative provision for such a special Tribunal, the Legislature can not a provision analogous to Section 35 F of Central Excise & Salt Act, 1914 which provided that the persons desirous of appealing against decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded ( or penalty levied) and that in case the deposit of duty demanded ( or penalty levied) would cause undue hardship to such person, such deposit can be dispensed with subject to such conditions which safeguard the interests of revenue.
• Legislature enactment to add an explanation below section 24(1) of Indian Electricity Act which provides that a bill in which the unpaid dues are specifically indicated and the bill itself contains a notice of disconnection in clear and direct terms with reference to the unpaid amount specifically indicated ( in say the red box), such a notice shall be deemed to be sufficient and proper notice under Section 24.