Restructuring of discoms The centre has approved of a financial package for state power distribution comp anies.

The main objective is to restructure their debt amounting to Rs 1,90,000 crore. The package makes it mandatory for state governments to go for annual rev isions of power tariffs, convert loans to equity and bring in private participat ion in distribution. The centre will provide grants totalling Rs 25,000 crore as part of the package. States can access the grants only if their power distribut ion firms reduce their losses by 25 per cent each year. State-government controlled power distribution companies had accumulated debt o f Rs 1.9 lakh crore, as of March 31, 2011. This was primarily due to the non-rev ision of tariffs, which increased the gap between the cost of supply and average tariff to 145 paise a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998 -99. "The scheme will tie states to a particular reform path and enable utilitie s to become technically, operationally and financially efficient, and recover th eir cost of operations," P Umashankar, Union power secretary, said. Half the short-term debt of the distribution companies will be taken over by sta te governments over a two- to five-year period. The modus operandi will be: firs t the debt will be converted into special bonds. The distribution firms or elect ricity boards will issue the bonds to their creditors which are banks and financ ial institutions. The bonds will have state government guarantee. Later, the debt will be transferred to states. On their part, the states have to ensure that the bonds are issued within the targets prescribed in the Financial Restructuring and Budget Management Act and also within their net borrowing cei lings set by the 13th finance commission. The remaining half of the debt will have a three-year moratorium on repayment of principal. But the distribution companies cannot use fresh loans to repay the l oans. The centre will create a transitional finance mechanism to the support states wi th cash grants in their task to restructure the power distributors' debt. The restructuring and rescheduling of loans would require concrete and measurabl e action by the distribution companies and the states to improve the operational performance of the utilities, said a government statement issued after the CCEA meeting. To monitor the progress of the turnaround plan, two committees at the state and central levels are proposed to be formed. The Centre would put in place a transitional finance mechanism for states that h ave an accelerated reduction in aggregated technical and commercial losses. "If one per cent of the losses are reduced, it will correspond with a central outgo of Rs 1,500 crore as incentive," said Umashankar. Though the move was welcomed b y power producers, Ashok Khurana, director general, Association of Power Produce rs, said, "The loss reduction and tariff increase plans would need to be monitor ed very strictly so that the utilities are able to break even in the next threefour years. In the interim, they need to be provided adequate transition finance ." Rajasthan, Tamil Nadu, Haryana and Uttar Pradesh are expected to avail themselve s of the scheme, which will be effective once notified and remain open till Dece mber 2012, unless extended by the Union government. States will be eligible for transitional finance only if the gap between the ave rage revenue realised and cost of supply is cut by at least 25 per cent during a year over 2010-11. A nodal bank will be nominated for every state or discom.