AIPEF flays Centre’s decision to introduce LC system

| | Lucknow
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AIPEF flays Centre’s decision to introduce LC system

Wednesday, 31 July 2019 | PNS | Lucknow

All-India Power Engineers Federation on Tuesday criticised the decision of Union Ministry of Power to introduce letter of credit (LC) system, a payment security mechanism to ensure timely payment of dues by Power Distribution Companies (Discoms) in lieu of supply by producers without similar protection to power utilities engaged in retail distribution.

AIPEF president Shailendra Dubey said in Lucknow that the system, scheduled to come into force from August 1, would cause an upheaval in power sector, particularly in uninterrupted supply to consumers. 

“Most Discoms across the country were not in a position to give required LC in advance due to their poor financial position, even after them joining Ujjwal Discom Assurance Yojana (UDAY),” he said.

Dube said that the Discoms had to practically make payments well in advance to generating companies as banks would give LC only in case they had liquidity or if the state governments gave counter-guarantee.

“Most of Discoms would purchase 65% of required power from central generating stations and private producers as generating companies of States were able to meet only 35% of the demand,” he said.

Dubey said that delay in payment of dues to power producers by Discoms was mainly due to delay in reimbursement of subsidies given to farmers and weaker sections by the state government. “The new system will enable generating companies to encash LC given by discoms after expiry of grace period – 45 to 60 days, as provided in power purchase agreements (PPAs),” he said.

To oppose the Centre’s decision, the national coordination committee of power engineers and employees will hold a meeting to decide the course of action regarding the issue in New Delhi on Wednesday.

The Union government, as a last resort, has forced PSU Discoms to open LC with power generating companies as the last two attempts by the Centre in the last ten years to bail out loss-making Discoms having failed to deliver desired objective.

In 2018, Union Energy Minister RK Singh had warned UPPCL that Discoms would be disqualified from obtaining loans from Power Finance Corporation and other financial institutions if they failed to bring down technical and distribution losses to 15 per cent. Presently, the line losses of UPPCL are over 30 per cent.

Continued non-performance and poor revenue recovery by Discoms in various states resulted in default of payment to power generation companies, who in turn defaulted in payment to their lenders.  The default amount crossed Rs 2 lakh crore early this year. 

The Reserve Bank of India, as per its circular of February 2018, was adamant on referring defaulting power generating companies to  Insolvency and Bankruptcy Board  for recovery of dues. 

But much to the relief of defaulting companies, the Supreme Court stayed the operation of RBI circular of February 2018.  The Centre later took the step of asking Discoms to open LC with power generating companies from August 1.

First, the Manmohan Singh-led UPA-II government brought financial resolution plan (FRP) wherein the state governments took  large part of Discoms’ loan burden. This enabled Discoms to make fresh borrowings from banks and financial institutions to help them come out of the red. Later, the Modi government brought UDAY in 2016. 

The UP government implemented UDAY from 2017-18 and took over loan burden of Rs 40,000 crore of UP Power Corporation Limited on itself.  This enabled UPPCL to contract fresh loans from banks and clean its books. There was some positive impact of the scheme in 2017-18 and 018-19. By the end of March, 2019, there was dramatic reversal of trend in decline of losses. The present accumulated losses of UPPCL are over Rs 80,000 crore.

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