Power Distribution Utilities to be rated by Ministry of Power

In an interesting article of The Hindu Business Line, a new rating methodology developed by the ministry of power was highlighted. In this methodology all utilities will be rated on the basis of their performance and their ability to sustain commercially viable operations in the long run. The methodology focuses on rewarding efforts of distribution utilities and therefore stimulating and improving operational and financial performance of distribution entities. One of the criteria for ranking of the distribution companies will also be the level of their Renewable Purchase Obligation fulfillment. A system of negative marks has also been introduced in the rating methodology. The first ranking expected to be issued in March 2013.
This integrated rating methodology is expected to facilitate realistic assessment by Banks/FIs of the risks associated with lending exposures to various state distribution utilities. It would enable funding with appropriate loan covenants for improving operational, financial and managerial performance.
For Ex: Gujarat has improved its position by ICRA & CRISIL ratings because of improved performance in optimization of power purchase costs, overall improvement in operational efficiency, savings in interest costs because of debt restructuring and significant improvement in cash collections. Whereas utilities in States which have lower ranking like MP, UP & Tamil Nadu will have no proper debt restructuring & unbundling, no proper power purchase costs etc.
Therefore, financial institutions or investors will decide in which state to locate their projects based on the rankings similarly in the case of banks, as they will choose to finance or provide loans to those utilities which have a good ranking and a proper debt structuring.
Contributed by Chetan Adhikari