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Poor financial condition of discoms poses risk to power traders: Fitch

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New Delhi: Rating agency Fitch says the poor financial condition of state electricity boards could pose significant business risks to power traders in the country.

In a report released today, Fitch Ratings It said the credit exposure of power traders has become “risky” due to the lack of profitability and liquidity faced by the state power companies.

“If these utilities have liquidity problems that are causing delays or defaults in their liability for electricity traders, this in turn increases business risk for electricity traders,” it noted.

This allows investors in power trading companies to either look for higher return on investment or look for alternative avenues of investment.

Major electricity traders include PTC India And Tata Power Trading Company,

According to estimates, over the past four years, the top five trading licensees have controlled more than 80 percent of the market in terms of volume.

Some of the big loss making power utilities come from the states of Tamil Nadu, Uttar Pradesh, Madhya Pradesh. These are also the largest buyers of short-term electricity through electricity traders, Fitch Ratings said.

“The financial position of state power utilities, major customers of power traders, has deteriorated from Rs 70 billion (Rs 7,000 crore) in FY 06 to Rs 295 billion (Rs 29,500 crore) in FY 10 with total annual book loss, Leading counterparty increased risk,” the report said.

According to Planning CommissionAs per the estimates of the U.S.A., the total loss in power distribution in 2010-11 was Rs.70,000 crore.

According to Fitch, the largest short-term buyers – SPUs in Tamil Nadu and Rajasthan – face huge energy losses with the biggest cash losses on a revenue and subsidized basis.

“Therefore, these states will continue to be net buyers on short-term electricity markets and continue to act as major counterparties to electricity traders. This significantly increases the risk for undivided electricity traders,” it added.

The report said traders with a strong equity base and high cash balances are better placed as they have the buffer to absorb any increase in the working capital cycle in the event of delays or defaults by SPUs.

Salil Garg, director of Fitch’s Asia Pacific Utilities team, said the agency expects larger traders to face less business risk due to a number of factors, including economies of scale and a diverse customer base.

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