Role of CFO in electric utility company and their importance

Ajay Kapoor is the Chief(Legal, Regulatory and Advocacy) at Tata Power Company Limited.

He has a rich experience of 33+ years with Companies e.g., ITC Ltd., Tata Group, Birla Group and HCL Group. He has extensive experience in all areas of finance, Legal, ERP implementations Mr. Kapoor is an honours graduate from prestigious Shri Ram College of Commerce, Delhi University and a qualified Chartered Accountant he also holds MBA and LL.B. degrees

Power sector is probably one of the most important cogs in the infrastructure sector which contributes immensely to economy’s development and growth. Without a healthy and flourishing power sector industries cannot develop and expand. At the same time power is a necessity with ever increasing dependence on electricity to power the households and offices for the power hungry devices that have become part of our daily life. Entire communications infrastructure is driven by electrically operated machinery without which we would be lost in a dark world. Globalisation has increased the need for the a robust power sector as attracting foreign investments require a sound infrastructure in place. Governments over the years have realised the importance of power sector and a slew of reforms have taken place over the years right from introduction of Electricity Act, 2002 which led to corporatisation of erstwhile electricity boards to setting up of regulatory commissions. The object of the Act has been laid down as:

CFO in an electric utility should be able to wear many hats that require him to be a cost controller, credit controller and be able to devise strategies

An Act to consolidate the laws relating to generation transmission, distribution, trading and use of electricity and generally for taking measures conducive to development of electricity industry, promoting competition therein, protecting interest of consumers and supply of electricity to all areas, rationalization of electricity tariff ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benign policies, constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto.

Decades of bleeding power sector necessitated an immediate need for reforms which would revive the sector, reducing its ever increasing dependence on grants and subsidies. Towards this end even in recent years the Ministry of Power has taken various steps to promote self sustaining power utilities without excessive dependence on government funding and at the same time ensuring that these utilities become profit making entities competing in an open marketplace. It has also tried to reduce political interference in various power sector decisions particularly in tariff setting so that loss making utilities pave the way for highly efficient utilities providing best of services and products to consumers of electricity. SmartGrids and Smart Meters are in phasing out the inefficient electricity infrastructure which was in use since the beginning of the last century.

Electric utility companies and particularly the distribution utilities today face a myriad of challenges from rising costs to non-cost reflective tariffs, collection issues to rising public sentiments about services and tariffs. Why I mention distribution utilities is because being consumer facing last leg of the electricity value chain, they have the most important role in the entire chain. A sick distribution utility is a burden not only the state but also the entire sector and it affects the smooth functioning of the sector. Without a healthy distribution the other constituents viz., Generation and Transmission are bound to collapse as the collections for the sector stem from the distribution itself.

The whole management of an electric utility boils down to effective financial engineering. In such a situation role of CFO is of utmost importance. It has been found a weak and inefficient finance function was the bane of power sector for decades and over the years electricity utilities have realised the need to have a robust and efficient finance function. CFO has to manage these myriad challenges and at the same time ensure the smooth operations of the utility.

CFO in an electric utility should be able to wear many hats tat require him to be a cost controller credit controller and be able to devise strategies along with CEO and other top management to handle new emerging challenges on almost a daily basis.

It’s a catch 22 situation where rising expectations of consumers about service quality must be balanced with rising costs to provide these services in a cost-effective manner. Tariffs are always under pressure due to political and other reasons and ever burgeoning regulatory gaps that need to be optimally funded at the most attractive rates of financing to ensure that consumers are not over burdened by interest costs.

In case of generation utilities pressure is on collections as most states today are looking at optimising their power portfolio to cut costs and be able to meet the political challenge of lowering the consumer tariffs. As a result of same, some of the states have decided to not honour the Power Purchase Agreements (PPAs) which were considered sacrosanct till now and have unilaterally decided to reduce tariffs and/or surrender the power, which obviously is against the laid down law and principles contained therein. This involves long rounds of litigation at various forums and the resultant litigation costs need to be managed. CFOs are closely involved along with legal teams to ensure a positive outcome and also for funding the operations of the plant in absence of collections to ensure adequate funding of the working capital.

Last but the most important role of CFO is in tariff setting process. A CFO must ensure that all costs are appropriately captured in the financial statements and are closely monitored in line with approved norms as per Regulations set by the appropriate Regulatory Commissions as exceeding these norms result in dis allowances which are not recoverable. Post tariff setting in form of a tariff order a CFO must ensure that all legitimate costs that have been allowed by the Regulator and if any costs have been disallowed then appropriate legal redressal mechanism is activated.

Thus, CFO plays the most important role in an electric utility and success or failure of a utility largely depends on the actions and decisions of its CFO.