Power Sector Reforms in Delhi What we can learn from the experience so far

2 Delhi Vidyut Board: - Integrated utility - Statutory Board -India’s largest urban utility (1999 figures given)

3 Features of Delhi power supply: Rapid load growth, high consumption.Rapid load growth, high consumption. Steep peak-offpeak variation.Steep peak-offpeak variation. Advantage of negligible agricultural load offset by large population in unauthorised colonies and squatter settlementsAdvantage of negligible agricultural load offset by large population in unauthorised colonies and squatter settlements –14% of consumption by ‘hooking’ in such areas. Deteriorating commercial performance.Deteriorating commercial performance.

4 DVB’s commercial performance was not always bad:

5 DESU/DVB a losing proposition even when the T&D losses were still under control, reflecting insufficient tariff: Note slight dip in losses after tariff revisions

6 Energy Audit 2K - districts with highest and lowest distribution losses: Energy released (Dec 99-Nov 2K) Energy billed (Jan-Dec 2K Distribution loss Yamuna Vihar (East Circle) MU MU 73.41% Nehru Place (South Circle) MU MU 21.70%

7 Reform Milestones: Feb., 99 - GNCTD Strategy PaperFeb., 99 - GNCTD Strategy Paper May., 99 – Delhi Electricity Regulatory Commission set up under CERC Act.,1998May., 99 – Delhi Electricity Regulatory Commission set up under CERC Act.,1998 Nov., 99 -SBI Caps engaged as ConsultantNov., 99 -SBI Caps engaged as Consultant Dec., 99 -Regulator AppointedDec., 99 -Regulator Appointed Oct., 2000 –Delhi Electricity Reforms OrdinanceOct., 2000 –Delhi Electricity Reforms Ordinance Oct., 2000 –Tripartite agreement between staff, DVB and Government, on same day as Ordinance.Oct., 2000 –Tripartite agreement between staff, DVB and Government, on same day as Ordinance. Jan., 2001 –Investors’ ConferenceJan., 2001 –Investors’ Conference

8 …continued: Feb 2001 – RFQ issuedFeb 2001 – RFQ issued –Bought by 31 parties. Mar Delhi Electricity Reforms Act, 2000 comes into forceMar Delhi Electricity Reforms Act, 2000 comes into force July 2001 – Consultants’ final reportJuly 2001 – Consultants’ final report May Bidders short listedMay Bidders short listed –Six bidders –Two expressed lack of interest Nov RFP issuedNov RFP issued Nov Policy DirectionsNov Policy Directions

9 …continued: Feb 2002– DERC order fixing opening loss levels and initial BST.Feb 2002– DERC order fixing opening loss levels and initial BST. April 2002 – Bids received from two bidders.April 2002 – Bids received from two bidders. –Considered not acceptable “in present form” by Cabinet. –Core Committee authorised to explore alternatives including negotiation.

10 …continued: Share Acquisition Agreement, May 31, 2002Share Acquisition Agreement, May 31, 2002 –Amendments to Policy Directions and Transfer Scheme Rules Shareholders Agreement and other agreements signed June 27Shareholders Agreement and other agreements signed June 27 –Operative from June 30 –Transfer Scheme operationalised June 30 –Management handover

11 The issues in reform: What is the objective? Reduce the high commercial losses in distribution:Reduce the high commercial losses in distribution: –In most of South Asia, all else pales into insignificance, for the time being. –Investor interest in any part of the power sector depends on it. –Motivation for other efficiencies—reducing technical losses, DSM—also depends on it. Reform in practice = distancing Government from management:Reform in practice = distancing Government from management: –‘Political’ will, related to Demand for better service;Demand for better service; Financial considerations.Financial considerations. –Investor interest a constraint: Reform modalities must derive from local situation.Reform modalities must derive from local situation.

12 The issues in reform: Can we compress the time frame? Political will:Political will: –Its relationship with compulsions of situation. If available, it must be honoured:If available, it must be honoured: –Implications for time frame—delay will damage credibility; –Necessity to go it alone in Delhi to achieve tangible results within a Government’s term.

13 Issues: How to deal with the transition: Design of package essentially to handle the transitional phase (say, 5 years).Design of package essentially to handle the transitional phase (say, 5 years). During the transitional phase, it is necessary to balance:During the transitional phase, it is necessary to balance: –Realistic expected efficiency gains; –Possible tariff increases; –Transitional assistance until the benefits of greater efficiency are realised.

14 Setting efficiency improvement targets: Primary investor concern.Primary investor concern. Regulatory (and public) regulatory approval not forthcoming for reasonable, achievable multi-year targets:Regulatory (and public) regulatory approval not forthcoming for reasonable, achievable multi-year targets: –Lack of understanding of nature of problem. –Lack of benchmark experience.

15 Multi-year tariff principles proposed by DVB in 2001: Annual Tariff fixation: general principles for power purchase, O&M, salaries, interest, depreciation.Annual Tariff fixation: general principles for power purchase, O&M, salaries, interest, depreciation. DERC to fix targets for collection efficiency shortfall.DERC to fix targets for collection efficiency shortfall. T&D loss reduction targets:T&D loss reduction targets: %2%2%3%3%

16 Negative response (except from investors): No general appreciation of the necessity for MYTP in the context of developing Orissa experience.No general appreciation of the necessity for MYTP in the context of developing Orissa experience. DVB accused of bad faith in making proposals on behalf of future, as yet non-existent, discoms.DVB accused of bad faith in making proposals on behalf of future, as yet non-existent, discoms. Targets considered too low.Targets considered too low. Collection inefficiency “pass-through” thought to be contrary to accounting principles.Collection inefficiency “pass-through” thought to be contrary to accounting principles.

17 No Time Gap between Corporatisation & Privatisation in Delhi: Shell companies registered in advance.Shell companies registered in advance. Objective was privatisation, not mere corporatisation.Objective was privatisation, not mere corporatisation. –New entities would incur losses before privatisation. –Govt. retained option to abort the entire exercise in absence of investor response.

18 Issues: Valuation method: –Business Valuation method used for second time in India — Kanpur, then Delhi. –Business Valuation, as adopted – value assets on going concern basisvalue assets on going concern basis asset value derived based on future earnings potential assuming reasonable retail tariff increase and efficiency improvementsasset value derived based on future earnings potential assuming reasonable retail tariff increase and efficiency improvements

19 ….. Valuation of Assets Principles applied:Principles applied: –electricity business becomes self sustaining within five years –Minimise retail tariff shock. –Support from GNCTD for funding initial losses - about Rs. 26 billion (increased to Rs billion).

20 Allocation of Assets & Liabilities (Rs. crores)

21 Financial Restructuring Plan Estimate of Total Liabilities (as on 31/3/2001) (Rs. crores)

22 …..Financial Restructuring Plan

23 …..Financial Restructuring Plan Support for funding losses in initial years About Rs 3450 cr to TRANSCOAbout Rs 3450 cr to TRANSCO –at interest rate of 12% –moratorium of four years on interest and principal repayment

24 Power Purchase/ Bulk Supply Arrangements Uniform Retail and differential Bulk Supply Tariffs.Uniform Retail and differential Bulk Supply Tariffs. –BST for each DISCOM based on its paying capacity After 5 years DISCOMs to buy power directly and pay wheeling charges to TRANSCOAfter 5 years DISCOMs to buy power directly and pay wheeling charges to TRANSCO

25 Delhi Solution to target setting: Legitimise targets through bidding procedure. Criterion for Selection of Investor Minimum target of Aggregate Technical & Commercial Loss to be achieved by investors each year for next five years specifiedMinimum target of Aggregate Technical & Commercial Loss to be achieved by investors each year for next five years specified Bids invited on “ Aggregate Technical & Commercial Loss ” with shares being sold at par valueBids invited on “ Aggregate Technical & Commercial Loss ” with shares being sold at par value

26 Issues: Quality of data Aggregate Technical & Commercial Loss - the difference between units input and units for which payment is realisedAggregate Technical & Commercial Loss - the difference between units input and units for which payment is realised –to capture the effect of both the Transmission & Distribution loss and shortfall in collection efficiency –avoids error inherent in billing figures

27 Issues: ‘Regulatory Risk’ Policy Directions to DERC To mitigate uncertainty and ensure successful privatisation, GNCTD issued policy directions under Section 12 of Reform Act, binding Regulator to the outcome of the bidding process.To mitigate uncertainty and ensure successful privatisation, GNCTD issued policy directions under Section 12 of Reform Act, binding Regulator to the outcome of the bidding process. It was felt that it would suffice to mitigate risk only in respect of loss reduction targets.It was felt that it would suffice to mitigate risk only in respect of loss reduction targets.

28 The Policy Directions: require that tariffs for take into account:require that tariffs for take into account: –Selection process of bidders –Technical & Commercial Loss to be on the basis of the bid of the selected bidder –DISCOMS earn 16% Return on Equity (Assuming loss reduction, ARR approval) –Incentives on over-achievement: 50% retained, 50% to rebate on tariff

29 Loss level reduction targets accepted: C/E0.75%1.75%4.00%5.65%5.10% S/W0.55%1.55%3.70%6.00%5.60% N/NW1.50%2.25%4.50%5.50%4.25%

30 Issues: Importance of staff Staff accepted inevitability of reforms in the face of strong political will:Staff accepted inevitability of reforms in the face of strong political will: –Enlightened union leadership; –Knew opposition to reforms would provoke public hostility. Seminars and visits to other states.Seminars and visits to other states. Engineers’ role generally positive.Engineers’ role generally positive. Tripartite Agreement protects interests.Tripartite Agreement protects interests. Pension Fund.Pension Fund. Staff expense not critical for investors.Staff expense not critical for investors. –Also, ageing work force, many retirements anticipated.

31 Reform package tariff projections: Years 1 to 3: retail tariff increase up to 10% per annum.Years 1 to 3: retail tariff increase up to 10% per annum. –Year 1 for 6 months only. Years 4 & 5: retail tariff increases of 5%, 3%.Years 4 & 5: retail tariff increases of 5%, 3%. Bulk (Transco) Tariff to rise more sharply, with phasing out of Government assistance, efficiency improvements.Bulk (Transco) Tariff to rise more sharply, with phasing out of Government assistance, efficiency improvements.

32 First post-reform tariff order: 5.18 % increase overall.5.18 % increase overall. Government decision to further subsidize to avoid tariff increase for consumers up to 400 kwh per month.Government decision to further subsidize to avoid tariff increase for consumers up to 400 kwh per month. Discom issues:Discom issues: –Depreciation rate; –Deferred tax liability.

33 First post-reform tariff order: (Continued) Order effective July 4, 03.Order effective July 4, 03. Holding Company collections assigned to Transco ARR.Holding Company collections assigned to Transco ARR. Overall, effect on investor interest to be watched:Overall, effect on investor interest to be watched: –Advance fixation of loss reduction targets will not suffice to allay investor apprehensions on regulatory uncertainty, in future.

34 More complete multi-year packages have since been suggested in South Asia: Andhra Pradesh:Andhra Pradesh: –By Regulatory Commission; –Principles enunciated in detail; –Actual fixation of targets may take time. Karachi:Karachi: –By Regulatory Commission; –Seven-year package announced; –Investor interest to be tested. Karnataka:Karnataka: –By Government; –Different kind of formula, still being developed.

35 Issues: Open Access? Supply Competition? Why Single Buyer Model?Why Single Buyer Model? –Little scope for generation competition initially. –Interim assistance to TRANSCO to keep tariff down, keep a uniform retail tariff. –No bar on supplementary purchases by DISCOMs. –Limited to five years.

36 … Open Access At what cost can open access (which must be for only a few large consumers) be introduced immediately?At what cost can open access (which must be for only a few large consumers) be introduced immediately? –Privatisation must be made attractive for investors. –Cross subsidy removal must await loss reduction. –Value of consumer interface in present situation: Mere ‘supplier’ responsible only for energy billed to own customers, not motivated to reduce losses;Mere ‘supplier’ responsible only for energy billed to own customers, not motivated to reduce losses; Supply quality—party responsible would become faceless;Supply quality—party responsible would become faceless; Possible neglect of unremunerative consumers.Possible neglect of unremunerative consumers.

37 In India, Electricity Act 2003 changes the context of privatisation: Mandates phasing-in of open access:Mandates phasing-in of open access: –Regulator to determine time frame; –Surcharges to compensate Cross-subsidy in interim period;Cross-subsidy in interim period; Distribution licensee's universal supply obligation.Distribution licensee's universal supply obligation. Multiple distribution licences.Multiple distribution licences. Loose definition of captive power.Loose definition of captive power.

38 Thank You