POWER SECTOR REFORMS IN INDIA

POWER SECTOR REFORMS IN DELHI Delhi Model of Distribution Privatization

Economic Axioms Applicable To India. More property the State has, the less well being the population has. Over presence of the State brings more inefficiencies and inequities. Pay Commissions &Wage Awards grant higher wages year after year. But higher wages warrant higher productivity, a missing link. Route to privatization is derivative of above scenario.

We Must Do What Country Wants And Not What Public Wants-It Is Not Easy Though. India has just 2% of the land while population is 17% of the globe. And this population is increasing at the rate of 2.1% every year. India’s POL requirements are 6%, while global average is 2%. We are importing 70% of our 20Billion USD(80,000 Crores). So where is economy is heading to.

Action taken by Delhi Heavy urbanization, unbridled influx,ballooning population,haphazard growth,abundant availability of electrical gadgets,rise in affordability level were some of the reasons that had been adding to the losses of the Power Utility of the Capital, year after year.

On the eve of privatization DVB was being rated as one of the worst SEBs in the country. Initial thinking was to unbundle DVB into Corporations for Generation, Transmission and Distribution businesses. But seeing the unmanageable stage where distribution had reached it was decided to start the privatization process with Distribution first. Action taken by Delhi

There were shocking tales of growing corruption. Gap between cost of power purchased and amount of realization was widening year after year. Increasing demand was adding to the losses with each unit of power purchased or generated and inducted into the network.

STEPPING STONES TO DVB’S PRIVATISATION Massive amount of preparatory home work went into the project of privatization of Distribution Business in Delhi. Process commenced with Investors' Conference chaired by LG and CM of Delhi. Firm Commitment to achieve successful conclusion. Total Transparency from day one. Unions, Associations and other bodies taken into confidence. Truthful base data. Truthful projection of T&D losses. Fairness in package deal with bidders.

Unique Features Of Delhi Model. Valuation Of Assets. Allaying Tariff Fears. Regulatory Comforts. Bulk Supply Tariff Comforts. Transitional Support. Bidding Criteria. Companies To Start With Clean Balance Sheet. Incentives For Performance. Transfer Policy.

Valuation Of Assets Valuation of the assets has been done on Business Value Techniques and not book value or physical value. Mind set has been set straight that transfer of assets is not sale of family gold or silver. Assets are going to licensed companies who will not run away. After accounting for retail tariff, drop in aggregate technical & commercial (AT&C) losses and future expenses,the assets have been valued as viable business venture.

The process of privatization is based on the axiom “The more property State has the less well being of the populace is.” Business valuation method of the assets enables the distribution business self sustainable in specified time period.

Allaying Tariff Fears There are apprehensions that privatization would lead to upward tariff revisions. The manner of bid invitation and bid evaluation would allay these fears. Placement of a competent and knowledgeable regulator would ensure fair tariff models.

Delhi bids were invited on efficiency improvement projections for five years. Delhi bids were not sale of equity as had been done in Orissa. Multi year tariff has to be placed before ERC manifesting year wise efficiency improvements.

Regulatory Comforts. In Delhi ERC was in place well before the process of privatization started. BSA (Bulk Supply Agreement) laying bulk supply tariff for purchase of allocated share of power from Transco was in place before closing of the bids. All non serviceable liabilities will be parked in the Holding Company.

Transitional Support Rupees 3500 crores has been kept aside as financial support to the two Distribution Companies for first five years to meet the gap between bulk power purchase and retail sale. This step would depress tariff hikes. In 5 years, AT&C losses would go on reducing, thus creating a balancing act. At the end of 5 years when Govt Support is not there reduced AT & Commercial losses would make up for that.

Bidding Criteria In Delhi bids were invited on percentage reduction in aggregate technical and distribution commercial losses for the years The opening levels of losses would be as notified in the Bulk Supply Tariff order of the ERC and not as issued by the State Govt. The sale would be to the bidder committing highest collection efficiency,maximum reduction in losses year after year,& obviating the tariff shocks

Performance Incentives In case the Distribution Company brings in more than the contracted efficiency, the Company would be entitled to retain certain component All receivables except those pertaining to current billing shall stand transferred to the Holding Company.If the Distribution Company is able to recover such receivables,these will be shared 80:20, with 80% going to Holding Company & 20% to Distribution Company.

Transfer Policy The transfer of assets and personnel to the successor entities have been done through a Transfer Scheme notified under the Reforms Act and duly gazetted. Transfer Scheme indicates opening balance sheets of successor Companies In order to enable the Companies to start with clean balance sheets, the gap between corporatization and privatization has been kept as nil. In fact the scheme had been announced earlier and effective date later.

Distribution Competition In India the competition is not yet ripe in Distribution. Even scope is not yet clear to many. Cross&direct subsidies are still rampant. Technical&commercial formats are to be modeled and standardized. Therefore,existing monopolistic utilities have to be motivated to increase efficiency in collection, billing and loss reduction techniques.

Conclusions Delhi Model will show that privatization is feasible. It would demonstrate benefits. It has been achieved without World Bank or any other Multilateral Agency. It has fully been done by local and native consultants and talent. It has been achieved within 3 years. World Bank or other Multilateral Agencies would have taken 5 to 6 years and at astronomical costs.

Enterprise Efficiency Tariff is sustainable only if there is efficiency by private companies. And there is enterprise efficiency by Govt.. utilities as in case of EDF France, NTPC India. Even State utilities have to improve. Public can no more be mute to rapid and massive tariff shocks.

Energy Intensity In India energy intensity is 3.7 times when in countries like Japan it is just 1.5. That is why goods in India are expensive. We face stiff competition in export markets from countries like China, Taiwan.

Betterments Over Orissa Model. Orissa was the first State in the country to go in for reforms. OERC was set up WEF Reforms were conceived by the World Bank and funded by DFID. The Agenda included running the electricity industry in an efficient and competitive manner. Unfortunately execution flopped.

Asset valuation was unrealistic at the time of transfer to corporations. Method of privatization was asset-based. Reform Scheme was vitiated by sharp upvaluation of assets at the time of transfer to utilities. So the transfer costs were high. Hence tariff was high. Transfer Policy did not stipulate any goals for loss reduction. Average tariff has more than 15 % without any customer service.

Distribution companies, Gridco and Generators have all become financially broke. Discoms default to Gridco, which in turn default to Gencos, who are facing inadequate cash realization. T&D losses remain to be massive with 46.94% in and 46.63%after 5 years, in Even escrow has failed. The concept is to be on efficiency, performance based returns rather than cost plus return on capital.

Orissa Model BC G G G G G D RC T G : Genco BC : Bulk Consumer T : Transco RC : Retail Consumer D : Discom

BC Recommended Model D NG OG RC OG : Old Genco BC : Bulk Consumer NG : New Genco RC : Retail Consumer D : Discom

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