A simplified timeline of electricity privatization in Delhi

INFORMATION

The idea of privatization of electricity occurred in 1999. By 2002, it was complete. It was in July 2002, that Delhi Government privatised distribution portion of Delhi Vidyut Board (DVB).

A logical question is - Why DVB had to be privatised in the first place?

-There were serious cash losses in the system. And instances of electricity theft.

-There was no register of assets or an accurate master list of customers. Similarly, there was poor information about which customers were in arrears.

- DVB had accumulated receivables of about US $400 million. In addition to this, no audited financial statements had been prepared for more than a decade.

- Still, in 2000, a Tri-partite agreement between DVB, its employees and the Delhi government was reached that protects the "employment" and pension rights of the employees.

- Delhi government had to subsidize DVB every year by about Rs. 1,500 crores (US$ 315 million) through “loans” that were never likely to be repaid.

- The total liabilities of the electricity sector (primarily government loans and power purchase dues) in Delhi was a little over Rs 23,100 Crore (over $5 billion). Effectively the servicing of these liabilities had not been met by DVB’s customers but rather by taxpayers.

- Since the inefficiencies could not be eliminated overnight, no private investor would be willing to take over the system unless the Delhi government would agree to provide direct or indirect subsidies for several years.

Before we go further, we need to understand the role of DERC (Delhi Electricity Regulatory Commission)

What is DERC?

- Simply put, DERC determines the tariff for electricity, wholesale bulk, grid or retail. DERC began functioning in December 1999 - three years prior to the privatization. .

- When the Delhi government began considering privatization, it was advised that the commission’s existing tariff policies (which were regulated by DERC) would be a major impediment to successful privatization.

- Delhi Government decided to issue a policy statement that required DERC to adopt certain tariff policies that the government believed were necessary to attract "private investors"

What directives did the Delhi Government issued?

-It defined the process of privatization.

-Proposed a set of opening loss levels for tariff setting purposes but which still needed DERC’s approval.

-Specified that bidding would be on the basis of a multi- year loss reduction trajectory rather than bids for the price of the equity interests.

-Mandated a sharing mechanism for revenues if the new private discoms beat the annual loss values specified in the trajectories accepted by the government.

-Required that DERC adopt the annual loss targets accepted by the government in the privatization agreement when the commission set annual tariffs for the discoms.

-Specified that retail tariffs can change over time but would have to remain uniform across the three private discoms during the 5 years following privatization.

-Required the regulator to set the prices that the discoms pay for power purchases from the Transco as a derived number based on an annual calculation of the estimated shortfall in the discoms’ annual revenue

requirements.

-Committed the government to provide a loan to the Transco to allow it to subsidize the discoms’ bulk supply costs up to a maximum of Rs. 2,600 crores (US $546 million, later increased to US $692 million or Rs. 3,450 crores)

Meanwhile, in the service of corporate's...

-A high level political support was made operationally effective by the fact that there was a small group of Delhi government officials who could respond quickly to the inevitable “crises” that arise in any attempt at privatization.

After DERC was tackled - what next?

- The assets and liabilities of DVB (Delhi Vidyut Board) were transferred to the Delhi government and then to six successor companies—one generating company, one transmission and bulk supply company, three distribution companies and one Holding Company. The three distribution companies were privatized but the three other companies continued to be owned by the Delhi government.

- Six companies - AES, BSES, Cescon, China Light & Power, Reliance Power and Tata Power - were pre-qualified but only two entities-BSES and Tata- submit proposals.

- Share Acquisition Agreements are signed with BSES Ltd. and Tata Power Company. BSES acquires controlling interest in two of the distribution companies, viz. South-West Delhi Electricity Distribution Company Ltd. and Central-East Delhi Electricity Distribution Company Ltd., and the Tata Power Company will take over the management of the third distribution company, viz. North-Northwest Delhi Distribution Company Ltd.

It is not clear why four of the companies decided not to bid. The two foreign businesses may have just been reacting to the general worldwide withdrawal of international players from power sector investments in developing countries. Reliance is now the owner of BSES and consequently may, at the time, have not wished to be bidding against a company it was considering acquiring.

Information about the bidding

The transaction was one where the private operators bid on the level of technical and commercial loss reduction to be achieved over the five years. The government proposed that losses would be calculated annually using a concept called Aggregate Technical and Commercial Losses (AT & C).

Loss reduction targets were set by the Delhi government from an average of over 50% to around 30% after five years.

BSES and Tata stated that they would not be able to meet the government specified targets. Instead, both companies responded with bids that would commit them to achieving cumulative loss reductions of 5 to 10% less than the government’s targets.

The government agrees, and more...

-The Delhi government commits to subsidize the new private discoms for up to Rs 3,450 crores (USD $720 million) for a period lasting no longer than 5 years. No specific amount of money is targeted for each discom. And there are no restrictions as to how 3,450 crores will be spent - it could be used up within two or three years or five years.

-In addition to the power purchase subsidy to the discoms, the Delhi government announced that it would

provide an additional subsidy of Rs. 52 crores to subsidize the tariffs of residential customers who consume

less than 400 kWhs per month. The government made the announcement just before the commission

issued its first post-privatization tariff order.

-The price for power is based on the discom’s “ability to pay” rather than the Transco’s costs of supply.47 In effect, the burden of the subsidy is shifted back to the Transco which has been mandated to supply power to the discoms at a loss.

-In other words, the discoms would first reimburse themselves for their distribution and retail supply expenses. The discoms are explicitly given the first “rights” to the retail revenue.

-The amount of subsidy received by an individual discom will depend, in part, on its internal operating efficiency. A less efficient discom will be eligible to receive a larger subsidy. As a general principle, it does not seem like a good idea to create a subsidy systems that rewards inefficiency with a higher subsidy.

What's wrong with the policy?

-These subsidies were intended to avoid the need for large post-privatization tariff increases. It doesn't achieve that.

- Regardless of when and how the subsidies are delivered, Delhi consumers will ultimately pay for the subsidies either in the form of higher taxes or in reduced government services.

-The disadvantage of the Delhi approach (where several contiguous discoms are being privatized) is that it leads to uncertainty over exact boundary lines, ownership of moveable assets, responsibility for shared services and allocation of shared costs. After privatization, the Delhi discoms have had to spend time trying to sort out who owned what—time that presumably would have been better spent on improving service and reducing inefficiencies.

- In any privatization that involves a subsidy, there is always a risk that the private companies will come back after a year or two and assert that they need a larger subsidy because their costs are higher or their revenues lower than It is also “partial” system in another respect. Two key regulatory elements, the distribution and retail supply license and quality of service standards, were not specified prior to privatization.

Source: The Delhi Electricity Discom Privatizations (2003)

On day of rally to Sheila Dixit's house, Economic Times published this article http://archive.is/rgDY5 as "expert" opinion - which overlooks many facts mentioned above.