Power Sector Reforms in Delhi

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

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

Features of Delhi power supply: • Rapid load growth, high consumption. • Steep peak-offpeak variation. • Advantage 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.

DVB’s commercial performance was not always bad:

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

Energy Audit 2K - districts with highest and lowest distribution losses:

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

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

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

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

The issues in reform:What is the objective? • 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: • ‘Political’ will, related to • Demand for better service; • Financial considerations. • Investor interest a constraint: • Reform modalities must derive from local situation.

The issues in reform:Can we compress the time frame? • Political will: • Its relationship with compulsions of situation. • 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.

Issues:How to deal with the transition: • Design of package essentially to handle the transitional phase (say, 5 years). • 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.

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

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

Negative response (except from investors): • 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. • Targets considered too low. • Collection inefficiency “pass-through” thought to be contrary to accounting principles.

No Time Gap between Corporatisation & Privatisation in Delhi: • Shell companies registered in advance. • 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.

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

….. Valuation of Assets • 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 34.50 billion).

Allocation of Assets & Liabilities (Rs. crores)

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

…..Financial Restructuring Plan

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

Power Purchase/ Bulk Supply Arrangements • 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 TRANSCO

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 specified • Bids invited on “Aggregate Technical & Commercial Loss” with shares being sold at par value

Issues: Quality of data • Aggregate Technical & CommercialLoss - 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

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. • It was felt that it would suffice to mitigate risk only in respect of loss reduction targets.

The Policy Directions: • require that tariffs for 2001-07 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

Loss level reduction targets accepted:

Issues:Importance of staff • 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. • Engineers’ role generally positive. • Tripartite Agreement protects interests. • Pension Fund. • Staff expense not critical for investors. • Also, ageing work force, many retirements anticipated.

Reform package tariff projections: • 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%. • Bulk (Transco) Tariff to rise more sharply, with phasing out of Government assistance, efficiency improvements.

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

First post-reform tariff order:(Continued) • Order effective July 4, 03. • Holding Company collections assigned to Transco ARR. • 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.

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

Issues: Open Access? Supply Competition? • 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.

… Open Access • 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; • Supply quality—party responsible would become faceless; • Possible neglect of unremunerative consumers.

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

Thank You

Power Sector Reforms in Delhi