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REFORMS IN DELHI. Reforms in Delhi --- Points of Concern.
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Reforms in Delhi --- Points of Concern • 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 unplanned growth of the Power Utility of the Capital, year after year.
Reforms in Delhi --- Points of Concern • 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.
Reforms in Delhi --- Points of Concern • There was a continuously rising trend in the theft and losses quantam. • 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.
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. --- long sustainable. • 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.
Allaying Tariff Fears • There are apprehensions that privatization would lead to upward tariff revisions. • The manner of bid invitation and bid evaluation however 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. • 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 2002-2007. • 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 and 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.
Power Sector Reforms : Orissa ModelFacts of the case: • Orissa was the first State in the country to go in for reforms. • OERC was set up WEF 1.4.96 • Reforms were conceived by the World Bank and funded by DFID . • The Agenda included running the electricity industry in an efficient and competitive manner (--- without any major change in procedures and environment). • The valuation to corporations at the time of transfer was done on the basis of assets transfer.
Power Sector Reforms : Orissa ModelPitfalls: • Valuation of the assets at the time of transfer to the utilities were unrealistic (…higher side). • Since the transfer costs were high, the tariff was high. • The concept was on cost plus return on capital, rather than on efficiency and performance based returns. • Transfer policy did not stipulate any goals for loss reduction. • Average tariff increased by around more than 15 % without any customer service.
Power Sector Reforms : Orissa ModelEndresults: • Distribution companies found it difficult to sustain financially and finally defaulted. • Discoms defaulted to Gridco, which in turn defaulted to Gencos, and hence inadequate cash realization by all concerned agencies. • T&D losses continued to remain high with 46.94% in 1995-96 and 46.63% even after 5 years, i.e. in 2002. • Even escrow failed.
