Power Sector ReformsPower Sector Reformsin Delhiin Delhi

What we can learn fromWhat we can learn from

the experience so farthe experience so far

2

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

0

500

1000

1500

2000

2500

3000

3500

Consumers(thousands)

Area of Supply (SqKm)

Employees/10 Peak Load (MW)

DVB

CESC

BSES

3

Features of Delhi power supply: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 Advantage of negligible agricultural load offset by large population in unauthorised offset by large population in unauthorised colonies and squatter settlementscolonies and squatter settlements– 14% of consumption by ‘hooking’ in such areas.14% of consumption by ‘hooking’ in such areas.

• Deteriorating commercial performance.Deteriorating commercial performance.

4

DVB’s commercial performance DVB’s commercial performance was not always bad:was not always bad:

DESU/DVB T&D LOSSES

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

ENERGY SUPPLIED (MU) ENERGY BILLED (MU)

5

Percentage T&D Losses

0

10

20

30

40

50

60

COMMERCIAL PERFORMANCE OF DESU/DVB

0.0200.0400.0600.0800.0

1000.01200.01400.0

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

Net Commercial Loss(Rs.Cr.) Operating Deficit(Rs.Cr.)*

DESU/DVB a losing proposition even when the DESU/DVB a losing proposition even when the T&D losses were still under control, reflecting T&D losses were still under control, reflecting insufficient tariff:insufficient tariff:

Note slight dip in losses after tariff revisions

6

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

Energy releasedEnergy released

(Dec 99-Nov 2K)(Dec 99-Nov 2K)

Energy billed Energy billed (Jan-Dec 2K(Jan-Dec 2K

Distribution Distribution lossloss

Yamuna Vihar Yamuna Vihar

(East Circle)(East Circle)

901.00 MU901.00 MU 239.61 MU239.61 MU 73.41%73.41%

Nehru Place Nehru Place (South Circle)(South Circle)

446.10 MU446.10 MU 349.31 MU349.31 MU 21.70%21.70%

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Reform Milestones:Reform Milestones: • Feb., 99 Feb., 99 - GNCTD Strategy Paper- GNCTD Strategy Paper• May., 99 May., 99 – Delhi Electricity Regulatory – Delhi Electricity Regulatory

Commission set up under CERC Act.,1998Commission set up under CERC Act.,1998• Nov., 99 Nov., 99 -SBI Caps engaged as Consultant-SBI Caps engaged as Consultant• Dec., 99 Dec., 99 -Regulator Appointed-Regulator Appointed• Oct., 2000 –Delhi Electricity Reforms OrdinanceOct., 2000 –Delhi Electricity Reforms Ordinance• Oct., 2000 –Tripartite agreement between staff, Oct., 2000 –Tripartite agreement between staff,

DVB and Government, on same day as Ordinance.DVB and Government, on same day as Ordinance.• Jan., 2001 –Investors’ ConferenceJan., 2001 –Investors’ Conference

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……continued:continued:

• Feb 2001 – RFQ issuedFeb 2001 – RFQ issued– Bought by 31 parties.Bought by 31 parties.

• Mar 2001 - Delhi Electricity Reforms Act, 2000 comes Mar 2001 - Delhi Electricity Reforms Act, 2000 comes into forceinto force

• July 2001 – Consultants’ final reportJuly 2001 – Consultants’ final report

• May 2001 - Bidders short listedMay 2001 - Bidders short listed– Six biddersSix bidders

– Two expressed lack of interestTwo expressed lack of interest

• Nov 2001- RFP issuedNov 2001- RFP issued

• Nov 2001 - Policy DirectionsNov 2001 - Policy Directions

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……continued:continued:

• Feb 2002– DERC order fixing opening loss levels Feb 2002– DERC order fixing opening loss levels and initial BST.and initial BST.

• April 2002 – Bids received from two bidders.April 2002 – Bids received from two bidders.– Considered not acceptable “in present form” by Considered not acceptable “in present form” by

Cabinet.Cabinet.

– Core Committee authorised to explore alternatives Core Committee authorised to explore alternatives including negotiation.including negotiation.

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……continued:continued:

• Share Acquisition Agreement, May 31, 2002Share Acquisition Agreement, May 31, 2002– Amendments to Policy Directions and Transfer Scheme Amendments to Policy Directions and Transfer Scheme

RulesRules

• Shareholders Agreement and other agreements Shareholders Agreement and other agreements signed June 27signed June 27– Operative from June 30Operative from June 30

– Transfer Scheme operationalised June 30Transfer Scheme operationalised June 30

– Management handover Management handover

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The issues in reform:The issues in reform:What is the objective?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, In most of South Asia, all else pales into insignificance, for the time being.for the time being.

– Investor interest in any part of the power sector Investor interest in any part of the power sector depends on it.depends on it.

– Motivation for other efficiencies—reducing technical Motivation for other efficiencies—reducing technical losses, DSM—also depends on it.losses, DSM—also depends on it.

• Reform in practice = distancing Government from Reform in practice = distancing Government from management:management:– ‘‘Political’ will, related to Political’ will, related to

• Demand for better service;Demand for better service;• Financial considerations.Financial considerations.

– Investor interest a constraint:Investor interest a constraint:• Reform modalities must derive from local situation.Reform modalities must derive from local situation.

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The issues in reform:The issues in reform:Can we compress the time frame?Can we compress the time frame?

• Political will:Political will:– Its relationship with compulsions of situation.Its relationship with compulsions of situation.

• If available, it must be honoured:If available, it must be honoured:– Implications for time frame—delay will Implications for time frame—delay will

damage credibility;damage credibility;– Necessity to go it alone in Delhi to achieve Necessity to go it alone in Delhi to achieve

tangible results within a Government’s term.tangible results within a Government’s term.

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Issues:Issues:How to deal with the transition:How to deal with the transition:

• Design of package essentially to handle the Design of package essentially to handle the transitional phase (say, 5 years).transitional phase (say, 5 years).

• During the transitional phase, it is necessary During the transitional phase, it is necessary to balance:to balance:– Realistic expected efficiency gains;Realistic expected efficiency gains;– Possible tariff increases;Possible tariff increases;– Transitional assistance until the benefits of Transitional assistance until the benefits of

greater efficiency are realised.greater efficiency are realised.

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Setting efficiency improvement targets:Setting efficiency improvement targets:

• Primary investor concern.Primary investor concern.

• Regulatory (and public) regulatory approval Regulatory (and public) regulatory approval not forthcoming for reasonable, achievable not forthcoming for reasonable, achievable multi-year targets:multi-year targets:– Lack of understanding of nature of problem.Lack of understanding of nature of problem.– Lack of benchmark experience.Lack of benchmark experience.

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Multi-year tariff principles proposed by DVB Multi-year tariff principles proposed by DVB in 2001:in 2001:

• Annual Tariff fixation: general principles Annual Tariff fixation: general principles for power purchase, O&M, salaries, for power purchase, O&M, salaries, interest, depreciation.interest, depreciation.

• DERC to fix targets for collection DERC to fix targets for collection efficiency shortfall.efficiency shortfall.

• T&D loss reduction targets:T&D loss reduction targets:2001-022001-02 2002-032002-03 2003-042003-04 2004-052004-05 2005-062005-06

2%2% 2%2% 2%2% 3%3% 3%3%

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Negative response (except from investors):Negative response (except from investors):

• No general appreciation of the necessity for No general appreciation of the necessity for MYTP in the context of developing Orissa MYTP in the context of developing Orissa experience.experience.

• DVB accused of bad faith in making proposals on DVB accused of bad faith in making proposals on behalf of future, as yet non-existent, discoms.behalf of future, as yet non-existent, discoms.

• Targets considered too low.Targets considered too low.• Collection inefficiency “pass-through” thought to Collection inefficiency “pass-through” thought to

be contrary to accounting principles.be contrary to accounting principles.

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No Time Gap between Corporatisation & No Time Gap between Corporatisation & Privatisation in Delhi:Privatisation in Delhi:

• Shell companies registered in Shell companies registered in advance.advance.

• Objective was privatisation, not mere Objective was privatisation, not mere corporatisation.corporatisation.– New entities would incur losses before New entities would incur losses before

privatisation.privatisation.– Govt. retained option to abort the entire Govt. retained option to abort the entire

exercise in absence of investor exercise in absence of investor response.response.

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Issues:Valuation method:

– Business Valuation method used for Business Valuation method used for second time in India—Kanpur, then second time in India—Kanpur, then Delhi.Delhi.

– Business Valuation, as adopted –Business Valuation, as adopted –•value assets on going concern basis value assets on going concern basis •asset value derived based on future asset value derived based on future

earnings potential assuming earnings potential assuming reasonable retail tariff increase and reasonable retail tariff increase and efficiency improvementsefficiency improvements

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….. Valuation of Assets

• Principles applied:Principles applied:– electricity business becomes self electricity business becomes self

sustaining within five years sustaining within five years – Minimise retail tariff shock. Minimise retail tariff shock. – Support from GNCTD for funding Support from GNCTD for funding

initial losses - about Rs. 26 billion initial losses - about Rs. 26 billion (increased to Rs 34.50 billion).(increased to Rs 34.50 billion).

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Allocation of Assets & Liabilities

Successor Entity Equity

Share

Capital

Debt Holding

Company

Total Asset

Value/Servicable

Liabilities

GENCO 140 210 350

TRANSCO 180 270 450

DISCOM 1 (E+C) 116 174 290

DISCOM 2 (S+W) 460 690 1150

DISCOM 3 (N+NW) 368 552 920

Total DISCOMS 944 1416 2360

GRAND TOTAL 1264 1896 3160

(Rs. crores)

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Financial Restructuring PlanFinancial Restructuring Plan

Estimate of Total Liabilities (as on Estimate of Total Liabilities (as on 31/3/2001)31/3/2001)

DESU Period Liabilities 12953Loan from GOI and CEA 196Loan from Delhi Administration 4405Power Purchase Dues 8352

DVB Period Liabilities 9297Loans from GNCTD 4840Power/ Fuel Dues 4457

Liability to Terminal Benefit Fund 887Total Liabilities 23137

(Rs. crores)

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……..Financial Restructuring Plan..Financial Restructuring Plan

DVB

Holding Co.

Genco Transco D1 D2 D3

GoNCT

1. All the assets and liabilities ofDVB are acquired by GNCTD

2. All the liabilities of DVB are transferredto Holding Company, entire Equity ofHolding Company is issued to GNCTD

3. All the assets are transferred fromGNCTD to successor entities. Assetswill be assigned a value equal toserviceable liabilities

4. Equity and Debt in the successorentities, equal to the value ofserviceable liabilities is issued infavour of the Holding Company

Legend

AssetsLiabilities

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……..Financial Restructuring Plan..Financial Restructuring Plan

Support for funding losses in Support for funding losses in initial years initial years

• About Rs 3450 cr to TRANSCO About Rs 3450 cr to TRANSCO – at interest rate of 12% at interest rate of 12% – moratorium of four years on moratorium of four years on

interest and principal repayment interest and principal repayment

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Power Purchase/ Bulk Supply Arrangements

• Uniform Retail and differential Bulk Uniform Retail and differential Bulk Supply Tariffs.Supply Tariffs.– BST for each DISCOM based on its paying BST for each DISCOM based on its paying

capacitycapacity

• After 5 years DISCOMs to buy After 5 years DISCOMs to buy power directly and pay wheeling power directly and pay wheeling charges to TRANSCOcharges to TRANSCO

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Delhi Solution to target setting: Legitimise targets through bidding procedure.

Criterion for Selection of InvestorCriterion for Selection of Investor• Minimum target of Aggregate Technical Minimum target of Aggregate Technical

& Commercial Loss to be achieved by & Commercial Loss to be achieved by investors each year for next five years investors each year for next five years specifiedspecified

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

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Issues:Quality of data

• Aggregate Technical & CommercialAggregate Technical & Commercial Loss - the difference between units Loss - the difference between units input and units for which payment input and units for which payment is realised is realised – to capture the effect of both the to capture the effect of both the

Transmission & Distribution loss and Transmission & Distribution loss and shortfall in collection efficiencyshortfall in collection efficiency

– avoids error inherent in billing figuresavoids error inherent in billing figures

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Issues:‘Regulatory Risk’

Policy Directions to DERCPolicy Directions to DERC• To mitigate uncertainty and ensure To mitigate uncertainty and ensure

successful privatisation, GNCTD issued successful privatisation, GNCTD issued policy directions under Section 12 of policy directions under Section 12 of Reform Act, binding Regulator to the Reform Act, binding Regulator to the outcome of the bidding process.outcome of the bidding process.

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

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The Policy Directions:

• require that tariffs for 2001-07 take into require that tariffs for 2001-07 take into account:account:– Selection process of bidders Selection process of bidders – Technical & Commercial Loss to be on Technical & Commercial Loss to be on

the basis of the bid of the selected the basis of the bid of the selected bidderbidder

– DISCOMS earn 16% Return on Equity DISCOMS earn 16% Return on Equity (Assuming loss reduction, ARR approval)(Assuming loss reduction, ARR approval)

– Incentives on over-achievement: 50% Incentives on over-achievement: 50% retained, 50% to rebate on tariffretained, 50% to rebate on tariff

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Loss level reduction targets accepted:Loss level reduction targets accepted:

2002-32002-3 2003-42003-4 2004-52004-5 2005-62005-6 2006-72006-7

C/EC/E 0.75%0.75% 1.75%1.75% 4.00%4.00% 5.65%5.65% 5.10%5.10%

S/WS/W 0.55%0.55% 1.55%1.55% 3.70%3.70% 6.00%6.00% 5.60%5.60%

N/NWN/NW 1.50%1.50% 2.25%2.25% 4.50%4.50% 5.50%5.50% 4.25%4.25%

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Issues:Issues:Importance of staffImportance of staff• Staff accepted inevitability of reforms in the face Staff accepted inevitability of reforms in the face

of strong political will:of strong political will:– Enlightened union leadership;Enlightened union leadership;– Knew opposition to reforms would provoke public Knew opposition to reforms would provoke public

hostility.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.Also, ageing work force, many retirements anticipated.

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Reform package tariff projections:Reform package tariff projections:

• Years 1 to 3: retail tariff increase up to 10% Years 1 to 3: retail tariff increase up to 10% per annum.per annum.– Year 1 for 6 months only.Year 1 for 6 months only.

• Years 4 & 5: retail tariff increases of 5%, Years 4 & 5: retail tariff increases of 5%, 3%.3%.

• Bulk (Transco) Tariff to rise more sharply, Bulk (Transco) Tariff to rise more sharply, with phasing out of Government assistance, with phasing out of Government assistance, efficiency improvements.efficiency improvements.

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First post-reform tariff order:First post-reform tariff order:

• 5.18 % increase overall.5.18 % increase overall.

• Government decision to further subsidize to Government decision to further subsidize to avoid tariff increase for consumers up to avoid tariff increase for consumers up to 400 kwh per month.400 kwh per month.

• Discom issues:Discom issues:– Depreciation rate;Depreciation rate;– Deferred tax liability.Deferred tax liability.

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First post-reform tariff order:First post-reform tariff order:(Continued)(Continued)

• Order effective July 4, 03.Order effective July 4, 03.

• Holding Company collections assigned to Holding Company collections assigned to Transco ARR.Transco ARR.

• Overall, effect on investor interest to be Overall, effect on investor interest to be watched:watched:– Advance fixation of loss reduction targets will Advance fixation of loss reduction targets will

not suffice to allay investor apprehensions on not suffice to allay investor apprehensions on regulatory uncertainty, in future.regulatory uncertainty, in future.

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More complete multi-year packages have More complete multi-year packages have since been suggested in South Asia:since been suggested in South Asia:• Andhra Pradesh:Andhra Pradesh:

– By Regulatory Commission;By Regulatory Commission;– Principles enunciated in detail;Principles enunciated in detail;– Actual fixation of targets may take time.Actual fixation of targets may take time.

• Karachi:Karachi:– By Regulatory Commission;By Regulatory Commission;– Seven-year package announced;Seven-year package announced;– Investor interest to be tested.Investor interest to be tested.

• Karnataka: Karnataka: – By Government;By Government;– Different kind of formula, still being developed.Different kind of formula, still being developed.

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Issues: Issues: Open Access? Supply Competition?Open Access? Supply Competition?

• Why Single Buyer Model?Why Single Buyer Model?– Little scope for generation competition initially.Little scope for generation competition initially.– Interim assistance to TRANSCO to keep tariff Interim assistance to TRANSCO to keep tariff

down, keep a uniform retail tariff.down, keep a uniform retail tariff.– No bar on supplementary purchases by No bar on supplementary purchases by

DISCOMs.DISCOMs.– Limited to five years.Limited to five years.

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… … Open AccessOpen Access• At what cost can open access (which must be for At what cost can open access (which must be for

only a few large consumers) be introduced only a few large consumers) be introduced immediately?immediately?– Privatisation must be made attractive for investors.Privatisation must be made attractive for investors.

– Cross subsidy removal must await loss reduction.Cross subsidy removal must await loss reduction.

– Value of consumer interface in present situation:Value of consumer interface in present situation:• Mere ‘supplier’ responsible only for energy billed to own Mere ‘supplier’ responsible only for energy billed to own

customers, not motivated to reduce losses;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.

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In India, Electricity Act 2003 changes the In India, Electricity Act 2003 changes the context of privatisation:context of privatisation:

• Mandates phasing-in of open access:Mandates phasing-in of open access:– Regulator to determine time frame;Regulator to determine time frame;– Surcharges to compensateSurcharges 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.

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Thank You