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The crowning achievement of this Government has been the steps taken to privatise the transmission and distribution of power by the restructuring of the Delhi Vidyut Board. Our reform efforts have been received by all sections of the society, including trade unions and officer associations of the Delhi Vidyut Board without any protest, agitation or labour disturbance. This has sent a clear signal to the whole country in general and the private investors in particular about our unflinching commitment to fundamental reforms.
The Delhi Vidyut Board (DVB) was a State Electricity Board set up in 1997 under the Electricity (Supply) Act, 1948, succeeding the Delhi Electricity Supply Undertaking (DESU), which had existed since 1957 as a wing of the Municipal Corporation of Delhi; it was an integrated utility with generation, transmission and distribution functions serving all of Delhi except the NDMC and MES (Cantonment) areas, to which it supplied power in bulk.
The creation of DVB, replacing DESU, in 1997 proved to be merely a change in the legal status of the organisation and was not followed by any real change in its structure, functioning and work culture: its reputation continued to deteriorate and its poor commercial performance—the best known thing about DVB perhaps being its high Transmission and Distribution (T&D) losses—made it a drain on the public exchequer and incapable of raising the resources necessary to improve its services. There were unprecedented, widespread expressions of public discontent during the difficult summer of 1998.
Against the above background, one of the first major steps taken by the new Government of the NCT of Delhi was to bring out a Strategy Paper on Power Sector Reforms in February 1999. There followed a unique, innovative yet fast track reform process that ultimately resulted in the unbundling of DVB and privatisation of distribution with effect from 1st July 2002. The Delhi power sector reforms are now being widely acclaimed as marking a breakthrough, and are being widely studied. The methodology adopted in Delhi has been favourably commented on in the report of the Distribution Reform Policy Committee appointed by the Central Government under the chairmanship of Shri A.K. Basu, then Secretary (Power) in the Central Government and now Chairman of the Central Electricity Regulatory Commission. Recently, on October 23, 2002, at the 4th Techno-Economic Summit & Expo on Power, Telecom & Infrastructure Construction held in Mumbai, Shri Ajay Maken, Power Minister, on behalf of the Government of Delhi, received from the Union Power Minister the Power India 2002 Excellence Award for the most progressive State Government; this prestigious trophy was awarded by a distinguished panel of judges headed by Mr. Justice A.M. Ahmadi, former Chief Justice of India.
We may look back briefly at some of the major milestones in these historic power sector reforms, and consider how complex, yet how transparent, the reform process actually was:
February 1999: The Government brought out a Strategy Paper on power. This paper envisaged:
March 3 1999: Delhi Electricity Regulatory Commission was set up under the Central Electricity Regulatory Act, 1998. At this stage the Commission’s functions were limited to tariff setting.
November 17, 1999: M/s. SBI Capital Markets were engaged as consultants for the reform process.
December 12, 1999: Shri V.K. Sood was appointed as Chairman and single member of the Regulatory Commission.
December 22, 1999: The first draft of the Electricity Reform Ordinance was sent to the Central Government. Thereafter, several revisions in the draft were made on the basis of suggestions received from them.
April 7, 2000: The Consultants’ Inception Report, indicating the main features of the proposed reform strategy, was received and began to be examined and processed by the departments concerned in the Delhi Government.
June 26, 2000: A Coordination Committee was established to monitor the progress of the reforms. It included representatives of Ministry of Power, Power Finance Corporation, outside experts and consultants, as well as Delhi Government and DVB officers.
October 28, 2000: The Delhi Electricity Reforms Ordinance was promulgated. The Ordinance
On the same day a Tripartite Agreement was signed between GNCTD, DVB and employee representatives ensuring the following to all the present employees of DVB:
November 11, 2000: The Delhi Assembly passed the Delhi Electricity Reform Bill, which was sent for Presidential assent.
January 6, 2001: The Cabinet of GNCTD accepted the Consultants’ Inception Report with some modifications.
January 17, 2001: An Investors’ Conference was was organised by GNCTD, DVB and the Power Finance Corporation (PFC). More than 100 attended – major national and international companies, financial institutions, foreign diplomatic representatives and industry associations.
February 15, 2001: Request for Qualification documents were issued, inviting Statements of Qualification by April 16, 2001. The main eligibility requirement was that the bidder should be a company with a net worth of Rs.500 cr.
March 11, 2001: The Delhi Electricity Reform Act came into force, after receiving Presidential Assent.
May 10, 2001: A Committee was set up to evaluate the SOQs received. It included the representatives of the Ministry of Power, Central Electricity Authority and a senior outside expert, besides officers of GNCTD.
May 15, 2001: After seven prospective bidders submitted their SOQs, the Committee prequalified six: A.E.S., BSES, China Light & Power, CESCON, Reliance and TATA Power.
July, 2001: Six ‘shell’ companies were registered, viz. a Holding Company, a Generating Company, a Transmission Company and three distribution companies. These would become successor entities of DVB on operationalisation of the Transfer Scheme.
July 16, 2001: The consultants submitted their Final Report.
October 5, 2001: The GNCTD Cabinet approved the Consultants’ Final Report.
November 20, 2001: Government issued the Transfer Scheme Rules which gave the Opening Balance Sheets of the new companies and laid down the manner in which the assets and functions of the DVB would be transferred to the new companies.
November 22, 2001: Government issued Policy Directions binding the regulatory commission to the conditions on which distribution companies would be disinvested as a result of the bidding process.
February 22, 2002: DERC fix the opening loss levels and initial BST, which was a pre-requisite for receiving bids.
April 10, 2002: Bids were received. The Cabinet considered the bids unacceptable ‘in the present form’ and a Core Committee of senior officers was authorized to explore alternatives including negotiations.
May 31, 2002:
June 27, 2002: The Shareholders’ Agreement and other agreements with the bidders were signed.
June 30, 2002: Transfer Scheme was operationalised and the management handover to the successor entities including the three distribution companies under private management become effective on midnight of June 30th 2002.
Features of the Reform Process: Magnitude of the task: The power sector reforms in Delhi had a number of unique features. First of all we must appreciate the magnitude of the task. The Delhi Vidyut Board was in fact the largest exclusively urban utility in India, much bigger than the private utilities in Mumbai and Calcutta as the following table shows:
INDIA’S LARGEST URBAN POWER UTILITY(2001-02)
| DVB | CESC(**) | BSES | |
| CONSUMER/THOUSAND | 2645 | 1600 | 2290 |
| AREA OF SUPPLY(SQ.KM) | 1483 | 567 | 384 |
| EMPLOYEES/10 | 2287 | 1476 | 3500 |
| PEAK LOAD(MW) | 2879 | 1183 | 1400 |
(**) 1998-99
With the privatization of DVB, the size of the private sector in power distribution in India has roughly doubled. In this context, it was also a relevant consideration throughout the reform process that there were relatively few parties who might be willing to take over the enormous task of distributing power in the national capital, with all its attendant risks. The earlier privatization in Orissa had appeared only a partial success and the companies which had taken over distribution there had been suffering losses.
Other features of Delhi power distribution: The heavy losses in Delhi were well known. Some of the features of power distribution in Delhi include:
As the table shows, the steady increase in T&D loss was somewhat controlled and slightly reversed from 1999 onwards. However, it was clear to the Government that it would be necessary to privatize distribution as quickly as possible.
Privatisation not corporatisation was the aim
In other states where reforms have been introduced, the policy has been to first create Government-owned corporations managing distribution and then gradually start the process of privatization. These government corporations run for several years and the experience so far does not indicate that they have been able to function viably. In Delhi, the intention was to privatize and not merely to corporatise, and the interim period of Government corporate functioning envisaged in other states was by-passed here. DVB continued to function until midnight of 30th June, 2002 and was immediately succeeded by the private companies in Distribution.
The basic problem of the power sector in India is that the distribution business incurs heavy losses, being unable to issue bills for all that energy supplied (i.e. high T&D losses) and unable to collect payment for many of the bills that are issued (i.e. low collection efficiency). The basic purpose of power sector reforms is to reduce these losses and make this sector self-sustaining. Commercial efficiency is the ultimate consumer interest because it means the consumer will not have to bear the cost of the utility’s losses, and this alone will ultimately keep the tariff under control. In Bombay, where the losses are low, there has been no tariff increase for six consecutive years and yet the utilities are profitable. That shows why it is absolutely necessary that any reform package should involve a steady, targeted reduction of T&D loss.
How should we measure commercial efficiency? All State Electricity Boards issue figures of the T&D losses but, with the exception of Delhi where all registered consumers were metered and bills were printed on the metered consumption, these figures lost much of their credibility. The T&D loss figures of State Electricity Boards do not bear scrutiny because much of the billing is on a flat rate basis (i.e. without meters) and can easily be inflated to keep the losses from appearing high. Thus after the reforms in many States, it has been found that the T&D losses were much higher than had been stated earlier. In Orissa this misinformation caused the investors who took over the distribution companies to suffer heavy losses. In Delhi, both the figures were more accurate, but it did happen that after the accounts were finalised they would sometimes be one or two percentage point different from the original figures. In order to create faith and confidence in the data in Delhi, we introduced the new concept of Aggregate Technical & Commercial (AT&C) Losses in place of T&D losses. T&D losses are the difference between energy supplied and energy billed; but since this figure may not always be accurate, the criterion adopted in Delhi was the difference between the number of units of energy supplied and the number of units of energy for which payment was actually recovered. This new criterion was called AT&C losses and it has since been adopted (under the term ‘effective loss’) by the UPERC in its last tariff order for Kanpur, and is now being advocated for all States by the Union Power Ministry.
How to fix the targets? In Delhi at current prices one percentage point of AT&C losses involves about Rs.80 crores per annum. In other words if an investor misses a target of AT&C loss reduction by 1% he stands to lose about Rs.80 crores, since the tariff would have been fixed according to the loss reduction targets. It is therefore very important that the targets should be achievable but (in the interest of the public) they should be fixed as high as possible.
How should we achieve this balance? The innovative target-setting methodology adopted in Delhi was to establish the efficiency improvement targets through the bidding process itself. This is a transparent method by which we have been able to show the public that we have obtained for them the best deal possible in the circumstances. The reduction of AT&C losses has been fixed at a level which will ensure that distribution in Delhi becomes viable by the end of the five-year period i.e. that the tariff should be completely under control without Government assistance after the end of this period. The opening AT&C losses for each distribution company and the targeted improvements are as follows:-
|
Central/East |
57.2% |
|
North/Northwest |
48.1% |
|
South/West |
48.1% |
|
All |
50.7% |
|
|
2002-3 |
2003-4 |
2004-5 |
2005-6 |
2006-7 |
|
Central/East |
0.75% |
1.75% |
4.00% |
5.65% |
5.10% |
|
South/West |
0.55% |
1.55% |
3.70% |
6.00% |
5.60% |
|
North/Northwest |
1.50% |
2.25% |
4.50% |
5.50% |
4.25% |
In case the companies achieve more than the targets originally set by the Government (which are a few percentage higher than those above), the new companies will keep half of the additional benefit as incentive and pass on half of it to their consumers as a rebate on the tariff. It should be remembered that Government retains 49% share in the distribution companies so that the private investors actually get about one-fourth of the additional benefit, which is a very justifiable incentive since once the losses come down it is a permanent benefit to the public.
What about tariffs? During this interim period after privatisation, the AT&C losses will still be high. Who is to bear the cost? Logically, the answer would be that the tariff should be increased to meet all the allowed cost of distribution including the allowed AT&C losses, but this would impose an undue burden on the public. Therefore, to bridge over this interim period before the industry becomes self-sustaining the Government will be giving a loan assistance of approximately Rs.3450 crores to the Transmission Company, which during this period will be buying power from outside Delhi and from the Generation Company, and supplying it to the distribution companies at a lower rate. It needs to be stressed that this does not helped the distribution company at all, since they are entitled to all their allowed costs, but is purely a means of helping the consumer.
This also makes it possible to have differential tariffs for the three distribution companies in order to maintain a common retail tariff throughout Delhi (subject only to slight variation because of the different rebates might earned for overachievement) during this interim period. This is in the public interest because otherwise the losses, and consequently the tariff, might be lower in well-to-do areas than some of the other areas where there is more unauthorised development.
How to value the assets? As we have seen, the controlling interest in each of the distribution companies has been sold to the investors who committed the highest loss reduction. How were the companies valued?
There are different ways of valuing assets. One conventional method is to value all the physical assets taking depreciation into account for each item. Alternatively there are various methods of business valuation. The Department of Disinvestment, Government of India in its manual entitled “Disinvestment: Policy and Procedures” advises that physical asset valuation is inappropriate for running businesses and that “business valuation methodologies are generally used for valuation of a going concern”. The asset valuation method, it says, “would be relevant only for valuation of assets in case of liquidation of a company”.
The assets of the Delhi Vidyut Board were valued on a business valuation basis. The method adopted was to take into account the projected efficiency improvements and reasonable retail tariff adjustments, as well as the projected Government assistance, assuming that the electricity business should become self-sustainable within five years. On this basis the assets and liabilities of Delhi Vidyut Board were valued as follows:-
|
Successor Entity |
Total Asset Value/ Serviceable
Liabilities |
|
GENCO |
350 |
|
TRANSCO |
450 |
|
DISCOM1 (E+C) |
290 |
|
DISCOM2 (S+W) |
1150 |
|
DISCOM3 (N+NW) |
920 |
|
TOTAL DISCOMS |
2360 |
|
GRAND TOTAL |
3160 |
It will be seen that the valuation of the companies varies considerably, one of the companies (Central + East) being of much lower value because of its limited commercial potential. But there is no real fear of under-valuation. It has to be remembered that this is a licensed business in which there is no prospect of “asset stripping” and the distribution companies cannot reduce the assets without the permission of the Regulatory Commission. In fact land have been given to them on licence basis and therefore they cannot divert the property entrusted to them to any other use but electricity distribution.
How to deal with liabilities ?
DVB and its predecessor DESU accumulated enormous losses which could not reasonably be passed on to the new companies. Nobody would buy them with heavy outstanding liabilities. Therefore the existing liabilities of DVB were diverted into those which were serviceable which will eventually be repaid by the successor entities after an initial four-year moratorium and those which were unserviceable will remain with the Holding Company and have to be dealt with separately. The financial restructuring plan is depicted graphically below:
As a result of the power sector reforms in Delhi, the national capital is now served by two of the best electric utilities in India, BSES and Tata Power. They will take some time to make the projected improvements, for which they have targets, but with economic viability the power situation in Delhi can only get gradually better with every passing year, reversing the legacy of deteriorating service that we had seen in the past.
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