Delhi Power sector reforms – A boon to private monopolies

JULY-SEPTEMBER, 2002

VOL. 3 NO.3

Delhi Power sector reforms – A boon to private monopolies

In this saga of privatisation in distress, whether it was opening up of power sector to private producers such as Enron or unbundling of the State electricity Board as in Orissa or the privatisation of distribution that is being attempted in Delhi, consequence is carrying forward the failures of new power policy from one stage to another stage without having been able to manage the period of transition.

Overlooking the Indian experience for fear of popular backlash regarding increasing tariff, Government of Delhi however issued directions to the regulator to increase tariffs for providing ‘attractive’ returns to the choosen private investors. The bidding process in Delhi seems to be vitiated as large concessions were granted to favoured bidders during post-bid close-door negotiations i.e. a negotiated bilateral deal and not a competitive bid, perhaps might be nececiated by Delhi’s Energy Minister to pile up huge sums of money required due to Delhi government entering in an election mode next year.

We know that if Dabhol (Enron) had to sell its produce in a competitive market, it could never have extracted such exploitative returns. Similarly in the arrangements contemplated for Delhi as its power minister says competition will take about 10 years to come, the privatised discom’s will command a monopoly status fleecing the consumers and will bring a replay of the failures of the nineties.

Private discom’s will buy electricity from the state-owned Transco at Rs.1.32 per unit but will sell at an average tariff of Rs. 4.16 to the consumers. Bulk consumers like Delhi Metro Rail will pay Rs. 4.80. Imagine a private discom pocketing Rs. 3.00 per unit for simply transporting electricity for few Kilometers. Similarly the government’s own Jal Board will pay Rs.6.52 while Municipal Corporation will pay Rs.6.95 for street lighting. For subsiding power purchase by three Discom’s, the Delhi government shall provide loan of Rs.3450 crores over the five year period to prevent tariff hike but it will be inevitable when repayment of loan begins.

The Government of Delhi has violated/altered the tariff principles specified in the sixth schedule of the Electricity (Supply ) Act 1948, in accordance to which tariffs are determined to rest of private discom’s all over the country. Section 28 (2) Delhi Electricity Reforms Act requires that E(S) Act be followed in Delhi too. However section 28(3) empowers the Regulator to make departures after recording its reasons in writing, following a public hearing. Delhi government had no powers to usurp the statutory role of the regulator that was primarily set up as an independent tariff setting authority.

The government directions are revealing. Electricity (S) Act allows a reasonable return equal to 5 per cent above the RBI rate, which is ruling at 6.5 per cent. This return of 11.5 per cent is to be paid on the capital base, which is defined as original cost, less depreciation. Under the E(S) Act when consumer pays for depreciation in cash, the capital investment gets reduced to that extent. The government of Delhi has fixed a 16 per cent return on equity which remains constant unlike the capital base which gets reduced progressively. This manipulation alone will double Discom’s profits by the fifth year as compared to E(S) Act.

Discom’s will also get a moratorium of three years on a government loan of Rs. 174 crore. The benefits however will not be passed on to the consumers who will nonethless pay Rs 43.3 crore to Discom on account of loan repayment, thus enabling it to increase returns by about 13 per cent. In fact none of the actions of the Delhi government will reduce consumer tariffs which happens to be highest in India billing at higher rates than in Tokyo and London after the regulator raised them by a hefty 22 per cent last year.

The best is yet to come. The regulator has determined the current distribution losses of Discom at 57.2 per cent and the government’s negotiated agreement requires discom to bring down losses to 40 per cent in five years. In case discom fairs better, it can retain one half of the additional revenues. Thus for every stolen unit recovered below 40 per cent, discom can retain Rs. 2.04 as its profit even though it had paid only Rs. 1.32 as the purchase price.

For matching 16 per cent distribution losses of New Delhi Municipal Council (NDMC), Discom must bring down a reduction of 24 per centage points below the negotiated 40 per cent. The additional revenue assuming a modest turnover of 6000 million units (taking Delhi’s daily consumption as 65 MU) will be about Rs. 600 crore of which discom can appropriate Rs.300 crore as profits.

Under the E(S) Act, Discom can retain up to 5 per cent of its reasonable return by way of excess profits and the balance must go into a reserve fund. Overlooking this statutory ceiling, the Delhi government has allowed Discom to appropriate even 400 per cent in profits, which means about Rs. 300 crore against a statutory ceiling of Rs 5 crore. If this ceiling had to be increased the regulator could do it by a reasoned order under section 28(3). The Delhi govt’s action is leaving the profits open-ended and also in linking them to lax performance standard smokes of a foul play and to anybody’s guess.

The bids received were conditional and non-responsive. A few hundred crores were added for expanding the subsidized supply to the bidder, and his risk of losses was also reduced by Rs.250 crores through lowering the threshold of losses by 2.75 per cent from 20 per cent to 17.25 per cent. In addition a new anti-theft law was promised so that thefts could be reduced and the bidder could appropriate half of the theft reduction in added profits.

The valuation of the assets of Discom has been also questioned. As a result private bidders would acquire 51% of the equity of distribution companies but paying only Rs.481 crores. Business valuation relates the value of an asset to the present value of expected future cash flows. It expresses the present value of a business as a function of its future cash earning capacity. The future cash flow streams are discounted to the present at an appropriate discount rate. Obviously the valuation done on this basis cannot be further reduced by accumulated depreciation of the past, as that is irrelevent to the net present value of future cash streams. Significantly too the benefit of reduction in capital costs will not flow to consumers. The regulator had hiked the consumer tariff by a hefty 22 per cent in May 2001, and one of the components of this tariff was the capital cost. Though the capital cost has been subsequently reduced under the transfer scheme, consumer tariffs will remaid unaltered.

Public assets of more than Rs 1000 crore seems to be vanishing between the regulator’s order and Delhi govt.’s notification, as against DVB’s capital assets of Rs.5403 crore, the gross fixed assets included in the transfer scheme notification on Nov.20, 2001, aggregate Rs.4263 crore only. This includes Rs 650 crore and Rs.510 crore of the Transco and Genco respectively; the remaining Rs. 3103 crore have been allocated to three Discoms. A gapping hole of Rs. 1140 crore is apparent between the two sets of figures, one approved by the Regulator and the other notified by the Delhi Government.

Yet another blow to the exchequer was administered by a further reduction of Rs. 743 crore in terms of accumulated depreciation. The value of these Discoms was thus reduced from Rs. 3103 crore to Rs. 2360 crores.


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