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Power Sector Reforms in India
IntroductionThe power sector in India faces a severe financial crisis and many state electricity boards are dangerously close to becoming bankrupt. For the past decade or so, there have been several efforts to reform the Indian power sector with an important option under consideration being ‘privatization’ of the distribution process. One may note that the power sector can broadly be classified into three functional sub-sectors, namely a. Generation b. Transmission and c. Distribution. Due to the stand-alone, low-risk nature of the generation business, fiscal incentives by the Government and the introduction of regulatory amendments in the Electricity Act of 2003, private players have made a notable entry in this sector. On the other hand, transmission is a complex, capital intensive and monopolistic sector. State Electricity Boards and the intra and inter-state transmission and there are hardly any instances of private transmission investment in the country.
The distribution sector however, holds great promise for private players and has been touted to be the driver of the reform process in the power sector. This stems primarily from the fact that India loses about 35% of its generated power in the form of AT&C losses , resulting in a colossal financial burden on the state utilities. Private players are known to bring in technological improvements and efficient revenue collection systems thereby resulting in a more profitable distribution business. Orissa and New Delhi are the only two states in India which have entirely privatized their power distribution system. In the following pages, we shall describe the Delhi reforms, their performance so far and possible improvements going forward.
Beginning with a strategy paper in 1999, the Delhi Government moved quickly to restructure the power sector in the capital city and privatize the distribution business. Just three years later in 2002, the Government had handed the distribution business to three private players.
There was a marked difference in the privatization process, as compared to that carried out earlier in Orissa. An important parameter – reduction in AT&C losses - was introduced to cover the non-technical and collection losses as well. The distribution assets were valued keeping in mind the following – a. Tariff increases b. Loss reductions c. gradually declining Government support over a five year period.
There were six qualified bidders for the privatization process, of which only two companies (TATA Power, BSES) successfully submitted bids. Moreover, the bids were in the range of 13-14% reduction in AT&C losses, far lower than the 20% figure the Government had stipulated in the initial schedule. The Government then went on to negotiate with the bidders and finally agreed to fix the loss reduction target at 17% for a period of five years.
Meanwhile, the bidders agreed to the following three eventualities: a. Loss reductions < 17% - Distribution Company (DisCom) shall pay the balance b. Loss reductions<20%, >17% - entire benefit is passed on to the customers c. Loss reductions> 20% - benefits shared equally by customer and the DisCom. Three distribution companies (DisComs) were created following the restructuring scheme – BSES Rajdhani Power Ltd. (BRPL) and BSES Yamuna Power Ltd. (BYPL) which were taken over by the Anil Dhirubhai Ambani Group and New Delhi Power Ltd. (NDPL) which was controlled by the TATA group.
To aid the success of this program, the Government decided to write-off the liabilities of the earlier Delhi Vidyut Board, amounting to over Rs. 19,000 crores. Further, the Government agreed to extend a soft-loan of Rs. 3450 crores as financial support to the private DisComs over a five year period. This would ensure that the DisComs would be able to set-up the essential infrastructure and tide over the initial period where savings due to reduction in AT&C losses would be low.
Aggregate Technical and Commercial Losses
One may note that owing to only two bidders participating in the process, there was hardly any competition for reduction in the AT&C losses as a result of which the Government had no option but to negotiate with the bidders and accept a mediocre figure of 20% reductions. The valuations for sale of the distribution assets as well as the target reductions can hardly be termed ambitious and could have been expected to be more stringent in the face of adequate competition.
On the performance front though, all three DisComs consistently reported improvements in the AT&C loss reductions (except for BYPL in ’02-’03). For the first two years, the reductions were very close to target levels. In ’04-’05 though, NDPL beat the targets by seven percent, thereby passing on a huge benefit amounting to Rs. 880 to the citizens of Delhi.
Capital Expenditure of DisComs
The capital expenditure of DisComs on setting up new infrastructure in terms of IT, improved switching, transformers, automatic distributors, land, buildings, new offices and so on is a critical parameter to be examined. Not only will the capital expenditure of a DisCom affect the tariff imposed on the end consumer (as we shall see in the next section), it will have a strong impact on the overall profitability of the DisCom as well. For this reason, the Delhi Electricity Regulatory Authority (DERC, the regulator in this case) commissioned a study to benchmark the likely costs of modernization and compared them to the costs proposed by the private players. It turned out that the private players had petitioned for 8 times the costs arrived at by the third-party evaluator.
The DERC stepped in at this point and sanctioned limited capital to modernize equipment keeping a check on the long-term effect of the same on consumer tariffs.
One important point of concern which the DERC did not address then was the priority of various expenses and whether certain capital could be spent in a phased manner based on its importance to the achievement of loss reduction targets in the first few years.
Tariff Revisions in the Post-transition phase
The Government introduced two crucial clauses in the contract which were to guide the tariffs in the transition phase and beyond: a. the retail tariffs would be the same for all DisComs till the end of the transition period (March 2007) b. tariffs are set so that DisComs earn a 16% rate of return provided they meet the loss reduction target.
The important point to note here is the fact that all three DisComs’s tariffs will be identical for the first five years irrespective of the Bulk Supply Tariff being paid by the DisCom. To overcome this disparity, the Government decided to cover these losses to the tune of Rs. 3450 crores over the five year period.
The DERC then arrived at yearly tariff increase rates of 0%, 5%, 10% and 6.6% for the next four years of the transition phase. These rates imply a cumulative increase of 23% in the tariffs – a figure comparable to the prevalent rate of tariff increase in absence of the private players.
Power Purchase Costs
The two major cost indicators of DisCom performance and benefit to the consumers are Purchasing costs and Distribution costs.
The first is the cost per input kWh which excludes the cost of losses and reflects the cost of purchase of electricity for the DisCom itself. The second cost is on a per realized kWh basis, being an indicator of the operational and commercial efficiency of the DisCom itself.
While the cost of power purchase has not changed significantly, increased operational efficiency has lowered AT&C losses leading to a decrease in Distribution costs. We must note here, that although the purchase cost of power has remained more or less stable at Rs. 2.5 per input kWh, the distribution cost has reduced significantly from Rs. 5.51 per realized kWh in ’02-‘03 to Rs. 4.63 per realized kWh in ’04-’05.
We must note here that BYPL continued to have a large revenue deficit of Rs. 1.73 per kWh in ’04-’05, while NDPL became almost financially self-sufficient at a deficit of Rs. 0.35 per kWh.
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