Learnings from Delhi's power supply privatisation

DELHI has never been inviting in May and June. This summer, the capital saw its worst power crisis, and frayed tempers pushed Sheila Dikshit’s government on the back foot. Power cuts lasting 12 to 15 hours a day became routine, especially in the worst 20 days of June when the temperature shot beyond 44{+0} Celsius. Since then, every aspect of power generation and distribution has been under the scanner as the government found it hard to explain a crisis of such magnitude after the much-publicised privatisation of power distribution in 2002.

When power reforms began in 2002, the Delhi Vidyut Board (DVB) was unbundled into three privately owned distribution companies – a power transmission company, a power generation company and a holding company that held most of the DVB’s pre-privatisation liabilities. Following the unbundling of the DVB in July 2002, the business of power distribution was transferred to North Delhi Power Limited (NDPL), owned by the Tata group; BSES Yamuna Power Limited (BYPL); and BSES Rajdhani Power Limited (BRPL), owned by the Anil Dhirubhai Ambani group. All this was part of the Delhi government’s effort to increase the efficiency of power distribution. These entities function as joint ventures with the Delhi government, but they hold 51 per cent of the shares.

For the full report that appeared in the Frontline, click here

The imperatives of privatisation of distribution of power, particularly in urban areas, has already been discussed threadbare here. Now, if the processes taken up are not going on too smoothly, let's examine the why of it all, based on the above report.

Points of note from the report:
1) Private discoms have proved more efficient than the DVB is the reduction of power losses and thefts. The losses, which were at 52.3 per cent in 2002-03, are now down to less than 20 per cent.

This means the freeing of a capacity of close to 1200 MW, which otherwise would have required an additional investment of Rs 6,000 cr.
 
2) More and more people now question the very basis of the privatisation decision, which has so far only meant power cuts and rising tariffs for the people and higher subsidies for the government.

At a gathering of Socialists, convened essentially for privatisation bashing, that I attended a few years back, a lady went on to blame TATA’s and Reliance for the faulty meterings in New Delhi, after they took over the distribution, and went to lament that A/C, which she termed as a necessity in the Delhi summer, has now become unaffordable for even the middle classes. The fact of the matter, however, is that the consumers in Delhi had so far been ‘managing’ the government-owned DESU very well, and, with the private sector players taking over, the consumers are now having to pay the actual costs.

There was another gentleman who went on to state that ‘electricity’ is now a necessity, and therefore, should be treated as a ‘fundamental right’. The question that arises simultaneously is whether A/C in Delhi should likewise be treated as a fundamental right, even as the poor in the villages are roasting in the summer heat because of the incompetencies of the government service providers. For more on that, click here

3) NDPL, however, seemed to perform better, mainly because of its strong human resources and the infrastructural upgradation it undertook over the past few years.

Perhaps, brings out the difference between TATA's and Ambani's.

4) The Reliance-backed BSES has been operating for seven years, but its chairman, Lalit Jalan, admitted that the old distribution network had not been replaced. “Around 50 per cent of the network is old and needs replacement. Old transformers are prone to breakdown,” he said. Upgrading the whole system would have made power supply “unviable for consumers in the long run”, he added.

However, replacing the transformers was part of the mandate for the private discoms when they took over from the DVB. Instead of spending money from their own pockets, the utilities are now demanding investment from the Centre. On their behalf, the Delhi government has also sought funds from the Union Ministry’s Rs.50,000-crore national scheme for power infrastructure development.

The Accelerated Power Development and Reforms Programme (APDRP) would give Delhi around Rs.300-400 crore as part of the funding, according to a newspaper report. “The money will only be used for better services. Why should Delhi consumers not benefit from Central funds just because their power distribution is privatised?” asked Arun Kanchan of BSES. The three discoms, however, are rich with a surplus of Rs.938 crore, and BSES claims to have spent Rs.3,500 crore on infrastructure upgradation.

The Delhi government still stands by its claim that decentralisation makes the power sector more efficient. However, the Public Accounts Committee (PAC) of the Delhi Legislative Assembly during the previous Sheila Dikshit government criticised the whole process of privatisation in its report in 2006. The committee, headed by a Congress member, S.C. Vats, accused the core committee of the State government of bending all “rules and colluding” with the business houses to “accrue monetary benefits” to the latter.

The PAC reportedly recommended an inquiry by the Central Bureau of Investigation (CBI) to ascertain the circumstances that led the members of the committee to go against the interest of the public exchequer by favouring the conditional bidders. The BJP, citing a CAG report, alleged that there was a Rs.12,000-crore scam in the power sector, and this became a campaign issue in the last Assembly election.

BSES has also been notorious for quoting an exaggerated Aggregate Revenue Requirement (ARR) to be approved by the Delhi Electricity Regulatory Commission (DERC). For instance, in 2004-05, BRPL claimed Rs.800 crore as capital investments. Of this, the DERC cleared only Rs.525 crore. For the same year, BYPL claimed Rs.700 crore, but the DERC cleared only Rs.416 crore.

The Tata-owned NDPL, in contrast, claimed Rs.328 crore – all of which was cleared. The DERC also complained, in the same year, that both BRPL and BYPL had spent just 40 per cent of the capital expenditure approved by it towards improving the power distribution network in the capital. The scorecard of NDPL is better: it spent almost 75 per cent of the capex approved by the DERC. Earlier this year, the DERC also sent notice to the discoms to replace faulty meters following numerous complaints of abnormally inflated electricity bills.

Reliance got into this business by acquiring BSES in Mumbai, which already was a fairly efficiently run set up, in the private sector. As compared to that, taking over from where the 'government boards/ undertakings' were earlier operating, is a far trickier job. So much so, even after seven years, Reliance and TATA's are still trying to chart their way through the minefield that had been laid out by the erstwhile DESU, in Delhi. In Orissa, in fact, a foreign player gave up and ran away after handing it over to RPG of Kolkata, for some salvage value. Based on the learnings, perhaps it can happen faster now. But, the greater the delay, the more difficult it's going to be.

It can perhaps be said in defence of Reliance that they may be tending to compare their financial performance in Mumbai with that of Delhi, and finding it comparatively unremunerative, are playing around to get the state to invest more (rather than pumping in their own money), using the various enabling clauses they would have managed to introduce into the contract in fine print. These pitfalls are inevitable when you allow the government agency to be run to ground, and then out of desperation look for a competent player to take over. This once again brings out the urgency for the government to divest itself from these functions early.

As for TATA's, this being their first full-fldged foray into distribution, they are not carrying any baggages, and are perhaps able to approach it totally objectively, and from a long-term point of view. This of course is apart from the intrinsic differences between TATA's and Ambani's.   

5) However, according to a Power Ministry report, all the three discoms have, in fact, sold 5.4 million units of energy through power exchange for Rs.5.35 crore between June 21 and June 29, the worst phase of the power crisis in Delhi. Power Ministry officials, who did not want to be quoted, said that despite the shortage of power in the capital, the three discoms had a history of selling power for profit and being stingy when it came to purchasing power for the city. In the monthly report of the Central Electricity Regulatory Commission’s (CERC) short-term transactions of electricity, compiled by the Market Monitoring Cell, Delhi ranked among the top five power sellers of the country both in the open market and through bilateral agreements for the first three months of 2009. But it ranked among the bottom five in purchasing power.

“The DVB, under the Delhi government, functioned with the sole purpose of providing service, but the private discoms are here for profit. If a company makes profits, it is also expected to upgrade its service and infrastructure, but BSES has not spent much on its units and it does not have adequate human resource to address people’s grievances. Since the power sector is one that directly affects people, accruing profits should be secondary. This situation is only one of the negative outcomes of the privatisation of such an important sector,” one official said. A.K. Sah, former Chairman of the NTPC has a similar view: “The discoms are being very commercial by not buying expensive power when consumers are suffering.”

I wonder what the regulator is doing. Clearly calls for strengthening the regulatory mechanism

6) Delhi Transco Limited, under the Delhi government, is responsible for wheeling power to the discoms and is known for having the lowest transmission loss in India. The discoms, therefore, seem to be the only entities responsible for the situation.

If they are known for keeping the losses at the lowest level compared to any other transmission company in the country, that is indeed commendable. However, transmission is a fairly simple function, requiring very little man-power, and consequently the efficiency can be quite high. Even our own KPTCL does a fairly good job of it.

Conclusion:  Well, like I have stated before, it's nobody's case that privatisation is the panacea for all the ills. There will continue to be problems. But, like the late Sri C Subramaniam had once stated, atleast these will be new problems, and not the same old ones for which we have no solutions for over half a century.

Further, apart from Delhi and Mumbai, the cities/ areas that 'enjoy' power supply from private companies are Ahmedabad, Surat, Kolkata, Greater Noida, and in all these places, the customer satisfaction and profitability levels are far higher than elsewhere where the supplies are with government companies/ agencies, all being subject to uniform regulation by the respective SERC's. So, there must be enough merit to it. And, perhaps learning from the experiences in Delhi, the switch-over in other cities can happen more smoothly.

Muralidhar Rao