re: Delhi power supply (cont'd)

[This was posted to Hasiru Usiru mailing list]
Some more replies.

And, quite like PRAYAS, what I have stated (in the concluding para) is appended below:

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.

Prayas (http://www.prayaspune.org) has refused to take a strict pro- or anti- reforms/privatization stand since they feel that would be unhelpful (note: reforms may or may not include privatization). But they do suggest abundant caution & re-thinking.

However, unlike them, pushing for privatization of everything (power, water, waste management, transport) even while admitting that it may not solve all the ills, is like wanting to eat the cake and to keep it too. And while Sri C Subramaniam was entitled to his opinion, I'm not sure I'm ready to invite new problems when I can't solve current known problems. Then again, they may not be new problems at all. At least some of the more intractable ones will not be new problems. I list some of these below:

• Greed & questionable behaviour

1. Selling power for higher returns: All three discoms sold power for profit outside Delhi during days of power cuts lasting 12 to 15 hours a day (see Power of profit). Apparently this type of thing even has a name. From Prayas' Of Rocks and Hard Places': Enron took advantage of the two part market in California by overscheduling load such that they could sell more power in the lucrative hour ahead market, a strategy they called 'Fat Boy'.

2. Inflating capital expenditure (which has a direct bearing on tariff) : Reliance discoms can't pass on Rs.535 crore to Delhi consumers - APTEL: "A senior DERC official explained after power distribution was privatised in the Capital, discoms had been directed to invest in capital goods — equipment among others. The purchase of Distribution Transformers by BSES discoms from its sister concern M/s Reliance Energy Ltd was at inflated rates, The transformers were purchased from Reliance Energy and found to be exorbitant and the rates were higher by 68 percent from the market rates. The regulatory commission which procured the VAT bills showed that the material was sold for 731 crores and the discoms showed an inflated price with profit margin of 68 percent and tried to pass on the buck to consumers. Procurement of equipment by Reliance backed discoms at higher rates amounts to loading the extra cost on the consumers of Delhi and further to give undue profit to the Discoms as well as the supplier which is the sister company of BSES." The Apellate Tribunal of Electricity agreed.

This has been happening from the beginning. Inflated capital expenditure claims: Capex affects tariff rates the discoms can charge, higher the capex, higher the tariff. Prayas notes in their 2007 Prayas' Delhi Summary Report that the Reliance companies are notorious for their exaggerated capex claims. For instance for '04-'05 they claimed Rs 800 crores, DERC cleared only Rs 525 crores.

• Manipulating numbers to boost profits:
  

In their summary report on Delhi's experience written in 2007, Prayas notes that ABR figures for BRPL/BYPL (the Reliance companies) were not matching DERC's projections. According to Prayas: The unexpected behavior of Annual Billing Rates and consumption that we have discussed here all have significant effect on the revenues and tariffs, and are also linked to the validity of the AT&C loss reduction calculations. (see Prayas' Delhi Summary Report). And while NDPL (Tata discom) didn't use this approach, their distribution costs were the highest, inspite of having a good network (see Prayas' Delhi Summary Report)! Prayas urged regulatory vigilance on this aspect.

And no, saying only Reliance is bad (while praising the same company's performance in Mumbai) doesn't cut it. Two private players. If one of them is bad, that is a bad-to-good ratio of 1.

• Regulatory lapses/capture/incompetence
  

Inspite of the Delhi Transmission company (Transco) pointing out the ABR issue to DERC (the Delhi regulator), the latter did not investigate(see Prayas' Delhi Summary Report ). Why? Prayas has pointed out that regulatory action is wanting. Will it every become sufficient?

No, if the US experience is anything to go by. Private utilities have existed in the US for a century or more. I'll quote here from Prayas' report on the US power sector reforms (Prayas' US Report): "As another point of comparison, the US Federal Electricity Regulatory Authority (FERC) has a staff of about 1200 [Hunt 2002]. Despite these considerable resources, the Chairman of FERC was quoted in the aftermath of the California crisis as saying that US regulators had "a long way to go" to match the sophistication of the companies it regulates [Egan 2005]."

In the 'Fat Boy' context, Prayas (same report) notes: Indeed, the example of Enron in California suggests market designers will be hard pressed to stay ahead of those who seek to game the market".

• Framing of rules tilted in favour of the private companies (Sweetheart deals)
  

1. A 16% Return on equity is guaranteed to the Delhi Discoms! NDPL makes profits even when it shows a revenue gap, as it does in this recent 2008-end presentation ( http://www.derc.gov.in//ordersPetitions/Petitions/MYTARR20092010/Distribution/NDPL.pdf). (The revenue gap is typically filled by tariff revisions.)

Interestingly, revenue surpluses of Rs 8 cr & Rs 208 cr were estimated for NDPL for 2007-08 & 2008-09 respectively. They turned out to be a mirage and turned into revenue gaps of Rs 213 cr & Rs 155 cr (see page # 3 http://www.derc.gov.in/ordersPetitions/Petitions/MYTARR20092010/Distribution/NDPL.pdf) No doubt they will get this back through tariff hikes or failing that through subsidies.

Why is this such a big thing? An article from 2005 in Business Standard, Chronicle of a crisis foretold explains it, quoting Haldea from National Council for Applied Economic Research:

According to Haldea, this ensures the firms will earn 59 per cent on their capital base and this could go up to 181 per cent in case they are able to lower losses to the level of, say, NDMC! [note: NDMC is the public utility supplying Lutyens' Delhi] (To understand how this works, in 2002-03, NDPL had equity of Rs 368 crore but free reserves of another Rs 50 crore; in the next year, the equity has remained the same till date but the "free reserves" has gone up to Rs 224 crore.)

The article also notes the problem with the process for setting targets for AT&C losses when the deal was finalised. This has an big impact on the profits that these companies make. The consultants (Tata Consulting Engineers) to the privatization projected 20% reduction in losses in the first five years. Reliance & Tata wanted only 13-14% reductions (see Prayas' Delhi Summary Report). 13-14% of the 50+% of the then losses - that would leave AT&C losses at around 40%! Why were they so reluctant?. As the above article explains:

What makes the deal even sweeter is the incentives given for loss reduction. After a certain level of reduction (the 17 per cent or so reduction that the firms have agreed to over 5 years plus a few percentage points more), the firms get to keep half the gains from the reduction (this works out to roughly Rs 30 crore for every one per cent reduction in ATC losses).

This, in fact, is the biggest problem with the deal signed by Dikshit's government in 2002 since, even five years after privatisation, the BSES twins [BRPL/BYPL] and NDPL will still have losses of around 33-34 per cent — so, customers will end up paying 50 per cent more than what power costs even in 2007-08. To put this in perspective, Mumbai has a loss level of around 11 per cent, Ahmedabad is around 14 per cent, Surat 15 per cent and the NDMC area in Delhi is around 16 per cent. While both BSES/NDPL and the government of Delhi argue that the loss reduction agreed to in 2002 was the best they could have got since it was got by bidding and no company bid higher than this, this is contested by Gajendra Haldea, chief advisor on infrastructure at the National Council of Applied Economic Research (NCAER). Haldea had argued then that when there were just two players left in the bidding process, the Delhi government changed the rules of the game — an additional loan of Rs 850 crore was provided to lower power supply costs, the minimum performance requirements were lowered by Rs 1,000 crore, among others — and had these been offered to everyone, there would have been better bids.

2. And then, the companies were given a clean balance sheet to begin with, and allowed to collect DVB's arrears and keep 20% of those (see next point)! Also, they got their majority stake in the discoms paying up a smallish Rs 481 crores for all three discoms combined ( see A Challenging Phase). Valuation of DVB's assets & other interesting happenings during the privatization itself are covered in Accountability, my foot & The Way to Accountability (there might be an element of politics involved if one notes the author of these two articles. But still - he does not make up any fact & quotes the PAC draft report).

• Hidden subsidies/financial transfers
  

  1. Prayas (See Prayas' Delhi Full Report) notes:
  

One of the critical features of the power sector restructuring in Delhi has been the large financial support provided by GNCTD. Through the transfer / restructuring scheme the GNCTD provided clean balance sheets to successor companies. In this massive financial reengineering process, nearly all past liabilities (around Rs. 19,000 Cr.) were taken over by GNCTD (i.e. essentially written off). Additionally, the government provided Rs. 3450 Cr. as transition support (over a 5 year period) and also contributed Rs. 886 Cr. towards employees pension trust.

For the first five years from 2002, the discoms were basically allowed to pay whatever they had left after all their expenses were covered (see Prayas' Delhi Summary Report). Rest would be made up by the govt in the form of subsidy. The total amount was estimated to be Rs 3450 Crores (the same Rs 3450 crores mentioned in the previous paragraph), not sure what the actual figure was. I will safely assume it was at least that much. After the transition period (first 5 years), the loan was supposed to be paid back. Interest on the loan at 10% works out to Rs 345 Crores. What about the repayment of the loan? I can't find any info on it. Meantime there are questions (see Tribunal strikes down Delhi Electricity Regulatory Commission move to create "regulatory assets" and avoid a tariff hike):

"The Rs.3,450-crore support granted by the government was intended originally as a loan that would have to be returned on terms decided by the two parties. While the details are yet to be made public, the funds will probably have to be raised through further tariff hikes."

2. Delhi Transco (one of the firms from which the dicoms buy power) is projecting revenue gap of Rs 1,500 crores in 2009 (see Coming soon: power tariff hike 'from 5 to 50 paise').

3. Then in 2005, Delhi govt gave a three-year subsidy of Rs 90 crores per year (see Amid outages, Delhi govt ends power subsidy). That has apparently been rolled back, after the three years. Who knows when it will be back? Power or opposition benches - difficult choice to make.

4. Then there is a annual subsidy Rs 184 crores subsidy for weaker sections & agricultural sector which is ongoing Delhi to give power subsidy for domestic, agricultural consumer).

So we can count the subsidies as : One-time pension trust donation of Rs 886 crores + annual interest of (at least) Rs 345 crores + pending principal amount of Rs 3450 crores + Rs 180 crores (for '05, '06) + Rs 184 crores (for weaker/agri sectors).

This does not include loans given to these discoms by the govt etc. This also does not include hidden subsidies to the private discoms like land etc... Tata's are looking for land to build gas-based generating stations in & around Delhi. So subsidies go on, privatization or not.

• 
  

• Collusion/cartelization between the private discoms
  

  1. Collusion started right at the beginning. The AT&C loss reduction estimates provided by Tata & Reliance in their bids for the license, were suspiciously in the same narrow range – 13-14% (see Prayas' Delhi Full Report). Prayas notes that this is very surprising. These were below the 20% minimum required by the bidding process, but the govt did not reject the (only) two bids, but renegotiated with the two bidders to 17%! (see ).

  2. And, NDPL (tata company) buys power for both NDPL & BRPL/BYPL (see Prayas' Delhi Full Report). Nice work! But weren't they supposed to be competitors? Moreover the tariff is same across the discoms. So if one is successful in fixing things so that it can get a tariff hike, the other can benefit form that. I just can't see any problem with that arrangement!
  

• Unaccountability/transparency

  The Delhi Govt has a 49% stake in NDPL & BRPL/BYPL. Hence, according to some people, they should come under the RTI Act. The CIC agreed. But the discoms went to high court and got a stay (see DERC report). What are they so afraid of?

• Tariff setting
  

Then there will always be the problem of tariffs (from Chronicle of a crisis foretold):

That is, by now (Year 4) tariffs would have risen by 40 per cent. The actual hikes, on the other hand, are just around 11 per cent. In fact, in order to keep the tariffs hikes low, the Delhi government provided Rs 3,450 crore of taxpayers' money to give BSES and North Delhi Power Ltd (the two companies which bought over DVB's assets) power at a subsidised rate.

And furthermore, besides these generic problems, there will be problems specific to the power sector. And they are not trivial problems (as the Prayas reports point out).

Delhi apparently is now paying a high price for having delayed the reforms process. Bangalore will perhaps have to pay an even higher price. Actually, it's already doing so, if one takes into account the enormous cost of stand-by (in many cases - mainstay) power that the entire city (as well as the state) population is dependent on - check this

BESCOM is not doing too bad. More on that in the next mail.

Regards,
Dinesh.