Restructuring and PrivatizationPAVING PATH FOR EFFICIENT OPERATION OF INDIAN POWER SECTOR

Provision in EA 2003

Preamble – An Act to consolidate the laws relating to generation, transmission, distribution, trading and use of electricity and generally for taking measures conducive to development of electricity industry, promoting competition therein, protecting interest of consumers and supply of electricity to all areas, rationalization of electricity tariff, ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benign policies, constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto.

Source: Electricity Act 2003

Part XIII – Reorganization of Board

Section 131 – Vesting of property of Board in State Government

Section 132 – Use of proceeds of sale or transfer of Board, etc.

Section 133 – Provisions relating to Officers and employees

Section 134 – Payment of compensation or damages on transfer

Source: Electricity Act 2003

Restructuring related sections

Section 82 – Constitution of State Commission

Every State Government shall, within six months from the appointed date, by notification, constitute for the purposes of this Act, a Commission for the State to be known as the (name of the State) Electricity Regulatory Commission

Section 17 of Electricity Regulatory Commission Act, 1998

The State Government may, if it deems fit, by notification in the Official Gazette, establish, for the purposes of this Act, a Commission for the State to be known as the (name of the State) Electricity Regulatory Commission.

Continued…

Section 79(2) – Functions of Central Commission

Promotion of competition, efficiency and economy in activities of the electricity industry

Promotion of investment in electricity industry

Section 86 – Functions of State Commission

Promotion of competition, efficiency and economy in activities of the electricity industry

Promotion of investment in electricity industry

Reorganization and restructuring of electricity industry in the State; The Electricity Act, 2003.

Source: Electricity Act 2003

Standard Reform ModelThe reform steps have included some of the following

• CORPORATIZATION AND COMMERCIALIZATION

• ENACTMENT OF REQUISITE LEGISLATION

• VERTICAL AND HORIZONTAL RESTRUCTURING

• EFFICIENT ACCESS TO THE TRANSMISSION NETWORK

• PRIVATIZATION

• INDEPENDENT POWER PRODUCERS (IPPS)

• INDEPENDENT SYSTEM OPERATOR

• UNBUNDLING OF RETAIL TARIFF

• MARKETS AND TRADING ARRANGEMENTS

Source: World Bank

Definitions

Corporatization and commercialization to transform state-owned utilities into separate (from the ministry/government) legal entities and restore financial discipline.

Enactment of requisite legislation to provide a legal mandate for restructuring and creation of (independent) regulatory agencies with adequate information, capacity, and statutory authority.

Vertical and horizontal restructuring to separate potentially competitive generation and retail activities from the natural monopoly segments of transmission and distribution and thus facilitate competitive entry and mitigate market power.

Establishment of regulatory rules to promote efficient access to the transmission network and provide signals for the efficient location of generation facilities.

Continued…

Privatization to restore financial discipline, provide incentives for cost efficiency and insulate the operating entities from damaging political interference.

Independent Power Producers (IPPs) to facilitate investment in generation even in the absence of comprehensive sectoral reform.

Designation of an independent system operator to direct the safe, reliable and economic operation of the interconnected electric system, determine the order of dispatch, and make arrangements for the expansion and enhancement of the transmission system.

Unbundling of retail tariffs to separate prices for competitive retail supply activities from the regulated network (transmission and distribution) charges.

Creation of markets and trading arrangements for voluntary energy and ancillary services.

Meaning of Restructuring

Reforms & Restructuring Mainly related to Unbundling & Privatization

Unbundling – Separate entity for Generation + Transmission + Distribution

Privatization – Opening & Promoting the market for private players

Need for Restructuring & Reforms

Scarcity of financial resources available with Central and State Governments.

Accountability

Necessity of improving the technical and commercial efficiency.

Tariff rationalization

Major Steps Electricity Regulatory Commissions Act 1998

APDRP

Electricity Act 2003

Power Sector Structure

Source: More Power to India, WB

Reforms and Restructuring status

Source: AR 2013-14 on the working of State Power Utilities & Electricity Department

Benefits of Restructuring & Reforms

Transparency & Fair Play

Loss Minimization & Eventually profit-

orientation

Phasing out cross subsidization

Increasingly Competitive

“Badlav acche hain”

“All change is hard at first, messy in the middle and gorgeous at the end”

Robin Sharma

Case Study – Content

Orissa Privatization model Need

Reforms Agenda

Phased Reform

Key Elements

Delhi Privatization model Need for privatization

Unbundling – Model adopted

Outcome – Comparison with Orissa Model

Orissa privatization model – Needs

High transmission and distribution losses

Poor financial performance

Inadequate accountability for various segments (generation, transmission, and distribution

There was also need to solve the financial problems of OSEB and meet the demand of funds for investment in generation, transmission and distribution system.

Reforms Agenda

Introduction of POWER SECTOR REFORM ACT,1995 which came in to effect from 1st April 1996

OERC was formed to establish an independent and transparent regulatory regime

Ultimate objective was to withdraw from the power sector as an operator of utilities, having instead privately managed utilities

Reform – First Phase

Two Government-owned corporate utilities were formed with agreement ensuring full autonomy with effect from 1st April 1996.

Orissa Hydro Power Corporation (OHPC) - responsible for hydro power generation

Grid Corporation of Orissa (GRIDCO) - responsible for transmission and distribution functions

Second Phase

Pursuant to the Orissa Electricity Reform Rules, 1998, the Govt. of Orissa transferred the distribution assets and properties along with personnel of GRIDCO to four distribution companies with effect from 26th November 1998

CESCO

NESCO

WESCO

SOUTHCO continued to function as affiliates of GRIDCO up to 31st March 1999

GRIDCO disinvested 51% share to Private Sector Investors keeping a share holding 39% with it and 10% share for Employees Welfare Trust

Continued…

On 19.11.97 GRIDCO divided its distribution functions into four geographical zones viz. Western zone, North-Eastern Zone, Southern Zone and Central Zone

The assets and liabilities were assigned to these Companies with an equity base for each Company

A decision was taken at the Govt. level for privatization of the distribution system in the State through a joint sector/joint venture route, in which the proposed equity sharing will be as under

Private Strategic Investors (PSI) : 51%

GRIDCO : 39%

Employees Trust : 10%

Continued…

No asset sale had actually taken place. Assets have been assigned to respective companies

Three Companies viz. WESCO, NESCO and SOUTHCO were taken over by M/s BSES of Mumbai from 01.04.99

CESCO was taken over by the AES of USA with effect from 01.09.99

The State Govt., which was paying a subsidy to the tune of Rs. 300 crore per year by 31.03.96 during the OSEB time, did not pay any subsidy from 01.04.96 onwards after the split up of OSEB and creation of GRIDCO and OHPC

New structure of electricity sector in Orissa

Key elements

The T&D losses that were assumed (Staff Appraisal Report of the World Bank) to be 39.5%, were actually greater than 50%

Even though 100% Collection Efficiency was assumed by FY98, the actual collection was 83% in FY99

Tariff increase was assumed to be 16% in FY97 and 18% in FY98. However weighted tariff increase by OERC in its two orders was less than 10% each year, with a 20 month gap between the two tariff orders

To make the distribution business attractive to private investors, only around Rs. 650 crores of total liabilities was passed on the four Distribution Companies while GRIDCO, the Transmission company, retained with it Rs. 1950 crores of liability in its own books, as all distribution companies were loss making undertakings

Delhi Model – Need for privatization

The problems of the electricity sector in Delhi can be divided into three sections:

Demand-Supply Imbalance

Transmission and Distribution losses

Financial Position

Unbundling

Delhi Vidyut Board

Holding Company

(DPCL)

GenCo (IPGCL)

TransCo (DTL)

Three Discoms

BSES Rajdhani

BSES Yamuna

TPDDL (Formerly

NDPL)

Continued…

All the assets and liabilities of DVB are acquired by GoNCT

All the liabilities of DVB are transferred to holding company, entire equity of holding company is issued to GoNCTD

All the assets are transferred from GoNCTD to successor entities. Assets assigned=serviceable liabilities

Equity and debt in the successor entities Equal to the value of serviceable liabilities is issued in favor of holding company

How it works

Assumption: Opening loss level to be 48%

High performance zone Committed performance zone

Short performance zone

Assumption: Committed loss level to be31%

Scenario – 3Surplus beyond stipulated to be

shared 50% between investor and consumers

Scenario – 2Surplus revenue over committed

performance but less than stipulated goes to consumers

Scenario1Deficit to be

born by private company

Initiative taken post reform

Automation initiatives and GIS

Complaint management system

Online connection management by consumer

Door step delivery of new connection

Privileged consumer scheme – Offering discounts

Automated bill payment Kiosks for consumer convenience

Source: www.idfc.com

Outcome – Comparison

Orissa Model Single Buyer Model for power

purchase

No Holding Company

T & D Losses Unreliable.

Highest offer for 51 % face value of share.

Government has withdrawn all subsidy immediately after privatization

Delhi Model Single buyer model for transition

phase of 5 years. After that, distribution companies can directly buy power from generation companies

Retaining liabilities of DVB and 49% share of unbundled utilities, so that companies could start with clean balance sheet

AT & C Losses (Considered Billed and Collected Inefficiencies). Max. reduction in AT&C losses over a 5 year period above the minimum level. Sale of 51 % at face value

Subsidy was given for initial 5 years, so that distribution companies should be able to achieve a positive turn around

Standard Reform ModelThe reform steps have included some of the following

• CORPORATIZATION AND COMMERCIALIZATION

• ENACTMENT OF REQUISITE LEGISLATION

• VERTICAL AND HORIZONTAL RESTRUCTURING

• EFFICIENT ACCESS TO THE TRANSMISSION NETWORK

• PRIVATIZATION

• INDEPENDENT POWER PRODUCERS (IPPS)

• INDEPENDENT SYSTEM OPERATOR

• UNBUNDLING OF RETAIL TARIFF

• MARKETS AND TRADING ARRANGEMENTS

Source: World Bank

What is Privatization ?

The transfer of ownership, property or business from the government to the private sector is termed privatization.

In IEA 1910, it envisages growth of the electricity industry through private licensees.

Some private utilities operating since independence( Tata Power)

Post 1991: After the liberalization of the Indian Economy, there has once again been greater involvement of the private sector in the power industry, and a rapid growth of this industry as well.

IPPs allowed since 1991.

Unbundling and corporatization of SEBs.

Review of International Models

Chile

• Privatization without vertical or horizontal unbundling. Wholesale competition. Market has been liberalized.

Argentina

• Privatization with full-scale vertical and horizontal restructuring.

Peru

• Partial privatization, vertical and horizontal unbundling. Single buyer model.

Source: The Electricity Journal (2012)

Continued…

Colombia

• Privatization with unbundling. Bid-based pool market.

Brazil

• Vertical unbundling.• Privatization focused on distribution while generation remained largely

state-owned. • Gradual transition to competition in generation and supply.

Sub-Saharan Afric

a

• Introduction of IPPs with some unbundling and limited progress in establishing independent regulatory mechanisms. The incumbent state-owned utility has remained dominant.

Source: The Electricity Journal (2012)

INDIAN Scenario

In early 1991

Opening up of generation by the private players, which led to investment by international players like ENRON when they developed a gas power project in the state of Maharashtra, which is also known as Ratnagiri Gas power project

Electricity Regulatory Commission Act, 1998

Electricity Act, 2003

It was the major initiative taken by the union govt. for a major overhaul of the electricity sector and mandated the Unbundling and setting up of SERCs

Unbundling & ERC establishment

Source: More Power to India, World Bank

Why Privatize ?

Lower taxes Don’t have to pay pesky Social Security taxes

Neither does employer

Higher returns You will be smart enough to always have high rates of return

You will be smart enough to outsmart the market

Market always rises, or at least, your returns will always grow

Self-control In charge of your money: you pick stocks or other investments

No one else has hand on your money

Continued…

Self-interest

Don’t have to pay taxes to take care of others you don’t like

Greater national savings

Since more people will have more money, they will save it by investing in the stock market

Greater business investment

Since we lower taxes on businesses, they can take the money and invest it, to create new jobs and new products

In addition, the flow of money to the stock market will mean more funds to business

Why Not Privatize ?

As privatization has many benefits but it certainly has some de-merits as well

Access of power to section of society below poverty line who cannot afford power

Fulfilment of Uniform Service Obligation, which may not turn out to be the interest of the private player

Access of power to the people living in very remote areas of the country

Fear for cartelization which may hamper the interest of consumer if it turns out to be non-regulated or self-regulated market commodity