The price of power

Tribunal strikes down Delhi Electricity Regulatory Commission move to create "regulatory assets" and avoid a tariff hike.

AMAN SETHI in New Delhi

REELING from the twin blows of a hot, dry summer and the annual power crisis, residents of Delhi were denied their last chance at relief when on July 25 an Appellate Tribunal on Electricity ruled that the Delhi Electricity Regulatory Commission (DERC) did not have the authority to create regulatory assets for power distribution companies.

The immediate impact of this could be a hike in electricity tariff for 2006-07. Last year high-profile protests by Residents Welfare Associations (RWAs) forced the Delhi government to roll back a proposed 10 per cent tariff hike and instead the government created regulatory assets. These assets refer to the difference between the amounts owed to the distribution companies (discoms) and the amounts actually collected from consumers.

Last year, the tariff hike was agreed to in principle but was not enforced. This created a revenue gap and this amount was set aside as a "regulatory asset" that the discoms could claim at a more convenient stage. However, pursuant to the Appellate Tribunal declaring such asset creation illegal, increased government subsidy may be the only way to hold off another hike this year.

The controversial privatisation of Delhi's power distribution network, now in its fifth year, has proved to be an enduring headache for Chief Minister Sheila Dixit, as performance has not matched expectations and frequent power cuts have made the administration vulnerable to attacks from the Opposition as well as disgruntled party cadre. More and more people now question the very basis of privatisation, which has so far only meant power cuts and rising tariffs for the people and higher subsidies for the government.

Blaming the power crisis on "unforeseen and unavoidable circumstances", Minister of State for Power Haroon Yusuf told Frontline that a failure of vital generation facilities at Naptha Jhakri, Singrauli and Badarpur contributed to a combined shortfall of about 600 megawatt (MW) on one particular day. He said the government had made investments in Tehri, Dadri and Chhattisgarh to ensure the long-term power-security of the capital. "The power problems are not an indictment of the privatisation process," he added.

In Orissa, the only other State to have privatised its distribution system, the Orissa Electricity Regulatory Commission (OERC) might be forced to renationalise the system as no qualified private company has shown interest in acquiring the distribution network after AES Corporation, a U.S.-based power and utilities company, walked out of its contract with the government. The reported withdrawal of five of the six bidders means that the OERC will have to run the system on its own.

Orissa's reform fiasco has prompted a re-evaluation of Delhi's reform process.

Power sector reforms in Delhi began in 2002 when 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 DVB's pre-privatisation liabilities. A five-year transition period was announced, wherein all discoms would provide electricity to their consumers at the same rates, and also bring down the aggregate technical and commercial losses (AT&C) by 17 per cent. The AT&C losses referred to the total losses incurred by the DVB during the transmission, distribution and bill collection stages. During this period the Delhi government would provide decreasing subsidies to the discoms, until rising tariffs and falling AT&C losses made the distribution business profitable.

During the transition period all discoms have to buy power from Delhi Transco Limited (DTL), a transmission utility of Delhi, at subsidised rates and sell it to consumers at a rate determined by the DERC. After that period, the subsidy would be withdrawn and the discoms would be free to set the rates, subject to DERC approval.

Ostensibly, efficient discoms would provide cheaper power and better service, but consumers do not have the option to choose their power-provider because companies have been given distribution licenses for specific areas.

With the transition period ending in 2006-07, the focus is on two inter-related issues - pricing mechanism and open access.

The pricing mechanism, as worked out by the DERC, is based on a system of Aggregate Revenue Requirement (ARR), which includes a 16 per cent post-tax return on equity as assured profit. An ARR is a detailed statement of expenditure, in which a discom lists its proposed expenditure on network upgradation, purchase of equipment and administrative and general expenses.

The DERC scrutinises each discom's ARR and fixes the tariff accordingly. In 2003-04, the DERC revised the tariff following such scrutiny.

Ideally, the DERC is supposed to clear only expenditure that it deems prudent, but a recent report by the Prayas Energy Group, a Pune-based non-governmental organisation (NGO), indicates that regulation has been far from stringent.

A pre-privatisation assessment carried out by SBI Caps, a consultancy service, estimated a total investment of Rs.1,021 crores for all discoms over a period of five years. This investment (and its 16 per cent return for the discoms) would be funded by a combination of increased tariff collection and government subsidy. However, an examination of the ARRs filed by the three discoms shows a total investment of Rs.2,334 crores in the first three years and a total projected investment of Rs.5,731 crores for the period 2002-07.

This figure is more than five times the original estimate and it compelled DTL write a note to the DERC: "The expenditure proposed to be incurred on Supervisory Control and Data Acquisition [SCADA] system, laying of new service lines, electrification of unauthorised colonies... seems to be highly inflated taking into consideration the recent trend in market prices and the expenses being incurred by DVB on similar works in the past." Subhash Sethi, Director (Operations), DTL, confirmed that such a note was written, but backtracked saying that market trends had changed drastically subsequent to the note being written.

In fact, the Reliance-owned BSES Yamuna Power Limited (BYPL) and BSES Rajdhani Power Limited (BRPL) are notorious for filing exaggerated ARRs. For instance in 2004-05, BRPL claimed Rs.800 crores as capital investments. Of this, the DERC cleared only Rs.525 crores. For the same year, BYPL claimed Rs.700 crores but the DERC cleared only Rs.416 crores. Tata-owned North Delhi Power Limited (NDPL), in contrast, claimed Rs.328 crores - all of which was cleared.

While the discoms claim that capital expenditure is essential to improve network quality and service, inflated claims only enforce the belief that most corporate entities have no interest in public welfare. A belief that has found resonance in a recent report by the Parliamentary Accounts Committee headed by Dr. S.C. Vats.

Adopted on the floor of the Assembly on March 2, the Vats Committee report surprised many by taking a stand that was critical of the government. The report noted: "Government was in such a desperate haste to privatise the distribution business that it had no time to fulfil the procedural obligations."

The committee came down heavily on the government for awarding the consultancy contract to SBI Caps without a proper tendering process, and forcing the Administrative Staff College of India (ASCI) to withdraw its bid. The report observed that the bidding process "was not above board", that the "entire system lacked supervision and accountability", and concluded by recommending a Central Bureau of Investigation (CBI) inquiry against members of the core committee on the grounds of "collusion with the business houses".

Some former DVB officials told Frontline that Vat's observations were excessive. They claimed that unlike officials in the Power Department they were never called before the committee nor offered the right to respond. Officials also explained that in 2002 the DVB was reeling under liabilities worth Rs.23,137 crores and privatisation was perhaps inevitable. They defended the award of the consultancy contract to SBI Caps on the basis of the company's work in the power sector reforms in Kanpur.

In an interview with Frontline, T.L. Sankar, Principal in charge and Head of Energy Consultancy at ASCI, refuted the allegations in the Vats report. He said: "The ASCI withdrew its bid as it lacked the logistical capabilities to complete the process in the required time," and that the entire privatisation process was, to the best of his knowledge, "professional" and "above board".

Meanwhile, NDPL consumers seem to be far happier with those serviced by the other two discoms. A reading of the Prayas report explains why. According to the report, all three discoms met their loss reduction targets, but the Reliance companies did so by improving collection efficiencies, while their transmission and distribution losses remained constant. This implies that the quality of the network has not improved despite claims of huge investments in network infrastructure.

Most of NDPL's loss reduction, by contrast, came through a reduction in transmission and distribution losses - the sign of an improving network.

Further, NDPL's record of submitting accurate, (and significantly lower) assessments of capital investments will probably result in lower electricity tariffs once the transition period ends. This possibility has led to a demand for "open access" among consumer groups.

"Privatisation has simply replaced a government monopoly, with a corporate one," said Pankaj Aggarwal, secretary of the Delhi RWA Joint Front. Aggarwal is not against privatisation per se, but feels that competition and open access are the only ways to improve the power situation.

Open access refers to a system where companies are not given exclusive rights over geographic zones, but customers are given the option of registering with a discom of their choice. It usually refers to a system where the distribution company is separate from the entity that owns the network. Thus, for example, NDPL could service consumers in the Reliance areas by paying carrying and wheeling charges to Reliance for using their network.

However, Jagdish Sagar, a former chairman of the erstwhile DVB, says such a system would push up the cost of power and might suit only large consumers with specific requirements of power. Sagar pointed to the situation in Maharashtra where the Reliance group laid entirely new parallel networks of its own to compete with the existing state-owned networks. However, such strategies are high-risk ones and would probably backfire if the State Electricity Boards were to pull up their socks.

Sagar feels that while an open access system is desirable, it is still a few years away - both in terms of technology and legislation required.

Apart from issues of open access and tariffs, several other issues must be resolved post-transition, including the repayment of funds due to the government and the sourcing of power. 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.