 "Delhi discom drama could derail power reforms")
For long, Delhi has held the distinction of being the country's only success story in power-distribution reforms. In the 12 years since power distribution was privatised in the capital, companies run by the Anil Ambani and Tata groups have managed to achieve what successive governments failed to do for decades: reduce power cuts to almost nil, provide better quality of power, bring down technical and commercial losses to a mere 17 per cent from 65 per cent and offer significantly cheaper rates than in most other cities and states. But a dark reality stares in the face - all these may draw to an end soon. Developments in the past month have amply demonstrated that the success story has gone sour, and notices, threats and payment defaults have become the new normal.
There are three distribution companies, or discoms, in Delhi. BSES Rajdhani and BSES Yamuna of the Anil Ambani group provide power to South and West Delhi and Central and East Delhi, respectively. Tata's Tata Power Delhi Distribution looks after North Delhi. The BSES companies are now threatening power cuts of up to 10 hours because they claim they have no money to buy power. (Power accounts for 80 per cent of their total expenditure.) Together, the three discoms are likely to have a revenue shortfall of Rs 1,356 crore in the current financial year (see box). Their principal supplier, state-owned National Thermal Power Corporation, or NTPC, had threatened to cut supplies from February 11 if they didn't clear their arrears. The Supreme Court stepped in to ask NTPC not to switch off supply to the discoms till March 25. To add to the drama, the state government, led by activist Chief Minister Arvind Kejriwal, has threatened to cancel the licences of the discoms should the power situation worsen. Kejriwal has demanded that the Comptroller & Auditor General, or CAG, conduct an audit of all the three discoms, which, in turn, have moved the Delhi High Court against such an action.
No less perplexing is the web of dues. The consumers owe Rs 20,000 crore to the discoms. These are called regulatory assets - recognised but unrecovered revenue. The discoms owe the state government Rs 3,500 crore as payment to its generation and transmission companies. The state owes Rs 262 crore to the discoms in the form of subsidies. And the discoms owe NTPC Rs 690 crore for supply of power.
No solution in sight
However, none of these seems like a workable solution in the present circumstances. The recent tariff increase of up to 8 per cent announced by the Delhi Electricity Regulatory Commission, or DERC, may give a temporary breather to the discoms but what about the regulatory assets amounting to a whopping Rs 20,000 crore? "The situation is pretty bad," says a senior analyst from a professional services firm who does not wish to be identified. "The latest tariff increase could give the discoms some leeway for a month or two. But, in view of the huge regulatory assets, and the fact that discoms do not have the money to make payments for even the monthly power purchases, this is just a drop in the ocean."
Also, any reprieve to the discoms through the subsidy route looks unlikely at the moment because the Kejriwal government has already linked subsidy payments with the CAG audit. "The government wants to wait for completion of the CAG audit even to clear the past subsidies," says a second analyst who also does not want to be identified given the political and legal nature of the issue. "This is a problem because the discoms are out of cash. Besides, the companies are contesting the audit in the courts on the ground that a CAG audit was not part of the scheme when the sector was privatised."
The second option of the discoms raising working capital loans is also exhausted as banks and financial institutions will be averse to more lendings, considering the overhang of the huge dues from consumers. For BSES alone, which supplies to 75 per cent of the city-state's 3.4 million consumers, the regulatory assets stand at over Rs 15,000 crore, a sum big enough to impact its credit ratings.
Similarly, further equity infusion seems highly improbable as neither the discoms' promoters nor the state government will be willing to risk fresh equity due to their already strained relationship. This is not the first time the discoms' bad financial health has brought the national capital's power sector to its knees. In December 2011, the regulator had served a suspension notice to the BSES discoms which were facing similar financial difficulties and could not pay the generating power plants. At that time, the situation was resolved by the Sheila Dikshit government which infused Rs 500 crore as equity in the debt-ridden BSES companies. This helped them get a bank loan to tide their financial woes. A similar intervention from the Kejriwal government, however, is unlikely. The new chief minister has, in fact, started preparations for a takeover of the discoms by government-appointed administrative officers.
Take over hassles
Experts say a takeover and subsequent replacement of BSES discoms is easier said than done. The provisions of licence cancellation and takeover elaborated in the Electricity Act and discom licencing indicate that, apart from the legal hurdles, the entire process is long-drawn and exhaustive. Under Section 19 (1) of the Electricity Act 2003, licence suspension and revocation is the exclusive domain of DERC. The regulator can cancel the licence on grounds of "public interest" if it is convinced the financial position of the licensee is such that it is unable to discharge its duties. DERC would, however, have to issue a show-cause notice to the discom and give it three months to explain its position. Also, while the Delhi government has advised DERC to conduct an enquiry into the discoms' finances within a few days, so that administrative officers can be appointed to run the two BSES discoms, the Act has no provision defining a time limit for the regulator's inquiry.
The difficulties do not end here. Experience shows that replacing a financially ill discom with a new one is an onerous task. A similar situation arose in Odisha in 2002 when US-based power utility AES abandoned the management of the state discom, CESU. At least three attempts by the state power regulator to have fresh bidding for the private distribution business have failed since. In Delhi's case too, cancellation of licences may not be easy since the contractual obligations and compensation for the physical assets may have built-in deterrents. Also, the new bidders are bound to come with a high-risk perception, affecting any enthusiastic bidding.
"Post the Delhi and Odisha experiences there is growing realization that the equity divestment model of privatization in power distribution does not work, largely because of the political and consumer interfaces and sensitivities. Now Distribution Franchisee (DF) is a more accepted form of private participation in the distribution of electricity," says consultancy firm Deloitte's senior director, Debasish Mishra. Other experts point out that the failure of distribution privatisation epitomised by Delhi would have far-reaching implications for the health of the power sector as a whole. "The steps taken by the Delhi government seem shortsighted but their impact is likely to be faced over the long term. Revival of the power generation sector hinges on the financial conditions of the distribution companies. By enhancing subsidies, which in turn result in regulatory assets due to non-payment by the state governments, the sector is being pushed back in time," says Dipesh Dipu, associate professor (energy), Administrative Staff College of India.
Dipu adds that the state government's announcement of a 50 per cent tariff subsidy has sown seeds of uncertainty, which could impact the Centre's Rs 1,90,000-crore financial restructuring package for loss-making utilities. Also, financing power generation projects will remain a challenge given these uncertainties over the financial health of discoms. "Risk perceptions are more damaging for the future of the industry than the commercial terms of payment and audits," says Dipu.
ESTIMATED FINANCIALS FOR DISCOMS IN 2013-14
* Total revenue at existing tariffs for three discoms: Rs 15,360.8 crore
* Combined annual revenue requirement of discoms: Rs 14,448.91 crore
* Net revenue surplus: Rs 911.91 crore
* Additional revenue from 8 per cent surcharge allowed last year: Rs 1,228.87crore
* Net revenue surplus: Rs 2,140.78 crore
* Additional revenue gap for period before 2012-13: Rs 3,497.69 crore
* Net incremental revenue shortfall after accounting for the gap: Rs 1,356.91 crore
Source: DERC tariff order 2013-14
There are three distribution companies, or discoms, in Delhi. BSES Rajdhani and BSES Yamuna of the Anil Ambani group provide power to South and West Delhi and Central and East Delhi, respectively. Tata's Tata Power Delhi Distribution looks after North Delhi. The BSES companies are now threatening power cuts of up to 10 hours because they claim they have no money to buy power. (Power accounts for 80 per cent of their total expenditure.) Together, the three discoms are likely to have a revenue shortfall of Rs 1,356 crore in the current financial year (see box). Their principal supplier, state-owned National Thermal Power Corporation, or NTPC, had threatened to cut supplies from February 11 if they didn't clear their arrears. The Supreme Court stepped in to ask NTPC not to switch off supply to the discoms till March 25. To add to the drama, the state government, led by activist Chief Minister Arvind Kejriwal, has threatened to cancel the licences of the discoms should the power situation worsen. Kejriwal has demanded that the Comptroller & Auditor General, or CAG, conduct an audit of all the three discoms, which, in turn, have moved the Delhi High Court against such an action.
No less perplexing is the web of dues. The consumers owe Rs 20,000 crore to the discoms. These are called regulatory assets - recognised but unrecovered revenue. The discoms owe the state government Rs 3,500 crore as payment to its generation and transmission companies. The state owes Rs 262 crore to the discoms in the form of subsidies. And the discoms owe NTPC Rs 690 crore for supply of power.
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So, where is this complex drama headed? Will the judicial intervention address the core issue, that of viability of the power distribution business in the face of inadequate tariff recovery? Or will the new government's transparency drive throw the sector into disarray? Experts are unanimous in their opinion: no easy or comfortable climax is in sight in the high-voltage drama. There are three options before the stake holders - the discoms and the state government - to resolve the crisis: one, increase tariff speedily to make the discoms financially viable while compensating the consumers with a subsidy; two, discoms take further loans for working capital; and three, fresh equity is infused into the discoms, like it was done in 2011.
No solution in sight
However, none of these seems like a workable solution in the present circumstances. The recent tariff increase of up to 8 per cent announced by the Delhi Electricity Regulatory Commission, or DERC, may give a temporary breather to the discoms but what about the regulatory assets amounting to a whopping Rs 20,000 crore? "The situation is pretty bad," says a senior analyst from a professional services firm who does not wish to be identified. "The latest tariff increase could give the discoms some leeway for a month or two. But, in view of the huge regulatory assets, and the fact that discoms do not have the money to make payments for even the monthly power purchases, this is just a drop in the ocean."
Also, any reprieve to the discoms through the subsidy route looks unlikely at the moment because the Kejriwal government has already linked subsidy payments with the CAG audit. "The government wants to wait for completion of the CAG audit even to clear the past subsidies," says a second analyst who also does not want to be identified given the political and legal nature of the issue. "This is a problem because the discoms are out of cash. Besides, the companies are contesting the audit in the courts on the ground that a CAG audit was not part of the scheme when the sector was privatised."
The second option of the discoms raising working capital loans is also exhausted as banks and financial institutions will be averse to more lendings, considering the overhang of the huge dues from consumers. For BSES alone, which supplies to 75 per cent of the city-state's 3.4 million consumers, the regulatory assets stand at over Rs 15,000 crore, a sum big enough to impact its credit ratings.
Similarly, further equity infusion seems highly improbable as neither the discoms' promoters nor the state government will be willing to risk fresh equity due to their already strained relationship. This is not the first time the discoms' bad financial health has brought the national capital's power sector to its knees. In December 2011, the regulator had served a suspension notice to the BSES discoms which were facing similar financial difficulties and could not pay the generating power plants. At that time, the situation was resolved by the Sheila Dikshit government which infused Rs 500 crore as equity in the debt-ridden BSES companies. This helped them get a bank loan to tide their financial woes. A similar intervention from the Kejriwal government, however, is unlikely. The new chief minister has, in fact, started preparations for a takeover of the discoms by government-appointed administrative officers.
Take over hassles
Experts say a takeover and subsequent replacement of BSES discoms is easier said than done. The provisions of licence cancellation and takeover elaborated in the Electricity Act and discom licencing indicate that, apart from the legal hurdles, the entire process is long-drawn and exhaustive. Under Section 19 (1) of the Electricity Act 2003, licence suspension and revocation is the exclusive domain of DERC. The regulator can cancel the licence on grounds of "public interest" if it is convinced the financial position of the licensee is such that it is unable to discharge its duties. DERC would, however, have to issue a show-cause notice to the discom and give it three months to explain its position. Also, while the Delhi government has advised DERC to conduct an enquiry into the discoms' finances within a few days, so that administrative officers can be appointed to run the two BSES discoms, the Act has no provision defining a time limit for the regulator's inquiry.
The difficulties do not end here. Experience shows that replacing a financially ill discom with a new one is an onerous task. A similar situation arose in Odisha in 2002 when US-based power utility AES abandoned the management of the state discom, CESU. At least three attempts by the state power regulator to have fresh bidding for the private distribution business have failed since. In Delhi's case too, cancellation of licences may not be easy since the contractual obligations and compensation for the physical assets may have built-in deterrents. Also, the new bidders are bound to come with a high-risk perception, affecting any enthusiastic bidding.
"Post the Delhi and Odisha experiences there is growing realization that the equity divestment model of privatization in power distribution does not work, largely because of the political and consumer interfaces and sensitivities. Now Distribution Franchisee (DF) is a more accepted form of private participation in the distribution of electricity," says consultancy firm Deloitte's senior director, Debasish Mishra. Other experts point out that the failure of distribution privatisation epitomised by Delhi would have far-reaching implications for the health of the power sector as a whole. "The steps taken by the Delhi government seem shortsighted but their impact is likely to be faced over the long term. Revival of the power generation sector hinges on the financial conditions of the distribution companies. By enhancing subsidies, which in turn result in regulatory assets due to non-payment by the state governments, the sector is being pushed back in time," says Dipesh Dipu, associate professor (energy), Administrative Staff College of India.
Dipu adds that the state government's announcement of a 50 per cent tariff subsidy has sown seeds of uncertainty, which could impact the Centre's Rs 1,90,000-crore financial restructuring package for loss-making utilities. Also, financing power generation projects will remain a challenge given these uncertainties over the financial health of discoms. "Risk perceptions are more damaging for the future of the industry than the commercial terms of payment and audits," says Dipu.
ESTIMATED FINANCIALS FOR DISCOMS IN 2013-14
* Total revenue at existing tariffs for three discoms: Rs 15,360.8 crore
* Combined annual revenue requirement of discoms: Rs 14,448.91 crore
* Net revenue surplus: Rs 911.91 crore
* Additional revenue from 8 per cent surcharge allowed last year: Rs 1,228.87crore
* Net revenue surplus: Rs 2,140.78 crore
* Additional revenue gap for period before 2012-13: Rs 3,497.69 crore
* Net incremental revenue shortfall after accounting for the gap: Rs 1,356.91 crore
Source: DERC tariff order 2013-14