People’s Democracy (Weekly Organ of the Communist Party of India (Marxist)

Vol. XXIX No. 39 September 25, 2005

Delhi
Power Scenario: The Magic of Privatisation

 

Prabir
Purkayastha

 

 

THE
power scenario is Delhi is looking like a three-ring circus with Delhi
government, DERC and the private Distcoms blaming each other for the tariff
rise. If each of them is to be believed, none of them wanted a tariff hike.
Faced with the angry response from Delhi citizens, particularly the articulate
middle class who had four years back supported privatisation of DVB, Sheila
Dixit government finally caved in and decided to provide an additional subsidy
of Rs 160 crore and also asked the private Distcoms to absorb an equal amount
from their profits so that the 10 per cent tariff hike announced by DERC earlier
gets withdrawn. As we shall see later, the Distcoms have not foregone their
profits; they have only agreed to let a larger revenue gap remain this year as a
part of regulatory assets, which will be recovered from Delhi citizens in the
future. And as for the Rs 160 crore Delhi government subsidy, all it means
is that the government instead of asking the Delhi citizens to pay this amount
as Electricity dues will recover this from the same citizens as tax: instead of
going from one pocket of the consumers, it will go from their other pocket. But
go it will from the pockets of Delhi citizens to Distcoms coffers.

 

MYTHS
OF PRIVATISATION

 

The
defence of the privatisation process in Delhi has also produced a number of
myths. Before we can address the real issues of Delhi power sector, we will need
first to explode these myths. Let us take up these one by one.

 

Myth
number 1:
The Delhi Distcoms have not asked for any tariff increase. To understand the
fraudulent nature of this claim, it is important to understand how the regulator
– DERC – fixes tariffs. Every year, there is an Aggregate Revenue
Requirement (ARR) that the Distcoms (and also other power companies) submit.
Based on the revenue gap – the difference of expenditure and revenue with
current tariffs – DERC sets the new tariff. So the question is not whether the
Distcoms had asked for an increase in tariff but what is the revenue gap that
they projected in their ARR. And that figure is a whopping Rs 1406 crore (Rs 773
crore for 2004 and Rs 633 crore for 2005). Even NDPL, who has performed little
better than Reliance Power, has shown a revenue gap of Rs 553 crore for these
two years. So if these companies are claiming that they have not asked for a
tariff increase, they are misleading the public. The question we need to ask is
why did they have such a huge revenue gap in spite of their so-called efficiency
improvements.

 

Myth
Number 2:
The agreement reached between Delhi government and the private companies had
envisaged an increase of 10 per cent every year for the first three years, which
DERC did not implement. This has caused a huge revenue gap and is now putting a
pressure on power tariffs for Delhi. This is the argument the private companies,
Sheila Dixit government and even DERC has repeated in public to explain the need
for a hefty dose of tariff increase.

 

THE
TRUTH ABOUT TARIFF
HIKE

 

There
are two major lies here. The agreement between Delhi government and the private
companies did not have any such clause of 10 per cent tariff hike every year. I
have personally talked to the persons responsible for the privatisation of Delhi
Vidyut Board (DVB) and they have confirmed that no such clause exists. However,
the SBI Caps, who were the consultants to Delhi government for privatisation of
DVB had projected an average tariff increase of 9.9 per cent for the first three
years. And this is where the second lie comes into effect. SBI Caps projection
of tariff increase was based on the increase in the cost of bulk power purchased
by Transco that they had assumed for these three years and the consequent rise
in the bulk supply price to the Distcoms. If we take into account the actual
cost of bulk power purchased by Transco, we will see that this, instead of going
up, it has in fact come down! So if input costs had come down from what SBI
Caps assumed, why should the projection of a 10 per cent rise be considered to
be valid? After all, the cost of supply by Distcoms depends on their input cost.
We are giving below the two sets of figures to bring out how SBI Caps projection
is being misused to argue for price hike for Distcom power. It may be noted that
the price at which Distcoms were supplied bulk power is much lower than this as
Delhi government kept the cost of bulk power to Distcoms lower than its cost
price to help the privatisation process. The SBI caps had envisaged a support of
Rs 2,600 crore as against the actual support of Rs 3,450 crore provided by Delhi
government, which also should go towards lower tariffs. In any case, DERC had
imposed a stiff 16 per cent tariff increase just prior to privatisation.

 

Table
1

Tariff
Increase Projected by SBI Caps against Actual Increase

 

Table
2

Bulk
Power Purchase Costs of Transco per Unit

 

In
other words, SBI Caps expected the price of bulk power to go up from Rs 2.32 to
Rs 2.95 by 2005, a rise of about 27 per cent, in actual terms. Instead, the bulk
supply cost has dropped by about 8 per cent. For
this, the credit goes to Transco and the various public sector units that supply
power to Delhi. It is very strange that while the cost of bulk power being
supplied to the Distcoms is actually dropping, and they are also bringing down
the Aggregate Technical and Commercial (ATC) losses, the revenue gap of the
Distcoms is actually growing. It does appear that their ability to manage their
ARRs to their advantage is quite in excess of their ability to manage the
Distcoms.

 

POSTPONING
TARIFF HIKE FOR
THE FUTURE

 

Once
we dispose of these myths being propagated by those who have got us into the
mess in the first place, we need to look at what the DERC has actually done and
its impact in the future. In the tariff order for 2005, DERC has created what it
calls regulatory assets to the tune of Rs 548 crore for and the rest of the
revenue deficit of Rs  320 crore has
been passed onto the consumer through a tariff hike of 10 per cent. The
regulatory asset of Rs 548 crore would now become a part of the capital base of
the Distcoms. The current year’s profits of Rs 205 crore have been allowed to
be offset against this revenue gap and converted to capital assets on which the
consumers will have to pay a 16 per cent rate of return on equity in perpetuity.
Thus creation of regulatory assets is merely shifting of the current burden
on to the future and hoping that it will some how go away. If this
postponement of payments for the future had not been adopted, the increase in
tariffs would have been a whopping 30 per cent. But postponing this tariff hike
does not address the underlying issues in any case. By “absorbing” Rs 160
crore this year as requested by Delhi government in order to remove the tariff
hike, the Distcoms have stated clearly that they consider this to be an
additional regulatory asset. It is not that they are actually foregoing their
profits — the Distcoms profits at 16 per cent rate of return on equity and 50
per cent of ATC savings beyond committed ATC figures are guaranteed irrespective
of the revenue gap.  So the
so-called absorbing of 5 per cent of the tariff hike by the Distcoms is merely
postponing this hike for the future.

 

COST
OF BUYING AND SELLING POWER

 

While
a huge regulatory asset has been built up, which will need to be paid for by the
consumers in the future, there are two other issues, which are worrying for the
health of the Delhi power utilities, particularly Delhi Transco, the government
owned transmission utility. Transco is the lynch pin of the Delhi power sector
as its purchase of bulk power and sale to the Distcoms is what keeps the
Distcoms running. The government had agreed to give a support of Rs 3,450 crore
for the privatisation scheme. This was done as a loan to Transco to keep it from
passing its full Bulk Supply Purchase price to the private Distcoms. Thus, while
it was paying a price of Rs.2.21 (FY 2002) to 2.13 (FY 2004), it was charging a
much lower price to the Distcoms, the shortfall being met from this loan. The
question now is what happens to the repayment of this loan. If the Delhi
consumers have to pay for this loan from next year, then the tariffs would have
to rise even more steeply. The second is that apart from this Rs 3,450 crore,
the other existing loans of the Distcoms, Transco and the generating companies
amount to about Rs 1,980 crore. There was a moratorium on these loans for four
years. From next year, this loan would also have to be considered while
calculating the tariffs.  If we add
these two items to the regulatory assets that DERC has already created, the
Delhi citizens are looking at a mind-boggling tariff hike. Of course, given this
year’s experience and the anger of Delhi citizens, it is quite on the cards
that the loans would be held in abeyance, at least in the near future. This
brings up the question of erstwhile DVB. If we look at the record of DVB, we
would see that the major reason for the financial sickness of DVB was that the
interest charges on its loan at the time of its privatisation was a whopping Rs
1,000 crore; without these interest charges, the net revenue deficit was only
about Rs 250 crore. It appears that even without these interest charges, the
revenue deficit of the successor companies are of the order of Rs 1,000 crore
per year (adding the support of Rs 3450 crore with the regulatory assets of Rs
548 crore created by DERC), even though the tariffs have been raised
substantially in these years and the bulk supply price for power has actually
come down.

 

Before
we end this article, it is worthwhile to see what is the bulk supply price that
each of the Distcoms pay to Transco. As will be seen from the table below, the
Delhi Transco sells power at costs or below costs to the Distcoms- it buys power
at Rs 2.13 per unit and sells it an average price of Rs 2.07 to the Distcoms. By
the policy directive given by Delhi government, DERC has to maintain a uniform
rate of power in Delhi and therefore each of the Distcoms pay a different rate
of power to Transco based on their ability to pay. Against this price at which
the Distcoms purchase power, what is the amount that they charge the consumer?
Table 3 shows the how much the consumers pay against the buying price of the
Distcoms. The figures speak for themselves; the
Delhi consumers are paying 211 per cent of the average buying price of the
Distcoms. This is the magic of privatisation of Delhi power utilities.

 

 

Table
3

Cost
of Buying and Selling Power for Distcoms