Delhi Power Scenario: The Magic Of Privatisation

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to absorb an equal amount from their profits so that the 10 per cent tariff hike announced by DERC earlier gets withdrawn.As we shall see later, the Distcoms have not foregone their profits; they have only agreed to let a larger revenue gap remain this year as a part of regulatory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.

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.

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

FY 2002 FY 2003 FY 2004 FY 2005
Percentage Av. Consumer Tariff Increase Projected by SBI Caps 9.9% 9.9% 9.9% 5.2%
Percentage Av. Consumer Tariff Increase Actual (DERC) 0% 5% 10% 6.6%
Table 2

Bulk Power Purchase Costs of Transco per Unit

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005
Bulk Power Purchase Costs per Unit Projected by SBI Caps (Rs/Kwhr) 2.32 2.52 2.61 2.72 2.95
Percentage Increase in Bulk Power Costs Projected by SBI Caps 8.62% 3.57% 4.21% 8.46%
Actual Transco’s Bulk Purchase Cost per Unit (Rs./Kwhr) 2.32 2.21 2.24 2.10 2.13
Percentage Increase in Transco’s Bulk Purchase Cost Actual -4.66% 1.30% -6.13% 1.19%

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.

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.


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



Bulk Purchase Price of Transco (Rs/kWh) 2.13 2.13 2.13 2.13
Bulk Supply Tariff (Rs/kWh) 2.11 2.21 1.77 2.07
Average price for Consumers (Rs/KWhr) 4.40 4.35 4.32 4.36
Average price for Consumers against buying Price Distcoms


209% 197% 244% 211%