Diving Into the Privatisation Push in India's Power Sector

A clear perspective of the process – its legal procedure, its objectives and the obvious pitfalls – must be taken.

In May 2002, the-then Delhi Vidyut Board (DVB) was privatised.  After two failures, for a third time, the discoms (distribution companies) in Odisha are being privatised, starting with Tata Power taking over the Central Electricity Supply Undertaking (CESU) from October 2020.

In both these privatisation exercises, 51% of the shares were sold, with government retaining a 49% stake.

Unlike these examples of privatisation, the Indian government’s power ministry has come up with a Standard Bidding Document (SBD) that envisages making privatisation an irreversible process. The main terms of sale proposed are:

Employees of the existing distribution licensee shall be transferred to the successor entity.

Assets of the existing distribution licensee, other than land, will be transferred to the new entity at Net Asset Value. Land owned or in possession of the existing distribution licensee shall be provided to the successor entity on a right to use basis at nominal charges.

The successor entity shall be provided with a clean balance sheet free of accumulated losses/ unserviceable liability.

State/ UT Government entity to structure a subsidized bulk power purchase cost for the successor entity for making it an independently financially viable entity, for a specified period

State/ UT Government may provide suitable transition support to the successor entity for a specified period of say 5 or 7 years.

Even as the COVID-19 pandemic rages, the Centre has decided the time is right for privatising the power distribution system, which belong mostly to the state governments. As part of the COVID-19 stimulus package, the finance minister Nirmala Sitharaman announced the privatisation of the distribution systems of the Union Territories (including J&K and Ladakh, that together were a state just a year earlier)

Also read: Why Is the Centre Pushing a New Electricity Bill in the Midst of the COVID-19 Crisis?

On July 22, the Puducherry assembly unanimously adopted a resolution opposing Centre`s move to privatise power distribution system. However, in August, when the file that represented the Puducherry government’s resolution to pull back the privatisation of power supply was officially presented by chief minister Narayanasamy and electricity minister Kamalakannan to Puducherry governor Kiran Bedi, she pushed the file to the central government.

Meanwhile, the Uttar Pradesh government also decided on the privatisation of the Purvanchal DISCOM, which covers over 21 districts of Eastern Uttar Pradesh. The discom’s employees put up a massive resistance, challenging the Adityanath government with jail bharo andolan. In response to this, the UP government gave in and decided to roll back its decision.

A few days later, at a meeting sponsored by the Multinational General Electrics and organised by the Economic Times, the Union minister R.K. Singh was very apologetic.

He apparently told the audience of prospective buyers: “Uttar Pradesh decided to explore PPP model in the Eastern part of the state. The Associations went on strike and ultimately the State Govt. had to give in and sign an agreement where they gave some time. The unions said they will improve the situation, so the state govt. will watch the situation for three months. If they reduce the losses in three months, then I will not privatise. Privatisation is not a policy; it is a method of reducing losses.”

A man stands in front of an electric pylon installed at a power house in the northern Indian city of Allahabad, July 31, 2012. Credit: Reuters/Jitendra Prakash/Files

A man stands in front of an electric pylon installed at a power house in the northern Indian city of Allahabad, July 31, 2012. Photo: Reuters/Jitendra Prakash/Files

The agreement that was signed by two ministers headed by the finance minister, the chief secretary and the additional chief secretary energy on the one side and the employee representatives on the other, stated the following. Firstly, that the proposal of privatisation of Purvanchal is withdrawn. Secondly, that improvements will be done in the existing arrangement of DISCOMS by taking employee into confidence. And thirdly,  no privatisation in the energy sector anywhere in the state will be undertaken without taking employees into confidence.

Should violation of law be a concern?

The current Indian government has never shown much concern for the process and procedures of law. There is complete confidence in pushing a bill through Parliament – farm bill style or getting a stamp of approval from the Supreme Court, Rafale style.

In BCPP Mazdoor Sangh & Anr, which involved NTPC employees being transferred to the privatised BALCO, the Hon’ble Supreme Court held: “It is clear that no employee could be transferred without his consent from one employer to another. The Government or its instrumentality cannot alter the conditions of service of its employee.”

Also read: Discoms Owed Power Producers 50% More in December 2019 Than They Did in 2018

Therefore, the provision that employees shall be transferred to the successor entity goes against this and several other judgements.

Section 131 (2) of the Electricity Act 2003, stipulates that: “Provided that the transfers value of any assets transferred hereunder shall be determined, as far as may be based on the revenue potential of such assets…” Therefore, any provision that assets will be transferred at Net Asset Value and that Land shall be provided at nominal charges, violates the Electricity Act 2003.

Besides this, there are several judgements that government cannot wilfully provide capital gains to private entities. Furthermore, the net value of the assets are to be evaluated by the State Electricity Regulatory Commission (SERC). The problem is that SERC’s have neither the ability nor the machinery to evaluate the net worth of the assets of the discoms, which invariably involve lakhs of crores of rupees.

For DISCOMS to be privatised, it is necessary that accounts are unbundled specific to the area that is to be handed over to the successor entity and that the asset register and accounts are audited prior to the sale. While State Electricity Board were unbundled into generation, transmission and distribution and then further unbundled into distribution into specific area, there has not be unbundling of the accounts and assets. Its noteworthy that, Delhi Vidyut Board was privatised without an asset register and audited accounts.

Discoms are to provide assets free of all accumulated losses or unserviceable liability. What are the legal provisions that allow governments to write off such large amounts in favour of private entities? And why should the tax payer, a third party, bear the burden of the transaction. The amounts to be written off are staggering. Power Finance Corporation and ICRA project the losses at more than Rs 30,000 crore. Since there are no official aggregate figures, the combined losses, across the country, could be expected to be higher, maybe even running into lakhs of crores.

When private generation was allowed in 2003, and green power in the form of solar and wind energy were introduced, there was a stampede amongst state governments to sign up. As a result, Power Purchase Agreements were signed left right and center. All manner of concessions was allowed. Consequently, under several PPAs, either state DISCOMS have to pay the generators high tariffs or pay fixed costs even if they do not consume a single unit of electricity. For example, Madhya Pradesh pays out around Rs 5,000 crore per annum, even without consuming a single unit. The Andhra government was not allowed to review the high cost solar energy PPAs. To ensure that these liabilities are not passed on to the successors, the bidding document requires the state government to structure subsidised bulk power purchase cost for the successor entity as well as provide transition support for 5 to seven years.

Also read: Why Renewable Energy Must Play a Greater Role in COVID-19 Economic Recovery

First a clean balance sheet, then subsidised bulk power and hand holding for 5 to 7 years. If these concessions were given to the existing state DSCOMS, they too would show profits immediately.

The mechanics of privatisation

Like the Standard Bidding documents, the Request for Proposals (RfP) and shareholders agreement spells out the objectives of the operational part of privatisation:

These are:

Achieve global benchmarks in AT&C
Achieve affordable and reasonable pricing of electricity.
Improve the quality, security, reliability of power supply and consumer service

During the privatisation of Delhi Vidyut Board, an ingenious index was invented called the Aggregate Technical and Commercial losses (AT&C losses). Technical loss occurs due to resistance in the flow of electrons and is therefore determined by the laws of physics. On the other hand, commercial losses are governed by the laws relating to criminality – theft, collection efficiency hampered by corruption and political interference etc. Reference to this index cannot be found in any standard text book related to power sector engineering, economics or management. Except India, no country uses this index. Therefore, achieving global benchmarks is a fiction.

AT&C losses surreptitiously enables a private company to escape the obligation to invest in T&D assets. It is used as a basis for privatisation in a manner that allows for post contract modification. This is clear from this report in the New Indian Express dated November 3, with a telling headline: “Within weeks of CESU takeover in Odisha, Tata Power seeks review of vesting order”.

The report states, “The aggregated technical and commercial loss trajectory from the current year for the next five years for tariff determination was linked the same to the performance of the company. In case of failure to meet the loss reduction target, the company will have to pay a penalty of Rs.50 crore for every one percent shortfall. Tata Power has asked for upward revision of the trajectory under force majeure clause because of the prevailing COVID- 19 pandemic situation. Ironically, the pandemic had started three months prior to the issue of vesting order and Tata Power was well aware of the situation”.

Also read: The Dangers of Dismantling India’s Public Sector

Resolving technical losses require investment in the systems – lines and transformers – logically investment should be the main condition in a standard bidding document. Every DISCOM has detailed mapping of the high technical loss areas and the investment required to reduce the losses. The present document does not prescribe investment and merely wants a promise of achieve a target of reducing AT&C losses.

A woman walks under high-tension power lines leading from a Tata Power sub station in Mumbai’s suburbs February 10, 2013. Photo: Reuters/Vivek Prakash/File Photo

Commercial losses are largely due to theft generally with political patronage. In addition there is subsidised or free power supply to some consumers. To overcome this, Section 59 of the Electricity (supply) Act 1948 stipulated that the state shall ensure 3 % rate of return to the State Electricity Boards. This provision was violated, across the board, by state governments.

Collection efficiency is also hampered by litigations and judicial pronouncements. For example, it is common for large consumers to challenge bills and obtain a stay from courts. In Delhi, as long as the system was under public management there was a ban on providing electricity to unauthorised colonies since that would amount to recognition of an unauthorised colony. This rule was changed only after privatisation.

Another problem is that government departments do not pay as long as DISCOMS are owned by the government. Only when it is privatised, payment is made, since privatisation is itself an act of political patronage by those who also release payments.

False claims, government must convince not coerce

Claims that privatisation and competition would reduce the cost of electricity is projected as a raison d’etre for privatisation. How would privatisation of DISCOMS help, when 80% of the cost of power is on account of generation. DISCOMS, deal with only 20% of the cost of electricity. On providing competition, even the Prime Minister has spoken of enabling, like in the case of mobile phones, electricity consumers a choice of service providers.

A World Bank study of power Sector reforms in England and Wales says “Introducing retail competition in this segment of the market appears difficult. Metering is expensive, and the cost may not be worth it below 75 kW …. The ultimate aims of the U.K. reforms were to remove the sector from government funding and to reduce prices for consumers through the increased efficiency of private sector operation and the pressure of competition. Broadly speaking, the first objective has been accomplished, but the second objective has yet to be convincingly achieved.”

The government of India should explain why in almost all the cities where privatisation was attempted – Gaya, Samastipur and Bhagalpur in Bihar, Kanpur in Uttar Pradesh, Gwalior, Sagar and Ujjain in Madhya Pradesh, Aurangabad and Jalgaon in Maharashtra, Ranchi and Jamshedpur in Jharkhand to name a few – the regulatory commissions were compelled to cancel the franchise.

Also read: Proposed Rules for Power Consumers Could Hurt Solar Rooftop Sector

It should also provide details regarding how much the present privatised DISCOMS have reduced AT&C losses on account of reduction of technical losses due to investment and how much on account of commercial losses. And within commercial losses how much is due to collecting arrears, particularly from government departments.

It should also highlight the justification for wholesale privatisation of the entire electrical power distribution system when the key findings of the report – “NITI Aayog, Rockefeller Foundation & Smart Power India Launch Electricity Access & Utility Benchmarking Report” released on 28th October, are:

As much as 92% of customers reported the overall availability of electricity infrastructure within 50 metres of their premises; however, not all have connections, the primary reason being the distance of households from the nearest pole.

Overall, 87% of the surveyed customers have access to grid-based electricity. The remaining 13% either use non-grid sources or don’t use any electricity at all.

The hours of supply have improved significantly across the customer categories to nearly 17 hours per day.

Nearly 85% of customers reported to have a metered electricity connection.

Access to electricity is observed in 83% of household customers.

A satisfaction index was created to assess the overall satisfaction level of customers with utility services. The study suggested that a total of 66% of those surveyed were satisfied––74% of customers in urban areas and 60% in rural areas.

Finally, the Indian government should assure the people that promoters who have created stressed assets (as was done by the 34 private power generators), defaulted on loan repayments to PSU banks (either deliberately or otherwise), engaged in over-invoicing of imports of coal and equipment would be debarred from bidding.

K  Ashok Rao is Patron, All India Power Engineers Forum and can be reached at [email protected].