Here are the key points against privatization of the power sector: - Access and affordability: Privatization may reduce access to power for low-income households who cannot afford higher tariffs set by private companies. Fulfilling universal service obligations may not be a priority for profit-driven private players. - Remote areas: Private companies may have little incentive to expand networks and supply power to remote, low-density or less profitable areas due to high costs. - Cartelization: There is a risk of cartelization or non-competitive behavior if the market is not properly regulated. Private players could collude to keep prices high and hamper consumer interests in a non-regulated or self-regulated market.

1. Restructuring and
Privatization
PAVING PATH FOR EFFICIENT OPERATION OF INDIAN
POWER SECTOR

2. Provision in EA 2003
 Preamble – An Act to consolidate the laws relating to
generation, transmission, distribution, trading and use of
electricity and generally for taking measures conducive to
development of electricity industry, promoting competition
therein, protecting interest of consumers and supply of
electricity to all areas, rationalization of electricity tariff,
ensuring transparent policies regarding subsidies, promotion of
efficient and environmentally benign policies, constitution of
Central Electricity Authority, Regulatory Commissions and
establishment of Appellate Tribunal and for matters
connected therewith or incidental thereto.
Source: Electricity Act 2003

3. Part XIII – Reorganization of Board
 Section 131 – Vesting of property of Board in State Government
 Section 132 – Use of proceeds of sale or transfer of Board, etc.
 Section 133 – Provisions relating to Officers and employees
 Section 134 – Payment of compensation or damages on transfer
Source: Electricity Act 2003

4. Restructuring related sections
 Section 82 – Constitution of State Commission
 Every State Government shall, within six months from the appointed date,
by notification, constitute for the purposes of this Act, a Commission for the
State to be known as the (name of the State) Electricity Regulatory
Commission
 Section 17 of Electricity Regulatory Commission Act, 1998
 The State Government may, if it deems fit, by notification in the Official
Gazette, establish, for the purposes of this Act, a Commission for the State
to be known as the (name of the State) Electricity Regulatory Commission.

5. Continued…
 Section 79(2) – Functions of Central Commission
 Promotion of competition, efficiency and economy in activities of the
electricity industry
 Promotion of investment in electricity industry
 Section 86 – Functions of State Commission
 Promotion of competition, efficiency and economy in activities of the
electricity industry
 Promotion of investment in electricity industry
 Reorganization and restructuring of electricity industry in the State; The
Electricity Act, 2003.
Source: Electricity Act 2003

6. Standard
Reform Model
The reform steps have
included some of the
following
• CORPORATIZATION AND
COMMERCIALIZATION
• ENACTMENT OF REQUISITE
LEGISLATION
• VERTICAL AND
HORIZONTAL
RESTRUCTURING
• EFFICIENT ACCESS TO THE
TRANSMISSION NETWORK
• PRIVATIZATION
• INDEPENDENT POWER
PRODUCERS (IPPS)
• INDEPENDENT SYSTEM
OPERATOR
• UNBUNDLING OF RETAIL
TARIFF
• MARKETS AND TRADING
ARRANGEMENTS
Source: World Bank

7. Definitions
 Corporatization and commercialization to transform state-owned
utilities into separate (from the ministry/government) legal entities and
restore financial discipline.
 Enactment of requisite legislation to provide a legal mandate for
restructuring and creation of (independent) regulatory agencies with
adequate information, capacity, and statutory authority.
 Vertical and horizontal restructuring to separate potentially
competitive generation and retail activities from the natural
monopoly segments of transmission and distribution and thus
facilitate competitive entry and mitigate market power.
 Establishment of regulatory rules to promote efficient access to the
transmission network and provide signals for the efficient location of
generation facilities.

8. Continued…
 Privatization to restore financial discipline, provide incentives for cost
efficiency and insulate the operating entities from damaging
political interference.
 Independent Power Producers (IPPs) to facilitate investment in
generation even in the absence of comprehensive sectoral reform.
 Designation of an independent system operator to direct the safe,
reliable and economic operation of the interconnected electric
system, determine the order of dispatch, and make arrangements
for the expansion and enhancement of the transmission system.
 Unbundling of retail tariffs to separate prices for competitive retail
supply activities from the regulated network (transmission and
distribution) charges.
 Creation of markets and trading arrangements for voluntary energy
and ancillary services.

9. Meaning of Restructuring
 Reforms & Restructuring Mainly related to Unbundling &
Privatization
 Unbundling – Separate entity for Generation + Transmission +
Distribution
 Privatization – Opening & Promoting the market for private players

10. Need for Restructuring &
Reforms
 Scarcity of financial resources available with Central and State
Governments.
 Accountability
 Necessity of improving the technical and commercial efficiency.
 Tariff rationalization
Major Steps
 Electricity Regulatory Commissions Act 1998
 APDRP
 Electricity Act 2003

11. Power Sector Structure
Source: More
Power to India, WB

12. Reforms and Restructuring status
Source: AR 2013-14 on the working of State Power Utilities & Electricity Department

13. Benefits of Restructuring & Reforms
Transparency & Fair Play
Loss Minimization &
Eventually profit-orientation
Phasing out cross
subsidization
Increasingly Competitive

14. “Badlav acche hain”
“All change is hard at first,
messy in the middle and
gorgeous at the end”
Robin Sharma

15. Case Study – Content
 Orissa Privatization model
 Need
 Reforms Agenda
 Phased Reform
 Key Elements
 Delhi Privatization model
 Need for privatization
 Unbundling – Model adopted
 Outcome – Comparison with Orissa Model

16. Orissa privatization model – Needs
 High transmission and distribution losses
 Poor financial performance
 Inadequate accountability for various segments (generation,
transmission, and distribution
 There was also need to solve the financial problems of OSEB and
meet the demand of funds for investment in generation, transmission
and distribution system.

17. Reforms Agenda
 Introduction of POWER SECTOR REFORM ACT,1995 which came in to
effect from 1st April 1996
 OERC was formed to establish an independent and transparent
regulatory regime
 Ultimate objective was to withdraw from the power sector as an
operator of utilities, having instead privately managed utilities

18. Reform – First Phase
 Two Government-owned corporate utilities were formed with
agreement ensuring full autonomy with effect from 1st April 1996.
 Orissa Hydro Power Corporation (OHPC) - responsible for hydro power
generation
 Grid Corporation of Orissa (GRIDCO) - responsible for transmission and
distribution functions

19. Second Phase
 Pursuant to the Orissa Electricity Reform Rules, 1998, the Govt. of
Orissa transferred the distribution assets and properties along with
personnel of GRIDCO to four distribution companies with effect from
26th November 1998
 CESCO
 NESCO
 WESCO
 SOUTHCO continued to function as affiliates of GRIDCO up to 31st March
1999
 GRIDCO disinvested 51% share to Private Sector Investors keeping a
share holding 39% with it and 10% share for Employees Welfare Trust

20. Continued…
 On 19.11.97 GRIDCO divided its distribution functions into four
geographical zones viz. Western zone, North-Eastern Zone, Southern
Zone and Central Zone
 The assets and liabilities were assigned to these Companies with an
equity base for each Company
 A decision was taken at the Govt. level for privatization of the
distribution system in the State through a joint sector/joint venture
route, in which the proposed equity sharing will be as under
 Private Strategic Investors (PSI) : 51%
 GRIDCO : 39%
 Employees Trust : 10%

21. Continued…
 No asset sale had actually taken place. Assets have been assigned
to respective companies
 Three Companies viz. WESCO, NESCO and SOUTHCO were taken
over by M/s BSES of Mumbai from 01.04.99
 CESCO was taken over by the AES of USA with effect from 01.09.99
 The State Govt., which was paying a subsidy to the tune of Rs. 300
crore per year by 31.03.96 during the OSEB time, did not pay any
subsidy from 01.04.96 onwards after the split up of OSEB and creation
of GRIDCO and OHPC

22. New structure of electricity
sector in Orissa

23. Key elements
 The T&D losses that were assumed (Staff Appraisal Report of the
World Bank) to be 39.5%, were actually greater than 50%
 Even though 100% Collection Efficiency was assumed by FY98, the
actual collection was 83% in FY99
 Tariff increase was assumed to be 16% in FY97 and 18% in FY98.
However weighted tariff increase by OERC in its two orders was less
than 10% each year, with a 20 month gap between the two tariff
orders
 To make the distribution business attractive to private investors, only
around Rs. 650 crores of total liabilities was passed on the four
Distribution Companies while GRIDCO, the Transmission company,
retained with it Rs. 1950 crores of liability in its own books, as all
distribution companies were loss making undertakings

24. Delhi Model – Need for privatization
The problems of the electricity sector in Delhi can be divided into
three sections:
 Demand-Supply Imbalance
 Transmission and Distribution losses
 Financial Position

25. Unbundling
Delhi
Vidyut
Board
Holding
Company
(DPCL)
GenCo
(IPGCL)
TransCo
(DTL)
Three
Discoms
BSES
Rajdhani
BSES
Yamuna
TPDDL
(Formerly
NDPL)

26. Continued…
All the assets and
liabilities of DVB are
acquired by GoNCT
All the liabilities of DVB
are transferred to
holding company, entire
equity of holding
company is issued to
GoNCTD
All the assets are
transferred from GoNCTD
to successor entities.
Assets
assigned=serviceable
liabilities
Equity and debt in the
successor entities Equal
to the value of
serviceable liabilities is
issued in favor of holding
company

27. How it works
Assumption: Opening loss level to be 48%
High performance zone Committed performance
zone
Short performance
zone
Assumption: Committed loss level to be31%
Scenario – 3
Surplus beyond
stipulated to be
shared 50% between
investor and
consumers
Scenario – 2
Surplus revenue over
committed
performance but
less than stipulated
goes to consumers
Scenario1
Deficit to be
born by private
company

28. Initiative taken post reform
 Automation initiatives and GIS
 Complaint management system
 Online connection management by consumer
 Door step delivery of new connection
 Privileged consumer scheme – Offering discounts
 Automated bill payment Kiosks for consumer convenience
Source: www.idfc.com

29. Outcome – Comparison
Orissa Model
 Single Buyer Model for power
purchase
 No Holding Company
 T & D Losses Unreliable.
 Highest offer for 51 % face value of
share.
 Government has withdrawn all
subsidy immediately after
privatization
Delhi Model
 Single buyer model for transition
phase of 5 years. After that,
distribution companies can directly
buy power from generation
companies
 Retaining liabilities of DVB and 49%
share of unbundled utilities, so that
companies could start with clean
balance sheet
 AT & C Losses (Considered Billed and
Collected Inefficiencies). Max.
reduction in AT&C losses over a 5
year period above the minimum
level. Sale of 51 % at face value
 Subsidy was given for initial 5 years,
so that distribution companies should
be able to achieve a positive turn
around

30. Standard
Reform Model
The reform steps have
included some of the
following
• CORPORATIZATION AND
COMMERCIALIZATION
• ENACTMENT OF REQUISITE
LEGISLATION
• VERTICAL AND
HORIZONTAL
RESTRUCTURING
• EFFICIENT ACCESS TO THE
TRANSMISSION NETWORK
• PRIVATIZATION
• INDEPENDENT POWER
PRODUCERS (IPPS)
• INDEPENDENT SYSTEM
OPERATOR
• UNBUNDLING OF RETAIL
TARIFF
• MARKETS AND TRADING
ARRANGEMENTS
Source: World Bank

31. What is Privatization ?
 The transfer of ownership, property or business from the government
to the private sector is termed privatization.
 In IEA 1910, it envisages growth of the electricity industry through
private licensees.
 Some private utilities operating since independence( Tata Power)
 Post 1991: After the liberalization of the Indian Economy, there has
once again been greater involvement of the private sector in the
power industry, and a rapid growth of this industry as well.
 IPPs allowed since 1991.
 Unbundling and corporatization of SEBs.

32. Review of International Models
Chile
•Privatization without vertical or horizontal unbundling.
Wholesale competition. Market has been liberalized.
Argentina
•Privatization with full-scale vertical and horizontal
restructuring.
Peru
•Partial privatization, vertical and horizontal unbundling.
Single buyer model.
Source: The Electricity Journal (2012)

33. Continued…
Colombia
• Privatization with unbundling. Bid-based pool market.
Brazil
•Vertical unbundling.
•Privatization focused on distribution while generation remained largely state-
owned.
•Gradual transition to competition in generation and supply.
Sub-Saharan
Africa
• Introduction of IPPs with some unbundling and limited progress
in establishing independent regulatory mechanisms. The
incumbent state-owned utility has remained dominant.
Source: The Electricity Journal (2012)

34. INDIAN Scenario
 In early 1991
 Opening up of generation by the private players, which led to investment
by international players like ENRON when they developed a gas power
project in the state of Maharashtra, which is also known as Ratnagiri Gas
power project
 Electricity Regulatory Commission Act, 1998
 Electricity Act, 2003
 It was the major initiative taken by the union govt. for a major overhaul of
the electricity sector and mandated the Unbundling and setting up of
SERCs

35. Unbundling & ERC establishment
Source: More Power to India, World Bank

36. Why Privatize ?
 Lower taxes
 Don’t have to pay pesky Social Security taxes
 Neither does employer
 Higher returns
 You will be smart enough to always have high rates of return
 You will be smart enough to outsmart the market
 Market always rises, or at least, your returns will always grow
 Self-control
 In charge of your money: you pick stocks or other investments
 No one else has hand on your money

37. Continued…
 Self-interest
 Don’t have to pay taxes to take care of others you don’t like
 Greater national savings
 Since more people will have more money, they will save it by investing in
the stock market
 Greater business investment
 Since we lower taxes on businesses, they can take the money and invest
it, to create new jobs and new products
 In addition, the flow of money to the stock market will mean more funds
to business

38. Why Not Privatize ?
As privatization has many benefits but it certainly has some de-merits as
well
 Access of power to section of society below poverty line who
cannot afford power
 Fulfilment of Uniform Service Obligation, which may not turn out to
be the interest of the private player
 Access of power to the people living in very remote areas of the
country
 Fear for cartelization which may hamper the interest of consumer if it
turns out to be non-regulated or self-regulated market commodity