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Restructuring and Privatization
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.
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Restructuring and Privatization
- 1. Restructuring and Privatization PAVING PATHFOR EFFICIENT OPERATION OF INDIAN POWER SECTOR
- 2. Provision in EA2003 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 reformsteps 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 andcommercialization 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 torestore 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 Restructuringstatus 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” “Allchange 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 Introductionof 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 – FirstPhase 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 Pursuantto 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 19.11.97GRIDCO 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 assetsale 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 ofelectricity sector in Orissa
- 23. Key elements TheT&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.
- 26. Continued… All the assetsand 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 postreform 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 OrissaModel 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 reformsteps 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 InternationalModels 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 withunbundling. 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 Inearly 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 & ERCestablishment 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’thave 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