Business Standard

Sunil Jain: Delhi's discom disaster

RATIONAL EXPECTATIONS

Sunil Jain  |  New Delhi 

Many in the Delhi government tout the stable electricity prices (there's been no change since 2004 and the latest order, from March 1, recommends just a 5 paise hike per unit) as a sign of the electricity privatisation delivering. While there is little doubt the quality of power supply has improved, prices have remained unchanged for two main reasons. First, the Delhi government gave thousands of crore of subsidies to ensure this in the initial years and, when this ran out, and prices had to go up last year, it agreed to absorb half the impact (the Reliance ADAG-owned BRPL and BYPL and the Tata-owned NDPL distribution companies, or discoms, were asked to absorb the rest). Second, the Delhi Electricity Regulatory Commission (DERC) has been deferring various legitimate expenses of the discoms to keep even these tariffs artificially low.
 
The logic behind this is that, as ATC loss levels come down each year, the tariff hikes, when finally granted, will get muted. While the moderate initial loss levels have been achieved by all discoms, only NDPL has said it will achieve the new DERC-mandated loss levels by 2010-11.
 
Thus, in the first five years of privatisation, the DERC allowed the discoms a lower rate of depreciation and other expenses (around Rs 1,100 crore) in comparison with what the government had promised them during privatisation "" the discoms went to the electricity tribunal, which agreed with them, and the matter was reconfirmed by the Supreme Court. Had the discoms been allowed to recover these expenses, tariffs would have gone up significantly.
 
In the event, the discoms are to be allowed to recover these expenses this year (2008-09), and the hike due to this could be around 50 paise per unit of electricity sold. The DERC has made other adjustments to keep the overall hike down to just 5 paise per unit. Around Rs 1,200 crore worth of capital expenses of BRPL/BYPL, for instance, have not been taken into account as the companies don't have the electrical inspectors' reports for them "" once the reports are in, as they will be, the DERC will have to hike tariffs. Based on the rates prescribed for debt, equity and depreciation, that works out to a hike of around 25 paise per unit, which has been deferred.
 
Similarly, all three discoms point out that the DERC has pared down the amounts of power they need to buy to levels lower than what they buy today! Some of this is due to the lower loss levels the DERC has mandated they achieve, but it is certain the firms will need to buy more power. Also, the DERC has assumed power purchase rates which are lower than those prevailing today. But, as per the law, when the discoms show their audited results, the DERC will have to allow them to charge customers to recover this. Based on the discoms' estimates, this could mean a tariff hike of anywhere between 15 and 20 paise per unit that has been deferred!
 
There are several other such instances, which will be challenged by the discoms at the appellate tribunal, but let's focus on the big dispute between DERC Chairman Berjinder Singh and Member K Venugopal "" though the latter wrote a dissent note, Singh used his casting vote while calculating the tariff in tariff order. While BRPL and BYPL bought Rs 1,233 crore worth of equipment from group firm Reliance Energy Limited (REL) in 2004-05, Singh managed to procure VAT receipts which showed REL's bill of materials for what it sold was a much lower Rs 731 crore. Singh argued that a 68 per cent margin for REL amounted to the ADAG group firms colluding to rip off Delhi's customers. While BRPL/BYPL chief Lalit Jalan strongly refuted the allegations and told the Delhi government that the purchases were made on the basis of competitive bids in which firms like ABB and Alstom participated, Singh's order says "the BSES companies have (failed to show) any evidence whatever in support of their claim that the goods were purchased on the basis of competitive pricing or that these were purchased at DERC approved rates." After taking into account other such transactions in later years, Singh disallowed Rs 533 crore of BRPL/BYPL's capital investment "" this also lowered this year's tariff hike.
 
Venugopal, for his part, says he disagrees with Singh, but doesn't really enter the issue of overcharging. Instead, he contents himself by stating that it is the DERC's job to look at the costs in detail and that, till this is done, it would be a good idea to accept the expenditure on a provisional basis. He ends saying it needs to be established if the DERC is the correct forum to decide on related-party transactions. Though Venugopal's voting against Singh's decision, he's correct in that the dispute is so serious it needs to be re-examined at a very high level. For, if true, it means while Reliance ADAG's REL has pocketed Rs 533 crore already, Delhi's consumers would have been forced to pay an additional Rs 90 crore or so to BRPL/BYPL each year in tariff hikes to pay for the investment. That would really be a mockery of the whole privatisation process.

 
 

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Sunil Jain: Delhi's discom disaster

RATIONAL EXPECTATIONS

Many in the Delhi government tout the stable electricity prices (theres been no change since 2004 and the latest order, from March 1, recommends just a 5 paise hike per unit) as a sign of the
Many in the Delhi government tout the stable electricity prices (there's been no change since 2004 and the latest order, from March 1, recommends just a 5 paise hike per unit) as a sign of the electricity privatisation delivering. While there is little doubt the quality of power supply has improved, prices have remained unchanged for two main reasons. First, the Delhi government gave thousands of crore of subsidies to ensure this in the initial years and, when this ran out, and prices had to go up last year, it agreed to absorb half the impact (the Reliance ADAG-owned BRPL and BYPL and the Tata-owned NDPL distribution companies, or discoms, were asked to absorb the rest). Second, the Delhi Electricity Regulatory Commission (DERC) has been deferring various legitimate expenses of the discoms to keep even these tariffs artificially low.
 
The logic behind this is that, as ATC loss levels come down each year, the tariff hikes, when finally granted, will get muted. While the moderate initial loss levels have been achieved by all discoms, only NDPL has said it will achieve the new DERC-mandated loss levels by 2010-11.
 
Thus, in the first five years of privatisation, the DERC allowed the discoms a lower rate of depreciation and other expenses (around Rs 1,100 crore) in comparison with what the government had promised them during privatisation "" the discoms went to the electricity tribunal, which agreed with them, and the matter was reconfirmed by the Supreme Court. Had the discoms been allowed to recover these expenses, tariffs would have gone up significantly.
 
In the event, the discoms are to be allowed to recover these expenses this year (2008-09), and the hike due to this could be around 50 paise per unit of electricity sold. The DERC has made other adjustments to keep the overall hike down to just 5 paise per unit. Around Rs 1,200 crore worth of capital expenses of BRPL/BYPL, for instance, have not been taken into account as the companies don't have the electrical inspectors' reports for them "" once the reports are in, as they will be, the DERC will have to hike tariffs. Based on the rates prescribed for debt, equity and depreciation, that works out to a hike of around 25 paise per unit, which has been deferred.
 
Similarly, all three discoms point out that the DERC has pared down the amounts of power they need to buy to levels lower than what they buy today! Some of this is due to the lower loss levels the DERC has mandated they achieve, but it is certain the firms will need to buy more power. Also, the DERC has assumed power purchase rates which are lower than those prevailing today. But, as per the law, when the discoms show their audited results, the DERC will have to allow them to charge customers to recover this. Based on the discoms' estimates, this could mean a tariff hike of anywhere between 15 and 20 paise per unit that has been deferred!
 
There are several other such instances, which will be challenged by the discoms at the appellate tribunal, but let's focus on the big dispute between DERC Chairman Berjinder Singh and Member K Venugopal "" though the latter wrote a dissent note, Singh used his casting vote while calculating the tariff in tariff order. While BRPL and BYPL bought Rs 1,233 crore worth of equipment from group firm Reliance Energy Limited (REL) in 2004-05, Singh managed to procure VAT receipts which showed REL's bill of materials for what it sold was a much lower Rs 731 crore. Singh argued that a 68 per cent margin for REL amounted to the ADAG group firms colluding to rip off Delhi's customers. While BRPL/BYPL chief Lalit Jalan strongly refuted the allegations and told the Delhi government that the purchases were made on the basis of competitive bids in which firms like ABB and Alstom participated, Singh's order says "the BSES companies have (failed to show) any evidence whatever in support of their claim that the goods were purchased on the basis of competitive pricing or that these were purchased at DERC approved rates." After taking into account other such transactions in later years, Singh disallowed Rs 533 crore of BRPL/BYPL's capital investment "" this also lowered this year's tariff hike.
 
Venugopal, for his part, says he disagrees with Singh, but doesn't really enter the issue of overcharging. Instead, he contents himself by stating that it is the DERC's job to look at the costs in detail and that, till this is done, it would be a good idea to accept the expenditure on a provisional basis. He ends saying it needs to be established if the DERC is the correct forum to decide on related-party transactions. Though Venugopal's voting against Singh's decision, he's correct in that the dispute is so serious it needs to be re-examined at a very high level. For, if true, it means while Reliance ADAG's REL has pocketed Rs 533 crore already, Delhi's consumers would have been forced to pay an additional Rs 90 crore or so to BRPL/BYPL each year in tariff hikes to pay for the investment. That would really be a mockery of the whole privatisation process.

 
 
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Business Standard
177 22

Sunil Jain: Delhi's discom disaster

RATIONAL EXPECTATIONS

Many in the Delhi government tout the stable electricity prices (there's been no change since 2004 and the latest order, from March 1, recommends just a 5 paise hike per unit) as a sign of the electricity privatisation delivering. While there is little doubt the quality of power supply has improved, prices have remained unchanged for two main reasons. First, the Delhi government gave thousands of crore of subsidies to ensure this in the initial years and, when this ran out, and prices had to go up last year, it agreed to absorb half the impact (the Reliance ADAG-owned BRPL and BYPL and the Tata-owned NDPL distribution companies, or discoms, were asked to absorb the rest). Second, the Delhi Electricity Regulatory Commission (DERC) has been deferring various legitimate expenses of the discoms to keep even these tariffs artificially low.
 
The logic behind this is that, as ATC loss levels come down each year, the tariff hikes, when finally granted, will get muted. While the moderate initial loss levels have been achieved by all discoms, only NDPL has said it will achieve the new DERC-mandated loss levels by 2010-11.
 
Thus, in the first five years of privatisation, the DERC allowed the discoms a lower rate of depreciation and other expenses (around Rs 1,100 crore) in comparison with what the government had promised them during privatisation "" the discoms went to the electricity tribunal, which agreed with them, and the matter was reconfirmed by the Supreme Court. Had the discoms been allowed to recover these expenses, tariffs would have gone up significantly.
 
In the event, the discoms are to be allowed to recover these expenses this year (2008-09), and the hike due to this could be around 50 paise per unit of electricity sold. The DERC has made other adjustments to keep the overall hike down to just 5 paise per unit. Around Rs 1,200 crore worth of capital expenses of BRPL/BYPL, for instance, have not been taken into account as the companies don't have the electrical inspectors' reports for them "" once the reports are in, as they will be, the DERC will have to hike tariffs. Based on the rates prescribed for debt, equity and depreciation, that works out to a hike of around 25 paise per unit, which has been deferred.
 
Similarly, all three discoms point out that the DERC has pared down the amounts of power they need to buy to levels lower than what they buy today! Some of this is due to the lower loss levels the DERC has mandated they achieve, but it is certain the firms will need to buy more power. Also, the DERC has assumed power purchase rates which are lower than those prevailing today. But, as per the law, when the discoms show their audited results, the DERC will have to allow them to charge customers to recover this. Based on the discoms' estimates, this could mean a tariff hike of anywhere between 15 and 20 paise per unit that has been deferred!
 
There are several other such instances, which will be challenged by the discoms at the appellate tribunal, but let's focus on the big dispute between DERC Chairman Berjinder Singh and Member K Venugopal "" though the latter wrote a dissent note, Singh used his casting vote while calculating the tariff in tariff order. While BRPL and BYPL bought Rs 1,233 crore worth of equipment from group firm Reliance Energy Limited (REL) in 2004-05, Singh managed to procure VAT receipts which showed REL's bill of materials for what it sold was a much lower Rs 731 crore. Singh argued that a 68 per cent margin for REL amounted to the ADAG group firms colluding to rip off Delhi's customers. While BRPL/BYPL chief Lalit Jalan strongly refuted the allegations and told the Delhi government that the purchases were made on the basis of competitive bids in which firms like ABB and Alstom participated, Singh's order says "the BSES companies have (failed to show) any evidence whatever in support of their claim that the goods were purchased on the basis of competitive pricing or that these were purchased at DERC approved rates." After taking into account other such transactions in later years, Singh disallowed Rs 533 crore of BRPL/BYPL's capital investment "" this also lowered this year's tariff hike.
 
Venugopal, for his part, says he disagrees with Singh, but doesn't really enter the issue of overcharging. Instead, he contents himself by stating that it is the DERC's job to look at the costs in detail and that, till this is done, it would be a good idea to accept the expenditure on a provisional basis. He ends saying it needs to be established if the DERC is the correct forum to decide on related-party transactions. Though Venugopal's voting against Singh's decision, he's correct in that the dispute is so serious it needs to be re-examined at a very high level. For, if true, it means while Reliance ADAG's REL has pocketed Rs 533 crore already, Delhi's consumers would have been forced to pay an additional Rs 90 crore or so to BRPL/BYPL each year in tariff hikes to pay for the investment. That would really be a mockery of the whole privatisation process.

 
 

image
Business Standard
177 22