The Delhi Vidyut Board is being unbundled into six companies, viz. one holding company, one generation company (GENCO), one transmission company (TRANSCO) and three distribution companies (DISCOMs). The Pragati Power Corporation Ltd. which is setting up the Pragati Power Plant will later be amalgamated with the generation company.

The three distribution companies which are the key to improving consumer services and commercial viability of operations are being privatised on 31st May, 2002. Share Acquisition Agreements are being signed with BSES Ltd. and Tata Power Company. BSES will acquire a controlling interest in two of the distribution companies, viz. South-West Delhi Electricity Distribution Company Ltd. and Central-East Delhi Electricity Distribution Company Ltd., and the Tata Power Company will take over the management of the third distribution company, viz. North-Northwest Delhi Distribution Company Ltd.

Following the Share Acquisition Agreements, the Transfer Scheme will be made effective by the end of June, 2002 i.e. DVB will actually cease to exist and its operations will be transferred to the new companies; the management of the new companies shall be transferred to BSES and Tata by 30th June, by which date the Shareholders Agreement will have to be executed.

The Govt. of National Capital Territory of Delhi (GNCTD) issued a strategy paper in Feb. 1999 highlighting the need to urgently reform DVB.

The Delhi Electricity Regulatory Commission became operational in December, 1999.

The Delhi Electricity Reform Ordinance was promulgated on 28/10/2000. This was replaced by the Delhi Electricity Reform Act, 2000(Act 2 of 2001) notified after receiving the assent of President of India.

A Tripartite Agreement was executed on 28.10.2000 between the Government of Delhi, DVB and representatives of DVB employees, whereby the parties mutually agreed to accept the conditions laid down in the Agreement to achieve the goal of smooth implementation of the policy for reorganization and restructuring of DVB.

Based on the inception report of the consultant, M/s SBI Capital Market Ltd., on 6th January 2001, the Council of Ministers, GNCTD approved the unbundling of DVB into six successor entities.

An investors' conference was jointly organized by the Government of Delhi and Power Finance Corporation Ltd. on 17th January, 2001 to inform the prospective investors of the new opportunity for investment in the power sector in the national capital.

Advertisements were published in leading national and international newspapers and journals in February, 2001, highlighting the opportunity for private sector participation in electricity distribution in Delhi and inviting Statement of Qualifications against the Request For Qualification (RFQ). Out of 32 purchasers of the RFQ, only 7 submitted their Statement of Qualifications (SOQ), out of which 6 bidders qualified for the Request For Proposal(RFP) stage.

The Final Report on restructuring of Delhi Vidyut Board of M/s SBI Caps, the consultants, was received on 16/7/2001.

The Council of Ministers, GNCTD, approved the restructuring model on 5.10.2001

The order on classification and allocation of residential colonies and sub-stations flats of Delhi Vidyut Board to successor entities was notified in Nov. 2001.

The order on classification and allocation of the personnel of DVB to the successor entities was notified in Nov. 20001.

To guide the reform process, the Power Department issued policy directions to the Delhi Electricity Regulatory Commission under the provisions of section-12 of the Delhi Electricity Reform Act, 2000. This was done in consultation with the Regulatory Commission.

The Request For Proposal (RFP) was issued to the pre-qualified bidders on 22-11-2001, inviting them to submit their Statement of Proposals(SOPs) by 10.04.2002. The bids were invited on the Aggregate Technical and Commercial Loss (AT&CL) reduction for the next five years i.e. 2002-03 to 2006-07.

Employee consent was ensured by guaranteeing (i) non-retrenchment of employees and continuance of service in the successor companies on the same terms and conditions prior to their transfer and (ii) taking over liability for retirement benefits of the existing employees and retirees of the Board by establishing a Pension Trust Fund to which the Government has contributed Rs.860 crores (supplementing Rs.442.52 crores available with DVB). Employees have consistently supported the unbundling of DVB and the privatisation of distribution.

Liabilities: All past unserviceable liabilities and past losses of DVB not to be passed on to the successor companies. The restructured entities start with clean opening balance-sheets.

Valuation of assets.

• Although DVB has now finalised its accounts up to 2000-01, they remain unaudited. Also, no State Electricity Board has Fixed Asset Registers, with all the necessary details. (Attempts through Consultants to value East Delhi in 1997 for purposes of privatisation proved unsuccessful for this reason).

• The value of assets is reflected in the tariff, which has to be fixed allowing a return on the assets. Over-valuation as compared to the actual earning ability of the assets therefore can create difficulties.

• The business valuation method is appropriate because of the nature of the business viz. the licensee is not able to strip the assets and must operate the business under the scrutiny of the Regulatory Commission.

• The asset value of Rs.3160 crores of DVB as a whole, arrived at by the business valuation method is close to the book value of Rs.3024 crores (based on unaudited accounts of DVB).

The most important feature from the bidders' point of view is the policy directions issued under Section-12 of the Delhi Electricity Reforms Act, 2001. Here it is necessary to describe the main features that are unique to the Delhi reforms. The key issue in reform is that the heavy loss which any State Electricity Board is incurring currently cannot be borne by a private company; it will take time for the private investor to reduce the loss, yet it is difficult to pass this burden on to the consumer immediately since the consequent tariff shock would render the reform process unacceptable. Secondly, it is absolutely necessary to get the correct picture of opening loss levels; in Orissa, incorrect information about opening losses created serious problems later. Thirdly, the most basic problem for the investor is to know how rapidly he is expected to reduce losses, since if the level of losses allowed from year to year is too high to achieve, he will lose heavily (as also happened in Orissa). The DVB reform package incorporates the following measures to take care of these issues.

• Since the core issue is commercial efficiency, instead of transmission and distribution (T&D) losses the new concept of Aggregate Technical & Commercial (AT&C) Losses has been introduced. The former is the difference between energy supplied and energy actually billed, and is subject to errors because of erroneous or false billing. In DVB we have used the concept of AT&C losses, namely, the difference between energy supplied and energy for which payment has actually been recovered. As is evident, this is clearly a measure of commercial loss. This figure will always be higher than the T&D losses, but will be more accurate. The opening level of AT&C losses for the DISCOMs was fixed by the Delhi Electricity Regulatory Commission as follows:

  DISCOM
  CEDEDCL	57.2
  NNWDDCL	48.1
  SWDEDCL	48.1
  All DISCOMs	50.7

• The loss reduction targets were established by competitive bidding. The bidders were required to bid on the basis of efficiency improvement, viz. the reduction of AT&C losses that they would achieve year-wise over a five-year period, and the bidder whose bids yielded the highest net present value in terms of consequential benefits becomes the highest bidder. Tariffs would be set annually by DERC on the basis of the accepted targets.

• The distribution licensees shall be entitled to retain 50% of the additional revenues from any AT&C loss reduction over and above the minimum targets fixed by the Government. The balance 50% of any excess efficiency gain shall be passed on to the consumers of the company. Since the Government also holds 49% of the equity of the company, effectively only about 25% of the additional revenue will accrue to the private investor. On the other hand even a single percentage point under achievement over the loss level bid by the selected bidder will result in substantial erosion of the returns of the company which would act as a safeguard to ensure improvement in performance over the transition period of five years.

• Distribution licensees will be allowed 16% return on the issued and paid up capital and free reserves (assuming the company succeeds in reducing the AT&C loss targets set by the bidding process and if the Regulatory Commission allows all expenses and investments that the company makes).

• To avoid a tariff shock, the Government initially made a commitment of Rs.2600 crores of loan assistance to Transco to keep the tariff down for the first five years. As the losses decrease every year, the level of assistance diminishes and the losses would be low enough for the consumer to bear the cost of supply (and loan repayment) at the end of five years. With the negotiated rate of improvement in AT&C loss, this figure of support will now increase to a maximum of Rs.3450 crores.

Two out of the six pre-qualified bidders dropped out at the RFP stage. Only two bids were received on the date of opening, viz. BSES Ltd. and Tata Power Co. Ltd. both offering AT&C Loss reduction much lower than the targets set by the Government. While BSES Ltd. bid for all the three companies, M/s. Tata Power submitted bids only for North-Northwest and South-West companies. As these bids were not satisfactory, a Core Committee consisting of senior officers have negotiated with the bidders in pursuance of the directions of the Cabinet for the last six weeks and a negotiated agreement has now been reached. The minimum AT&C loss reduction targets set by the Government, the original bids received and the revised negotiated and accepted bids are given in the table below:

Some other minor adjustments given below have also been agreed to in the terms of the agreements.

• The moratorium on repayment and interest waiver on Holding Company debt will be extended to the fourth year instead of three years in the original structure. In case a DISCOM underachieves in the fourth year, the moratorium on Holding Company debt will be increased to fifth year for that company.

• With regard to over-achievement/underachievement for the transition period of five years, the cumulative effect till the end of the relevant year shall be taken and appropriate adjustments made. The method of treatment will be as follows:
            If the AT&C loss reduction of a DISCOM is better than the minimum AT&C loss levels stipulated by the Government, it shall be allowed to retain 50% of the additional revenue resulting from such better performance and the balance 50% shall be counted for the purpose of tariff fixation. On the other hand, if the actual AT&C loss reduction of a DISCOM is worse than the AT&C loss reduction level quoted in the bid, the entire short-fall on account of the same shall be borne by the DISCOM. In the event the actual AT&C loss of a DISCOM is worse than the minimum AT&C loss reduction level stipulated by the Government but better than the loss reduction level quoted in the bid, the entire additional revenue from such better performance shall be counted for the purpose of tariff fixation.

• Liabilities arising out of litigation, suits, claims etc. pending on the date of the takeover and/or arising due to events prior to takeover shall be borne by the relevant distribution company subject to a cap of Rs.1 crore per annum. Any amount beyond this cap shall be to the account of the Holding Company if the same has not been allowed by the Commission.

• Till 31st March, 2004, the priority of payment of salary, wages and other statutory payments will rank above the payment due to Transco in the Escrow Arrangements. Other than this, the Escrow arrangements would remain the same as stipulated earlier.

• A mechanism, be put in place to ensure that DISCOMs receive timely payment for electricity dues from Delhi Jal Board only in respect of HT connections.