Ministry of Power Readies Framework to Privatize Distribution Licensees

The move is an attempt to accelerate private participation in the distribution of power

September 24, 2020


The Ministry of Power (MoP) has issued draft standard bidding documents to select bidders for acquiring a majority stake in distribution licensees for the distribution and retail sale of electricity.

In May this year, the central government came up with a proposal to privatize DISCOMs in the union territories. DISCOMs in the union territories come under the administration of the central government while the respective state governments govern those in the states.

Following this announcement, Tata Power took over the management of Central Electricity Supply Utility of Odisha (CESU) for the distribution and supply of power in Odisha’s five circles. These five circles are Bhubaneshwar, Cuttack, Puri, Paradeep, and Dhenekal.

Earlier this year, expressing his views on the current state of DISCOMs, Raj Prabhu, CEO of Mercom Capital, had said, “The status quo is not working. DISCOMS are at the root of all the problems in the Indian energy sector. Due to their financial ineptitude, attracting investments into the sector has become incredibly challenging. Programs like UDAY have been introduced in the past and have failed to fix the underlying problems. Unless steps like privatization of DISCOMS is put on the table, chances of a turnaround in the energy sector are minimal.”

This move is part of the ministry’s endeavor to accelerate private sector participation in power distribution across the country.

According to the standard bidding documents, the assets of the existing distribution licensee will be transferred to the new entity at state electricity regulatory commission’s (SERC) approved net asset value. The land owned by the current distribution licensee will also be transferred to the entity on a ‘right to use’ basis at nominal charges.

The overall process will include a review of the existing structure and the decision on the need for the creation of a special purpose vehicle (SPV) in which the selected bidder will acquire equity stakes.

In states and union territories where the existing distribution licensee is a government department, an SPV may be incorporated for taking over the distribution licensee function.

The timeline for the accomplishment of the pre-feasibility and post-transaction stage activities:

Ministry of Power - Timeline of DISCOM Privatization Process from Pre-Feasibility to Post-Transaction Stage

In the case of the shareholding of the distribution company, the investor can acquire 100% of the equity share with no government involvement. This will be useful for distribution utilities in densely populated urban areas. In another case, the investor can hold 74% of the equity shares, while the government will have 26%.  This will be applicable for distribution utilities in urban-rural mixed geography.

For power purchase agreements (PPAs), the documents state that the PPAs can be assigned to the successor entity, or the PPAs may be retained by the state-owned entity for a specified period.

The documents further specify that the consultant will consider everything to assess the feasibility and financial restructuring and transition financing. The consultant will use industry benchmarks and analysis of past data for receivables, payables, stores, and capital work in progress to arrive at a realistic assessment of values to be considered for the opening balance sheet of the restructured distribution utility.

A similar analysis will also be carried out on the power purchase and transmission payments, with any overdue payments and its associated delayed payment surcharges to be accounted for realistically in the opening balance sheet of the restructured distribution utility.

As per the draft bidding documents, fixed assets and their associated capital sources will be transferred at values approved by SERC. The consultants will analyze regulatory orders for the values of net assets, liabilities, and equity permitted by the SERC in tariffs over the years.

The consultants will also carry out detailed financial projections for the restructured DISCOM with assumptions agreed with the state governments on energy demand-supply, power procurement, tariff revisions, loss trajectories, and financing of future capital expenditure on a reasonable basis.

As per the draft RfP document, the bidder (or the lead member of the bidding consortium) should be a power distribution license or distribution franchisee serving at least 500,000 consumers in its supply area. In this case, the bidder’s average net worth during the last three financial years should be at least ₹20 billion (~$271.8 million).  Alternatively, the bidder should have developed, financed, commissioned, and operated power transmission projects of at least ₹50 billion (~$679.6 million). In this case, the bidder’s net average worth in the last three years should be at least ₹40 billion (~$543.7 million).

In another case, the bidder who owns and operates commissioned power generation projects of cumulative operational generation capacity of at least 1 GW either on its own or through an affiliate company can also participate in the bidding process. The net worth of the bidder, in this case, should be ₹40 billion (~$543.7 billion).

Previously, Mercom had discussed various business models through which DISCOMs can be privatized. These can vary from licensing, distribution franchisee, and profit-sharing models. DISCOMS are at the root of all the problems in the Indian energy sector. Their financial ineptitude has failed to attract investments into the sector. Despite the $900 billion relief package provided to the DISCOMs, their dues to the power generators have only been piling up. The privatization of DISCOMS is the next big hope for a turnaround in the energy sector.