Report of Indian Institute of Public Administration ... - Ministry of Power

State Reports (Vol.-III)
Study on `Impact of Restructuring of SEBs’
simply put, was the minimum cash collection for the sale of electricity. There would
be a penalty for not achieving the MCR.
While clarifying the procedure which was to be adopted, the State Government’s
Privatisation Strategy Paper 16 also clarified that the winning bidder must buy at least
51 per cent of the equity of the DISCOM concerned, the price of which would be
fixed at par value, before the submission of bids. Specific service standards would be
set during the transition period. Since it was envisaged that during the transition
period, the privatised companies might not have enough revenues to pay for the entire
electricity purchased, the deficit would be met by the Government of Karnataka or it
will make alternate arrangements. The risk will be, thus, during the transition period,
taken over by the State Government, and will not pass to the privatised DISCOM.
Importantly, the Strategy Paper said that all four DISCOMs existing then would be
privatised simultaneously, as recommended by the FDP consultants.
The strategy was quite innovative and offered substantial incentives and concessions
to the prospective bidders, by Government of Karnataka assuming a major part of the
risks during the transition period. As expected, there were severe criticisms against the
proposed strategy. Although the reasoning behind DM is logical, doubts could arise
about the higher extent of risk assigned to by Government of Karnataka as for a fiveyear
period. For instance, Shri S.L. Rao points out the following likely impact of the
DM methodology on the power sector of the State:
i) Private ownership is to be free for a ‘transition period’ while the public sector
will continue to be tightly regulated;
ii) There will be a maximum of four tariff changes in a year allowing for variations
in input costs, procurement costs, etc. But there is no provision for scrutiny of
these costs and their validity;
iii) There is no transparency;
iv) Cross pass-through are not subject to examination. This is an invitation for
padding of costs. The risk sharing puts a heavier load on the Government; and
v) These proposals appear to attempt incorporation of the right contractual norms of
Chile model. They use the conceptual model framework of the World Bank
paper titled ‘Regulation by Contract’. It must be realised that the many problems
in distribution will take years to be resolved and to make the distribution
16 Independent Power Producers Policy, Energy Department, Government of Karnataka, 2001.
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