Govt sweetens discom privatisation plan to attract investment

The government has sweetened the deal to privatise state-owned power distributions operations in Union Territories as 100 per cent equity holding will be sold only in financially viable utilities while it will retain 26 per cent stake in weaker discoms expected to have continued need for subsidised retail tariffs.

Also, the power purchase agreement (PPAs) of only better performing discoms having retail tariffs that cover the cost of power purchase will be assigned to the purchaser. Discoms making losses on sale on power will continue to be supported by the state-owned entity for a specified period even after equity transfer to a private entity.

"The draft standard bidding document finalised for privatisation of discoms in UTs has laid emphasis on giving a commercially attractive deal to investors. This is expected to attract better valuations for discoms," said a government official asking not to be named.

The provisions in the draft bidding document means that privatisation of discoms in say, the UT of Jammu and Kashmir, will continue to have a role of state agencies to meet the subsidy needs of the consumers. There is a gap of Rs 2.12 per unit in the average cost of supply and the average cost of realisation in J&K while the aggregate transmission and commercial (AT&C) losses in the state are staggering 47.85 per cent.

As part of the Aatmnirbhar Bharat announcements, Finance Minister Nirmala Sitharaman on May 16 announced the privatisation of power distribution companies (discoms) in the UTs, including Jammu & Kashmir, amid the Covid-19 crisis. She said that this will set a model for adoption of similar reforms initiatives in states.

Though the bid document has not specified the role state agencies would play post privatisation of weak discoms, it is expected that support will be extended for a period of between three to five years to ensure independent financial viability of the successor entity over the specified period. During this period, the buyer of the discom may sign a Bulk Supply Agreement with the target entity.

The fixed bidding parameters in case of discoms with medium/high AT&C Losses of above 15 per cent, will be loss commitment for first 5 years. In case of discoms with lower than 15 per cent AT&C Losses (with no/negligible ACS-ARR gap), bid parameter may be upfront premium for equity consideration in the distribution company.