Financial Daily from THE HINDU group of publications
Thursday, Feb 03, 2005
Industry & Economy
NTPC arm to enter distribution biz in Mangalore circle
Bangalore , Feb. 2
NTPC has started due diligence in Mangalore circle in Karnataka as a prelude to kicking off its foray into the electricity distribution business.
It has set up a subsidiary, NTPC Electricity Supply Company Ltd (NESCL), to enter the business.
Sources said that the company has expressed interest in the Mangalore circle, after the State Government approached it.
The proposal, the sources said, initially involved operating the circle through a management contract in Mangalore Electricity Supply Company Ltd (MESCOM), the unbundled entity of Karnataka Power Transmission Corporation Ltd (KPTCL).
This implied that NESCL would be responsible for billing and collections from the circle. This operation is fee-based, allowing the contractor to retain a portion of revenues collected.
However, the sources said that NESCL was not too keen on management contract. Instead, it was interested in picking up equity stake in MESCOM.
This means the management control of MESCOM would pass on to NESCL, sources added.
The State Government's policy allows transfer of equity control of up to 51 per cent to other investors, including domestic and foreign private sector. However, few private sector investors have evinced interest in the proposal. This prompted the State Government to approach the NESCL.
The sources said while NESCL was open to taking over the circle, several issues still needed to be sorted out such as the revenue and loss profile of the circle. NESCL, the sources said, was not prepared to accept the State Government's figures of the customer profile of the MESCOM. Instead, it preferred to carry out its own diligence of the circle for arriving at a reasonable valuation for operating the business, the sources added.
High distribution loss
Currently, figures for Mangalore, submitted to the State Electricity Regulatory Commission indicated that the gross electricity sales in the region was around 5,700 million units per annum. At least 50 per cent of the supply was un-metered. This included at least 3.25 lakh irrigation pump sets with a specific consumption of about 4,993 units per pump set.
The distribution loss, according to the data, was 22.25 per cent inclusive of EHT (extra high tension) load. Exclusive of the EHT consumption, the loss ratio according to the data was 25.25 per cent. This is also the loss ratio applied for fixing tariffs.
But, this loss ratio was acceptable to few. This is partly on account of the high specific consumption by the irrigation pumps.
Current indications were that the irrigation load was overstated to conceal the actual loss. As a result, the actual losses are estimated at levels far higher than the official estimates. The high difference in the losses made it unattractive for private sector investment.
A report submitted two years ago by consultants to the State Government for privatising the distribution circles had estimated the compensation for the loss differential at 95 paise per unit. This was to meet the minimum return expectations of investors in the distribution business. Besides, there were also issues relating to liabilities of the circle, which included borrowings from financial institutions before unbundling.
But, the sources said, despite these contentious issues the State Government was keen on NESCL's participation in Mangalore.
This was particularly to improve the revenues from each of the regions through better billing and collection efficiencies. Currently, collection efficiency was barely 50 per cent. Improvement in both billing and collection was expected to progressively bring down the subsidy burden.
In addition, the State Government also hoped to show case MESCOM as a model for privatisation of the remaining four circles in the State.
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