"BSES and Reliance would synthesize their strategy” - Views on News from Equitymaster

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  • Jan 12, 2002 - "BSES and Reliance would synthesize their strategy”

"BSES and Reliance would synthesize their strategy”

Jan 12, 2002

R. V. Shahi, a postgraduate in Industrial Engineering and Business Management has worn many caps. After long stints in Steel Authority of India and NTPC, he finally joined BSES as its Chairman & M.D. Since then he has been a man on the move. With the success at Dahanu plant behind him, he is exploring new avenues to chug the BSES growth engine. In a conversation with Equitymaster.com Mr. Shahi spoke about reforms in the power sector and BSES’s business plan 2012. He also spoke about the company’s interest in Dabhol and about Reliance’s role in the company.

EQM: The government recently announced a major rural electrification programme. It has also promised a one-time write off Rs 260 bn losses of SEBs. Do you think these are steps in the right direction? What else in your view should be done to encourage private participation in the power sector?

Mr. Shahi:  The Ministry of Power, GoI, has announced the accelerated power development program (APDP), according to which, there is a budget allocation of Rs 15 bn for the year 2001-02, which is really a step in the right direction. This scheme basically aims at strengthening the distribution system in the country. The approach is also good as the select circle and the identified circle have to be separate in terms of sub-stations, lines and other distribution management related requirements. For this the Ministry of Power signs an agreement with the concerned state and the state has to agree to milestone based reforms program, which will aim at reducing transmission and distribution losses, put into place energy audit systems, improving quality and reliability of supply, and metering of energy supplied.

The reforms in the power sector, which started on the emphasis on generation through private sector involvement (IPPs) has not yielded the desired results. Therefore, I feel that in the last few years the government has recognized that distribution has to be attended to first. Infact, this should have been taken up right in the early nineties, when the power sector was being opened up. In the coming years, I feel that the Ministry of Power will try to enhance the financial allocation to distribution reforms in the country.

I also feel there is need for the states to get more serious for reforming the sector, especially distribution. This will mean putting in place a regulatory commission, de-politicizing tariff formulation, and a thorough regulatory commission rationalizing the tariff structure that is very lopsided today. You have a large group of consumers who are highly subsidized. Consequently, the economic group of consumers (both commercial and industrial) has to pay high tariffs. In today’s context of global competition this imbalance has to be removed. We do hope that through the regulatory commissions (15 to 17 regulatory commissions have been set up in different states) and also through the CERC (Central Electricity Regulatory Commission) all imbalances in tariff structures, which have crept into the commercial working of the power sector over a period of last 40 to 50 years, would gradually be removed. A beginning has already been made.

Other schemes like Mega Power Project scheme, the state that wants to avail of power from Mega Power Projects, would have to privatize their distribution in towns and cities with population of 1 m or more. This power is comparatively cheaper because the Mega Power Projects have a number of concessions, which include waiver of customs duty, excise and sales tax. This results in lower cost of the project.

Thus the central government has taken a number of initiatives. Now the state government has to respond. This is because most of the problems in the electricity sector in India can be traced to state government’s jurisdiction. State governments through SEBs control more than 95% of distribution. These steps may not come in in a year or two, but will certainly pave the way for improved working of the sector.

As I said, most important aspect is that the right end of the industry i.e. distribution end, is now being rectified in the correct way.

EQM: What is the one thing that differentiates the Indian power sector with that of the developed world?

Mr. Shahi:  So far as power plants are concerned, Indian power plants are second to none. You have a large number of power plants not only of NTPC, but also of SEBs and private sector players like our own Dahanu Power plant, whose performance is comparable to the best plants in the world. The plants have reliability factor to the order of 85% to 90%, plant load factor of more than 80%, specific oil consumption of 0.5 or less ml per KWH, auxiliary power consumption of 7.5% to 8%. These are exceedingly good parameters. In power generation, some of the plants set up in India are more modern than any other plants abroad in terms of instrumentation and control systems. So on the power generation front we are second to none.

However, we have a numbers of SEBs whose power stations are not so modern. The plants typically would have load factors lower that 30% and in many cases even less than 20%. The government of India is stressing on modernisation and renovation of such plants. There is a scheme of incentive and funding through the finance corporation for the SEBs who want to modernise their plants. The logic is to invest lesser money in renovating and modernising these plants than to create new capacity at twice or thrice the cost. You can generate the same MW, at almost half or one third the cost, and quickly add to the effective capacity of the Indian power systems. This approach is praise worthy. This shall again contribute to the improved working of the sector. Of course in the last 15 years, the average plant load factor of the Indian power sector has improved substantially. It used to be in the range of 50% to 55% earlier and now it is more than 66%.

EQM: BSES had plans to add 2000 MW capacity in five years and about 6000 MW of additional capacity in ten years time in July 2000, when we met last. Where is BSES placed now in terms of achieving that target?

Mr. Shahi:  BSES has updated its business plan during the year and the board has approved business plan 2012. We have also made presentation of this business plan to our major institutional stakeholders. According to business plan 2012, we shall be restructuring keeping in view the 16th electric survey by the CERC for the period 2002 to 2007 and 2007 and 2012 (10th and 11th plan)

During this period the company would aim at

  • Working on aggregate capacity of 9,000 MW. All of this would not have been commissioned but would be in different stages of development.

  • Taking up as a developer at least three transmission systems. This has been added in our business plan keeping in view the new opportunity that has emerged by way of Power Grid Corporation of Indian Limited (PGCIL) offering independent power transmission companies development of point-to-point power transmission systems on BOT (built-own-transfer) basis.

  • 6 distribution systems, which the company would acquire in different parts of the country. This has been added keeping in view that a large number of states on select basis trying to privatize their distribution systems.

This will take care of almost 85% to 90% of the resources of the company. 10% to 15% of the remaining resources would be utilised for things like coal washeries, telecom, active coal mining not as major investor but as a power producer wherever there is an obligatory requirement of certain investment. We don’t want to get into mining as of now, but where it makes sense in terms of better economy and efficiency, those projects would be taken into account.

After the Kerala project, we should be commissioning very soon, a 220 MW combined cycle project at Samalkot at Andhra Pradesh. A 1,000 MW mega project is coming up in Maithon in the state of Jharkhand, which will be a pithead power station and will sell power through the Power Trading Corporation to other states. The cost of power will be comparatively cheaper due to the fact that it is a pithead power station. We are also in the process of evaluating and finalising some of the projects, which existing promoters have been developing and are in various stages of completion and we might acquire these projects. We have been talking to about half-a-dozen of such promoters in the country, who are keen to let BSES acquire their projects. The aggregate capacity of such projects would come to about 45,000 MW. We will be deciding about this very soon. We will not acquire all in one go but one by one. Wherever it makes sense we are going to acquire these projects.

On the distribution side, we are at present trying to fill up the RFP document (Request For Proposal) for the Delhi Vidyut board, which is in the most advanced stage in terms of progress towards privatisation of distribution. Hopefully, BSES will be able to get one of the three distribution companies in Delhi. We are looking at similar opportunities coming up the next few months in Karnataka and Andhra Pradesh. These are the areas in which acquisition of distribution companies will be in our consideration. On the transmission side some of the projects that have been offered by the Power Grid Corporation of India are in the evaluation stage. That would also be pursued in line with the business plan 2012.

EQM: What is Reliance’s role in BSES? How do you think it benefits BSES?

Mr. Shahi:  You see, Reliance made an open offer in the year 2000 and their holding in the company exceeded 26%. So far as the management of BSES is concerned, it is a professionally managed company, and it would continue to be like that. The proposition is so far acceptable to Reliance. Reliance holds currently about 30% of the stake and therefore, the interest of this company is very much there in Reliance’s agenda. Therefore, so far as management control is concerned, it will remain a professionally managed company. This is not a point on which Reliance had a different view earlier.

Since Reliance has a huge back up of energy, I feel that on a long-term basis, BSES and Reliance would synthesize their strategy, one to complement the other. BSES would do its bit by making fuel markets available by setting up large power projects and Reliance could ensure good fuel strategy. I think integration of the strategies of these two companies go a long way.

EQM: Could you shed some light on the Dabhol fiasco? Also, please elaborate your strategy to acquire Dabhol. How does it fit in BSES’s future game plan?

Mr. Shahi:  We have shown our interest in Dabhol. We are power people. BSES is a fully integrated power company. As I told you that we are going to add over 9,000 MW over a period of 10 to 12 years besides working on transmission and distribution. Therefore, addition of power project capacity is in our scheme of things. But we cannot be buying projects whose tariffs are unacceptable. What we have been envisaging is that it will require financial re-engineering to get the project on track. The current stakeholders will have to make sacrifices, equity holders will have to make maximum sacrifices. Lenders will also have to make sacrifices by revising the structure of coupon rates, tenure of payment period etc. Make a cut on the loaned amount to make an acceptable tariff structure. These aspects are to be put in place so that the proposal becomes acceptable. BSES is there and Tata Power is there. We will have to carry out due diligence. For this we need to sign a confidentiality agreement with Dabhol Power Company.


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