Central Electricity Supply Company of Orissa (CESCO)

cancelled

In September 1999, AES Corporation paid $10m to take a 51% equity stake in Central Electricity Supply Company of Orissa (CESCO), the last of the State Government of Orissa’s four distribution companies to be privatized. At that time, CESCO was operating as a corporatized government company and had a 30-year license to supply power to more than 500,000 customers in an area with a population of 1 million. CESCO managed power distribution in Central Orissa, which covered important cities like Puri, Cuttack and Bhubaneshwar. The licensing arrangement required an annual fee of $100,000 to be paid to the Government. CESCO’s license did not specify any time-bound quantitative targets for investment, coverage, or service quality. An international bidding process was held for the stake in CESCO, but only two bids were received. An apparent reason for the poor participation was the requirement that CESCO place all incoming revenues in an escrow account, which would first be used to pay for power generation from the local supplier, the Orissa Power Generation Company (OPGC). AES Corporation of the United States, which also was part owner of OPGC, stepped in to purchase the 51% stake in CESCO after the original winning consortium, Tata Electricity Company (TEC)-Viridian PLC, withdrew. Electricity prices for CESCO were set by the Orissa Electricity Regulatory Commission (OERC), the state power regulator, through application of rate-of-return (or cost-plus pricing) regulation. OERC had a fair amount of discretion to “depart from that baseline on valid reasons in determining allowed revenues.” AES submitted its first revenue requirement and rate review application in mid October 1999, which was modified downwards by the regulator. The company’s second submission, in October 2000, was similarly rejected by the regulator, who expressed the difficulty of balancing financial viability with affordable tariffs. In 1999 CESCO's assets were largely destroyed by a cyclone that hit Orissa causing damages to the distribution network that were estimated at US$23 million. In the 1999-2000 period the company spent US$16 million for power restoration. OERC had requested that CESCO reconnect all consumers, including those who had previously been disconnected for non-payment (although it subsequently said that CESCO could disconnect them again), and then placed a limit on cyclone-related expenditure below actual damage costs. Faced with high technical and distribution losses and continued operating budget deficits, AES began using proceeds from the escrow account to meet payroll expenses. In response, the regulator initiated criminal proceedings against AES’s local CEO. AES stopped using the escrow account, but also publicly stated an inability to pay July 2001 salaries to its 8,5000 employees. In August 2001, AES formally stated its desire to exit the project and re-offered its stake to either the Government or a third party, a proposal rejected by the State Government. Later in August 2001, the State Government filed a complaint with the OERC that CESCO was not supplying power to its customers, had stopped its billing operations, and that senior staff had stopped going to the office. Following the Employees’ Association’s threat to go on strike in early September 2001 and the State Government’s complaints, OERC vested the management of CESCO to an administrator nominated by the State Government. Under no opposition from AES, the new administrator superseded the AES controlled Board of Directors. None None