Round Table Discussion on Power Sector Regulatory Issues: Unfinished Agenda

1. Round Table Discussion on Power Sector Regulatory Issues:Unfinished Agenda Presentation by:Shri V S Ailawadi – IAS (Retd)Fr. Chairman ERCDate: 3rd September, 2008

2. State Electricity Regulation Commissions (SERCs) • Development of electricity market is important responsibility under the EA, 03 on the SERCs and CERCs. The EA, 03 and NEP put clear responsibility on them to prepare a road map for developing electricity market, competition, access and affordability to consumers. • The public expectations of improvement in supply of electricity and its quality and presence of competition in electricity market are legitimate. How far, SERCs have performed in promoting competition in electricity markets and achieving the mandate for the success of Distribution Reforms in the states. The progress on the reform agenda has been limited. • SERCs have remained over cautious and found of shortages as reason for lack of competition. In contrast, the competition in the telecom market was achieved by the proactive role played by the Telecom Regulator in promotion of competition. And the result are there for all to see. • SERCs have been operational in the power sector for more than 7 years. • SERCs have played important role in certain ways but its implementation of reforms has been less than the expectations.

3. SERCs have successfully made progress in tariff rationalization. But distortions exist in industrial and commercial tariffs, which are used for cross subsiding domesticconsumers • EA, 03 put important obligations on SERCs to promote: • Implementing distribution reforms • AT & C loss reductions • Improvement in quality of supply • Performance standards of power utility • Customer Relation Management (CRM) & Customer Satisfaction • SERCs have fair degree of independence and adequate powers with a legal authority comparable with that of Civil Court to seek information & investigation. The appeal mechanism ensures accountability of the Regulatory Bodies • On the positive side, the SERCs made tangible progress namely; • Transparency in functioning • Utilities financial & technical information in public domain • Formulation of Rules & Regulations • Better public participation in tariff design / making process

4. Shortfalls in the key areas: • AT & C losses of power utility are high. Not able to get utilities to bring down losses to comparable Asian countries standards. This remains as main constrain in tariff reductions. (Para, 5..4.6) • SERCs should suo moto move towards cost to serve tariff approach rather that waiting for utilities to file a petition or any direction from the State Government. ( In AP, SERC has clearly said that in case the utility receives a monthly tariff subsidy then the tariff is X else in case no subsidy is there the tariff to be charged is Rs Y). • SERCs have notified MYT regime but it falls short on the objective to incentive and minimize risk for utility and consumers. • Like the CERCs recent endeavour of establishing the benchmark capital cost for generation, transmission and distribution projects (currently CERC has asked for bids for conducting this study), SERCs should also conduct their own state specific studies to establish suitable similar benchmarks.

5. Agriculture Consumption Estimates of power consumption for agriculture are based on adhoc approaches. SERCs should arrange to conduct base line studies for agricultural consumers (flat load category) through third parties which should be revised periodically. SERCs are not comfortable to adopt the data submitted by the utilities and therefore rely on historical data or its own estimates. • July’07 amendment EA 03, mandates the commissions to reduce subsidy and cross subsidy progressively. Except for states like Maharashtra, Madhya Pradesh time horizon for reducing cross subsidy not encouraging. • With Government indirect control over power utilities and its short term goals reduction in cross subsidy surcharge seems difficult. • Competition in Electricity Market Merely framing of regulations under sub section 2 of section 42 not sufficient. • NEP’2005 (Para, 5.7.1) puts duty on SERCs to promote competitive framework. This has not been fulfilled by SERCs.

6. EA, 03 also mandates the SERCs to provide conducive business environment in terms of adequate returns and investment in distribution. In this, also the commissions have not been note worthy. (Para, 5.4.4 – NEP) • EA, 03 mandated Open Access in Distribution. • Its implementation has not been meaningful manner for the Consumers of Open Access. (Para, 5.8.3 – NEP) • SERCs failure to reduce cross subsidy surcharge on third party demanding open access • Transmission corridor limited for open access users and uncertain availability of interconnection facilities. • When full overheads cost are recovered in long term PPAs, extra cost from “Open Access” users aught to be reasonably determined. Difficulties for arranging transmission have not been addressed. Unreasonable conditions and “transmission cost charges” are high & remain unaddressed. • No standard agreement for supply arrangements and settlement procedures devised by the SERCs.

7. Karnataka Methodology for Cross subsidy surcharge These four illustrations give different approach methodology . Average cost of supply method • The Commission feels that since average cost of supply has been considered for tariff determination, the same methodology shall be adopted for determination of surcharge also and it would be inappropriate to adopt different methodologies.

8. Madhya Pradesh Avoided Cost Method • Based on 5% power purchased at margin. • This method adopted since it is recommended by the group of regulators and also in the National Tariff Policy.

9. Gujarat Methodology • Avoided Cost Method • Reasons for adopting Avoided Cost Method • Recommended by FOIR • Adopted in the Draft Tariff Policy of MoP • Avoided Cost Method takes care of loss to the existing Licensee on losing the subsidizing consumers and promotes competition. • The Commission has decided to consider Pooled Power Purchase and Generation Cost as Avoided Cost for calculation of Cross-Subsidy Surcharge.

10. DERC. Methodology • The cross subsidy surcharge shall be calculated based on the surcharge formula laid-down in Para 8.5 of the tariff policy issued by the Govt of India with same assumptions taking into account some state specific issues, as specified in this order. • Surcharge applicable to different consumers at different voltages / and different class of consumers along with certain assumptions which are indicated in Annexure – 1.

11. Some Assumptions of DERC. • For calculation of cross subsidy surcharge, 5% of the marginal power purchase has been computed with the data available in the MYT order for FY 2008-09. • Top 5% of the costliest power has been allocated to various power procurement starting from the highest cost and going down to the level at which the top 5% quantum get completed. • . • For calculation of the total energy received at the discom periphery losses have been assumed at 3% for PGCIL and 1% DTL. • .

12. The average cost of power purchase in the above calculation has been arrived at after grossing up for the losses. • The distribution losses and wheeling charges for each of the discom shall be as per the tariff order for FY 2008-09 and will also correspond to voltage level at which open access is being sought.

13. SERCs have not made proactive move in exempting renewable power from any “open access charges”, “transmission / wheeling charges” and “scheduling fee”, etc. Open access should have been allowed to renewable power with only reactive energy charges as adopted in the CERCs approach paper. • Competition in distribution and private sector participation in distribution are important objectives of the NEP and EA, 03. • One of the key provisions of the NEP is the concept of multiple licensees in the same area of supply through their independent distribution systems. State Government has full flexibility in carving out distribution zones while restructuring the Government utilities. SERCs could have played catalyst role in suggesting suitable model. (Para, 5.4.7 – NEP)

14. Central Electricity Regulation Commissions (CERCs) CERCs is assigned a major role in promoting open access, which is non-discriminatory and overarching. However, it is felt that the mandate given to the CERCs for competition and open access has not been effectively put into use. The main concerns in this respect are: • Jurisdictional Surrender The CERCs (Open Access in Inter-State Transmission) Regulation, 2008 have not led to expectations embedded in the EA, 03. This is, because, in practice, the CERCs have allowed a virtual veto power to the State Power Utility (SPU) and State Level Dispatch Center (SLDC). The intention of the EA, 03 is clear that unless there are “strong technical reasons”, transmission capacity available should not be denied for Open Access transactions. There has been reluctance on the part of CERCs to exercise its powers to intervene where NOC is denied, and where SLDC has not acted fairly and has not satisfactorily explained the reasons for not giving concurrence or NOC

15. Lack of Transparency Second concern arises from lack of binding conditions on the SLDCs in the CERCs Regulations for providing correct information about TTC and update Available Transmission Capacity (ATC) to Open Access customers. The SLDC is seen as always, under pressure of the state electricity company/SEB and have refused permission or raised objection of ATC. The control of STU on SLDC is against spirit of EA, 03 and NEP. (Para, 5.3.7) • Securing Surcharge The question of specifying transmission surcharge payable by the consumer as and when open access is allowed by the State Commissions, for inter-state supply of power has been left open. The CERCs have fixed surcharges differently, which in effect, amount to pancaking. EA, 03 provides in the Section 36 that charges or rates for using intervening transmission facilities of Open Access should be fair, reasonable and in proportionate to the use of such facilities. CERCs could have used powers under Section 36 proviso for rationalising open access charges. In the alternative, it could have issued guidelines on this.

16. Ring Fencing of SLDCs As the national level, the RLDCs are now proposed to be formed into an independent entity. This is all the more pressing now when ABT regime is to be implemented for intra - state generation stations under NTP. SLDCs have to be made autonomous and free from the control of state utilities.

17. Promotion of Renewable Energy Sources • Promotion of RES is the responsibility of the SERCs, in the context of increasing gap in demand and supply, by encouraging utilization available resources and harnessing them fully. The regulatory issues have not received adequate attention for promoting RES. • SERCs seem to be satisfied by fixing only percentage of RES in their regulations. Here again, the commissions have not shown boldness in promoting RES. Share of RES is nominal between 3 – 6 % as fixed by many state regulators except Karnataka and Maharashtra. The share of RES in the Europe and USA is 20%. We should be looking at minimum 10%. • Rationalization of Transmission Charges This is still an issue, most SERCs, have not adopted the “transmission charges” for the short-term open access. As promotional objective, it could have followed on the lines of CERCs Regulation fixing 25% of “transmission charge” of Long term consumers for “short term open access”. • For Small Hydel power, issues relating to transmission requirements for power produced by small hydel projects is begging a solution from the regulators.

18. Conclusion • There is no doubt that SERCs have achieved progress but lot of work remains. • More proactive role is need be achieve objective of the EA,03, NEP & NTP • Promotion of competition and facilitating predictability for open access will unlock opportunities for creating more generation of electricity and availability of quality power. Thank You