POWER SECTOR : RESTRUCTURING AND REGULATION

POWER SECTOR : RESTRUCTURING AND REGULATION To The General Management Programme for PGCIL 17 August 2001 Usha Ramachandra

Components of Reforms • Restructuring • Regulation

RESTRUCTURING RATIONALE • To limit government intervention/ Intrusiveness • Increase autonomy • Clarify issues of accountability • Earn commercial rates of return on investment • Make power utilities responsible for their borrowing & budget

COMPONENTS OF RESTRUCTURING • Unbundling • Corporatisation • Private Sector Participation • => Management Contracts • => Leasing of Assets • => Joint Ventures • => Sale of Assets • => New ventures in private • sector

Vertical Integration Company A Vertically Integrated Company B Unbundled Generation Transmission Distribution Generation Transmission Distribution

VERTICAL INTEGRATION (Contd...) COMPANY A VERTICALLY ITEGRATED COMPANY B UNBUNDLED Exchange between generator, transmitter and distributor are internal to the company. Exchange between generator, transmitter and distributor takes place in the market VERTICAL INTEGRATION WITHIN A FIRM IS BEING REPLACED BY VERTICAL CONTRACTS BETWEEN FIRMS.

WHOLESALE COMPETITION Gen. Co.-1 Gen. Co.-2 Gen. Co.-3 Competition in generation Pay Transco for use of its system (Regulated) Transmission Co. Distributors can choose who will supply them (Distributor can buy from any GENCO). Dist. Co.-1 Dist. Co.-2 Dist. Co.-3 Consumers

RETAIL COMPETITION Competition in Generation Gen. Co.-1 Gen. Co.-2 Gen. Co.-3 Pay Transco for use of its system (Regulated) Transmission Co. Distributors can choose who will supply them Distributors/ Traders Pay distributor for use of distribution system (Regulated) Distribution System End consumer can choose who will supply them Consumers

NEED FOR REGULATION • Regulation essentially seeks to limit monopoly abuse and simulate a competitive market. In the electricity industry this implies: • Generation through competitive bidding • Transmission remains a natural monopoly though some elements may be competitive • Distribution & Supply through franchises/ auctions / competitive bidding / lease / joint ventures or outright sale

Price and Non Price Regulation • Price Regulation: • Rate of return or rate base regulation • Performance or incentive regulation • Non Price Regulation: • Environment • Safety Standards

RATE OF RETURN REGULATION - II Cost of Service Revenue Requirements = Expenses* + (RR X RB) *:- Fuel Costs including purchased power contracts typically pass through to customers automatically Prices (Rates) = Revenue Requirements / Sales . O & M Taxes Wages Depreciation Debt / Equity Undepreciated Capital

Price Cap R P I - X RPI: Retail Price Index X: Represents expected annual gain in utility efficiency Problem is in the determining the change in Price Caps and the frequency with which it is adjusted. Resetting PCs too often moves the firm towards traditional regulation Setting it once & for all - probability that it may be too high or too low in the future

SHIFT: ROR RPI - x • Information Asymmetry: • In ROR the Regulator is omniscient & sets optimal prices based on full knowledge of costs and demand • Price Cap is an incentive mechanism for the regulatory firm that will lead it to maximise society’s objectives (whether these are efficiency, distributive or other objectives) while pursuing self-interest.

CHARECTERISTICS OF REGULATION THAT INSPIRE CONFIDENCE • Independence from utility • Independence from excessive political interference • Clear and comprehensive regulatory law • Complete and standard accounting requirements • Openness of regulatory procedures, records & decision-making to public review • Continuous meaningful interaction between regulatory body, public & those with particular interest in regulatory decision • Adequate resources both for regulation and enforcement • Stability of Regulation Policies

REGULATORY PRACTICES: PITFALLS TO AVOID 8Political Regulatory Capture 8 Commercial regulatory capture 8 Insufficient Accountability 8 “Drowning” in consumer complaint resolution 8 Fragmentation of regulatory functions

GLOBAL TRENDS DEVELOPED COUNTRIES are deregulating and privatizing their electricity industry to bring in more competition, achieve greater efficiencies & improve quality of service to customers DEVELOPING COUNTRIES are shifting from state owned, managed and regulated electricity industry to private sector participation, independent & autonomous regulation

REGULATORY TRANSITION Tariffs under PBR Regulation Administered Tariffs Tariffs under ROR Regulation

REGULATORY PRACTICES: INTERNATIONAL EXPERIENCE • USA: • Regulatory Commissions (multiple) • Nominated or Elected • System of Open Hearing • Rate of Return Regulation • Considered “Heavy Handed” U.K.: • Single Regulator • Price Cap Regulation • Considered “Light Handed”

TRANSITION: US EXPERIENCE I The electricity industry has existed for a little more than 100 years and seen the transition FROM • Fierce competition in the early years TO • Franchised monopoly status & regulation TO • Increasing competition

US RESTRUCTURING HISTORY 1910-20 -- Creation of state regulation - brought on by chaos and corruption 1930-35 -- Creation of federal regulation and federal power projects - brought on by private monopoly abuse 1975-80 -- Regulatory Revival, introduction of competition, energy efficiency -- brought on by high fuel prices and nuclear costs

US REGULATORY STRUCTURE • Legislature: Provides broad policy outlines • Federal Energy Regulatory Commission [FERC] • State Public Utility Commissions: • Performs quasi-legislative & quasi-legislative functions • Elected Commissioners/ Appointed Commissioners

PUC: REGULATORY FUNCTIONS • Regulate tariffs based on cost of service data [Rate of Return Regulation] • Non-price regulation such as environment & safety • Integrated Resource Planning to justify investment • Demand Side Management • Other social goals & objectives

OVERVIEW OF RATESETTING PROCESS Newspaper Notices Application Filed Discovery on Application (Requests by Parties for Information) Information Meetings Pre-Hearing Conference Public Statement Hearings Evidentiary Hearings Briefs to ALJ Decision of ALJ Commission Decision Petition for Rehearing Petition for Judicial Review

TRANSITION: US EXPERIENCE II Competition is being sought through: • Multiple players in generation • Open Access Transmission • Retail Competition

TRANSITION: US EXPERIENCE III COMPETITION THROUGH DEREGULATION: • Every state has formulated plans to deregulate or is seriously considering deregulation • California and Arizona are examples of deregulation

TRANSITION: US EXPERIENCE IV The issue of stranded costs has been the most contentious: FERC defines stranded costs as those costs that were prudently incurred to serve power customers and that could go unrecovered if these customers use open access to move to another supplier

U.S. Regulation and Restructuring in the 1990s • Originated by industrial customers in high cost states • Telephone and Gas restructuring (1980s) • British restructuring experience (1990) • Federal Open Access Rule • California announced full customer choice (1994)

U.S. EXPERIENCE • US Generation costs cut in half in 15 years • New technology developed • Operating and fuel costs also reduced • Capital available, risk allocated • Many new companies • New retail services start to appear • New uses for utility assets

U.S. EXPERIENCE • Appearance of market power • Price spikes • Stakeholders responsibilities need clarification • Stranded costs problems differently tackled by PUCs • “Switching” was disappointing

U.K. INDUSTRY BEFORE RESTRUCTURING 31 March 1990 France Scotland CEGB GRID Large Customers 12 AREA BOARDS Customers

U.K. INDUSTRY BEFORE PRIVATISATION • Focus on engineering not customers • Costly and bureaucratic • Capital rationing • “Inflexible” working methods BUT KEPT THE LIGHTS ON - WAS WORKING WELL - HAD PUBLIC SERVICE OBLIGATION

U.K. OBJECTIVES OF RESTRUCTURING & PRIVATISATION • Introduce competition where possible & regulation elsewhere • Increase efficiency through market discipline • Widen share ownership • Maximise government revenue from sales • Reduce political & civil interference

U.K. INDUSTRY AFTER RESTRUCTURING National Power IPPs Imported Power Pumped Storage Nuclear Electric Generation POOL/ NETA Transmission 400/275kV Distribution 132kV-240v 12 Regional Electric Companies Customers Customers Large Customers

UK ELECTRICITY - TRANSITION NATIONALISATION PRE 1990 GOVERNMENT OWNED AND CONTROLLED CEGB LIBERALISATION (1990 – 1998) 1990 – THE ELECTRICITY POOL -1 MW – 1990 -100 KW – 1994 -ALL - 1998 REGULATION (1998 ….) 2000 – ELEXON LIMITED 2001 – THE NEW ELECTRICITY TRADING ARRANGEMENTS

U.K. POWER POOL • The Sale and purchase of electricity is through the Pool • Generators compete daily via price bids to the Pool in shares of the total required generation. • Suppliers compete in concluding sales contracts with retail consumers and fulfill their requirements via daily physical purchases. • Settlements are made typically within a month after the trade is concluded and final pool prices are announced.

U.K. ELECTRICITY TRADING Under NETA : All Electricity bought and sold under Bilateral Contracts - Long Term Or Short Term But Traders may buy more or less than what they have sold Generators physically generate more or less than what they have sold Customers/Suppliers consumer more or less than what has been contracted by them/on their behalf Under NETA – Surpluses and Deficits (or imbalances) are measured and invoices sent for settlement (Imbalance Statement) All Licenses have the appropriate electronic communication links to the Systems Operator Mandatory Participation in the Imbalance Settlement Process to ensure that all participants, above the licensed size are treated the same and do not receive the benefit of electricity for which they have not paid.

UK ELECTRICITY & GAS • 1986 - Gas Act for privatisation & regulation of Gas - Ofgas • 1989 - Electricity Act - Offer • Electricity privatised & restructured over 1990 -1996 • Ofgem introduced in 1999 • Utilities Act 2000 - Telecom opted out • GEMA - Gas & Electricity Markets Authority • NETA replaced the Power Pool in end-March 2001 E.g. London Electricity - different Xs Parallel process of regulatory reforms with changes in market structure

Argentina Pre-Reforms Post-Reforms Six public enterprises, several utilities owned by provincial Governments and a number of cooperatives. • 24 Generating Cos. • 1 Transmission Co. • 25 Distribution • Companies

Ukraine Pre-Reforms Post-Reforms Eight vertically integrated utilities handling generation, transmission and distribution. • generation by 6 • new companies • 27 distribution • new companies • one transmission • company

Chile Pre-Reforms Post-Reforms • Two vertically inte-grated companies responsible for generation, transmission and distribution. • Fourteen small public • owned distribution • companies • seven generating • companies • one transmission • company • 26 distribution • companies

Norway Pre-Reforms Post-Reforms • 61 generating companies • one transmission company • 211 distribution companies, • some have their own • generation. • Even after reforms, the • sector is mostly public • owned One vertically integrated public owned utility. 210 distribution entities owned by Municipalities and Public Bodies

Malaysia Pre-Reforms Post-Reforms Vertically integrated public sector organisation for generation, transmission and distribution. 3 vertically integrated privatised utilities with 77% of shares with Government and balance by public.

Alberta – Canada Pre-Reforms Post-Reforms • Number of players are • introduced for • generation. • Single transmission • entity. • A number of distribution • companies Four vertically integrated utilities, number of Municipal undertakings and some distribution companies.

CONCLUSIONS • The following conclusions can be drawn from the analysis • of power reforms worldwide: • Competition in electricity industry is possible • Different countries choose different models • Results differ depending on model & country • In some cases competition has caused significant increases in efficiency as well as reduction in prices • Competitive reforms have become more & more common • growing trend to give consumers access rights

STATE LEVEL INITIATIVES Several states have enacted separate Electricity Reforms Act which enables restructuring of the power sector in the state: Orissa: 1995 Karnataka: 1998 Haryana: 1998 Uttar Pradesh: 1999 Andhra Pradesh: 1999 Rajasthan: 2000

STATUS OF SERCS • State Acts: Orissa, • Andhra Pradesh • Karnataka • Uttar Pradesh • Haryana • Rajasthan • ERC (1998): Madhya Pradesh, Maharashtra • Gujarat, Delhi • Tamil Nadu, Arunachal Pradesh West Bengal

Cesco Wesco Southco Nesco ORISSA: PRESENT STRUCTURE OHPC IPP NTPC OPGC CPP Generation GRIDCO (Transmission and Bulk Supply) Bulk Supply & Transmission Retail Supply & Distribution C C C C C C C C C C C C C C

ORISSA : REGULATORY STRUCTURE CENTRAL ELECTRICITY REGULATORY COMMISSION GOVERNMENT OF INDIA CENTRAL ELECTRICITY AUTHORITY ORISSA ELECTRICITY REGULATORY COMMISSION GOVERNMENT OF ORISSA TRANSMISSION AND BULK SUPPLY LICENSEE DISTRIBUTION & RETAIL SUPPLY LICENSEE I DISTRIBUTION & RETAIL SUPPLY LICENSEE II DISTRIBUTION & RETAIL SUPPLY LICENSEE III DISTRIBUTION & RETAIL SUPPLY LICENSEE IV

Andhra Pradesh • Hiten Bhaya Committee Report in 1995 • A.P. Power Reforms Policy 1997 • A.P. Electricity Reform Act in 1998 • A.P. Electricity Regulatory Commission in 1999 • A.P. Genco and A.P. Transco formed on 1-2-1999 • Four distribution companies formed on 1-4-2000 • APERC’s first tariff order in May 2000, 2001

Karnataka • KPCL separated from KEB in the early 1970s • Karnataka Power Reforms Act • KEB wound up & KPTCL corporatised • Each zone works as profit centres • KERC set up • In the process of scrutinising first tariff application • First Tariff Order in December 2000

POWER SECTOR : RESTRUCTURING AND REGULATION