Policy Models for Distribution Reforms

1. Policy Models for Distribution Reforms ‘Multiple Licensing Arrangement’ Presented by: R.R. Mehta President- Reliance Infrastructure Limited

2. Agenda • Regulatory and Policy Support for Competition • Policy Model for Distribution Reform • International Experience • Conclusion 2

3. Regulatory and Policy Support for Competition Legal & Regulatory Support • Section 2(17): "distribution licensee" means a licensee authorised to operate and maintain a distribution system for supplying electricity to the consumers in his area of supply; • Section 2(47): “open access” means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission; Consumers served by Distribution Licensee (Wire + Retail) or Open Access 3

4. Policy Models for Distribution Reform • Status of ‘Parallel Distribution Licensing’ in EA 03 Section 14(6th Proviso): ………………………………………………………………………... ………………………………………...…………..…… Provided also that the Appropriate Commission may grant a licence to two or more persons for distribution of electricity through their own distribution system within the same area, subject to the conditions that the applicant for grant of licence within the same area shall, without prejudice to the other conditions or requirements under this Act, comply with the additional requirements relating to the capital adequacy, creditworthiness, or code of conduct as may be prescribed by the Central Government, and no such applicant, who complies with all the requirements for grant of licence, shall be refused grant of licence on the ground that there already exists a licensee in the same area for the same purpose More than one Licensee, however, each licensee to supply through its own network 4

5. Regulatory and Policy Support for Competition Legal & Regulatory Support • Section 43 “(1) Save as otherwise provided in this Act, every distribution licensee, shall, on an application by the owner or occupier of any premises, give supply of electricity to such premises, within one month after receipt of the application requiring such supply………. (3) If a distribution licensee fails to supply the electricity within the period specified in sub-section (1), he shall be liable to a penalty which may extend to one thousand rupees for each day of default…” All licensees in an area obligated to supply on request (USO) 5

6. Policy Models for Distribution Reform • Judgments strengthening ‘Open Access’ Appeal No 132 of 2011 …… (B)Various provisions of the 2003 Act as well as 1910 Act required a distribution licensee to lay down its own distribution network for meeting the universal service obligation to consumers. TPC, the distribution licensee who had been granted license in the year 1907 and who failed to lay its own distribution network cannot now claim right over the distribution network of other licensee to meet its universal service obligations. (C) The only method to use the network of the Distribution Licensee namely RInfra, by the another Distribution Licensee namely TPC, is only through open access under Section 42 of the Act. Section 42(3) envisages the existence of parallel distribution licensee and it is equally applicable in this case where a consumer connected to the network of one distribution licensee i.e. RInfra, takes power from other distribution licensee i.e. TPC in the same area of supply. (D) The State Commission does not have any plenary power to permit something which is not permitted within the Act itself. In this case, there is specific provision for Open Access to allow the TPC to supply to the change over consumers by using the network of RInfra. Hence, the question of invoking plenary powers does not arise As held in RInfra – TPC matter : TPC usage of RInfra network under Open Access as an interim step 6

7. Policy Models for Distribution Reform Objective Options Available Policy Models Single Wire (Regulated) - Multi Retailer (un-regulated) Wire- Retail Separation (Open Access) Single Wire (Regulated) – 1 Retailer (Regulated), Multi retailer (un-regulated) Competition in Distribution Multiple license in Common Area of Supply e.g. Mumbai Multiple Licenses (Wire + Retail) • Choice to Consumer • Cheaper and Reliable electricity supply 7

8. Policy Models for Distribution Reform Objective Options Available Policy Models Single Wire (Regulated) - Multi Retailer (un-regulated) Wire- Retail Separation (Open Access) Single Wire (Regulated) – 1 Retailer (Regulated), Multi retailer (un-regulated) Competition in Distribution Multiple license in Common Area of Supply e.g. Mumbai Multiple Licenses (Wire + Retail) • Choice to Consumer • Cheaper and Reliable electricity supply 8

9. Policy Models for Distribution Reform • Multiple Licensee (Wire + Retail)’ Benefits Issues • How to recover the Stranded Cost of assets and contracts? • True Implementation of EA 03 • Freedom to Consumes for choosing their electricity service provider • Encouraging Competition in Distribution • Doesn’t it leads to duplication of costly and limited resources? • Whether same consumers need to pay twice for similar asset made to serve similar purpose? • Whether past liabilities of consumers post shift over to other licensee eliminates? • How to ensure financial stability of licensees in political sensitive, socio-economic and non-periodic tariff design framework? • Elimination of Subsidy/Cross-subsidy Competition enabled through Duplication of Resources – Uneconomic & embedded Implementation Constraints 9

10. Policy Models for Distribution Reform Objective Options Available Policy Models Single Wire (Regulated) - Multi Retailer (un-regulated) Wire- Retail Separation (Open Access) Single Wire (Regulated) – 1 Retailer (Regulated), Multi retailer (un-regulated) Competition in Distribution Multiple license in Common Area of Supply e.g. Mumbai Multiple Licenses (Wire + Retail) • Choice to Consumer • Cheaper and Reliable electricity supply 10

11. Ensure Non-discrimination in access to required Infrastructure Promote Balancing Market and PX Promote Necessary Infrastructure development Support a rational and viable Multiple Supply model Policy Models for Distribution Reform • ‘Open Access withWire –Retail Separation’ Issues Benefits • Requires unbundling of costs and tariffs for network services • Requires further managerial and financial segregation of network and retail business • Recognise electricity transaction follow electrical rather than boundary • Initiate with administered market and then gradually move to free market • Develop infrastructure to alleviate long-run constraints • Ensure flexibility in transmission capacity and tariff • Address the issue of stranded cost and asset • Extent of “USO” Open Access creates Market and enables Choice to Consumer through Competition, the need is to address the issues 11

12. Policy Models for Distribution Reform • ‘Open Access withWire –Retail Separation’ Issues - Recurring Consumer Mix Cross Subsidy • EA 03 mandates for USO (i.e. choice of consumer not available with licensees) • Skewed Consumer mix due to dominant agricultural, domestic consumer • Consumer Mix with varying affordability to pay • Tariff structure itself promotes cross-subsidisation • Mandate of EA 03 and TP not yet realised to eliminate or reduce • Cross subsidy will prevail till Cost of Supply tariff approach is not followed in practice Recommendations • 1 Wire, 1-Default Retailer (to avoid cost burden on lower end consumer) and multiple retailer (operating as deregulated market) • Subsidy support to regulated market either through government or through adequate CSS from deregulated market 12

13. Policy Models for Distribution Reform • ‘Open Access withWire –Retail Separation’ Issues – One Time • Past Revenue Gaps (Regulatory Assets) • Stranded Power Purchase Contracts • Transfer Scheme for allocation of assets and liabilities between wires and retail Recommendations • Defining a Charge to be recovered from all consumers of wire licensee • Capacity not absorbed by other retailers to be recovered by way of Additional Surcharge from Contestable consumers • Appropriate Transfer scheme to be defined 13

14. Policy Models for Distribution Reform • Distribution Reform through ‘Open Access withWire –Retail Separation’ • Phase I: Institutional Framework • Unbundling retail –wire functions with distinct licensing arrangement • Identification of Contestable and Non-contestable market • Mechanism of voltage and category wise loss assessment • Responsibility allocation of technical losses to wire operator and commercial losses to retailers • Mechanism to allocate the financial losses among wire and retail • Infrastructure strengthening in form of Advanced metering and site identified technical loss correction • USO applicability to retailers Phase I: Development of Institutional Framework 14

15. Policy Models for Distribution Reform • ‘Open Access withWire –Retail Separation’ • Phase II: Introduction of Competition in Retail • Ownership transfer and ring-fenced arrangement between wire and retail • Multi-retailers in contestable market to operate on commercial principles under non-regulated atmosphere • Default retailer in identified category and wire operator to operate under regulated atmosphere • SERCs to ensure adequate, transparent and cost-reflective tariff (i.e. including OA Charges) to regulated entities viz., default retailer • Allocation of PPA among retailers post meeting requirement of regulated default retailer • Choice based retailing to be discouraged Phase II: Introduction of Competition in Retail 15

16. International Experience • International Experience in Retail Competition Model A Model B Model C Business Model Competitive Retailer Distributor (incl. default retailer) Retailer for all market Distributor (only wires) Distributor (Wire and Retailer for all market Portugal Italy Spain Great Britain Germany Belgium Germany (small distributors) Italy (small distributors) Countries Different Leadership possibilities of overall retail business Ring-fenced Business with no overlapping of rights and responsibilities Pre-competitive scenario for almost all countries Comments Source: Mckinsey Presentation on Distribution Reforms Options 16

17. International Experience • International Experience in Retail Competition: Australia • Retail Market is partly competitive and partly operate on Franchise basis • In competitive retail market retailer compete to • Large customer preferring not to reach wholesale market • Small customer opting out their choice of supply from First tier retailer • In NEM operated states, first retailers can sell to all consumers at prices controlled by Regulator • Attached to Distribution business with geographical monopoly in that state • They can sell throughout state irrespective of consumer location • Retail business is ring –fenced from distribution business First Tier Retailers Distribution and Retail Supply in each State • Standalone businesses not attached to distribution business • They can sell throughout state irrespective of consumer location • They may be first-tier retailer in other state Second Tier Retailers 17

18. International Experience • International Experience in Retail Competition: New Zealand • Common ownership of distribution and either of retailing and generating business is prohibited • Extent of retail competition varies across the country, customers have a choice of retailers • Retail tariffs are not subject to price control • Free web-based tools are also available to help residential users to shop around • 29 Line companies own the local networks and operate as monopolies and all connected to National Grid • Line companies sell their line services to retailers who manage electricity supply to end consumers • Network operators are subject to targeted price control regime Line Business Distribution Business • Complete contestable retail segment and no USO • Extended deregulated retail market • Regulator’s role limited to providing arrangements for the protection of consumers, as well as administering retail market rules Supply Business 18

19. International Experience • International Experience in Retail Competition: United Kingdom • They provide Overhead lines and under sea lines connecting the transmission networks in different countries • Regulatory office of OFGEM have Market monitoring role • Statutory duty on Distribution Network Owner to connect any customer requiring electricity within a defined area, and to maintain that connection • DNO recovers charges for system, connection and balancing Inter-connector • Natural Monopoly and licensed activity • Prevented from supplying electricity to consumers • Regulated through 5 year control periods on PBR principles Private Electricity Supplier Distribution Network Owner • Retail market opened in stages for large, medium users and for residential users • Customers free to choose supplier • Competition in metering services Supply 19

20. Conclusion • Multiple Combined Licenses – Uneconomic and Constraints in Implementation • Wire-Retail separation essential requirement for Competition and Consumer Choice • Single-Wire and Multiple Retail (Open Access) 20