The passing of the electricity bill by Parliament has been one of the biggest developments in the sector in recent times. It promises to bring in many changes in the sector and open new opportunities for the industry. To assess the impact and implications of the new legislation, Power Line recently organized a workshop in Delhi on the new electricity bill. The workshop was addressed by prominent speakers, including R.V.Shahi, Secretary, Ministry of Power. We bring you the viewpoints of various sector experts on the electricity bill as presented at the workshop……

Srikant Kulkarni,
Director,
CRISIL Advisory Services

The passing of the electricity bill is a landmark development for the Indian power sector. My presentation will cover issues specifically relating to private sector participation in distribution.

The scenario for distribution privatization presents a mixed picture with questions raised in the context of Orissa, the uncertain time-frame in most reforming states like Karnataka, Rajasthan and Andhra Pradesh. The Delhi experience is being watched closely and will hold the key in spurring investor interest in distribution. Sectoral constraints and a relatively weak investor climate seem to be affecting almost all proposed distribution privatization transactions in the country.

Let’s take a look at how the electricity bill attempts to address some of the constraints in the sector.

Multi-year tariffs have been very explicitly enabled in the bill. The introduction of a tariff policy has been talked about. A tariff policy will bring about uniformity and predictability and, more importantly, a financial viability orientation in the tariff-setting process.

An appellate tribunal will be set up and, consumers can go to the tribunal if they have a problem with regulatory orders. Are we going to see the tribunal being inundated with consumer-level issues?

Are we going to see a time deadline for resolving disputes? Could a separate bench be constituted for resolution of disputes between private licensees and the state electricity regulatory commissions (SERCs)? More such issues will crop up the moment we have more private investors. The institutionalization of special courts and explicit anti-theft clauses will provide confidence to investors.

There was a reference that subsidies would be paid in advance, as prescribed by the regulatory commission. This is a very positive development. But it would not really take away the entire risk that private discoms are exposed to, since it would depend on the State government’s willingness and ability to service the subsidy requirement. One solution is that if they do not pay the subsidy, you charge full-cost tariffs or regulator-determined tariffs. But this is not a practical way of looking at it.

The provision for 100 per cent metering has an open-ended time-frame. The regulator can extend that timeline for certain sections. This is really a dampenser. Since metering has become such a big political issue, there is no consensus on the subject even in advanced reforming states. Therefore, the state governments need to come out with a comprehensive metering policy within a realistic timeframe to supplement this provision.

Some of the other provisions are open access at the licensee level. This could facilitate low-cost power procurement for discoms. But this cannot happen immediately because there is a single buyer locked into long-term PPAs and it is only incremental power that can be competitively procured. The state governments need to draw up a roadmap where they can move from a single buyer to a multi-buyer model in the medium to long term, with allocation of power purchase contracts based on the discom’s business potential.

An attempt has been made to introduce private sector participation in rural electrification, as no licence is required for generation and distribution in rural areas. This is a positive development even from the perspective of strategic investors in the discom.

Let us now look at some of the provisions that can have a deterring impact.

Freeing up of captive generating stations could possible see some flight of industrial consumers. In urban distribution centers that have few HT consumers, if these consumers go away, you can visualize the viability of the business. There is no cross-subsidy surcharge compensation, which poses a significant financial risk to the incumbent licensees.

As for open access at the consumer level, while the regulator is to determine the timing for this, I hope the tariff policy comes out with some guidelines as to how the cross-subsidy surcharge will be determined; otherwise this could be a debatable issue. And, depending on how different regulators treat the cross-subsidy surcharge issue, discoms could be exposed to the risk of not getting the compensation they ought to get in order to keep their businesses viable.

As per the bill, “parallel networks” can be set up by different distribution licensees servicing the same area. Please appreciate that the SERC is only a licence issuer and has no control on the entry of the new player a long as the applicant meets the financial and other norms specified by the Government of India. The new licensee can cherry-pick consumers with no cross-subsidy surcharge available to the incumbent distribution licensee. Would the licensee be governed by some kind of universal service obligation through the licence condition? And could competition based on parallel networks pose a more immediate threat than trading-based competition?

The current revenue cap model (Sixth Schedule philosophy) restricts the upsides that distribution licensees can have. This coupled with the limited freedom on market-based power purchase (unless the discom decides to unshackle itself from all the PPAs that have been signed, which is unlikely) are not compatible with accelerated introduction of retail-level competition. This is an important point of debate.

Thus, the overall situation will improve in the distribution business. Regulatory risk would come down by virtue of multi-year tariffs/long-term tariff principles. Subsidy risk has been brought down; at least there is a legislative intent that you pay it in advance. Data risk with a thrust on metering and energy accounting should come down. However, due to captive and parallel distribution networks, significant market risk could develop. People who have right of way could significantly benefit from these provisions.

In conclusion, the electricity bill provides strong legislative support for various critical aspects such as subsidy, multi-year tariffs, energy accounting, and theft control. However, it creates direct and immediate exposure of private sector participants in distribution to significant market risks, which may or may not have commensurate financial compensation.

N. Namasivayam,
Executive Director,
Pricewaterhouse-Coopers

The electricity bill aims to be a national act. The bill talks about a national tariff policy for the first time. It does not aim to eliminate cross-subsidy, rather it plans to progressively reduce subsidy and eliminate it within a prescribed period specified by the respective regulatory commissions.

The state governments announce subsidy but never give them in time. The bill says that subsidy should be paid in advance, and if the government does not do so, the tariff will go back to what was declared in the order. In other words, it is much more specific and pushes the regulatory commissions in a proper direction.

The bill aims to bring changes in the industry structure so that each player drives the process of change. For the first time, trading has been introduced. Any generating company can sell power to consumers directly or to a licensee. There are provisions for load dispatch to be independent, but it is not mandated by a time-frame. The current state transmission utilities (STUs) and central transmission utilities (CTUs) continue to be load dispatchers, but the bills provides for a framework where if a particular state or the union government decides on independent dispatch, it can happen. It also allows for dedicated transmission lines from captive plants or from generating companies. The state commission can decide the time-frame, manner and process of bringing in open access.

Under the bill, generation has been made free-there is no requirement for a licence to establish a generating company. Only hydel projects would need approval from the Central Electricity Authority (CEA). It also says that a generating company may supply electricity to any licensee or consumer. If a generating company supplies to a licensee, the tariff would be governed by the state commission. But if a generating company supplies directly to a consumer, the state commission has no jurisdiction on the price of energy. However, the state commission will decide the wheeling charges and surcharge for open access.

For captive generation, there is no surcharge. The definition of captive generation has been amended to include an association of persons, cooperatives, etc. As long as you do not call yourself a generating company and instead portray yourself as a group captive company, you do not have to pay a surcharge.

The bill provides for a framework where captive players can come in and reduce the price for industrial consumers. But let’s look at the ground realities. The key issue is that the states have already started tariff rationalization and are losing industrial consumers. For example, in Andhra Pradesh, the HT marginal tariff is Rs.3.28 per unit. So, if anybody wants to supply directly to consumers, he should be able to price it cheaper than that. But if you are a generating company, you have a disadvantage. Then you probably have to pay surcharge, which, at today’s cost, is Rs.1.85 per kWH.

If the states allow 20 per cent of the state generator’s power to be sold in the market, a lot of innovation and choices will be available. They could sell to the industrial consumer at a negotiated price.

When you let the market forces operate, one can plan ahead and structure demand and supply. That will help in reducing prices and bringing more efficiency in the existing infrastructure. We may then have a single national peak shortage instead of little regional peak shortages all over. If we are able to achieve this, our peak shortage at the all-India level will go down by 50 per cent.

The current CTUs and STUs will continue to operate the regional load dispatch center (RLDC), and the state-level load dispatch center (SLDC), unless notified otherwise. But none of them can engage in power trading. Many state-level transmission companies are today involved in trading. Earlier, supply and sale were differentiated. The bill now combines supply and sale into one trading activity.

Today, in Orissa, Gridco is a single buyer. It has to pay the generator even if it does not take all the power. However, now a trading company can be created and all the PPAs assigned to it. Another option is to assign these PPAs directly to the distribution companies, who take the risk. Under the new bill, the distribution companies can trade anywhere. They can sell in other regions. So, their viability is no longer determined by the capacity of a particular region.
Another major point is that the bill differentiates in its approach towards rural areas and urban areas. No licence is required for distribution in the rural areas, except that the authority will decide on the safety standards that need to be followed. In urban areas, generators can be distribution licensees and there can be wires competition. The commission cannot deny a licensee the right to put up a distribution system as long as it is financially viable. The urban market is going to be very competitive. One can make the system profitable by installing modern technology.

Any licensee can come and supply to any other licensee, but the retail tariff would be decided by the commission. The wheeling charges would also be decided by the commission. Then there is a cross-subsidy surcharge. There is also an element of fixed cost to the distribution licensee from whom supply has not been availed. So, unless power is produced very efficiently, it will be difficult to compete with the existing licensees.

The state has to provide a transparent subsidy. However, state finances are in a mess. Many states borrow to pay interest and salaries. Thus, this is a big challenge how to pay subsidies in the transition period. There is an unprecedented agricultural crisis in rural areas with productivity-level investments coming down. So, unless rural investment happens in a much more integrated manner, the pressure for more power from agriculture will increase. This needs to be addressed to move forward in the market system.

In short, for the electricity bill to be implemented effectively, a far more integrated economic approach is needed. We are, I presume, headed in that direction.

Mohit Saraf,
Partner,
Luthra & Luthra Law Offices

I would like to confine my presentation to some crucial legal issues emerging from the bill. One of the prominent features of the bill is that generation has been delicensed. In the 1990s, when private participation was being promoted, over 300 MoUs were signed by prospective IPPs with the SEBs. But very few of these MoUs culminated into operational power plants. Therefore, for delicensing of generation to be effective, appropriate steps would need to be introduced to make generation a viable business opportunity. An important cornerstone for this would be to allow generating companies the freedom to sell power, which, in turn, would depend on “non-discriminatory open access”. In the earlier regime, generating companies were forced to sell electricity to bankrupt SEBs and thus, despite these 300 MoUs very few culminated into generating stations. Delicensing would not on its own encourage investment in generating companies unless it is coupled with a firm commitment of “non-discriminatory open access”.

The bill, for the first time, recognizes the principle of non-discriminatory open access. The Standing Committee of Parliament recommended that open access should be introduced in a time-bound manner. However, the bill leaves the introduction of open access to the discretion of the regulator, but the success of such a progressive idea depends on the maturity of the “regulatory body as an institution”. So, the success of the bill depends on open access, and that of open access on the regulator, and that of the regulator on his ability to take decisions independently.

It would, therefore, be useful to examine the independence of the regulator, especially when the state which appoints the regulator also controls and owns most of the generating, distribution, transmission companies and vertically integrated SEBs. The bill permits members of the regulatory commission to be re-employed by the same state government. It further permits removal of members by the government upon inquiry by a retired judge as opposed to removal by the governor or president, as the case may be, upon inquiry by the high court or Supreme Court. These provisions could have a serious impact on the independence of the regulator, who would ultimately introduce open access.

The whole aim of liberalisation in the electricity sector is to introduce competition and provide choice and not just to privatize the utilities. Privatisation, in fact, is a means to introduce choice and competition and not an end in itself. Introduction of non-discriminatory open access is a tool to being in choice and competition. Though the bill permits open access to distribution companies and to captive power plants, it fails to introduce open access to bulk consumers, thus delaying the introduction of competition.

Therefore, the electricity bill would be able to deliver the desired result either if the independence of the regulator is guaranteed or a time-bound introduction of open access is provided in the bill.

One important point that comes to mind is whether the SEBs would survive the new electricity bill. Sure, the bill introduces and guarantees open access to captive generating companies and relieves such consumers from subsidy burden, which eventually would result in the migration of HT consumers from the SEBs. Such migration would on the one hand improve the competitiveness of Indian industry, but on the other, would make the SEBs more sick and bankrupt. One very positive aspects of the bill is that it provides for second licences in the case of distribution companies. The second licensee in distribution would ensure competition and choice. The bill provides that as long as one meets the criteria set by the union government, once cannot be denied a second licence for distribution. However, the bill somehow misses a second licence for transmission.

As per the standing committee, state laws should not be superseded by the new electricity bill, since electricity is on the concurrent list. But what about uniformity? The bill provides that in case of a conflict between state law and the bill, the bill would override. When you go out and talk to an investor, you do not want to say that I have 26 state laws and therefore, this should be viewed positively.

This is a long-awaited step. The electricity bill is an enabling legislation. Experience from other countries shows that if there is enabling legislation, regulatory regimes do mature. I am hopeful that very soon we can go out and represent that India means business – especially in the power sector.

T.N. Thakur,
Chairman, PTC

Today, while the Power Trading Corporation (PTC) has been doing trading for the last couple of years, it is not trading in the real sense. Because trading is when you have the freedom to buy from wherever you want to buy and the freedom to sell wherever you want to sell, at a negotiated price.

That is not at all possible in the current environment. But the bill does provide for this to happen. When trading does take place, you will not have to worry too much about surpluses in one place and deficits in another. Pricing efficiency will be achieved, as we in PTC have already experienced in the last two years. Costs will come down, PLFs will go up and, of course, there is better utilization of capacity.

Now let’s come to the enablers in this bill. The first enabler is open access. But how will open access really take effect? Can you make use of existing lines for open access or will you have to lay more transmission and distribution lines? There the role of the regulators is most important.

Another enabler is that there is a licence for trading while distribution and generation have been delicensed. A distribution licensee does not require a separate licence for trading. So any distribution licensee can do trading.

Then there is a provision for multiple licensing in the same area. You need not have a multiple network but multiple licences would be there. So this is another enabling provision.

T&D companies can use their assets, such as right of way, to earn additional revenue. That will lead to deductions in transmission and billing charges.

Also, gencos have been allowed to supply power to any licensee without hindrance. Captive generation and supply have been freely permitted. Of course, there is some confusion on the definition of captive generation. You define captive when the power is “primarily” for your own use. How do you define “primarily” – is it 50 per cent, 75 cent?

CTUs and STUs have been barred from trading in power. But what about existing licensees such as the SEBs, which are both STUs and distribution licensees? Are they barred from trading?

Other enablers relate to rural energy systems. You can set up transmission lines and your own generation unit for which you do not require any licence. Personally I feel there will be a good amount of business for private players in the rural areas.

There are possibilities of user associations being formed like those in Bangladesh. Rural cooperatives that are engaged in electricity supply in Bangladesh have entered generation. All this will happen in India thanks to the provisions of this bill.

We visualize that there will be trading at many levels. It can be interstate trading or interregional trading. There will be organizations undertaking localized trading. And, there will be opportunities in franchising. Trading companies can give franchises to small trading companies for local business. There can be more partnerships and joint ventures. Distribution or generating companies will also get into trading.

The new trading players will have to prepare themselves before they enter the sector. Some will fade away, but some will do good business in this sector.

The regulators will need to strike a balance between the SEB’s present financial health, surcharges and some type of subsidy. There are some fears of unnecessary regulatory interference. Though there is so much reliance on the regulators, people are also wary of them.
The way forward is that we have to recognize the potential of the local market, regional markets, and national markets. There will be more of strategic alliances and franchises and there will be comprehensive pricing structures for increased price efficiency.

We in PTC have already introduced different types of tariffs for different times of the day. Power quality is being recognized as a criterion for pricing. That will give an impetus to certain types of generators. Hydro power stations will not use water in their reservoirs during off-peak hours. They may use it only during peak hours and get peaking tariff for it. Baseload can be supplied by thermal generation.

So, I think the bill provides a roadmap and gives an outline of the shape of things to come. It is for us to sit down and think about how to make the best use of it and how to take it further.