2013-09-17_new paradigm.pdf

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New paradigm in power sector....

Where we stand....?

(CPG)

1

A decade has passed after the enactment of Electricity Act 2003 which has paved the way for

evolution of a competitive power sector in India. Now the power sector in India is operating in a

different paradigm compared to the era before the IE Act 2003. Most of the functions entrusted tothe various agencies as envisaged in the Act have been achieved and the sector has become too

complex with multi functional operations at multi dimensions with multi players. This include

Governments, regulatory bodies, statutory agencies, CTU, STUs, Transmission and distribution

licences, generators, traders, power exchanges, Load Dispatch Centres etc. The operations are

governed by the spirit of the Act and relevant regulations framed accordingly. The appropriate

regulatory commissions have become the most important body in deciding the direction, future and

fate of the power sector through proactive interventions with appropriate regulations and orders.

The sector has become too complex and dynamic to operate in the conventional bureaucratic way

and functional approach (in organisational structure, in work execution and in human resorce

management) is the only solution to meet the challenges in the sector. With the target of National

Grid is envisaged by 2014 with inter regional exchange of 37150 MW; we need to have a relook in tothe conventional approach on utilisation of our resources and investment plans.

Let us have a look into the state of power sector in Kerala and try to reinvent our functions

in tune with the new environment. The survival of the organisation and the future of the state

power sector is very much depends on the adoption of the changes that is essential for minimum

functional efficiency of the organisation. Actually we are still bogged down on issues related to

company formation though the real issue is not the company or Pension, but the functional

freedom as envisaged in the electricity act.

A right attitude towards Electricity act 2003 is a minimum requirement to have a balancedview over the issues facing us. We need to know that the Act is evolved out of necessity and the Act

with all the relevant regulations are dynamic. The change is an ongoing continuous process and we

need to keep the pace with the changes to meet the challenges. We need to look forward to the

future and realise that the changes are irreversible and there is no possibility of going back to the

history.

The Regulatory Commission were established to introduce competition, efficiency

and economy in the power sector, safeguard the consumer interest and improve the quality of

supply. This externalised a substantial part of the entire process of regulation of the power sector,

from the government. It has done so with the hope that greater professionalism, transparency ofprocess and procedure and the participation of a larger group of stakeholders in the decision making

process, will result in informed, unbiased, efficient, fair and commercially sound decision making.

The Electricity Act, 2003 has entrusted the regulators with additional responsibilities, inter-alia, of

development of market, grid security etc.

The provisions promoting competition included allowing non-discriminatory open access to

transmission and distribution lines for use by generating companies, trading/distribution licensees

from the very beginning and by consumers in a phased manner (Sections 38,39, 40, 42). Again the

market determined tariff with maximum/minimum thresholds (Sec. 62) and determination of tariff

through competitive bidding (Sec. 63) is provided to promote competition to further levels.

The Electricity Act, 2003 envisages two broad modes of tariff determination- Tariffdetermination by Regulatory Commissions under section 62 (regulated tariff) and Tariff

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Where we stand....?

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determination through competitive bidding process under section 63 (to be adopted by the

Appropriate Commission).

As it was realised that the competitive market in power will evolve gradually. During theintervening period, the regulation of generation tariff will have to be continued on cost of service

approach. Even under this approach the objectives of achieving economic efficiency on the one hand

and encouraging investment on the other hand would remain. Transmission being a natural

monopoly, its tariff will also need to be regulated under a similar principle.

In addition to the above two modes, prices for electricity are also discovered / mutually

agreed in the short term market through bilateral transactions (direct or through traders) or through

power exchange.

There also exists frequency linked price of electricity through UI Mechanism (although theCentral Commission has also conveyed that UI Mechanism was not meant for commercial transactionand that UI was primarily meant for managing the imbalances and ensuring grid discipline) .

Regulatory intervention in the tariff determination under section 63 of the Act and pricediscovery through short term transaction is limited.

The main role of the regulator lies in the tariff determination under section 62. Traditionally,

tariff whether in generation, transmission or distribution is determined by the Regulatory

Commission based on cost plus approach. Section 61 of the Act, however, provides guiding principles

for the Appropriate Commission for specifying tariff regulations which includes inter alia the Multi-

year Tariff principles, rewarding efficiency in performance and the requirement of safeguarding of

consumersinterest and at the same time ensuring recovery of the cost of electricity in reasonable

manner.

The same provision (Section 61) also provides that the principles and methodologies specified

by Central Commission for generation and transmission would be the guiding principles for State

Commissions.In the cost plus approach, the Regulator has to go into the various components constituting

tariff. In thermal generation, cost of fuel is a variable component and all other components such as

cost of servicing the capital (equity and loan), depreciation and O&M are fixed components.

In hydro generation and transmission sector, there is no fuel cost involved. In performance

based regulation, incentive is another component of tariff. The tax liabilities of utility are also to be

accounted for in the tariff structure.

The Point is, the State Regulatory Commission is the apex body in the state to ensure

development of state power sector through implementation of the provision of the IE act, National

Electricity Policy, Plan & Tariff Policy in its true spirit through appropriate regulations and orders.

The IE Act envisaged functional autonomy for various sectors- the generation, transmission,distribution and Load Dispatch Centres, and SERC should ensure the same through framing and

enforcement of appropriate regulation and relevant orders. It is nothing to do with the company

formation....! It means the three profit centres- the Generation, Transmission & Distribution profit

Centres need to have functional freedom and ensure that they comply with relevant provisions of

the IE Act.

The IE Act, National Electricity Policy and Tariff Policy envisaged separate ARR & investment plan for

Distribution, Transmission and SLDC. Non discriminatory Open Access is the foremost responsibility

of the Transmission Licensee and SLDC. The Act prohibits the State transmission

utilities/transmission licensees & SLDCs from engaging in trading in electricity.

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As described in the National electric policy, the spirit of the provisions of the Act is to ensure

independent system operation through NLDC, RLDCs and SLDCs.

As per the national electricity policy;the regulatory commission need to provide facilitative

framework for non-discriminatory open access. This requires load dispatch facilities with state-of-the

art communication and data acquisition capability on a real time basis. National Electric Policy says,

State Commissions must ensure that matching facilities with technology upgrades are provided at

the State level, where necessary and realized not later than June 2006.

As per Para 7.1.7 of Tariff Policy; after coming into effect of the CERC regulation on framework for

the inter-State transmission ,a similar approach should be implemented by SERCs in next two years

for the intra-State transmission, duly considering factors like voltage, distance, direction and

quantum of flow.

As per Para 7.1.8 of Tariff Policy; Metering compatible with the requirements of the proposed

transmission tariff framework should be established on priority basis. The metering should be

compatible with ABT requirements, which would also facilitate implementation of Time of Day (ToD)

tariffs.

As per Para 7.2.2 of Tariff policy; Appropriate Commission may require necessary studies to be

conducted to establish the allowable level of system loss for the network configuration, and the

capital expenditure required to augment the transmission system and reduce system losses. Since

additional flows above a level of line loading leads to significantly higher losses, CTU/STU shouldensure upgrading of transmission systems to avoid the situations of overloading. The Appropriate

Commission should permit adequate capital investments in new assets for upgrading the

transmission system

As per Para 8.0 of Tariff Policy;All power purchase costs need to be considered legitimate unless it

is established that the merit order principle has been violated or power has been purchased at

unreasonable rates.The reduction of Aggregate Technical & Commercial (ATC) losses needs to be

brought about but not by denying revenues required for power purchase for 24 hours supply and

necessary and reasonable O&M and investment for system up gradation. Consumers, particularly

those who are ready to pay a tariff which reflects efficient costs have the right to getuninterrupted 24 hours supply of quality power.

As per Para 8.2.1 of Tariff policy; The State Commissions should ensure compliance of Section 65

of IE Act, which says no direction of the State government on Tariff Subsidy is applicable unless

payment is made in advance, to ensure financial viability of the utilities. Again it mandated enough

working capital duly recognising the transition issues faced by the utilities.

As per Para 8.3.2 of Tariff Policy; by the end of year 2010-2011 SERC should ensure that tariffs

should be within 20 % of the average cost of supply.

The point is when we appreciate KSERCs proactive approach on regulations that concernswith consumer rights, the same approach is required for providing the necessary infrastructure,

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appropriate technology and working environment for achieving the targets. This basic approach

necessary for the healthy development of the state power sector is found missing. Actually the SERC

have been so far consumer/distribution focused and any initiative on application of relevant

technology in generation and transmission is found missing. It is observed that instead of insisting

for implementing the CEA standard, SERC is diluting the relevant CEA standards in favour of the

consumers, without much concern over the consequences. Actually real time energy accounting,

transmission automation and grid visibility are the three areas which require urgent technological

innovation for efficient & economical operation of the power sector. An initiative from the SERC in

right direction shall provide enough motivation for KSEB to move forward with right investment

plans.

The evaluation of performance without appropriate functional autonomy and proper energy

accounting is meaningless. Separate ARR and investment plan for Transmission, Distribution and

SLDC are long pending. Generation Tariff needs to be determined by the SERC based on the guiding

principles. The capital works need to be executed & accounted through a separate mechanism in

each wing, without mixing it up with the O&M works. These are the minimum pre-requisite in

arriving a realistic tariff based on balanced requirements in state electricity sector & actual cost of

supply. For achieving this objective, each profit centre needs to have freedom to decide upon the

resources managed by them, which means functional autonomy.

The present bureaucratic way of handling the functions encourages mediocrity, lack of

accountability and leads to conflict of interests which prevents any meaningful functional freedom.

SLDC and STU are responsible to perform many statutory functions as independent agencies and

should ensure non discriminatory open access to various distribution licensees and eligible

consumers. The transmission need to present their ARR separately based on the energy handled by

the transmission system, the assets and O&M expenses.

The Act prohibits the SLDCs & State transmission utilities/transmission licensees from

engaging in trading in electricity. Now KSEB is utilising SLDC for doing the day ahead trading

operation and the EHT consumers are treated as consumers of the transmission system. This

violation need to be corrected to comply with the provisions of the IE Act. Actually the present

arrangement can lead to the question of compromising the functional autonomy and independency

in many decisions taken by the SLDC and STU. Actually it is the responsibility of the distribution

licensee to estimate and ensure relevant power purchase through proper planning and regulatory

approval. The present mechanism of involving officers from STU and SLDC in power purchase

decisions need to be relooked. Power purchase decision need to the done by the distribution

licensee and Participation of senior officers from the distribution wing need to be ensured in the

power purchase decisions processes in tune with the spirit of the IE Act. Actually it is observed that

power purchase to tune of thousands of millions of rupees per annum is being left to the last minute

decisions of SLDC, violating Section 31 (2) of the IE Act.

Proper energy accounting need to be implemented with proper metering infrastructure

projects as envisaged in the CEA regulation (Installation & operation of Energy meters) and actual

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transmission loss need to be estimated. The present estimation of transmission loss based on load

flow studies are far away from reality. To comply with guidelines of Para: 7.1.7 of tariff policy, SERC

need to implement intra-state transmission tariff based on POC mechanismand interfacing meters

with time synchronisation is a prerequisite for the same.

SLDC need to be ring-fencedas envisaged in the Pradhan Committeereport to ensure

independency of the SLDC functions. According to Section 32 of IE Act, the State Load Despatch

Centre shall be the apex body to ensure integrated operation of the power system in a State.

Hence it is important that SLDC function in a professional way with balanced approach

according to the provisions of IEGC, State Grid Code and relevant regulations. This is

possible only through financial independence. As per Section 32 (3) of IE act, same is

envisaged through collection of levy, fee and charges from the generating companies &

licensees engaged in intra-State transmission of electricity as may be specified by the StateCommission. A separate ARR need to be approved by the SERC for proper accountability

and functional efficiency of the SLDC.

As such KSEB & SERC need to stride a long way to cope up with the new paradigm in the

power sector. The consumer oriented regulations need to be supplemented with appropriate

regulations and actions from the SERC to provide proper infrastructure and functional autonomy for

various functions. Actually SERC need to have functional divisions staffed with competent electrical

engineers who shall work in tune with the corresponding licensees or generators. Similarly KSEB

need separate TRAC wing functional under each functional heads of the transmission, distribution

and Generation wings to make respective functions accountable, efficient and function as a profit

centre in true sense. SERC, State Government and the KSEB Management need to realise that thespirit of electricity reform is not company formatinbut, functional structure, functional autonomy

and functional freedom.

C.P.George,

Dy.CE, CGRF, Ernakulam

2013-09-17_new paradigm.pdf

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