NATIONAL CONFERENCE ON

“10 YEARS OF THE ELECTRICITY ACT, 2003: A CRITICAL REVIEW”

Anish DeNew Delhi, June 11, 2003

A Peek At the Past….

2

3

Summary of fundamental changes brought about by the new law Freedom to procure Freedom to sell Economics in preference of

command and control structure

Slide from Electricity Act, 2003: An analysis of Open Access and Trading issues, Anish De, June 11, 2003

4

Conclusion – Freedom to buy and sell is not adequate. We need….. 1. Investments in network

infrastructure 2. Defined rules of energy exchange3. Accounting and settlement

systems4. A system “whole” for cash5. Transparent and equitable

regulation6. Institutional capability in operators

and regulators

Slide from Electricity Act, 2003: An analysis of Open Access and Trading issues, Anish De, June 11, 2003

The Fruits of Faith….

5

6

Capacity addition driven by policy reforms encouraging private sector

Capacity in excess of 75 GW added in last 5 years of which 42 GW under the competitive bidding

Increase in market share of private sector from 17 GW in 2007 to 62 GW in 2012-13

Capacity addition through RE gaining momentum, with 14 GW added in last five years.

Despite positive developments, challenges still remain…

• Domestic Fuel shortage & expensive imported coal resulting in stranded capacity• Poor management of peak load requirement still remain a cause for concern• Slow implementation of projects, delay in environment clearances or land acquisition

Source: CEA

7

Transmission System evolved from regional boundaries to national grid Improved operations backed by

institutional frameworks and standardized grid operations

Adoption of higher voltage levels up to 1200 kV, construction of HVAC & HVDC systems

SR is expected to be integrated with the NEW Grid, forming the National Grid, with more than 230 GW of installed capacity

Private sector participation encouraged IPTC and JVC model

Source: AF- Mercados EMI Analysis

However, failure of defence mechanisms such as load shedding schemes through under frequency relays, rate of change of frequency relays & islanding schemes in the NR and ER were observed (July 2012)

Volumes Lost due to Congestion – Historical Trend

- Volumes cleared after price matching are presently being lost on the exchange due to congestion in the transmission network

- In the last 6 months (Oct, 2012 – March, 2013), the average un-cleared volume was 2.7 BUs which is 21.5% of the total volumes cleared on the exchange .

Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

2008 2009 2010 2011 2012 2013

-

100

200

300

400

500

600

700

800

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Uncleared Volumes on IEX

Volumes Lost due to Congestion Volumes lost as a percentage of Constrained Volumes

MUs

Perc

enta

ge

8

A Vibrant New Competitive World…

9

10

Power Trading & Markets: Unlocking of the unused/economic capacities in the sector

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13*

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

2.16% 2.49% 2.41%3.15%

3.57%

5.25%

6.73%

7.88% 8.28%

Nearly 32% CAGR

since fo

rmatio

n of

Px

Electricity Transacted on OTC and Power Exchange in Total Electricity Generation

Power trading accounts ~9% of the total net generation

Optimum utilization of the network & efficiency gains through increased system strengthening investments

Sale of surplus captive capacity to deficit third party

Power traded via Day Ahead Market accounts to 97% of the total volumes

However, challenges do exist

• Growth of the market is deterred by poor transmission system and congestion• Improved transmission system needs to be adopted to reduce the loss of power

Source: CERC Monthly Market Monitoring Reports

Price of Short-term transactions of Electricity during 2009-13

* Data for 2012-13 available for 11 months, has been pro-rated for 12 months

• Most of the consumers are located in Tamil Nadu, Punjab, Rajasthan, Haryana, and Madhya Pradesh. • During the year 2012-13, Andhra Pradesh experience its worst ever power crisis due to shortage in gas and poor rainfall. The Industrial Consumers had to choose between either 3 continuous days power cut in a week or 12 continuous days power cut in a month. It is only post this that the Discom has granted Open Access to its Industrial Consumers. The consumption of the State has increased significantly over the earlier years.

Tamil N

adu

Punjab

Rajas

than

Andh

ra Pra

desh

Haryan

aGuja

rat

Karna

taka

Chha

ttisga

rh

Madhy

a Prad

esh

Uttarak

hand

Mahara

shtra

Aruna

chal P

radesh

Orissa

MeSEB DVC Goa J&K

West Ben

gal0

100200300400500600

482

317

10348 44 43 45 30 16 12 8 4 4 3 1 1 1 1

State-wise Number of Industrial Consumer at IEX in March 2012

No. of Open Access Consumer in March 2012

Industrial Consumers – Major States

Source: IEX website

11

But The Same Bogeyman….

12

13

Distribution Sector: Slow Improvements

Post Electricity ActPre Electricity Act

30.93%

32.86%33.98%

32.54%

32.53%

31.25%

30.42%

28.65%

27.20%

25.47%

25.39%

23.97%

22.39%

0%5%

10%15%20%25%30%35%40%

Perc

enta

ge

Policy reforms undertaken to strengthen the distribution sector

• Privatization• Franchisee• R-APDRP• Viability Gap Funding, now being

tested• Financial Restructuring Plan

R-APDRP has had reasonable impact in reducing T&D losses, however the progress has been slow

Directed by the APTEL, over the past 24 months, SERCs have regularly revised the tariffs

2007-08 2008-09 2009-10 2010-11 (RE)

2011-12 (AP)

0.001.002.003.004.005.006.00

4.044.6 4.76 4.84 4.87

3.06 3.26 3.33 3.57 3.80

0.981.34 1.43 1.27 1.07

Unit Cost Average Tariff per Unit Gap (per unit)Rs

./kW

h

Source: CEA

Source: Planning Commission Annual Report 2011-12

Trend in T&D losses

Average Gap (Rs./kWh)

Despite reforms the challenges remain

• T&D losses remain unacceptably high• The tariff revisions has not been adequate to recover increasing costs. • Unsustainable level of borrowings of utilities pose a serious threat to the banking sector

14

Unbundling of the utilities: Not able to achieve the set targets Process of unbundling was

incorporated to ensure separate companies for G, T, D

Process of unbundling began in 1995, with unbundling of Orissa SEB

Unbundling has been adopted by almost all state utilities*; although power departments are yet to unbundle their operations

*JSEB and KSEB are the only two utilities to remain bundled.

Has led to: Improved Transparency and

Accountability Increased private sector

participation Significant efficiency

improvement in generation

and transmission

Key Challenges being faced:

• Lack of coordination among unbundled utilities• Inefficiency still pertinent in the utility operations • Bureaucracy still persistent in the un-bundled set up • Utilities unable to in-corporate the corporatized structure as per the Companies Act, 1956

15

Obligation to supply & flawed framework for rural electrification

2005 2006 2007 2008 2009 2010 201130%

35%

40%

45%

50%

55%

60%

% of RHH electrified

% o

f RHH

ele

ctrifi

ed

Source: Rajiv Gandhi Rural Electrification Program Urgent Need for Mid-course Correction. Prayas Energy Group, June’11

National Electricity Policy specified the goals with respect to access & supply Several policies & programs introduced

to improve access and service quality

RGGVY India’s flagship policy to develop rural electrification Aim was to provide electricity to 23.4

million BPL households by 2009 (@ Rs 16, 000 cr)

Challenges faced by obligation to supply & RGGVY:

• Obligation to supply interpreted as obligation to connect only, while ignoring quality of supply

• RGGVY as a program has faced numerous criticism:o Exceeding initial cost estimate by 225%o Failure of franchisee models at rural levelo Lack of robust infrastructure, puts the whole system at risko New connection primarily to the subsidized BPL customers

Progress of electrification under RGGVY

Financial Health of Unbundled Utilities - Discoms

States

Energy Handled

on average -

BU

Subsidy Aggregate, 2005-2011 (in Rs. Mn.)

Net Profit Margin

Net Profit Margin

(w/o subsidy)

(ACS-ARR w/o subsidy)/ACS

A ‘-ve’ value means profits

Debtor Days

Creditor Days

Interest Coverage

Ratio

Delhi 15 0 3.06% 3.06% -3.43% 89 6 2.15West Bengal 17 0 0.93% 0.93% -1.10% 79 38 1.21Andhra Pradesh 51 269030 0.48% -27.90% 20.9% 77 53 1.13Gujarat 36 67870 0.30% -8% 7% 53 0 1.18Rajasthan 25 376430 0% -66% 36.90% 110 56 1Karnataka 30 91400 -2.20% -17.60% 15% 166 125 0.6Maharashtra 56 4283 -2.73% -2.98% 2.72% 146 49 0.13Assam 2 2520 -3.20% -3.20% 6% 116 126 -1.67Orissa 10 0 -4.60% -4.60% 4.34% 148 180 -0.24Haryana 19 140837 -8.91% -47.00% 32.00% 152 68 -1.26Chhattisgarh 11 0 -9.50% -9.50% 8.64% 101 0 -4.36

Uttarakhand 5 0 -18.50% -18.50% 15.30% 229 340 -2.44

MP 20 46860 -20.30% -32.00% 24.00% 201 118 -4.79

UP 36 93500 -34.00% -53.00% 34% 310 413 -5.17

- Even though Gujarat and Maharashtra discoms are in losses, the level of Revenue Gap is still at a very manageable level. Also, Gujarat’s operating earnings are enough to cover its interest expenses.

- UP and Rajasthan are the worst performers. In both the states’ discoms, the costs are greater than 150% of the revenues.

- In both AP and Haryana, a huge amount of subsidies is being provided to cover as much of the Revenue Gap as possible.

Unbundled Utilities - Six Year Averages (2005-11) - Ranked on basis of Net Profit Margin

Source: PFC, AF Mercados EMI Analysis

Worst Performer Bad Performer Best Performer Second Best Performer

ACS – Average Cost of Supply

ARR – Average Revenue Realized 16

Financial Health of Bundled Utilities

States Output Units - BU

Subsidy Aggregate, 2005-2010 (in Rs. Mn.)

Net Profit

Margin

Net Profit

Margin (w/o

subsidy)

(ACS-ARR w/o

subsidy)/ ACS

A ‘-ve’ value means profits

Debtor Days

Creditor Days

Debt-Equity Ratio

Interest Coverage

Ratio

Kerala 12 269130 3.72% 2.95% -3.87% 83 86 1.39 1.67Himachal 5 1214 -0.75% -2.09% 2% 46 123 10.1 0.87Meghalaya 0.8 1047 -6.65% -12.14% 13% 295 171 6.21 0.49Tripura 0.5 1690 -7.33% -19.50% 14% 27 0 0 n.aPunjab 29 147060 -9.90% -41.00% 29% 75 14 3.96 0Tamil Nadu 49 74701 -26.45% -38.80% 26% 86 40 13.69 -1.49Jharkhand 4 15708 -35% -52.00% 34% 305 259 n.a -0.64Bihar 4 49240 -36% -97% 49% 784 94 n.a -0.05

- Out of the bundled utilities, Kerala is one of the rare states with a positive profit margin. Most of the bundled utilities are suffering heavy losses.

- Bihar and Jharkhand have performed very poorly in the last five years. In fact, Bihar has losses that are almost equal to its revenue. Also, the BSEB’s debtor days are more than 2 years.

- In spite of reporting low T&D loss figures, Tamil Nadu has huge negative margin and a significant financial Gap.

Bundled Utilities - Six Year Averages (2005-11) - Ranked on basis of Net Profit Margin

Source: PFC, AF Mercados EMI Analysis

Worst Performer

Bad Performer

Best Performer

Second Best Performer

17

18

Privatization and PPP- A tepid attempts

Orissa was the first state to implement privatization of its discoms

Have faced several issues in eliminating the inefficiencies

Delhi was the second state to privatize its discoms

Delhi’s discoms were able to improve the efficiency on the base line data

However, deficits in regulation persist

0%

10%

20%

30%

40%

50%

60%

NDPL BRPL BYPL

Baseline AT&C loss Current AT&C loss

0%

10%

20%

30%

40%

50%

60%

NDPL BRPL BYPL

Baseline T&D loss Current T&D loss

0%1%2%3%4%5%6%7%8%9%

NDPL BRPL BYPL

Baseline transformer Failure rate

Current transformer failure rate

0%

20%

40%

60%

80%

100%

120%

140%

NDPL BRPL BYPL

Baseline collection efficiency Current collection efficiency

Comparison of efficiency pre and post privatization: Delhi- 2008-09

Challenges faced by Privatization model:

• Orissa’s privatization failed due to lack state Govt.’s commitment and lack of proper baseline data collection

• Delhi’s model faced issues related to deficits in regulations

19

Privatization and PPP- A tepid attempts (contd...) Second set of privatization model

implemented was the franchisee model First established in 2007, in Bhiwandi has

been able to improve efficiencies significantly

However, model adoption by other states has been slow

The Act allowed multiple distribution licensees to operate in a given area, with a rational to eradicate the monopoly of the licensees

Has faced several issues, however the provision itself is unique and makes consumer the decision maker

Parameter At the time of takeover

2010-11

Distribution Transformer Failure Rate

40% 2.80%

Load Shedding (Hours)

10-12 <3

Accurate Metering 23% 99%

AT&C losses 58%18.80

%Collection Efficiency 58% 99%Source: Torrent Power Presentation

Challenges faced by Franchisee and Multiple Licensee model:

• Franchisee model has been tried in other parts of the country, but the Bhiwandi’s results haven’t been replicated

• Multiple licensees is not feasible on a large scale without serious loss of efficiency. • Multiple licensee face issues related to tariff determination and consumer loss.

Key Improvement in Bhiwandi Circle

Monitoring the Monitor….

20

21

India’s Experience With Regulation in the Past Decade is Very Mixed....

Aspect Act section CERC Role and status SERC Role and status

Regulate the tariff of generating companies and licensees

79, 86Well set regulations

following Multi-year tariff (MYT) structure as

prescribed in the Act

Relatively weak regulations (typically annual tariff review structures, although MYT is now more prevalent)

Introduce distribution open access in such phases

42 Not relevantRegulators in several states have actively blocked open access in many states

Regulate electricity procurement by distribution licensees

86 Not relevant

In most states the utilities actual cost has been poorly estimated due to weak regulatory processes. Cost pass through mechanisms inadequately established

Determine wheeling charges, cross-subsidy surcharge and additional charges

42, 79, 86 Not relevantRegulators in several states have actively blocked open access in many states through use of exorbitantly high charges

Facilitate transmission and wheeling of electricity

79,86Has structured open

access regulations that facilitate transactions

As above

Roles have been carried out well Partial Achievement Poor Performance* AF Mercados EMI analysis/views.

22

India’s Experience With Regulation in the Past Decade is Very Mixed....

Aspect Act section CERC Role and status SERC Role and status

Specify Grid Code 79,86IEGC developed an revised regularly depending on emergent conditions

Weak state grid codes – major hindrance to open access and renewables

Specify and enforce the standards with respect to quality of supply

86 Even where established the standards are rarely enforced

Fix the trading margin 79,86 Has actively managed the market to prevent abuse Not a major role

Develop power markets 66Has actively promoted markets through trading and Px. Has also promoted renewable energy markets

Not a major role

Prevent market domination 60Formulated regulations that are presently under finalisation

Not a major role

Promote co-generation and generation of electricity from renewable sources. Fix Renewable Purchase Obligation

86 Not relevantPoorly executed. In most states with resource limitations the RPO standards are below desired levels and/or enforcement is poor.

Roles have been carried out well Partial Achievement Poor Performance

* AF Mercados EMI analysis/views.

What is In Store for the Consumer?

23

• Even with large capacity addition, peak deficits persist

• Given the baseload dominance in the capacity mix , meeting peak demand (and maintaining spinning reserves) would be a very expensive exercise where large and expensive generators would operate at part capacity

• The mix can be corrected through altering the capacity mix and/or markets

Will The Indian Customer Ever Have Reliable Electricity?

Source: AF Mercados EMI Analysis

Increase in prices

Increase in quantity supplied

24

Mar

gina

l gen

erat

ion

cost

s (R

s./kw

h)

-11.37

-1.47

-20.39

-7.45

-9.66

-25.00

-20.00

-15.00

-10.00

-5.00

0.0005,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

Northern Western Southern Eastern North Eastern

Defic

it -%

MW

Peak Deficit - 2012-13

Peak Demand (MW) Peak Met (MW) Deficit % Source: CEA Power Supply Position

25

Open Access

Provision enables consumer to chose an alternate supplier

Mandated to counter the monopolistic practices of distribution licensee

Aims to improve efficiency of operation by introducing competition

Operated at whole sale and retail market level

Challenges faced in Open Access and Retail Choice & Competition

• Resistance from licensee; in fear of loss of industrial consumers

• Unpredictability of charges based on region, e.g. West Bengal, Tamil Nadu and Punjab have high cross subsidy surcharge.

• Regulatory Gaps, no mechanism to calculate stand-by & additional charges

• Inadequate transmission facility , esp. in the SR is a bottleneck

• Retail Supply of electricity is still under distribution licensee

The buyer can procure power from either generator, discom or the trader

Grants choice and access for the consumer

Retail supply can provide tremendous cost efficiency, cost and service related gains

Retail Choice & Competition

Competition in Wholesale & Retail Markets

26

Action Plan for Short, Medium and Long Term

Strengthening of Governance

Utility Reforms

Loss Reduction and Efficiency improvement measures to be strengthened

DSM and energy efficiency at customer end to be encouraged

Tariff Revisions to be regular and should not mask inefficiencies

Rationalization of subsidies and alternate model for subsidy payment should be considered

Regulatory Independence: Proactive role in implementing change in provisions relating to Open Access, MYT and SOPs

Assessment of regulatory performance and ensuring accountability

Market Reforms

Open Access: Measures to rationalize charges and cross subsidy, augmentation of infrastructure, creation of awareness

Preventing misuse of legal safeguards such as Sec 11

Competition in Retail Supply will require legislative changes

Creating deeper competitive markets

27

Action Plan for Short, Medium and Long Term (contd…)

Building Human Capital

Expanse and complexity of the sector requires deep skills on a large scale, perhaps like no other sector

Development large scale consumer awareness is also a requisite for holistic sector development

Strengthening System & Processes

Customer Service Orientation

Efficient Power Procurement Practices and inventory planning

IT & C contributing to better network data generation, management and control systems

Monitoring & Evaluation: Regular audits by third party agencies and reviews

• The Electricity Act, 2003 has created a very strong and enabling framework for sector development

• Regulations have performed admirably at central level, however the deficit at state level are stark

• Measures needed that make regulators more independent, competent and accountable

Thank You