ROLE OF REGULATORS FOR ENERGY SCENARIO by Vijoy Kumar Chairman, UPERC

DRIVING FACTORS FOR THE REFORMS The demand for primary energy is increasing in the last one decade. This trend will continue. The consumption of primary energy is increasing around 3.76% at annual compound rate. Coal constitutes 55% and hydro electric at 5.20%. Share of natural gas will increase from the current level of approx 8% with new oil discoveries and better prospect of LNG imports. Existing shortages are high both in overall and peak time requirements for the economy. During total shortage was 7.86% which translates into 39,816 million units. Peak demand shortages of 13% translates into 10,157 MW. The bottom line is that with GDP target of 7% to 8%, the time for action is now.

FINANCIAL STABILITY Improving financial health of SEBs is crucial. Losses amounting to Rs. 33,000/- crore which is 1.5% of GDP. Outstanding from the SEBs to PSUs are approx Rs. 50,000/- crore. Without improving revenues chain fresh investments are unlikely. Measures taken by the Ministry of Power for bringing financial restructuring of the outstanding. Strategy for improvement of revenue stream through APDRP Scheme. Release of funds benchmarked with targets for efficiency improvements.

LACK OF REGULATION IN RELATED SECTORS – COAL & GAS In the total energy use, coal constitutes significant percentage. 60% (of power generating capacity), 62,631 MW is coal based. More than 50% of coal carried to generating stations by Railways. The cost of coal and freight effect the delivered fuel cost at the generating plant. Inadequate reforms in the coal sector initiated as early as made no impact on prices and inefficiencies. Monopoly character in coal and railways lead to inefficient pricing and make cost of generation high. The same position of monopoly in gas deprives the generating plant the price advantage from competition. Regulator and competition are essential for coal and gas to maximize benefits of sector reforms.

ENABLING ENTRY OF NEW PLAYERS The additional generation capacity is aimed at setting up new thermal and hydro electric generation projects. The new Act introduces liberal provisions to enable investors. The provisions include: a)De-licensing of generation, b)Stand alone systems for generation and distribution in rural and remote areas, c)Open access in Transmission and Distribution in non discriminatory manner, d)Trading of Electricity across the country. e)Generating companies have option for taking up distribution through a license. f)Most favored treatment for own use and supply and captive power.

FUNCTIONS OF THE CERC Functions of the CERC include: – Advise the Central Government on the formulation of National Electricity Policy and Tariff Policy. – Regulate the tariff of Central Government owned or controlled Generating Companies. – Regulate inter-state transmission including tariffs of transmission utilities. – Regulate inter-state sale of power and fix trading margin in the inter-state trading of electricity. – Enforce National Grid standards. – Adjudicate disputes or refer any dispute for arbitration in regard to certain matters between generating & transmitting companies. – To advise Central Government on promotion of competition, investments in electricity industry, etc.

FUNCTIONS OF THE SERCs Main functions of the SERCs include: Determination of tariffs for electricity. Regulate power purchase and procurement process of Transmission utilities. Facilitate wheeling of electricity, bulk, wholesale or retail and trading of power. Promote co-generation and renewable sources of energy and fix percentage of such energy in the total consumption. Promote open access to generation companies and CPPs. Issue licenses for transmission, distribution and electricity traders. Specify state grid code quality of supply continuity and reliability.

CRUCIAL ROLE OF REGULATION The Act underpins the success of new objectives on the regulatory bodies. Setting up of the regulatory bodies made compulsory. Uniformity in the structure and functioning of the regulatory bodies. The Act defines responsibility between the CERC and SERCs. Financial autonomy and organizational autonomy limited. Policy directions made binding on the regulatory bodies. Regulatory bodies to be guided by objectives of the National Electricity and National Tariff Policy. Transparency in functioning and decision making. New Appellate Tribunal setup for speedy disposal of review / appeal of the decision of regulators.

NEW DIMENSIONS FOR REGULATORY PROCESS Within one year of the commencement of EA 2003 license mandatory for utilities. SERCs mandated to consider more than one distribution license within the area of supply. SERCs permission not necessary to generate and distribute electricity in notified rural areas. SERCs to allow open access at the consumer level. SERCs to decide wheeling charges and surcharge for open access. SERCs to promote power trading by fixing trading margins.

CREATING REGULATORY STRUCTURE The important areas that require new rules and procedures by the regulators:- Approach to tariff principles and tariffs design for:  Generation  Transmission including inter-state transmission  Distribution and retail Sale by generating companies:  Allowed to maintain and operate “Dedicated transmission lines”.  Allowed direct sale to Distributing company in addition to Transmission Company. contd…..

CREATING REGULATORY STRUCTURE …….contd. Open access allowed:-  For T&D companies  Bulk or wholesale consumers  For parallel transmission and distribution system.  For the power trading companies. Business opportunities in new areas such as:-  SBM for power procurement dropped  Supply of power  Trading across country and regions  Distribution and retail competition  Distribution generation in rural / remote areas

CREATING REGULATORY STRUCTURES / RULES …….Contd. o Approach to Tariff Design  The new EA 2003 has removed Schedule VI as the guiding principle in determining Annual Revenue Receipts / Requirements (ARR).  SERCs to progressively reduce subsidy and specify time frame. The timeframe may differ from state to state.  Subsidy risk has been brought by mandating its payment in advance by State Governments.  Recognizes cost of supply for customers as basis for tariffs.  Need for review of existing tariff regime and replace with workable solutions.  Introduces incentive based / multi year tariff model. Contd……

CREATING REGULATORY STRUCTURES / RULES …….Contd. o Prescribing formats and norms o For competitive bidding for tariffs. o For determining costs for generation, transmission and distribution business. o For detailed terms and conditions for license to companies:-  Allowed to maintain and operate “Dedicated transmission lines”.  Allows direct sale to Distributing company in addition to Transmission Company. Contd…….

CREATING REGULATORY STRUCTURES / RULES …….Contd. Rules for non-discriminatory Open Access o Open access:- o For T&D companies. o Bulk of wholesale consumers. o Captive Power Plants allowed:- o Carrying of power to destination of own use subject to availability. o Operations and balancing of system management by System Operators(SO). o Methodology for determining “surcharge” for Open Access as priority. Contd…….

EVOLVING COMMON APPROACH The experience of five years of regulation in India and international experience may help in finding overall consistent approach to:-  Investors expect certainty in relation to investments (ROE / ROR) and costs.  Design for incentives and control period for tariff design through consultation with stakeholders.  Overcoming constraints of information in formulating Incentive Based Regulation or Performance Based Regulation.  Common criteria for determining ATC at the start for tariff design and control period.  Common criteria for defining controllable costs and uncontrollable costs for tariff purpose.

SOME COMMON OBJECTIVES Performance benchmarks in the control period. Issues in “parallel networks” in same service area eg. “chery picking”. Scope for tariff increases and tariff rationalization limited as per the present experience of tariff increases. Time frame for road map for restructuring and introducing distribution privatization. Level of Government commitment and financial support crucial in the transition period. Enforcement machinery for control of thefts.

SOME KEY ISSUES Uniformity in Regulation desirable on following issues to attract best and competent investors:- – Provision for bad and doubtful debts. – Return for investors. – Norms for Collection Efficiency. – Norms for depreciation and taxes in the new tariff principles. – Treatment of Revenue Gap and Cash loss. – Time frame for phasing out of subsidies. – Consumer category class for open access and its phasing.

ROLE OF GOVERMENT The National Tariff Policy will have major impact on the role and functioning of regulators. In designing NTP, the crucial elements in tariff determination such as ROE / ROR, depreciation, treatment of taxes, normative efficiency principles need to be well defined. For investors perspective there is need for a uniform approach to these crucial elements. Government commitment for financial support in the transition period is critical and assured. Support to managements in effective governance of reduce thefts which constitute single most component of losses.

RESOURCES TO MEET NEW TASKS Regulatory responsibilities have been increased. The new timeframe for mandatory tasks require additional resources. Present experience of getting experience and trained manpower not encouraging. Specialized agency services required to undertake regulations / guidelines for facilitating open access, power procurement and trading. Non discriminatory open access must precede expert assessment of capability and constraints.

CONCLUSION Credible environment for business opportunities under the framework of new act. Remove regulatory uncertainty in coal and gas sector. Huge work for the Regulatory Bodies both at the central and state level. There are important common tasks on which new work has to be done. Reducing uncertainty for investors by having some common ground on crucial elements of costs and expectations of rate of return. The feel good effect of the new act will not last long. Action early on for deliverable is necessary.

THANK YOU