CHITALE & CHITALE PARTNERS 1 POLICY FRAMEWORK FOR TRANSMISSION & DISTRIBUTION IN POWER SECTOR ADVOCATES & LEGAL CONSULTANTS ONGCONGC

CHITALE & CHITALE PARTNERS 2 By K.A. Sivaram, Partner CHITALE & CHITALE PARTNERS ADVOCATES & LEGAL CONSULTANTS

CHITALE & CHITALE PARTNERS 3 Transmission and Distribution of Power in India This presentation covers an overview of the law and policies of the Government of India for transmission and distribution of power, comprised in : The Electricity Act, 2003 The National Tariff Policy, 2006 Guidelines on Tariff Determination by Competitive Bidding Foreign Direct Investment Policy

CHITALE & CHITALE PARTNERS 4 Policy Directives Applicable The Electricity Act, 2003 The Electricity Act, 2003 (“Electricity Act”) lays down the law relating to generation, transmission, distribution, trading and use of electricity. It provides for liberal and progressive framework for power sector development and facilitation of investment by creating competitive environment, and reforming the distribution segment of power industry. The Electricity Act has several enabling provisions, with a view to promote accelerated development of the power sector. The Electricity Act: Removes / reduces entry barriers Mandates open access in transmission Permits multiple licensees in distribution Constitutes Central and State Regulatory Commissions - to develop market (including trading)

CHITALE & CHITALE PARTNERS 5 Policy Directives Applicable Central government to prepare National Electricity Policy and Tariff Policy. (Section 3-6) Generation is delicensed. Captive generation is freely permitted. Hydro projects need approval of State Government and central Electricity Authority (CEA) (Section 7-11) The Central Electricity Regulatory Commission (“CERC”) / State Electricity Regulatory Commissions (“SERC”) are the licensing authorities for transmission, distribution and trading of electricity. The CERC / SERC have the power to grant, revoke, amend or suspend the licence granted. (Sections ) The CERC / SERC may specify any general or specific conditions under the licence. (Section 16) Central Transmission Utilities (CTUs) / State Transmission Utilities (STUs) as well as Government companies are deemed to be the transmission licensees. (Section 14).

CHITALE & CHITALE PARTNERS 6 The Electricity Act, 2003 on Transmission and Distribution Transmission There would be Transmission Utilities at the Centre and in the States to undertake planning and development of transmission system. (Sections 38, 39) Load despatch to be in the hands of a government company / organization. Flexibility regarding keeping Transmission Utility and Load Despatch Centre together or separating them. Load Despatch function is critical for grid stability and neutrality as compared to generation and distribution. (Sections 26, 27, 28, 31, 32) Transmission companies to be licensed by the Appropriate Commission after giving due consideration to the views of the Transmission Utility. (Section 15(5)(b)) The National Load Despacth Centre (NLDC) and Regional Load Dispatch Centres (RLDCs) / Transmission Utilities / Transmission Licensees do not trade in power. The RLDCs ensure integrated operation of the power system and optimum scheduling and despatch of electricity. (Sections 26, 27, 31, 32, 38, 39, 41) Non-discriminatory open access to the transmission system to be provided to the distribution licensees, generating companies. Provision for progressive reduction of surcharge and cross subsidies. (Sections 38-40) This would generate competitive pressures and lead to gradual cost reduction.

CHITALE & CHITALE PARTNERS 7 The Electricity Act, 2003 on Transmission and Distribution contd.. Distribution Distribution to be licensed by SERCs. Distribution Licensees are also free to take up generation. Also generating companies are free to take up distribution. This would facilitate private sector participation. (Sections 12-14) Retail tariff is to be determined by the CERC / SERC. (Section 62) Metering is mandatory. (Section 55) CERC / SERC have been given powers to suspend/revoke licence of the distribution/transmission companies. (Sections 19, 24) Open access in distribution to be allowed by SERC in phases. (Section 42) In addition to the wheeling charges, provision for surcharge if open access is allowed before elimination of cross subsidies, to take care of current level of cross subsidy. Licensee’s obligation to supply. (Section 42). Provision relating to safety and standards of performance (Section 53-57)

CHITALE & CHITALE PARTNERS 8 Tariff determination by competitive bidding Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees (often referred to as the Procurers) have been framed by the Central Government and the same are to be adopted by CERC / SERC as provided by Section 63 of the Electricity Act. The specific objectives of these guidelines are as follows: Promote competitive procurement of electricity by distribution licensees Facilitate transparency and fairness in procurement processes; Facilitate reduction of information asymmetries for various bidders; Protect consumer interests by facilitating competitive conditions in procurement of electricity; Enhance standardization and reduce ambiguity and hence time for materialization of projects; Provide flexibility to suppliers on internal operations while ensuring certainty on availability of power and tariffs for buyers.

CHITALE & CHITALE PARTNERS 9 The National Tariff Policy, 2006 Transmission: Implementation of suitable transmission tariff framework for all inter-State transmission, including transmission of electricity across the territory of an intervening State as well as conveyance within the State which is incidental to such inter-state transmission. National tariff framework implemented should be sensitive to distance, direction and related to quantum of power flow. This would be developed by CERC taking into consideration the advice of the Central Electricity Authority (CEA). Transmission charges in proportion to the respective utilization of the transmission system. Prior agreement with the beneficiaries would not be a pre-condition for network expansion. Transactions should be charged on the basis of average losses arrived at after appropriately considering the distance and directional sensitivity, as applicable to relevant voltage level, on the transmission system. Financial incentives and disincentives should be implemented for the CTUs and the STUs around the key performance indicators (KPI) for these organizations.

CHITALE & CHITALE PARTNERS 10 The National Tariff Policy, 2006 contd… Distribution: Implementation of Multi-Year Tariff (MYT) framework to minimize risks for utilities and consumers, promote efficiency and appropriate reduction of system losses and attract investments. Introduction of mechanisms for sharing of excess profits and losses with the consumers as part of the overall MYT framework. Incumbent licensees should have the option of filing for separate revenue requirements and tariffs for an area where the State Commission has issued multiple distribution licences, pursuant to the provisions of Section 14 of the Act read with the Policy. CERC / SERCs should initiate tariff determination and regulatory scrutiny on a suo moto basis in case the licensee does not initiate filings in time. The Policy also lays down methodology for tariff determination. The Policy lays down that the amount of cross-subsidy surcharge and the additional surcharge to be levied from consumers who are permitted open access should not be so onerous that it eliminates competition which is intended to be fostered in generation and supply of power directly to the consumers through open access. The Electricity Act provides that the Appropriate Commission may fix the trading margin, if considered necessary. Though there is a need to promote trading in electricity for making the markets competitive, the Appropriate Commission should monitor the trading transactions continuously and ensure that the electricity traders do not indulge in profiteering in situation of power shortages. Fixing of trading margin should be resorted to for achieving this objective.

CHITALE & CHITALE PARTNERS 11 Foreign Direct Investment Policy In accordance with the Consolidated FDI Policy (effective from October 1, 2010), 100% FDI is allowed under the automatic route. For transmission of electric energy produced in hydro-electric, coal/lignite based thermal, oil based thermal and gas based thermal power plants. Also, the same is applicable for distribution of electric energy to households, industrial, commercial and other users. However FDI is not allowed when electricity is produced in atomic power plant / atomic energy since private investment in this sector/activity is prohibited and is reserved for public sector.

CHITALE & CHITALE PARTNERS 12 Thank You CHITALE & CHITALE PARTNERS C-83, Neeti Bagh, New Delhi Phone: /66/67 Facsimile: