1. NATIONAL CONFERENCE ON “10 YEARS OF THE ELECTRICITY ACT, 2003: A CRITICAL REVIEW” Anish De New Delhi, June 11, 2003 Anish De New Delhi, June 11, 2003

2. A Peek At the Past…. 2

3. 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. 4 Conclusion – Freedom to buy and sell is not adequate. We need….. 1.Investments in network infrastructure 2.Defined rules of energy exchange 3.Accounting and settlement systems 4.A system “whole” for cash 5.Transparent and equitable regulation 6.Institutional capability in operators and regulators Slide from Electricity Act, 2003: An analysis of Open Access and Trading issues, Anish De, June 11, 2003

5. The Fruits of Faith…. 5

6. 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. 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)

8. 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. 8

9. A Vibrant New Competitive World… 9

10. 10 Power Trading & Markets: Unlocking of the unused/economic capacities in the sector Nearly 32% CAGR since formation 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

11. 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. Industrial Consumers – Major States Source: IEX website 11

12. But The Same Bogeyman…. 12

13. 13 Distribution Sector: Slow Improvements  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 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. 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. 15 Obligation to supply & flawed framework for rural electrification 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 level o Lack of robust infrastructure, puts the whole system at risk o New connection primarily to the subsidized BPL customers Progress of electrification under RGGVY

16. 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 1503.06% -3.43%8962.15 West Bengal 1700.93% -1.10%79381.21 Andhra Pradesh 512690300.48%-27.90%20.9%77531.13 Gujarat 36678700.30%-8%7%5301.18 Rajasthan 253764300%-66%36.90%110561 Karnataka 3091400-2.20%-17.60%15%1661250.6 Maharashtra 564283-2.73%-2.98%2.72%146490.13 Assam 22520-3.20% 6%116126-1.67 Orissa 100-4.60% 4.34%148180-0.24 Haryana 19140837-8.91%-47.00%32.00%15268-1.26 Chhattisgarh 110-9.50% 8.64%1010-4.36 Uttarakhand 50-18.50% 15.30%229340-2.44 MP 2046860-20.30%-32.00%24.00%201118-4.79 UP 3693500-34.00%-53.00%34%310413-5.17 - 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

17. 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 Kerala122691303.72%2.95%-3.87%83861.391.67 Himachal51214-0.75%-2.09%2%4612310.10.87 Meghalaya0.81047-6.65%-12.14%13%2951716.210.49 Tripura0.51690-7.33%-19.50%14%2700n.a Punjab29147060-9.90%-41.00%29%75143.960 Tamil Nadu4974701-26.45%-38.80%26%864013.69-1.49 Jharkhand415708-35%-52.00%34%305259n.a-0.64 Bihar449240-36%-97%49%78494n.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. 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 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. 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 Metering23%99% AT&C losses58% 18.80 % Collection Efficiency58%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

20. Monitoring the Monitor…. 20

21. 21 India’s Experience With Regulation in the Past Decade is Very Mixed.... AspectAct sectionCERC Role and statusSERC Role and status Regulate the tariff of generating companies and licensees 79, 86 Well 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 42Not relevant Regulators in several states have actively blocked open access in many states Regulate electricity procurement by distribution licensees 86Not 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, 86Not relevant Regulators in several states have actively blocked open access in many states through use of exorbitantly high charges Facilitate transmission and wheeling of electricity 79,86 Has structured open access regulations that facilitate transactions As above Roles have been carried out wellPartial AchievementPoor Performance * AF Mercados EMI analysis/views.

22. 22 India’s Experience With Regulation in the Past Decade is Very Mixed.... Aspect Act section CERC Role and statusSERC Role and status Specify Grid Code79,86 IEGC 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 margin79,86 Has actively managed the market to prevent abuse Not a major role Develop power markets66 Has actively promoted markets through trading and Px. Has also promoted renewable energy markets Not a major role Prevent market domination60 Formulated regulations that are presently under finalisation Not a major role Promote co-generation and generation of electricity from renewable sources. Fix Renewable Purchase Obligation 86Not relevant Poorly executed. In most states with resource limitations the RPO standards are below desired levels and/or enforcement is poor. Roles have been carried out wellPartial AchievementPoor Performance * AF Mercados EMI analysis/views.

23. What is In Store for the Consumer? 23

24. 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 Marginal generation costs (Rs./kwh) Source: CEA Power Supply Position

25. 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. 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. 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

28. Thank You