ptchronicle-july2012.pdf

JULY 2012 | PTC INDIA LIMITED | 1

July 2012Journal from PTC India Limited

NOT FOR SALE

ChannelisingDistribution

2 | PTC CHRONICLE | JULY 2012


Editorial Team:

Lavjit Singh, Nirmita Singh, Anupum Vadehra, Varun Sethi, S C Shukla

Editorial Address:

PTC India Ltd., 2nd Floor, NBCC Tower, 15, Bhikaji Cama Place, New Delhi 110066

PTChronicle takes no responsibility in case of any unsolicited photographs or material.

PTChronicle journal is the property of PTC India Ltd. No part of this publication or any part of the contents thereof may be reproduced, stored in a retrieval system, or transmitted in any form without the written permission from PTC India Ltd.

Design & Printing by:

Colour Bar Communications, New Delhi

From the Chairman’s DeskDear Readers,

It brings me an immense pleasure to introduce the Third Edition of PTChronicle – a literary endeavor by PTC India Limited. We have been serving the power sector for almost 13 years today, and take this opportunity to present forth our views and understanding on this dynamic sector.

PTC India, the largest power trader in India, and also touted regarded as the most unique, innovative and holistic energy solutions provider, is spearheading the development of an effective power market. Today, through PTChronicle, PTC aims to demystify and elucidate the various issues and challenges surrounding and impacting this sector. This edition of PTChronicle delves on an impertinent issue tangling the power sector; it being our power distribution woes.

Indian power distribution, supplying electricity to both rural and urban areas, is characterized by inbred inefficiency. High AT&C losses, billing and collection inefficiency, theft, archaic infrastructure, etc. are crippling the entire power value chain. The weakened distribution system affects the profitability of the State discoms. Discoms, in turn, do not have the optimum financial resources to procure competitive power. The inability of the discoms to procure power affects the generators. The downside of value chain reduces necessary investments, a must for a developing economy.

This edition discusses the issues and challenges attenuating the power distribution in the country. To delve on further, bailout of SEBs, enhancement of rural distribution and investments in distribution provides complete guide for a holistic perspective on distribution. The edition also brings an effective market coverage and analysis of the power sector in the last quarter.

Appreciating the feedbacks and reviews on past editions, the team of PTChronicle has come out with an even better resourceful edition bringing the intricacies of this dynamic sector closer to the people.

We wish you a valuable read.

Chairman & Managing DirectorPTC India Limited

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Con

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sJuly 2012

SEBs Bail Out-A Moral Hazard ....................................................6 T N Thakur, CMD, PTC India

Market Watch ............................................................................8 Corporate Development Team, PTC India

Power Glance - Overview .........................................................10

The Burden Brunt by State Discoms .........................................13 Rakesh Kalsi, PFS

Power Parlance ........................................................................17

Power Sector Reforms .............................................................19 D. P. Bagchi & V. K. Sood

Distribution Reforms in India - Key Challenges .........................23 Dr. Pawan Singh, Director, PFS

Power Glance – Coal Slaw .......................................................30

Social Interventions in Reforming Rural Electricity Supply .........33 Prabir Neogi, CESC

Power Glance – Sector Finance ................................................38

Making Open Access a Reality at Retail Level ..........................40 Rupa Devi Singh, MD & CEO, PXIL

Will the New Guidelines benefit theShort Term Bilateral Market? ....................................................42Harish Saran, Executive Vice President, PTC India

Proposed Amendments to Electricity Act 2003 .........................45 Dr. Atmanand, MDI

Next Generation Power Market Intelligence ...............................47Dr. Rajiv K. Mishra, Executive Director, PTC India

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All the contents of PTChronicle are only for general

information and/or use. Such contents do not constitute

advice and should not be relied upon in making (or

refraining from making) any decision. Any specific

advice or replies to queries in any part of the journal is/

are the personal opinion of such experts/consultants/

persons and are not subscribed to by PTC India.

PTChronicle has employed due care and caution in

compilation of data for preparing this journal. The

information or data of photographs have been compiled

from various sources including newspapers, websites,

etc. PTChronicle does not guarantee the accuracy,

adequacy or completeness of any data/information that

was furnished by external reports and is not responsible

for any error or omission or for the results obtained from

the use of such data/ information.

Your feedback is valuable to us. Kindly share them at

[email protected]


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Sh. Tantra Narayan Thakur Chairman & Managing Director, PTC Group

balance sheet of state power utilities and ensure that no further losses are incurred.

Earlier, a bailout was given about a decade back when Montek Singh Ahluwalia Committee recommended State Governments to issue bonds as many State Power Utilities (SPUs) were defaulting on payments of dues to central power utilities and Financial Institutions (FIs). At that time, it was emphasized that this will be a one off event. We have come a full circle again, and not only that, the situation seems more precarious. State Governments are not in a position to even redeem the bonds that were issued earlier.

What kind of signals are we giving through such bailouts to the non-performing distribution utilities? Should we not use this challenge as the opportunity to bring about serious structural changes in the SEBs? This seems to be a moral hazard and not sustainable in the long run. What is the guarantee that utilities will not run in the ‘Business-as Usual’ way? It is likely that need for such bail outs in future would be more frequent with more severe liabilities if root causes are not addressed.

The curious case of tariff revisions

Many States have not revised their tariffs from a long time. Tariff hikes should be gradual to avoid any shock to the consumers and concomitant with distinct improvement in supply conditions such as reliability and quality of supply for better acceptance by consumers. Appellate Tribunal’s landmark judgment that State Electricity Regulatory Commissions can initiate suo-moto tariff determination without waiting for state power utilities to file tariff petitions is encouraging, but the moot question about implementation remains. A CRISIL study conducted recently has come out with some revealing facts that the expenses on electricity as a proportion of total household expenses are either static or going down.

Consumers are ready to pay higher tariff provided they are ensured quality and reliable power. Consumers’ propensity to spend on high cost Diesel Generator sets or even on inverters etc. support this view. Even in rural areas, diesel and biogas generators are doing brisk business, by charging around

Rs. 10/kWh. How come the rural population is ready to pay higher tariff to private players but not to SEB. Most obvious

Indian Power Sector has shown good results in recent times particularly in generation and transmission. Generation capacity addition of ~54,000 MW in 11th plan has been the highest so far in any plan. Private sector has shown promising performance in capacity addition and we have crossed the psychological barrier of 200,000 MW generation capacity in the country. In transmission sector also, we are close to realizing dream of ‘One Nation One Grid. But the distribution sector issues are likely to derail the economic growth with the utilities reaching unprecedented loss levels.

The Electricity Act (EA) 2003 had envisaged restructuring of vertically integrated entities into separate generation, transmission and distribution utilities. Most of the States embarked on this corporatization albeit half-heartedly. As per the Shunglu Committee’s report, those changes were more ‘in form than in substance’. The cumulative losses for five years up to FY 2010 have reached Rs. 1,79,000 crore before subsidy and Rs. 82,000 crore after subsidy. These losses were primarily because of the gap of about Rs. 0.60/kWh between average cost and average revenue and operational and management issues coupled with regulatory shortcomings.

Sustainability of Bailouts

Another attempt to bailout state power utilities is being contemplated. Ministry of Power (MoP) believed to have given directive to State Governments to clear the

SEBs Bail Out- A Moral Hazard


reason seems that SEBs have yet to adopt the concept of service to the consumers. As long as they do favor than providing service to consumers, we cannot expect transformation in the distribution sector. Universal obligation to supply should not merely be an obligation to connections.

Road ahead

Utilities don’t have much headroom as their cost of power procurement including from Short-term (ST) market is going up due to increased input costs and rising component of imported fuel (coal or gas) in generation. So the era of cheap power is almost over. Public has to be sensitized accordingly that rise in cost of electricity is inevitable.

SEBs have to decrease their cost of procurement and cost of supply through efficient and economic measures. About 60-70% of the total cost for SEBs is on procurement of power and there is room for optimization. There is marked difference in tariffs between Long-term (LT)/Medium-term (MT) and ST procurement. Therefore, procurement must be planned properly with advance tie-ups. Utilities should rely on ST/Power Exchanges (PXs) only to take care of short term mismatches. Unscheduled Interchange should also not be relied upon for ST power requirements with narrowing of frequency band and higher penalties.

For the over-all system to be viable, interests of other stakeholders in the value chain like generators, fuel suppliers, intermediaries etc. need to be protected so that they are able to get reasonable returns. Distribution companies must be allowed to run on commercial principles and give more emphasis on quality and service. Separation of wire business from retail supply could bring much needed investment in distribution infrastructure and competition in retail supply would give choice to consumers. Retail suppliers would vie for improved service to retain consumers. EA 2003 may be amended appropriately to bring about this change.

The fact is that changes will not happen overnight. Regulators need to work more on fundamentals and refrain from setting unrealistic targets, be it performance standards or loss reduction.

If at all bailout is to be given, it should be with strict pre-conditions that tariff must be revised annually, that there is distinctive improvement in overall efficiency and performance standards; Open Access to 1 MW and above customers is implemented; and they adopt austerity measures. Ministry of Power should take the political agenda with State governments forward as they have the necessary wherewithal by having a say in funding through PFC, REC etc, R-APDRP scheme, allocation of unallocated power from central sector power stations, among others.

Also Published in Financial Express, 28 May, 2012

“The era of cheap power

is almost over. Public

has to be sensitized

accordingly that rise in cost of

electricity is inevitable.”


• OTCpriceswereingeneralhigherthanIEXandPXILpricesinMarchof2012-apremiumforcertaintyinOTCcontracts

• OTCpricesweregenerally lowerthanIEXandPXILpricesinAprilandMayof2012.Thisisbecauseofhigherpricesdiscovered inPowerExchanges forSouthernRegionovercongestionintranmsissioncorridors.

Daily Prices - Indian Energy Exchange (IEX)

MARKETWATCH

Daily Prices - Power Exchange India Limited (PXIL)

Max. Price : 7.04 Min. Price : 2.59 Avg. Price : 3.56

Weighted Average Prices 2012 (March - May)

Max. Price : 6.67 Min. Price : 3.06 Avg. Price : 4.32

Total Short Term Contract Volume 2012 (March - May)

• Short-term contract volume for March 2012 was1647.71MUs,3240.76MUs inApril2012and for themonthofMay2012,itwas2744.28MUs.

• Out of the OTC volume for the period of March-Mayof2012,34.9%(1862.04MUs)wascontractedaboveRs.4.00/kWh.

• Banking transactions are increasing in the marketpredominantly due to the poor paying capability ofdiscoms.

• The market has prefered shorter duration contractsfor the period March-May of 2012 due to prevailinguncertainties.

• OvertheperiodfromMarch-Mayof2012,PTChasledthemarketbyundertaking172contracts(49%oftotalmarketcontracts)

ContributedbyCoorporateDevelopmentTeamPTC India Limited



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Top 5 Sellers DELhI GUjARAT jInDALPOWER STERLITEEnERGy LAnCOAMARkAnTAkPOWER

Top 5 Buyers UTTARPRADESh MAhARAShTRA RAjASThAn hARyAnA TAMILnADU

Non-Solar RECs Price Trend - PXIL (May 2011 - June 2012)

Non-Solar RECs Price Trend - IEX (May 2011 - June 2012)

Volume of Unscheduled Interchange 2012(February - April)

Total Volume Traded in Short Term vs Total Generation 2012(February - April)

• PoorfinancialhealthofthebuyersmakethembuyfromPowerExchangeonlyduringacutedistress.

• Banking transactions have risen as they are cashlesstransactions.

• Bilateral(direct)hasbeenincreasingasgeneratorsdonotseeeffectivepaymentsecuritywithmajorityoftraders.

Percentage of Different Segments in Short Term Market 2012 (February-April)

(ExcludingUI)

REC Price Trends

Non-Solar RECs Volume Details 2012 (April - June)

• SolarRECscommenced trading fromMay2012with volumes increasing injune2012

• Injune2012,336SolarRECsweretradedatIEXforclearingpriceofRs.12750perRECwhereas6SolarRECsweretradedatPXILforRs.12506perREC

Source:CERC Market Monitoring ReportREC Registry IndiaIndian Energy ExchangePower Exchange India Ltd.


Power Glance Overview

With the commissioning of a 660 MW unit of a power plant in Jhajjar, Haryana, the installed capacity in the country has crossed two lakh megawatt mark, according to the Power Ministry.

Source : May 4, Business StandardSource : April 13, Hindu Business Line

The ministry has proposed amendments to Section 11 to curb its alleged misuse by state governments and prohibit the sale of surplus power from generating units to entities outside a state.

AprilWeek 1

May JuneWeek 2 Week 3 Week 4 Week 1 Week 2 Week 3 Week 4 Week 1 Week 2 Week 3

Windmill developers to lose tax breaks

Tamil Nadu hikes power tariff after 9 years

CERC tightens grid frequency

3200 MW of wind energy capacity added in 2011-12

Biomass-based power producers seek tariff revision in few States

Solar sector sees $ 329-mn VC funding

Jharkhand's energy policy finalized

Power Min for amendments to Electricity Act 2003

Power deficit touches 11000 MW in April

National Electric Mobility Mission likely to launched by July

Power distribution companies' losses cross Rs 2 lakh crore, says Crisil

Installed power capacity crosses 2 lakhs MW

Spot power prices may go up 17% by June

Toe W Bengal power tariff model: PMO

Policy uncertainty threatens capacity addition in wind sector

Record power capacity added in 11th plan

Government issues guidelines to discoms for short term power purchase

Power Exchanges begin trading of solar energy certificates

Power generation up 6% despite low fuel stocks

Power crisis hits industry in Andhra Pradesh PFS to fund

electricity purchase

Power Min evaluating 14 smart grid project proposals

India to supply 500 MW to Pakistan



Source : May 21, Economic Times Source : June 4, Economic TImes

In signs of worsening power supply situation for consumers, the shortfall in electricity generation during peak hours stood at nearly 11,000 MW in April as fuel scarcity hurt performance of thermal plants.

The two power trading exchanges Indian Energy Exchange (IEX) and Power Exchange India Ltd. (PXIL) commenced trading of solar Renewable Energy Certificates (RECs) on Monday amidst keen interest within the power sector

AprilWeek 1


Windmill developers to lose tax breaks

Tamil Nadu hikes power tariff after 9 years

CERC tightens grid frequency

3200 MW of wind energy capacity added in 2011-12

Biomass-based power producers seek tariff revision in few States

Solar sector sees $ 329-mn VC funding

Jharkhand's energy policy finalized

Power Min for amendments to Electricity Act 2003

Power deficit touches 11000 MW in April

National Electric Mobility Mission likely to launched by July

Power distribution companies' losses cross Rs 2 lakh crore, says Crisil

Installed power capacity crosses 2 lakhs MW

Spot power prices may go up 17% by June

Toe W Bengal power tariff model: PMO

Policy uncertainty threatens capacity addition in wind sector

Record power capacity added in 11th plan

Government issues guidelines to discoms for short term power purchase

Power Exchanges begin trading of solar energy certificates

Power generation up 6% despite low fuel stocks

Power crisis hits industry in Andhra Pradesh PFS to fund

electricity purchase

Power Min evaluating 14 smart grid project proposals

India to supply 500 MW to Pakistan


12 | PTC CHRONICLE | JULY 201212 | PTC CHRONICLE | JULY 2012


The Burden Bruntby State Discoms

Indian Power Distribution constitutes of (i) primary distribution network operating at 11

Kilo Volts (KV) & 33 (KV) and (ii) secondary distribution network operating at 415/240 V

& 440/220 V for end use domestic consumption.

Distribution begins from the end of sub-transmission network (33 KV to 220 KV) that

delivers energy to distribution sub-stations. The distribution sub-station converts energy

from high voltage to lower primary system voltage for local distribution. This primary

distribution network constitutes circuit feeders (which we usually see running along our

streets) operating at 11 KV / 33 KV; supplying load to a defined geographical area. The

primary distribution network of 11 KV & 33 KV feeders further constitutes of distribution

transformers (also also known as DTR’s) installed on poles in proximity to consumer

homes and these transform the primary voltage to secondary voltage, usually 415/240

volts. Secondary circuits (comprising of 415/240 Volts) carry energy from distribution

transformers and deliver energy through service lines to consumers at declared voltage

of 400/220 Volts.

The Distribution sector plays a crucial role in the overall functioning of the power sector.

An efficient and well performing distribution sector with a focused approach to improve

financial health of utilities is necessary for providing reliable, quality and continuous

power access to consumers. In fact, it can be said that the sustainability of the power

sector is largely hinged on the Distribution sector.

In India, the recent years has witnessed growing concerns over the financial health

of Distribution Companies (discoms) with growing deficit ARR’s for most of the State

Discoms, and hence increasing financial dues to these discoms. Also, the settlement of

past dues would not alone solve the basic challenges faced by the discoms and hence

it is essential that the issues of current unsustainability in distribution is addressed as

priority, or else dues/losses would mount further crippling the entire power value chain.

The “Study on Specific Aspects of the Power Sector for Impact on State Finances”

for “The Thirteenth Finance Commission, GoI” shows projected cumulative net loss

of the states for year 2010-11 at Rs. 68,643 crores without considering subsidy. As

against this, the net losses for discoms (without considering subsidy) in the country for

Rakesh KalsiPTC India Financial Services Limited

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FY 2011-12 is around Rs. 80,000 crore, up from around Rs. 63,500 crore in FY 2010 which shows an increase of ~27%

from FY 2009-10. It is therefore required to take urgent and immediate actions for bringing reforms in the distribution sector.

Let us view some of the major causes/reasons for the detrimental state of the distribution sector

1) Gap between ARR & ACS resulting Revenue Loss

The commercial viability of the distribution company is judged from difference between Average Cost of Supply (ACS) and

Average Revenue Realized (ARR) per unit. From the formation of distribution companies in various states till the present today,

this gap has been increasing which says that cost to supply one unit of electricity is more than revenue realized for that one

unit. The Gap between ACS and ARR is widening and has increased to Rs.0.73 /Kwh in 2009-10 from Rs. 0.37/Kwh in

2007-08 on subsidy realized basis. The increasing ACS-ARR gap trend for the country has been rising over the years as

can be seen in the following table:

Region Gap without subsidy(Rs./kWh)

Gap on subsidy booked basis (Rs./kWh)

Gap on subsidy realized basis (Rs./kWh)

year--->> 07-08 08-09 09-10 07-08 08-09 09-10 07-08 08-09 09-10Eastern 0.48 0.49 0.51 0.33 0.36 0.33 0.24 0.38 0.31northEastern 0.50 0.33 0.81 0.4 0.3 0.78 0.45 0.49 0.91northern 0.95 1.11 1.34 0.41 0.41 0.45 0.69 0.83 1.17Southern 0.51 1.09 0.96 0.17 0.49 0.47 0.21 0.83 0.79Western 0.15 0.26 0.34 0.06 0.15 0.21 0.20 0.41 0.29national 0.54 0.79 0.86 0.23 0.35 0.38 0.37 0.67 0.73

Source: PFC

The table above infers that the gaps are increasing at a faster pace. Also, the gaps are much more on subsidy realized basis

as compared to subsidy booked basis, indicating that discoms are not able to realize full amount of subsidy against booked

numbers. The National Tariff Policy notified in year 2005 mandated the SERCs to carve roadmap with a target that latest by

the end of year FY 2012 the tariffs are within ± 20 % of the average cost of supply. However, several states are yet to fully

achieve this. However, majority of states are far behind this target.

Free Power/Low Tariff to certain sections of the society or categories of consumers is still in practice in some States. This

deficit is provided as subsidy by state governments, creating a liability on the state exchequer to pay to the distribution

company the gap between the concessional tariff and the tariff worked out by the Regulatory Commission. However, in

practice either no subsidy is released to the distribution company or even if, it is released, it is much less than the desired

(not to forget the delay in payments) which results into book adjustments. At times, the subsidies are even adjusted against

the interest accrued on the loans released by the State Government to the distribution companies. These practices revolving

around subsidies adversely affect the financial performance of the distribution company. It can also be said that the solution

does not lie in timely release of subsidy amount by state distribution company (though it may act as short time remedy),

but the right and effective solution lies in eliminating subsidies and the gap between ACS and ARR by raising power tariffs

appropriately to match cost of supply. The timebound and consistent tariff hikes by distribution company is the only solution

to this growing concern.

2) Mounting Debt on Utilities

As per the VII report on “Performance of State Power Utilities by PFC” from FY 2007-08 to FY 2009-10, the total capital

employed in all state power distribution companies was around Rs. 3,71,945 croers as on 31st March 2010. The borrowings

from FIs, Banks and market continue to be the major source of capital employed in the sector. The share of these borrowings

in the total capital employed increased from 60% as at the end of FY 2008 to 72% at the end of FY 2010.

The outstanding State Govt. loans have increased from Rs. 41,857 crores as on 31st March, 2008 to Rs. 44,408 Crores as

on 31st March, 2010. The outstanding loan from Banks/FIs, bonds & debentures and other loans constituted about 86% of


the total borrowings of the utilities during 2009-10. The loans increased from Rs. 1,58,003 crores as on 31st March 2008

to Rs. 2,66,508 Crores as on 31st March 2010. This shows that state utilities or distribution companies are borrowing more

from banks & market as compared to state government. The table below shows breakup of increase in borrowings of the

distribution companies for year 2007-08 to 2009-10:

Borrowings of Distribution Companies Rs. Crore

Particular 2007-08 2008-09 2009-10LoansfromStateGovt. 41857 43868 44408LoanfromFIs/Banks 158003 201101 266507

Source: PFC

The increase in borrowing as percentage of total capital employed is leading to increase in interest burden of the state

distribution companies and hence leading to more cash constraints. Many distribution companies are servicing the interest

on existing loans by fresh borrowings, which have led to stretched liquidity situations. This in turn has led to increased levels

of delays on payments to power and fuel suppliers.

3) AT & C Losses

The biggest challenge of the power sector is the high Transmission and Distribution (T&D) losses. A combination of technical

and non-technical factors is contributing to high T&D losses. As T&D loss figures did not capture the gap between the billing

and the collection, the concept of Aggregate Technical & Commercial (AT&C) loss was introduced in 2001-2002 to capture

total performance of the utility.

The AT&C losses are presently in the range of 20% to 60% in various states. The official figures as per PFC VIII report on

“Performance of State Power Utilities” state that average AT&C Losses in India 2009-10 were around 27%. It is pertinent to

note that the actual loss levels are much higher as stated by distribution companies and hence AT&C loss of 27% is much

lower than actual. The table below shows expected state wise AT&C Losses in different states:

< 20% B/w 20% - 30% B/w 30 - 40% Above 40%Goa Tamilnadu WestBengal MadhyaPradesh

jharkhand Delhi Chattisgarh Biharkerala Gujarat Mizoram nagaland

AndhraPradesh Maharashtra UttarPradesh ManipurPunjab karnataka Orissa Meghalaya

himachalPradesh haryana SikkimPuducherry Assam ArunachalPradesh

Tripura UttarakhandRajasthan jammu&kashmir

There is wide variation of losses among the states and among discoms within the states. The major portion of losses are

due to theft and pilferage, that are estimated at about Rs. 20,000 crore annually. Apart from theft, the distribution sector is

also suffering from poor billing and collection efficiency in almost all states. More than 75%-80% of the total technical loss

and almost the entire commercial loss occur at the distribution stage. It is estimated that 1.0% reduction in T&D losses would

generate savings of over Rs. 700 to Rs. 800 crores. Reduction of T&D loss to around 10% will release energy equivalent to

an additional capacity of 10,000-12,000 MW.

Power sector reforms were first initiated in India in 1992 by the Ministry of Power (MoP) to invite private investments in power

generation to bridge the demand-supply gap. As part of the reform programmes, distribution segment was identified as the

key area enabling to push the sector on the right track. Distribution reforms involve system up-gradation, loss reduction,

theft control, consumer orientation, commercialization and adoption of IT. For reducing operational costs, strengthening the

electricity distribution network and minimizing distribution losses due to theft and operational inefficiency, the Government


of India (GoI) launched the Accelerated Power Development and Reforms Programme (APDRP) during the 10th Five Year

Plan (2002-07) for strengthening of Sub – Transmission and Distribution network and reduction in AT&C losses. Continuing

its support for power distribution reforms, the GoI launched the Restructured APDRP (R-APDRP) in the 11th Five Year Plan

(2007-12) with revised terms and conditions. Under the R-APDRP, state energy utilities are required to adopt measures for

reducing AT&C losses, while also taking steps to strengthen distribution network and improve commercial viability.

4) Cross Subsidy

The tariff structure in India is skewed with high degree of cross subsidization among different categories of consumers. The

agricultural consumers in many states are provided free electricity or power at abnormally low tariffs. Earlier, the government

could afford to give free supply to agriculture consumers as electricity demand by agriculture was a small portion of total

demand. It was 4% in 1950-51, ~ 6% in 1960-61, ~30% in 2001-02 and it has now grown to around 40% presently. It can

seen from table below that in many states the percentage of total electricity sold to agriculture consumers is around 35% -

39% for the year 2009-10.

As stated above, the share of agricultural demand was quite less (~6% in 1950-51) as compared to ~40% (present), hence

burden of subsidy was also less. Hoever, with time and with increase in share of agricultural demand, the share of subsidy

has also increased tremendously. This in turn gave origin to cross subsidation of consumer i.e. charging more to commercial/

industrial consumers and less to agricultural/domestic consumers. This has led to sharp increase of industrial consumers,

hence resulting in continuous increase in quantum of cross subsidy from industrial consumer to domestic and agriculture

consumers. The following table indicates the level of cross subsidy from Industrial consumers to Agricultural consumers:

Level of Cross subsidy from Industrial and Agriculture Consumers (FY 2009-10)

State Agriculture (% of total energy sold)

Agriculture (% of total revenue)

Industrial (% of total energy sold)

Industrial (% of total energy revenue)

Punjab 32% - 34% 57%Tamilnadu 22% - 35% 54%AndhraPradesh 31% 2% 31% 44%haryana 38% 3% 26% 31%karnataka 35% 10% 22% 32%Maharashtra 22% 10% 45% 51%MadhyaPradesh 30% 12% 31% 39%Gujarat 32% 14% 43% 58%Rajasthan 39% 18% 26% 39%

Source: PFC

Punjab and Tamil Nadu earned NIL revenue against sale of around 32% & 22% of energy to agricultural consumers. Similar

situation occurs in the state of Harayana, Karnataka, Maharashtra and Madhya Pradesh where small portions to factor of

around 2% to 10% of revenue is achieved from sale to agricultural consumers against sale of around 30% to 38% of energy.

Based on the above it can be concluded that the gap between Average Revenue Realized (ARR) and Average Cost of

Supply (ACS) should be reduced and infact eliminated to improve financial viability of distribution companies. The distribution

companies across the country, whether in public or private sector, require tariff hikes of around 40-60% to meet their

operating costs. The increase of this magnitude will require political and consumer consensus in sure to support distribution

companies to come across present status of cash crunch and hence function effectively satisfying all stakeholders.

The increase in tariffs will also provide cushion to distribution companies to pay back to generating companies and hence

improve financial viability of existing generating companies (public & private) allowing an improvement in bankability of

upcoming generation projects.


POWERPARLANCE

India is wasting hydro potential

A. B. L. SrivastavaCMD, NHPC

India to be world’s 3rd largest energy consumer by 2020

Shri Sushil Kumar ShindeHon’ble Minister of Power, GOI

Nuclear energy is one part of more towards low-carbon future

Montek Singh AhluwaliaDeputy Chairman, Planning Commission of India

Opening up of coal sector for commercial mining is not possible now

Shri Sriprakash JaiswalHon’ble Minister of Coal, GOI

It would be harmful for the country to pass an ordinance on denial of nuclear power

Dr. Manmohan SinghHon’ble Prime Minister of India

The Hindu, 16 May, 2012

Economic Times, 21 April, 2012

DNA India, 10 April, 2012

The Hindu Business Line, 01 May, 2012

The Hindu Business Line, 27 June, 2012



Reforms

In consonance with the socialist path of growth and development, wherein the state was

supposed to be at the “commanding heights of the economy”, electricity, both centrally

as well as at the state level remained under the direct control of the Government.

The State Electricity Boards (SEBs), created pursuant to the promulgation of the

Electricity Supply Act 1948, mandated the creation of SEBs, which were vehicles for

massive electrification activities across the length and breadth of the country. Electricity

hitherto limited to cities, was extended to the rural areas. Yet over time, SEBs became

bastions of political patronage rather than true business enterprises. Blackouts were

rampant and the system appeared headed for collapse. Around the eighties, the state

budgets could no longer offset the losses of the SEBs. The state run electricity boards

had reduced themselves to the largest drains on state finances and were seen as

encroaching into the states’ ability to meet its other social obligations like health care,

infrastructure, education etc.

In 1991, immediately after the balance of payments crisis, the country witnessed

sweeping economic liberalization. The 1st phase of Reforms that were initiated in

the Electricity Sector was primarily generation driven. The focus was on increasing

investment in power generation. A special effort was made to attract foreign investment

by encouraging Independent Power Producers (IPPs) with attractive guaranteed rates

of returns and sovereign guarantees. While, the IPPs generated expensive power and

supplied only a tiny fraction of the new generation requirements, the structural weakness

remained unaddressed. For reasons, already known, end-user tariffs remained well

below the actual cost of supply, and the misery got worse by the day.

Some courageous states attempted to address the endemic issue but it was Orissa,

one of India`s less developed states which became the frontrunner in power sector

reforms. Subsequently, other states like Haryana, Andhra Pradesh and Rajasthan also

carried out reforms but with the sole exception of Orissa, the distribution companies

remained in the govt domain. The not so encouraging results of the Orissa privatization

process also added to the woes of the policy maker.

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- Need for a Fresh OutlookPower Sector Reforms

V. K. Soodis the Ex-Chairman of Delhi Electricity Regulatory Commission & Ex-CEO of Reliance

Energy Distribution Company for Orissa.

D. P. Bagchiis the former Chief Secretary & Chief Development Commissioner for Government of Orissa.

He was also the Chief Advisor and Secretary to Government of India Planning Commission


During the later part of the 1990`s, the 2nd Phase of

Institutionally focused reforms was initiated. The focus

was more on the establishment of independent electricity

regulatory commissions (ERCs). Several states created

ERCs in the mid 1990s as part of their reform strategy. In

1998 the central government adopted the ERC Act that

created Central / State Electricity Regulatory Commission.

The primary objective was to distance the Government from

Tariff determination. It may be recalled that retail tariffs were

controlled by the state governments (through the SEBs)

and had become highly politicized. Domestic consumers

& agriculturists secured low tariffs for themselves, which

forced the SEBs to try to offset their losses by raising tariffs

on industrial and commercial users. The outcome was

that many of the industries were forced to set their own

captives, which again was cumbersome and required huge

capital outlay. Power sector continued to grovel. There was

hardly any worthwhile investment in the transmission and

distribution segments.

It was the Electricity Act 2003, which unleashed the most

decisive 3rd phase of reforms in the Electricity sector. The

legislation, the most forward looking till date, almost set the

tone for a vibrant phase of growth. Apart from ensuring a

standard industry structure( functional unbundling- separate

entities for generation, transmission & distribution), and

mandatory creation of state regulatory commissions , the

focus was promoting competition, delicensing of generation,

promoting power markets, allowing consumers to exercise

the choice of supply through open access and finally setting

up an Appellate Tribunal of Electricity for quicker disposal of

disputes instead of the time consuming process of seeking

judicial redress through courts. Consumers’ interests were

also kept in mind by setting up of Grievance Redressal Fora

and Ombudsmen. In a nutshell, the Electricity Act 2003,

aimed to combine all aspects of business, consumer

interests and competition through non discriminatory open

access.

Distribution – It would not be out of place to mention that

the Electricity Act 2003 was the most comprehensive

piece of legislation that aimed to address all structural and

functional issues plaguing the sector. Besides introducing

the concept of multiple licensing, the Act also recognized

the problems plaguing the distribution sector. The spectre

of rampant power thefts, which were assuming gigantic

proportions, and threatening to get out of control, were

adequately addressed. The Act carried special provisions

which empowered the distribution licensees to curb theft

but also penalize the person for wrongful or unauthorised

use of power.

Assessment Of Reforms - In the meanwhile, sometime

around 2006, the Ministry of Power felt it opportune to study

the ‘Impact of Restructuring of SEBs’ and entrusted the

responsibility to the Indian Institute of Public Administration

for undertaking a comprehensive study. The IIPA team

comprised of 10 members with wide ranging experience

and domain expertise, conducted in-depth study of 12

states, and carried out detailed performance analysis of

as many as 60 power Utilities, spread across the country.

Exhaustive consultations with stakeholders were also a part

of the assessment exercise. The major recommendations of

the IIPA study were that:

a) there was a need for sustained political commitment

and support for reforms and the need to issue Detailed

Policy Statements (DPS) to spell out the future policies

and programmes;

b) need for an effective and forceful communication

strategy;

c) to make available excellent, competent consultancy

support to the State Governments;

d) need to develop a forward-looking and transparent

HRD policy after taking the staff representatives into

confidence;

e) need to undertake measures to make the regulatory

mechanism more effective;

f) need for the Central Government to support Power

Sector Reform Funds;

g) strengthening the boards of directors and management

cadres of the restructured Utilities;

h) increasing the accountability and autonomy of the

Utilities by private/employees’ participation in the equity

base;

i) appointment of independent directors;

j) reduction of cross-subsidies showing political

commitment;

k) introduction of various measures, which would improve

the efficiency and productivity of the Utilities, including

extending the benefits of the APDRP programme to the

private sector DISCOMs.


Privatization of Distribution Companies –

Delhi & Orissa

While several states dutifully implemented the

Electricity Act 2003, and unbundled their monolith

SEBs into separate generation, transmission and

distribution entities, only Orissa and Delhi divested

51% of their equity in the distribution business to

private entities.

In Orissa, through a transparent bidding process,

involving several bidders, 51% of the equity in

each of the distribution companies -Wesco,

Nesco and Southco was acquired by Ms BSES

(currently Reliance) in April 99, while 51% of equity

of CESCO was acquired by AES Ltd in Sept 1999.

The investors acquired the shares of Rs 114.70

Crs for Rs 158.50 by paying a premium of Rs 43.8

Cr. without any return on equity till date.

Learning from the experience in Orissa, the

privatization process in Delhi was better rooted

to the ground and sometime around mid 2000,

BSES ( now Reliance Infra) acquired 51% stake

in each of the Discoms –BRPL ( BSES Rajdhani )

& BYPL( BSES Yamuna) while the Tata`s acquired

51% in NDPL.

The Reform Model in Orissa sought to maximize on

the privatization process by up valuation of assets,

seeking a premium on the sale process, while

Delhi chose to divest equity on par by seeking

performance commitment from the investors. The

investors in Delhi were presented with opening

loss levels and were asked to submit bids with

a loss reduction strategy unlike in Orissa which

has witnessed the biggest controversy as far

the opening baseline loss levels are considered.

Probably the biggest instance of pragmatism

displayed in Delhi was the upfront commitment of

Rs 3450 Cr as transition support. In Orissa, the

newly privatized distribution companies had no

such support and were left to fend for themselves.

Consequently, the Delhi Reforms process was

a runaway success and is going from strength

to strength in terms of sharp decline in losses,

improved quality of power supply and higher

investments while the reforms process in Orissa

after a decade of limping shows no signs of

recovery – the high level of losses, deteriorating

quality of power supply and low investments

remain.

Reforms today – It’s almost a decade since the

Electricity Act 2003 was promulgated, but the

impact of such legislation has been at best muted.

Barring the two states of Orissa and Delhi, the

power sector has not been able to attract the

desired levels of investment. And this will continue

till the distribution sector remains in the neglected

state that it is in. Strangely though, the disconnect

between policy formulation and policy execution

seems to be growing. The absence of political

will to see through the reform process is taking

its toll. It is in this connection, that the role of the

Forum of Indian Regulators (FOIR) and Forum of

Regulators (FOR) needs scrutiny. Both the FOIR

and FOR need to be proactive and rise up to the

expectations of being a policy think tank. So far an

uniformity of approach in preparing various models

of distribution reforms has eluded them

The distribution segment is going to turn into the

heel of Achilles for the Power Sector. Reports

of several expert bodies are gathering dust.

The latest is the Shunglu Committee Report,

which inter-alia, has suggested reviewing the

accounts of the SEBs and the Discoms as on

31st March’2010 and to project their loss levels

by 2012. It has also suggested a plan of action

to achieve financial viability of the sector by 2017.

2017 is only five years away. A detailed pathway

is yet to be suggested by the Union Government

and the States.

As a result, the power sector continues to remain

unattractive. There aren’t any success stories in

the distribution sector. The franchisee model under

the RGGVY scheme is again a top down version

of an unviable business model, more forced rather

than preferred. The example of Torrent in Bhiwandi

is an exception and difficult to replicate. As a result

of policy imperfections, industry does not seem

much excited about the business prospects in

the sector. Thus the presence of a few number of

players in the sector, and the resulting inertia.

The need of the hour is a De-novo Approach to

infuse life and vigour into this sector. It is never “too

late to turn”.

Barring the two states of Orissa and Delhi, the

power sector has not been able to attract

the desired levels of

investment. And this will continue till

the distribution sector

remains in the neglected state

that it is in.


22 | PTC CHRONICLE | JULY 201222 April 201222 | PTC CHRONICLE | JULY 2012


The power distribution companies (Discoms) in India have been riddled with losses and

in efficiencies.

The accumulated loss of the Discoms up to 31st March, 2012 was over Rs. 80,000

Crore. This is more than what Government collects annually through service tax. The

losses highly impact the Country worsening the fiscal condition of States. The widening

revenue gap, delayed tariff revision, high AT&C losses and sizeable debt and interest

cost have played havoc with solvency and liquidity issues of Indian Discoms.

Today most of the Discoms borrowings go to meet the financial loss rather than asset

requirements.

Keeping into consideration the above factors, government appointed high powered

Shunglu committee to study in detail the financial working of the distribution companies.

While committee brought very clearly the reasons for failure of first privatization which

happened in Orissa on account of absence of reliable data and unrealistic assumptions

on loss reduction targets, it has gone to appreciate the benefits of privatization both in

Delhi as well as franchisee model in Bhiwadi and elsewhere.

The committee however, has favored franchisee over PPP based privatization which

happened in Delhi. The points raised were as follows i.e. firstly the competitive process

in case of PPP is restrictive as it allows only power sector players to bid. Well this is a

qualifying requirement only and can be applied to both in PPP as well as to Franchisee

model. Bid documents based on merit can be kept as a qualifying requirement of

power sector experience as one of the pre conditions for bidding or it can be kept more

open ended to bring other sector players. Though, it cannot be denied that an open

qualifying criteria leads to more competition, at the same it may not be appropriate

to keep a totally open qualifying criteria. Absolutely open criteria in either of the two

models may lead to incapable and non serious contenders competing in the bids and

many times they may quote unworkable rates. This could put reforms process itself into

jeopardy, consequence of which could be felt much later.

Distribution Reforms in India -Key Challenges

Dr. Pawan SinghDirector - Finance

PTC India Financial Services Limited

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The Shunglu committee report further states that the capex

of franchisee is audited in the accounts of the company and

approved by the regulator. It may be pointed out so are the

assets of PPP. Moreover the PPP model has government

representatives as public player’s nominees in the board

of Discom’s and therefore, they can preaudit the Capex of

Discom’s. In case of franchisee it is always a case of post

audit of capex. It would be worthwhile to remember an old

adage, “No use closing the stable door when the horses

have left”.

Another oversight the committee has done to infer Rs.3452

Crore provided by Delhi Govt. to Transco as financial

support. It has gone ahead to assume that such financial

support will not be necessary for a PPP model. It has

really not gone into the character money which was used

in the reforms in PPP model. This money was used to

part finance power purchase for initial five year period of

the reforms. The money came in a tapering manner and

after five years full power purchase responsibility shifted to

Discom’s. In contrast to above, in case of franchisee the

risk and responsibility of power purchase remains with the

state or the state power company. From public policy angle

this puts huge drain on the state exchequer. Further there

is no incentive for the franchisee operator to bring down

cost of power purchase. In fact, power purchase accounts

for nearly 75 to 80% of distribution cost. No reform would

be able to address the issue fully without taking into

consideration this most significant portion of distribution

cost. The committee has pointed that the franchisee would

not frequently seek revision tariff, where as in the PPP it will

have to be done annually. But it needs to be pointed out

that in case of former, the state power company will have to

seek periodic hikes even if franchise may not seek annual

revision. In fact one of the banes of power sector is that

periodic non revision of tariff has let to building of regulatory

assets, causing precarious financial condition of utilities. As

far as the assets acquisition programme of Discom’s are

concerned franchise or PPP, eventually both of them will

have to move towards Multi Year- Tariff (MYT) model of

regulation.

In fact, PPP model is more robust and highly suitable for

open access to work in electricity. Some of the points

reflecting such characteristics of PPP model have been

given below.

1. It may also be imperative to mention that since for

the franchisees most of the profit will come from loss

reduction in AT&C, it may do very little to work on

systems improvement or Grid strengthening, which over

time leads to more system overload and quipement

failure. It may therefore impair the quality and delivery of

power supplied to consumers.

2. Business Valuation Methodology

The committee has said that the biggest challenge is to

have a valuation inplace in a PPP model. Delhi Vidyut

Board (“DVB”) case would make a worthwhile study in

this regard. As DVB had large losses, it’s assets had

been depreciated and had become obsolete. It would

have been very difficult to have found investors to buy

these assets and also pay the government value for

these assets. Book Value method, or asset valuation

model, or equity valuation method as generally followed

would not have worked for Disinvestment/privatisation .

In case of Delhi therefore Business valuation model was

followed. Business valuation Methodology evaluates

assets on the basis of revenue earning potential of the

asset. In Delhi each of the Discoms unit was valued

by means of modeling based on certain assumptions

about reasonable tariff increases; targeted efficiency

improvements (for the business to be self-sustaining

within five years); and Government assistance for

the transitional period. This also obviated the impact

of overvaluation on retail tariff. A conventional asset

valuation exercise as adopted in Orissa and elsewhere

would, in the absence of the requisite data, have

involved delay. This was an additional reason for

adopting a Business Valuation methodology. Now a

model is available it to be largely replicated elsewhere.

3. Principle of Aggregate Technical & Commercial

(AT&C) losses:

The Delhi reforms were the first to adopt the principle

of AT&C loss (the difference between energy input and

units of energy for which payment is actually realized) as

the measure of commercial efficiency. The conventional

measure of T&D loss or unaccounted energy (the

difference between energy input and energy billed) no

longer generates confidence in India as it became clear

that many SEBs were grossly understating the figure. In

case of T&D losses in Orissa, same power losses that

the SEB had stated as 24% were restated by consultants

as 35% and are now conceded to actually have been

of the order of 50%. Such “fudging” is achieved simply


by inflating the billing figures, which is easily done where

much of the billing is on an estimated basis. The AT&C

concept removed the remaining element of inaccuracy

and contributed to investor confidence. The Ministry of

Power has now adopted AT&C losses as a measure

of commercial efficiency in all distribution reform

programmes generally.

The uniqueness of Delhi Power sector reforms lies

in the fact that Disinvestment was done on efficiency

promotion rather than on one time economic returns to

the Government.

4. Bidding Criterion:

Normally Government Disinvestment / privatization

programmes are done to generate money from the

Sale of Assets so that the fiscal deficit can be met.

In contrast to this, in PPP model the bidders were to

quote on loss reduction targets for electricity over a five

year period. Value of assets were freezed based on

the business valuation of DVB assets. The uniqueness

of scheme lay in the fact that for every 1% reduction

in loss, system generated Rs.100 crore of revenue,

and consequent savings to the Govt. exchequer by

that such amount. In many states large part of the state

budget goes to fund the power purchase or the losses

of state power utilities.

In case of Delhi, bidding were for the basis of efficiency

improvement of reduction of AT&C losses that they

achieve year wise over a period of five years. A PPP

Model can lead to cash inflow to the Public finances

and bring down Aggregate Revenue Requirement (ARR)

of Discoms.

5. Strategic Financial Support During the Transition

Period :

The sector was to achieve turnaround in the transition

period from 2002-07. By the year 2007 situation was to

achieve break even.

“The Discoms balance sheet is a thermometer to the

health of the power sector”. Discoms are at the end

of the entire supply chain of the sector. The feeding

of cash in power sector is from the Discoms. No

generating company can have a healthy balance

sheet in the absence of bankable Discoms to which

it has to eventually sell the power” Electricity as a

social commodity needs commercial gearing to make

the power sector self sustainable and necessitates

consumer to have near neutral increase in the tariff

during the interim period. This was facilitated by a loan

assistance of approximately Rs.3452 Crores to the

Transmission Company, which during the transition

period was to bring power from outside Delhi and from

the Delhi’s Generation Companies and supply it to the

distribution companies. The Discom liability on bulk

purchase of power was fixed. The gap between bulk

supply tariff and between retail tariffs was narrowed

during the transition period through the loan support as

the efficiency gains were to come over a period of time

and the sector was to achieve break even after the end

of the transition period. Rs.3452 Crores was used to

part fund the power purchase cost during the transition

period and not as any financial grant support that has

been presumed by the Shunglu committee. In any case,

state would have continued to incur this expenditure

on power purchase even though the PPP scheme

would not have been implemented in Delhi. In fact, had

reforms were not been implemented, the outflow from

Government funds towards Power Purchase would

have gone up astronomically thereby constraining the

Public finances.

6. Incentive Based System

Apart from the assured 16% return on equity, it was

agreed that the 50% of the additional revenues from

any AT&C loss reduction over and above the minimum

targets fixed by the Government would go to the private

Discoms. On the other hand even a single percentage

point under achievement over the loss level bid by the

selected bidder would result in the substantial erosion of

returns of the company which acted as a safeguard to

ensure improvement in performance over the transition

period of five years.

Positive Outcome of PPP Reforms in Delhi- some of the

positive outcome of the reforms were as follows

• AllloadrequirementweremetwithoutanyGovt.finance

as or support

• Most of the demand has been met in spite of load

shedding

• There has been massive improvement in power

availability index since pre-reforms period


Exhibit II: Reduction in AT & C Losses

Opening Level as per DERC at the time of unbundling of DVB

BSES Rajdhani BSES Yamuna North Delhi Power Ltd48.10 57.20 48.10

Year Target Level Achieved Target Level Achieved Target Level Achieved2002-03 47.55 47.40 56.45 61.89 47.60 47.792003-04 46.00 45.06 54.70 54.29 45.35 44.862004-05 42.70 40.64 50.70 50.12 40.85 33.792005-06 36.70 35.53 45.05 43.89 35.35 26.522006-07 31.10 29.92 39.95 39.03 31.10 23.732007-08 27.34 27.51 34.77 30.23 22.03 18.292008-09 23.46 20.59 30.52 24.02 20.35 14.822009-10 20.00 19.02 22.00 23.11 17.00 13.252010-11 16.58 15.79 21.61 18.85 16.58 11.58

As pointed out earlier 1% decrease in loss, meant about Rs. 100 Crores of cash inflows to the sector. Therefore about 35% reduction in

Delhi has lead to Rs. 3500 crores of additional revenue. This has saved large position of Delhi’s budget.

Exhibit III: Cash Flow Generated which went to the government through PPP Power Sector Reforms in Delhi

Companies Sale of Equity Payment of Secured Loan

Interest Dividend Collection of Sundry Debtors

Total

DTL --- 270.00 72.28 5.85(DPCL) --- 348.1310.33(GnCTD)

IPGCL --- 81.67 81.53 --- --- 163.20BRPL 234.60 690.00 29.04 --- 159.95 1113.59ByPL 59.16 174.00 7.32 --- 117.07 357.55nDPL 187.68 552.00 --- 117.21 139.26 996.15Total 481.44 1767.67 190.17 133.39 380.11** 3369.06

** Recovery from Govt. deptt./ Agencies recd. Directly in DPCL

In addition to above Rs. 700 crores were raised through incentive on timely payment. The whole amount was used to clear the old outstanding dues to central power utilities owed to them from DVB days. In case of other states most of amount come from the state exchequer.

Exhibit I: Peak Demand (MW) of Delhi


Illustrationsdepictedhere,sourcedfromrecentCRISILreportclearlybringsouthowPPPmodelinDelhihasplacedDelhiamongthebestplacedintermsofstatesfiscalhealthandfinancialpositionincomparisontootherstatepowerutilities.

Exhibit IV: Year Wise Capitalization

Capital Expenditure of Distribution Companies (Rs. Crores)DISCOMS 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 TotalnDPL Actual 48.51 281.46 338.2 430.93 270.51 245.11 288.57 374.09 2277.38ByPL Actual 58 85 416 357 283 281 295 247 2022BRPL Actual 72 115 538 711 399 128 391 475 2829TotalCAPEX Actual 178.51 481.46 1,292.20 1,498.93 952.51 654.11 974.57 1,096.09 7128.38

The entire capitalization was met out of discom and Transco balance sheet and no budgetary support was required from the government. In fact the large investment which we see in Delhi today on roads and metro is also because of that fact the money which would have gone to fund losses of power sector, was saved and diverted to these sectors. In other states, the state subsidizes and funds the power sector. In case of Delhi, Power Sector has enabled funding of other urban infrastructure. In fact a good “PPP” model is also a good public policy model. The Discoms could generate funds through efficiency gains and also increasing the credit worthiness of the system. The money went to make capital investment to improve delivery of the system.

Exhibit VI

Exhibit V


CONCLUSIONEconomic Sustainibility & Road ahead

In the Distribution Sector alone the planned CAPEX for the period 2002-2010 amounts

to Rs.7128.38 crores. The investment plan of Transco for the MYT period 2007-11 is

Rs.2072 crores. Similarly, there are three power projects coming with a total capacity of

3621 MW. The effect of these huge investments in the sector has not been felt by the

consumers as it has been done by capturing the inefficiencies of the system. As these pockets

of opportunities slender in the future, the marginal improvement in the efficiency decreases,

making the investments more expensive. Earlier the major investment was towards the AT&C

loss reduction and system reliability improvement, now it will be more towards load growth

and infrastructure development, like replacing the aging assets and therefore more reflective in

tariff. The regulatory commission must engage the companies to develop a business plan with

a vision of ten years so that its impact on the retail tariff could be spread over a longer duration.

It is relevant to note that the future sustainability of the success story depends on the continued

commercial viability of all the enterprises. It is important for the consumers too to understand

that the power tariff which today exists is less than the cost incurred by the Discoms and

is being regulated which results in the revenue gaps. Such gaps eventually burden the

consumers at the latter date in higher proportion, as they carry interest charges and costs of

postponing the cost recovery.

Delhi has one of the lowest tariffs among metros and neighboring cities. It needs to move

towards cost reflective to be able to sustain the reforms achieved so far and to achieve its

target of becoming a world-class city with reliable and uninterrupted power supply. Some of

the best and comparable developed regions in the world have T&D levels of 8-10% and to

aspire to reach these levels, even the Discoms have to plan and implement modernization

plan programmes; there is need for the Regulator to build in an enabling environment which

will facilitate this process and the necessary capital expenditure. The regulatory framework

needs to nurture the reforms process by balancing the interest of the consumers on one hand

and economic sustainability of the distribution utilities on the other.

Thus, PPP method is a more sustainable model and serves as a great panacea for Power

sector in India and also developing countries and undeveloped countries like Brazil, South

Africa, Nepal, Bangladesh, Pakistan which have similar loss level in distribution.


A ‘Presidential directive’ was issued to CIL asking it to sign FSAs for committed supplies. However, the Government has given CIL the flexibility to decide on the quantum of penalty if it falls short of meeting the commitments to supply 80 per cent of the assured quantity

Source: April 17, Financial ExpressSource : April 3, Hindu Business Line

India, the world’s third-largest coal user, imported 24% more of the fuel in March as power plants increased buying before summer, according to shipping data.

Power Glance Coal-SlawPower Glance Coal-Slaw

AprilWeek 1


Govt directs Coal India to sign supply pacts with power producers

Power Min wants rider on coal allocation

CIL may sign fuel pacts with 50 firms

Chhattisgarh coal block allocation faulty - CAG

Coal stock for just four days at 25 power plants

Govt working on PPP model for CIL mines

Coal India to sign fuel supply pacts with minor penalties


Coal ministry revises guidelines for mine closure plans

No changes in fuel supply pact clauses, says Coal India

Demand supply gap in coal rises to 161 MT in 2011-12

Coal imports increase 24% to 11.6 million tonne in march

Power Cos to get coal blocks without bidding

Coal India says ready to review force majeure in FSA

CIL told to examine FSAs flagged by power companies

Power Min - CIL must supply coal via MoU route till FSAs in place

Coal shortage situation in thermal plants worsens

Raise penalty in fuel supply pacts, Power Ministry tells Coal India

CIL can assure only 60 % supply

Coal India to tweak fuel supply pact clauses

Changes in FSA penalty clause to hit finances - CIL



Source : May 11, Indian Express Source : June 6, Hindu Business Line

The power ministry has asked the coal ministry to instruct CIL to continue supplying coal to power plants through the MoU route till the time the ongoing exercise of inking of fuel supply agreements (FSAs) are completed, failing which capacity addition of nearly 25,000 Megawatts will get stranded.

In a setback to thermal plants facing fuel shortage, Coal India has informed power producers that it can assure only 60 per cent of supply and would “gradually” reach the 80 per cent mark in the coming years.

AprilWeek 1


Govt directs Coal India to sign supply pacts with power producers

Power Min wants rider on coal allocation

CIL may sign fuel pacts with 50 firms

Chhattisgarh coal block allocation faulty - CAG

Coal stock for just four days at 25 power plants

Govt working on PPP model for CIL mines



Coal ministry revises guidelines for mine closure plans

No changes in fuel supply pact clauses, says Coal India

Demand supply gap in coal rises to 161 MT in 2011-12

Coal imports increase 24% to 11.6 million tonne in march

Power Cos to get coal blocks without bidding

Coal India says ready to review force majeure in FSA

CIL told to examine FSAs flagged by power companies

Power Min - CIL must supply coal via MoU route till FSAs in place

Coal shortage situation in thermal plants worsens

Raise penalty in fuel supply pacts, Power Ministry tells Coal India

CIL can assure only 60 % supply

Coal India to tweak fuel supply pact clauses

Changes in FSA penalty clause to hit finances - CIL



Introduction

The root cause of the ills plaguing the country’s power sector has rightfully been traced

to the distribution sector, which is desperately in need of reforms. Revenue losses

arising out of high system loss and inadequate cost recovery have assumed such

gigantic proportions that unless the trend is reversed, the financial health of the sector

will continue to be as abysmal as it is today.

Clearly, new technical and managerial inputs are necessary. In such a context, the

private sector is expected to play a meaningful role in bringing in new investments

and setting up an independent management that will squarely address the issues –

high T&D losses, billing irregularities and poor consumer service. Indeed, privatisation

of distribution has had spectacular success in the advanced countries, but it had a

broader objective – that of ushering in a price-competitive regime.

The task at hand while reforming the electricity distribution in the country has somewhat

a different dimension. Subsidy for the weaker sections has seriously distorted the

tariff structure, electricity thefts are rampant, and the quality of supply is anything but

disastrous – all of which lead to steady revenue erosions. Reforms in distribution –

privatisation included – must necessarily address these issues if tangible benefits are

to accrue to the power sector. The remedy will lie not merely in undertaking policy

initiatives and employing professional skills, but adopting an approach that will make

electricity a popular medium of mass upliftment.

That India has a predominantly large agrarian society, which is entitled to a modern

lifestyle that will be the outcome of electricity being available at affordable prices,

deserves special mention if distribution reforms are to make an impact. Clearly, privatising

Social Interventions in Reforming Rural Electricity Supply

Prabir Neogiis CEO, New Initiatives on Fuel & Power Distribution and

Director, Training Institute of CESC Limited at CESC Limited.

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urban centres alone will not help, as the benefits will accrue

to a privileged few. The idea is also not to create centres of

excellence surrounded by vast areas served by inefficient

and inadequate power, leaving unviable businesses in

the hands of the public sector. Distribution privatisation, if

attempted, must necessarily encompass rural areas such

that the States are effectively split up into autonomous,

decentralised zones based on an optimum load mix and a

representative consumer cross-section. Benefits of change,

leading to quality supply at a reasonable price, must reach

the masses if reforms are to be sustainable.

Genesis

The solution, however, is not as simple as it may appear.

Rural supply in its present form has many pitfalls. In the

first place, there is the concept of flat tariff, which is not

consumption-linked. There has been little or no move to

metering supplies, so neither the actual consumption nor

the commercial loss is known. Because the business is

unattractive, the power utility is least interested in upkeep

of the network. Extensions to provide new connections

follow the least cost approach as there is no system of cost

recovery by way of contribution from the consumers, nor

there is the guarantee of a future revenue stream. Worse

still, the consumers are reluctant to pay their dues even at

the subsidised rates. Attempts to enforce revenue collection

often meet with resistance from local pressure groups

having constituencies to nurture.

The question is whether the present system is serving any

purpose. For one, rural areas have restricted power supply

– thus a 24-hour schedule is not considered sustainable.

Supply conditions do not follow any minimum standards,

resulting from a dilapidated, ill-conceived and neglected

distribution system that poses hazards to life and property.

Safety risks increase as the lines are tampered with

for unscrupulous access to free electricity that is often

the handiwork of organised groups. The influence is so

pervasive that even the conscious consumer falls prey to the

temptation, notwithstanding that it is only a nominal amount

he has to part with against authorised consumption. All

these give rise to a vicious cycle as there is a huge burden of

unaccounted for energy, revenue losses keep mounting, the

power utility does not invest in the network nor undertakes

maintenance, and the supply keeps degenerating. Lines

and transformers, if subject to faults, take days to repair or

replace, and both ‘brown-outs’ and ‘black-outs’ arising out

of sub-standard supply voltage are far too common. In the

end in the garb of cheap power, there is no power.

The policy of extending free largesse has not worked either

nor served any social cause. The subsidised tariff has mostly

been to the benefit of the well-to-do farmer, who owns

multiple pump sets and undertakes commercial selling of

water. Similar is the case with the more affluent section of

the village, living in the built-up areas and having the ‘ability

to pay’. Often these are the people who represent a strong

lobby that resists any change, which will be to the detriment

of their own narrow interests. In any case, the beneficiary is

not the lifeline consumer, nor the landless farmer.

Local Governance

In a country like India, electricity as a subject will continue to

have a social dimension, which will have profound impacts

in situations where communities congregate and conflicts

of interest arise. The problems facing rural electricity supply

will, therefore, be best addressed if the solutions are

targeted to benefit the community at large, and not externally

imposed. What is important is that such solutions must also

appear to be the outcome of initiatives undertaken by the

local population, so that there is a sense of ownership of

the decisions to be implemented for enforcing commercial

discipline. The principles of self-governance, leading to the

formation of Village Councils, have been successfully tried

out for accelerating local development programmes under

decentralised set-ups. It is proposed to bring into play

similar concepts for administering the electricity supply in

villages, particularly metering, billing and collection.

To implement the proposal, a two-tier approach is

suggested. A distribution intermediary, which can be a local

body, a consumer co-operative or an NGO, will receive bulk

supply from the power utility and undertake the responsibility

of retail supply. The bulk tariff will attempt to recover the cost

of supply, at least in stages if not possible initially. In turn,

the distribution intermediary will charge commercial tariff that

at the minimum will be consumption-linked. Clear clusters

of the population will be identified that will have the ‘ability

to pay’. The ‘willingness to pay’ will follow once the promise

of 24-hour supply, backed by reliable service, translates

into reality. There will still be pockets in the village inhabited


by the weaker sections. Concessional rates under ‘lifeline’

tariff will be made to apply to these selected groups who

are known to live below the poverty line. The revenue gap

that will arise due to inadequate recovery of the costs will

then be made good by the State in the form of a direct

subsidy or grant, the quantum of which will be assessed

in advance and provided for against budgetary allocation.

The least advantage that will accrue is that the State will not

be required to fund unquantified losses in a defined area of

supply.

To bring in the concept of self-governance, a Village

Committee made up of bona-fide representatives can

be constituted to oversee the routine operations of

meter reading, bill delivery and revenue collection. Such

intermediation is necessary to cultivate commercial

discipline amongst the electricity users, discourage thefts

and protect the interests of genuine consumers who are

willing to pay. In short, community involvement is sought

as a means to act as a social deterrent to the present

mal-practices of unauthorised use of electricity. The hard-

core engineering functions, like O&M, metering etc., will,

however, be handled by the distribution intermediary with

trained staff, who can be imparted the necessary skills by

the power utility. A complement of two linesmen will be

adequate for the purpose, given the extent of the supply

network normally prevalent in a village. Major line repairs /

replacements can be given on contract, to be overseen by

these linesmen. A third employee will handle the commercial

and accounting workload, including record keeping, billing

and bookkeeping. The database will not be large and can

be stored in a Desk Top PC, as the number of consumers

in a typical village will not exceed 200-300.

As the profile of all these jobs is simple in nature, there is

a distinct possibility that the employment can be offered

to the local youth who can be encouraged to acquire the

basic skills and also receive training from the power utility.

These very employees will be called upon to undertake

meter reading and bill distribution, and report to the

Village Committee, which will intervene if any difficulties

are encountered. On the specified day to be announced

in advance, the consumers will be asked to deposit their

monthly payments to the Village Committee, which will

maintain an account before passing on the collection. The

distribution intermediary, in turn, will deposit with the Village

Committee an amount per consumer for each activity, say,

Rs.0.60 for every meter reading, Rs.0.40 for bill distribution

and Rs.1.00 for collection, so as to cover the administrative

costs incurred. The Committee’s services will be voluntary in

nature, and the surplus cash that will be left at year-end after

meeting the costs will be available for disbursement equally

among the 3 employees of the distribution intermediary to

provide them an incentive in the form of annual benefits. In

addition, they can also undertake minor electrical repairs at

consumers’ premises, and the income from such work can

be equally shared if overseen by the Village Committee.

The approach can lead to interesting results. Supply will be

secure, so will be the collection of user charges. Energy

accounting will be realistic, as metered readings will be

relied upon. Aberrations in the system, including consumer

mischief, will be highlighted and addressed by the village

elders. Local employment is generated, and the village

economy as a whole improves.


Innovating & Improving

The arrangement, however, cannot succeed on a stand-

alone basis. As a means of seeking continuous improvement

in electricity supply, new investments in capital assets will

be necessary. The Rural Electrification Corporation (REC)

can lend meaningful support by advancing soft loans at

concessional rates to the distribution intermediary, which

can then undertake these new investments. To increase

consumer accountability, smaller clusters of supply fed by

dedicated low-capacity transformers can fetch handsome

returns in improving collection and reducing losses. Metering

of supplies too can be financed by institutional funding, as

has been the practice elsewhere in the Sector. Promotional

measures of energy conservation that will be beneficial to

the supplier and the user alike can be pursued vigorously

by exploiting the positive sentiments of the cost-conscious

consumer. Agricultural consumers can take advantage of

energy-efficient pump sets that can be brought into service

through institutional arrangements, replacing the cheap,

energy-guzzling units that also result in depleting the water

table through indiscriminate use. The financing arrangement

can be so structured that the distribution intermediary can

pay back the equipment supplier or the lender from the cost

savings resulting from optimised energy usage.

The emphatic point is that rural electrification, if handled

innovatively, can have interesting possibilities of shortening

the ‘pay-back’ period of the initial investments, if not making

it attractive. Field trials have established that even in a regime

of subsidised tariff, measures like extension of the primary

(11kV) network, installation of ‘one-off’ transformers at load

centres and introduction of insulated overhead mains can

yield significant benefits in the immediate term and make the

investments attractive. If the consumers can be persuaded

to pay a commercial tariff that is at least consumption-linked,

such investments can indeed be sustainable.

Conclusion

In their Paper titled “Better energy services for the poor

(2000)”, Brook and Besant-Jones (2000)7 observe that

“traditional mechanisms for handling the interface with

customers are often ill-suited to poor households in informal

settlements (which may lack a formal address) or small

and dispersed rural communities”. So is the case in Indian

villages, which also suffer from poor literacy levels and lack

of basic amenities, like education, sanitation and healthcare.

Energy reforms in such context can succeed when there

is community mobilisation to create social barriers against

electricity thefts and commercial malpractices.

The argument that can be advanced is that commercial

principles will not work in a rural setting. Metering too is

considered a difficult proposition, as it leads to additional

pressure on staffing and costs. The truth is that there is

no other option if rural supply is to be put back on track

with some semblance of quality, reliability and affordability.

Wherever metering has been tried, it has served as a

differentiator between reliable power and cheap power,

which gives little or no guarantee of supply.

The scheme suggested is an attempt to cultivate commercial

discipline amongst the rural electricity users through active

community participation. Such measures have been largely

successful in Bangladesh, where a co-operative movement

has provided the necessary inspiration. Electricity Act 2003

recognises similar need and recommends the role of co-

operative societies, user associations or local authorities in

handling the supply arrangement in villages under the Rural

Electrification Plan of the States.

The simple advantage also is that the distribution

intermediary, representing largely a local effort and a non-

profit endeavour, will have low overhead costs and be seen

as contributing to the village welfare. Consumer interfacing

will improve and service will be personalised – distinct from

the present system whereby the power utility can ill-afford

to post dedicated staff. The vastness and spread of India’s

countryside calls for local solutions that can address village-

specific issues, and creating the distribution intermediary for

handling the electricity supply is just another step in that

direction. Implementation can commence with pilot schemes

at chosen locations to produce a demonstrative effect and

replicating the model after there is public awareness of the

benefits of the system. A good communication strategy will

be important in establishing that the change process, after

all, is in greater public interest, and hence legitimate.

The power sector in India has waited for long for reforms

to bring in the desired change. The wait could be longer

if the complexities of rural electricity supply continue to be

ignored without addressing the problems.


In a significant move that expands the scope and powers of the Sebi beyond the universe of listed companies, the market regulator cleared the framework of the rules governing Alternative Investment Funds

Source : May 18, Indian ExpressSource : April 3, Business Standard

With the free fall of the rupee against the dollar, private equity funds are not only witnessing a shrinking investment portfolio, but their returns on investments are also taking a hit, making the exit scenario gloomy.

Power Glance Sector FinancePower Glance Sector Finance

AprilWeek 1


Finance of state power utilities precarious:RBI

Bank may recast power loans worth Rs 15000 Crore

SEBI takes over regulation of private equity industry

Govt eases foreign investment norms for commodity exchanges

SEBI to amend exchange regulations

New Sebi norms reduce listing-day volatility

ECB norms for power cos eased; RBI to issue guidelines in 7 days

Private Equity investors line up to cash in on wind energy sector

Rs free fall against greenback hits PE investment portfolios

Investor protection group files ease against SEBI, exchanges

Rupee-hit power producers seek stable gas prices now

SEBI notifies alternative investments fund regulations

Banks recastRs 75,000 CrSEB loans

RBI likely to relax norms for NBFCs

RBI leaves key rates unchanged disappointing industry market

SEBI shuts the consent route for insider traders front runners

Rs 2 lakh cr needed to harness states hydelpotential

Power Discomsmay issue bonds against losses



Source : May 23, Business Standard Source : June 16, Business Standard

Restructuring of power sector loans have picked up in the March 2012 quarter. Public sector banks have been reported inFinancial Express to have restructured loans extended to state electricity boards (SEBs) of around Rs 75,000 crore.

To bring power distribution companies (discoms) out of losses, the government is planning to allow them to issue bonds, backed by state guarantees, for about 50 per cent of their outstanding loans

AprilWeek 1


Finance of state power utilities precarious:RBI

Bank may recast power loans worth Rs 15000 Crore

SEBI takes over regulation of private equity industry

Govt eases foreign investment norms for commodity exchanges

SEBI to amend exchange regulations

New Sebi norms reduce listing-day volatility

ECB norms for power cos eased; RBI to issue guidelines in 7 days

Private Equity investors line up to cash in on wind energy sector

Rs free fall against greenback hits PE investment portfolios

Investor protection group files ease against SEBI, exchanges

Rupee-hit power producers seek stable gas prices now

SEBI notifies alternative investments fund regulations

Banks recastRs 75,000 CrSEB loans

RBI likely to relax norms for NBFCs

RBI leaves key rates unchanged disappointing industry market

SEBI shuts the consent route for insider traders front runners

Rs 2 lakh cr needed to harness states hydelpotential

Power Discomsmay issue bonds against losses



Introduction

In the Electricity Act 2003, Open Access has been defined as

“ the non-discriminatory provision for the use of transmission

lines and distribution system or associated facilities with

such lines or system by any licensee or consumer or a

person engaged in the generation in accordance with the

regulation specified by the appropriate commission”. It is

therefore evident that open access essentially offers choice

for consumers, for intermediaries like trading licensee or

distribution licensee or even generating companies. Each

one of them is entitled to the use of transmission systems

or distribution infrastructure in a non discriminatory manner.

Advantages of Open Access:

a) Enables Power transfer from surplus region to deficit

region thereby enabling overall economic growth.

b) Facilitates merchant power capacities to come up and

thereby encouraging competition in the power market

and development of power market.

c) Provides freedom to consumers to choose their

suppliers thereby promoting merit order and reduction

in cost of procurement.

d) Provides choice to generators to sell their power to

procurers of their choice.

The Present Scenario:

Though interstate open access has been a success

story, there are lots of concerns as far as intra state open

access is concerned. There are several instances of state

government in India citing shortage of power in their states,

have issued orders under section 11 and other provisions

of the EA 2003 which have had the effect of denial of open

access.

On the other hand, states like Punjab, Tamil Nadu, Rajasthan,

Gujarat etc have gone ahead with retail level open access in

a big way. Presently more than 1000 open access buyers

procure power on Day ahead spot market on daily basis

from Power Exchange.

Recently, Ministry of Law and Justice and learned Attorney

General of India have opined that all 1 MW and above

consumer are deemed to be open access consumers and

Discoms are required to comply with open access which

facilitates power supply with demand above 1MW.

Key Areas of Concern:

• Apprehensionoflosinghighrevenuecrosssubsidizing

customers:

Cases have been noticed where open access requests

have been put in hold by the utilities/SLDCs with the

application neither being approved nor rejected for longer

duration. The utilities apprehend loss of revenue from open

access. However the impact of open access on the utilities

needs to be studied in greater details.

In case of a power deficit utility, open access to buyer may

effectively lower the requirements to buy short term power

from market which may translate in savings in the form of

reduced requirements of high cost marginal power. It will

also facilitate supply to cross subsidized categories which

may earn government support in the form of additional

Rupa Devi SinghManaging Director & CEO, Power Exchange India Limited

Making Open Accessa Reality at Retail Level

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subsidies for revenue neutrality. Similarly for a power surplus

utility retail level open access may help in trade of surplus

power and additional revenue.

• Highlevelsofcrosssubsidysurcharge:

With the fear of losing cross-subsidy in mind, some utilities

have argued for cross subsidy charges ranging between 50

paise – 200 paise per unit . Under these circumstances, it

would be difficult for the open access consumer to be able

to find power at such rates that the landed cost remains

economically attractive to him after taking into account the

cross subsidy charges and the transmission and wheeling

charges.

Cross subsidy charges need to balance the twin objective

of encouraging competition in the sector as well as being

fairly compensatory to the Distribution Utility. The additional

production that the state would witness as a result of

availability of more economical and reliable power through

open access would, in all likelihood, generate tax earnings

that would more than compensate for the subsidies that

the Government would need to provide on account of open

access.

• Lackofcrediblebalancingandsettlementmechanisms

at the state level:

Retail level open access calls for setting up Intra-state ABT

mechanisms across the states to ensure efficient energy

balancing and settlement. It’s absence in some states

poses serious road-block in retail level open access.

• Requirementofsupportinfrastructureforopenaccess:

Intra state ABT requires implementation of special energy

meters on the periphery of all the entities. The interface points

such as CPP with the grid and open access consumers

with the grid will have to be metered. Adequate & reliable

communication facilities should also be established by the

Distribution Utility / STU to enable speedy data transfer.

• Requirement of assurance of uninterrupted power

supply through the open access route:

An open access consumer who procures power from an

external supplier after paying for transmission charges,

wheeling charges, cross subsidy surcharge, would obviously

expect uninterrupted power supply. Power interruptions by

the Utility on account of network quality may be a longer

term issue to tackle, however, as far as possible when the

curtailment is due to generation availability issues; to the

extent the network configuration permits, a consumer’s

power should not be interrupted if scheduled .

• Availabilityofsufficienttransfercapability:

Inadequate transfer capability between Southern and NEW

(Rest of India) grid results in uncertainty and volume risk

for retail open access buyers. Similarly inadequate transfer

capability inside some states also pose considerable volume

risk for retail customers prohibiting the growth.

Conclusion

We have seen successful implementation of retail level open

access in few states only. The steps listed below would go

a long way in ensuring success in retail level open access

throughout the country:

• Create awareness among Distribution Utilities and

provide them appropriate Govt/ Regulatory flexibility

and support to allay their apprehension about losing

high revenue cross subsidizing customers

• The Regulatory and technical barriers need to be

eased out to bring greater clarity and assurance to

open access customers

• Augmentation of transmission capacity in line with

generation capacity to ensure a de-bottlenecked

transmission system for power evacuation and transfer

• An appropriate transmission pricing regime that

provides the right locational signals and does not

discourage transfer of power over long distances

• ProactivesupporttoMerchantPowercapacityaddition

through facilitatory measures such as timely fuel

allocation and other clearance requirements.



Will the New Guidelines benefit the Short Term Bilateral Market?Critical evaluation of Guidelines for Short Term Procurement of Power by Distribution Licencees


A decade ago, the Electricity Act of 2003 was passed as a

legislation aiming to transform and catalyze the development

of power market in India. The legislation delicensed

generation, introduced Open Access and accepted power

trading as a distinct activity.

Though power trading is defined concisely as ‘purchase

of electricity for sale thereof’, over the last decade trading

of power has evolved from a possibility to an everyday

strategy. States selling surplus power during sudden rains

and purchasing power on generation outages, procurement

and selling of power as required from Power Exchanges

on day ahead basis, trading power through a mix of

Unscheduled Interchange and Collective transactions,

etc. are trading strategies utilities/discoms apply on day to

day basis to reduce power purchase costs or increasing

power sale revenues. Lining a macro-perspective, trading

has translated benefits to the market economy in terms

of competitive tariffs, effective utilization of resources and

increase of private investments in the energy sector.

Trading has been categorized as Long Term Trading- term

up to 35 years, Medium Term Trading – term ranging 1 year

to 3 years, and Short Term Trading – term ranging Intraday

to 1 year. National Electricity Policy 2005, a resolution

enforced by central government aiming to provide power for

all, has encouraged Short Term Trading of Power by stating,

‘To promote market development, a part of new generating

capacities, say 15% may be sold outside long-term PPAs.

As the power markets develop, it would be feasible to finance

projects with competitive generation costs outside the long-

term power purchase agreement framework. In the coming

years, a significant portion of the installed capacity of new

generating stations could participate in competitive power

markets. This will increase the depth of the power markets

and provide alternatives for both generators and licensees/

consumers and in long run would lead to reduction in tariff’.

However, the recently issued ‘Guidelines for Short Term

Procurement of Power by distribution licensees’ in April,

with an objective to promote competitive procurement of

electricity, may not accelerate the development of power

market. The Ministry of Power has notified guidelines for

short term procurement of electricity by distribution licensees

through Tariff based bidding process. These guidelines

have been framed under section 63 of the Act.

The objective of the guidelines is to reduce the power

purchase cost for distribution utilities through a process of

competitive procurement; reducing the cost of procurement

of power and standardizing the process of procurement

of power. However, the guidelines may turn procurement

of short term power to relatively complex and procedural,

which rather requires swift decision making, innovative

solutions and seizing of opportunities towards optimization

of scarce energy resources.

Highlights of the guidelines for short term procurement are

listed below:

• The guidelines are excluded for power procured for

less than 15 days, banking mechanism and Power

exchanges. The bidding process is a single stage

process which would be adopted by inviting for

Request for Proposal (RfP). The procurer based on

the requirement would invite bids on round the clock

basis (RTC) or for different time slots. The bidder should

quote the single tariff at delivery point upon the invitation

of bids by the procurer. There would be no escalation

in tariff during the period of contract. However, pricing

would be different if bids are invited for different time

slots. All the bids would be evaluated at the procurer’s

periphery.

• EachbiddershouldsubmitanEarnestMoneyDeposit

(EMD) of Rs. 30,000 per MW per month of the capacity

offered in the form of Bank Guarantee. The successful

bidder should furnish Contract Performance Guarantee

(CPG) for an amount of Rs. 3 Lakh per MW per month

of contract period.

• The bidder who has quoted lowest tariff shall be

declared as the successful bidder for the quantum of

power. Once PPA is entered with the selected bidder,

bidders may raise the bills on weekly basis or at the end

of the contract period for the energy scheduled. Any

deviation by more than 15% of the contractual capacity

by seller or procurer would lead to a compensation of

20% of the tariff per KWh for short fall.

Harish SaranExecutive Vice President, PTC India Limited

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• Procurer may be required to provide a payment

security in form of a revolving Letter of Credit (LC) prior

to the supply of power, equivalent to 100% of weekly

energy corresponding to the contracted capacity. The

processing time for the bids from publication of RfP till

signing of PPA is 10 days.

The short term market has been able to bring a lot of benefits

to both buyers and sellers, with its competitive tariff, better

utilization of existing infrastructure & resources and private

investments. The short term power market is up to 10% of

the total energy generation in the country. If Unscheduled

Interchange (approx. 3%) and Power Exchange (approx.

2%) are excluded then bilateral short term is about 5% only.

These guidelines may impose restrictions on the potential

Short Term market and may hinder the expansion and

promotion of the same.

Guidelines state that ‘Power purchase cost for short term

procurement of power is significant part of overall power

purchase cost for distribution licensees’. The statement

seems to be incorrect as statistics indicate that the current

weighted average bilateral short term prices are even lower

than the long term prices of liquid-fuel based generation/

thermal based (running on imported coal) generations. The

short term power purchase costs even vary across different

states and are reducing significantly. Power purchase costs

are subject to market price fluctuations that are due to

inaccurate estimation of demand projections by utilities as

well as external pressures.

Also, subjecting the Short term procurement to regulatory

approvals seems undesirable considering the quotient of

time available to service the deficit/surplus power supply

positions. The recent Shunglu Committee report on

Financial Position of Distribution Utilities, 2011 has also

recommended that, ‘regulators should not be unduly rigid

and disallow variations in the cost. The event having already

taken place, a realistic approach can prevent revenue loss

to the distribution utility’.

The main objective of the guidelines is said to promote

competitive procurement of electricity, an endeavor

already placed in the market. Power exchange is a neutral,

transparent and competitive platform. Short term bilateral

procurements are mostly made through competitive bidding

except that they are not standardized. Short term market is

uncertain and some element of flexibility needs to be built in

rather than introducing tight structure and time consuming

bid process. In an era, when the market is moving towards

e-procurement etc., bringing short term market under such

structure may be deterrent to the development of the power

market.

Another objective of the guidelines is to facilitate transparency

and fairness in procurement process. However, the present

system of procurement is transparent and fair. There is

no information asymmetry in the current procedures as

every licensee has to submit Form IV to CERC on monthly

basis detailing all contracts executed. Moreover, Market

Monitoring Cell (MMC) of CERC is constantly monitoring the

market and releases monthly and weekly reports, which are

available in the public domain.

Distribution licensees having surplus power sell their power in

the open market through traders. The mechanism laid down

through these guidelines require distribution companies

to wait for the tenders from other licensees, which forces

them to sell power through UI and Power Exchanges where

scheduling is uncertain.

Moreover, an unreasonable amount on Earnest Money

Deposit (EMD) and Contract Performance Guarantee (CPG)

of Rs. 30,000 per MW per month and Rs. 3 lakh per MW

per month respectively, forces private and small generators

including renewable energy generators not to participate in

any bidding process.

If one perceives the market, the benefits of case-1 bidding

for long and medium term have not been witnessed and the

market has not reached a stable state. In this case, over-

regulation of a well performing short term market may act

as a barrier to development of power market. The rationale

for these guidelines is not subject to the current market

scenario and may push further challenges against the

growing market.

Though most of the buyers in the Short Term market are

opting for competitive bidding process, the impact of new

guidelines will be felt only after its implementation in totality

by the buyers. Most of the buyers in Southern Region have

already completed their purchase for the next one to two

years before applicability of these guidelines. Purchases

have come to minimum in other Regions of the country and

impact will only be known after it is implemented by such

buyers located in other Regions.

The opinions expressed in this article are author’s personal opinions, and they do not reflect in any way those of the institutions to which he is affiliated.


Legislation is a law enacted by a Governing Body; it is an

establishment of statutory framework to which respective

businesses refer every day every hour. Laws under legislation

are inviolable, sacrosanct and framed for the amelioration

of the entire society. The vision, virtues and vigilance, of a

group of individuals backed by reasearch, consensus and

validity, forms the strength of legislation.

In India, the most welcomed, needed and effective legislation

for power sector has been ‘The Electricty Act 2003’ – It

was under discussions for two years, redrafted ten times,

introduced in Lok Sabha in August 2001 and was finally

passed on 5th May 2003.

Electricity Act, 2003 as incorporated in its preamble, is to

consolidate the laws relating to generation, transmission,

distribution, trading and use of electricity and generally for

taking measures conducive to development of electricity

industry, promoting competition therein, protecting interest of

consumers and supply of electricity to all areas, rationalisation

of electricity tariff, ensuring transparent policies regarding

subsidies, promotion of efficient and environmentally

benign policies, constitution of Central Electricity Authority,

Regulatory Commissions and establishment of Appellate

Tribunal and for matters connected therewith or incidental

thereto.

The Act is an attempt to introduce ‘market based regime’

in Indian power sector. Open Access, Power Trading,

opportunities for Captives and IPPs, granting wider choices

to consumers and generators, sale of SEBs and phasing

out of Subsidies, all marked a radical shift in the market

environment. When laws begin to garner hopes, an

economic righteousness is established; a reason why the

EA 2003 is the most revered power legislation of India.

However, any market or sector otherwise, has an intrinsic

growth that develops and structures the market itself into

something new. This is due to evolution of practices and

transformation of business ideas. From barter trades to

e-procurement, change in shift of consumer behavior is a

determinant of market restructuring as a result of an intrinsic

growth.

Similarly, the Indian power sector has undergone substantial

growth from monopolies to an oligopolistic competition.

Almost 9 years to the EA 2003, and 9 years of incredible

growth, both call for certain amendments to the provisions

of the Electricity Act 2003.

Following are certain amendments proposed for promoting

a fair and competitive market

• Power Exchanges (PX) were introduced in India in

2008. Since then, trading on exchanges have grown

significantly and now constitute 16% of the total Short-

term (ST) market. Being a significant component of

trading business, Power Exchanges’ operations should

also be brought under the ambit of sections 60 and 66

and the appropriate sections, including the definitions,

may be appropriately amended.

•Section60(MarketDomination):

The Appropriate Commission may issue such directions

as it considers appropriate to a licensee or a generating

company or a power exchange if such licensee or generating

company or power exchange enters into any agreement or

Proposed Amendments to Electricity Act 2003

Dr. AtmanandProfessor of Economics & EnergyFormer DeanManagement Development Institute, Gurgaon

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abuses its dominant position or enters into a combination

which is likely to cause or causes an adverse effect on

competition in electricity industry.

- Section 66 (Development of Market):

The Appropriate Commission shall endeavour to promote

the development of a market (including trading and power

exchange) in power in such manner as may be specified

and shall be guided by the National Electricity Policy referred

to in section 3 in this regard.

• PXshouldcomeunderthepurviewofCommissionand

to be treated as Licensees for all other general purposes.

They should also be made to provide information on

their trade (s) monthly the way trading licensees do (by

filling up various forms).

• Also,tobeinlinewiththespiritofEA2003,thereshould

be no discrimination amongst the various players.

Hence, in case of curtailment due to congestion, PX

should not be given priority over traders.

• Section62,63,79,86–Amendmentrequiredtoavoid

different interpretations.

• Section62and63oftheElectricityAct-2003,provide

for two alternatives available to the distribution licensees

to procure power with the approval of tariff by the

Appropriate Commission, viz:

• Under section 62, Appropriate Commission shall

determine tariff for supply of electricity by a generating

company to a distribution licensee

• Under section 63, tariff is determined by competitive

bidding and the Appropriate Commission shall adopt

such tariff

Hence, Section 63 is an exception to Section 62 and the

guidelines will operate only when tariff is to be determined by

the bidding process. It is also pertinent to note that Section

62 of the Electricity Act – 2003 has not been repealed.

• Further to above, National Tariff Policy (NTP) and

National Electricity Policy (NEP) were framed under the

provisions of the EA-2003 and these are subordinate

legislations and cannot override the provisions of the

Act and in case of a conflict between a substantive Act

and subordinate legislation, the former shall prevail in

as much as subordinate legislation must be read in the

context of the primary/legislative Act and not vice versa.

Hence, a clarification note could be introduced in the Act

so as to ensure that both the alternatives are available to

the distribution licensees. This will also help in reducing

uncertainties that the private IPPs are facing to sell their

power to utilities as they do not seem to have any other

option but to go for competitive bidding (which has inherent

critical issues) only.

• Wire(distribution)andcontent(retailsupply)businessof

all existing discoms should be unbundled and separated

to avoid cross subsidization. This will lead to separation of

content (Competitive) and carrier (Regulated) segments.

• Section11

Directions to Generating Companies not to provide

opportunities for third party sale of power. This way

many private generating companies, who can avail better

opportunities in inter-State trading market, are forced to

be captive to the concerned State. This is acting as major

barrier to the growth of power market. Although this matter

is subjudice, it is important that Section 11 is elaborated

in more detail in the Act so as to clearly lay out the

circumstances under which State government can invoke

the provision. This clarity will help in not subjecting the

provision to different interpretations and strengthen the spirit

of Act which is competition and non-discriminatory Open

Access (OA).

• There have always been debates and discussions

about selection of regulators and independence of the

regulatory bodies from the Government control, first

step in this regard should be to avoid retired state public

servants to select for these positions. Second there can

be consultation but no administrative approval required

for any proposal of SERCs from the concern Ministry in

the state to avoid arm twisting.

Amendments to legislation are difficult, comprehensive and

involves majority consensus of all stakeholders. However,

they suggestions for amendments stand important, distinct

and thought-provoking for initializing any change. These

amendments would frame the EA 2003 subjects to today’s

market. Such amendments may promote an even effective,

fair and competitive market than ever. A revised legislation

may also propel support to further growth and market

restructuring suiting our growing economy. Nonetheless,

the EA 2003 has been a key framework in the growth of our

power sector and appropriate revisions in future shall be as

revered with compliance as ever.


Next Generation Power Market Intelligence

Sally Hunt the famous author of books “Competition and

Choice in Electricity” (Wiley, London 1996) and “Making

Competition Work in Electricity” (Wiley, New York 2002)

was the mastermind of electricity privatisation in Britain in

the 1980s and introduction of competition at the same time.

Electricity as a tradable commodity and available on spot

market had never been done anywher e, and most experts

considered it impossible. But Hunt convinced everybody

during more than two years and dozens of meetings, drafts

and negotiations to develop a workable plan – and the plan

that emerged has survived remarkably well. The people

who constructed it had found a new talent – electricity

restructuring and power market. Similarly in India during

2001-02 the concepts of a Power market was penned

down with lot of initial doubts and inhibitions in drafts for

EA2003.

Power market in India since then has travelled a long journey

and played an important role as growth driver for the sector

and has considerably enhanced investor’s confidence.

Short-term market now has grown to a size of US$ 4

billion. In terms of energy 94 billion units which accounts

for almost ten-percent of the total power generated in the

country is traded either through traders or Power Exchange.

However with the ever expanding Power Market, issues

that have slightly dampened the spirit are complexity of

the market dynamics, uncertainties and fluctuating price. It

is also opined that quantum and time of power buy and

sell by utilities are also not rationale. Decisions are mostly

based on the gut feelings and conventional wisdom and

even at times on political reasons. Cost of error in decisions

by utilities has large commercial implications running in to

several hundred crores. UI drawls during under-frequency

conditions are causing huge loss to the state exchequer as

it is irrational power procurement at exorbitant rate. There

is a huge potential of revenue saving for SEBs / Discoms

if they take informed market decisions. If Demand Side

management is also taken in to account there is a potential

savings of 18-20% of the electricity bills for Industrial

consumers. It is strongly felt that suitable Market Information

System is required to support IPPs, Discoms, Open Access

Consumers (particularly 1MW and above), Traders, Buying

utilities and all other market participants in taking more

informed decisions related to Purchase / Sale of power

via Power Exchanges, Day-ahead Bilateral or Contingency

Market.

Deployment of SCADA in Indian Power-Sector

System Operation, Grid security and control in Indian Power

sector is the responsibility of System Operator (a neutral

ring fenced agency) at national and regional level. The Grid

is monitored and controlled through hierarchical system

viz. National - NLDC, Regional - RLDC and State – SLDC.

The backbone of power system information collection and

applications are SCADA (Supervisory Control and Data

Acquisition) and EMS (Energy Management System) for

monitoring the healthiness of the Grid. SCADA applications

are essentially acquiring power system data online from the

RTU (Remote Terminal Units) located at different generating

as well as Sub-stations and providing real time system

information for Grid controller

The SCADA platform monitors pre fixed analog and Digital

parameters including MW, MVAR, Voltage, Frequency

and Digital status of Circuit Breaker and Isolators. The

Dr. Rajiv Kumar MishraExecutive Director, PTC India Limited


Present schemes installed at Load Despatch Centers

are not capturing the real time commercial parameters

including Energy Meter data. To take care of the scheduling

requirement for 96 time blocks as per the ABT mechanism,

each RLDC has deployed separate home-grown software.

The UI (unscheduled Interchange) as per ABT mechanism

is calculated and levied on a separate platform. There is no

real time market intelligence available at dispatcher level for

providing commercial and Business decisions in respect of

merit order despatch including purchase and sale of Power

through exchange or avoiding UI during over drawls at low

frequency conditions.

At distribution level, deployment of RAPDRP-IT would cover

end to end business processes, namely: Connection MGMT,

Meter reading -billing- collection, Energy Audit, Energy

Accounting, Asset lifecycle management, Consumer lifecycle

management – similar to Bank KYC and Bank Customer.

However it has to traverse a long treacherous route before it

becomes a reality. Presently the information flow is interrupted

and far from seamless.

Power Market in India – Development and IT Needs

Indian Power Market is a robust 4Billion US$ Market

(INR22,000Crs.). There are unique products available in

Indian Power Market namely Trading - Short/Medium/Long

Term. Indian Power Market is witnessing innovative concepts

about product and services – weekly billings, time-of the-day

power such as peak power, round-the-clock power, off-peak

power, weekend power, day-ahead power, as well. Multiple

Power Exchanges in a deficit scenario is a feat achieved

nowhere else in the world. Exchanges have provided a

transparent platform and market players are increasingly using

it to meet their power requirements. Despite apprehensions

that time is not ripe for a power exchange, it has been

functioning quite well and meeting global standards. Lower

tariff in deficit situation is also a surprise to many. But this

can be attributed to Indian way of being cost effective in their

operations. Sourcing fuel from one source, equipment from

other, we have been able to keep our costs low with this

entrepreneurial approach.

Development of power market in India has created investor

friendly regime wherein the transition is from cost-based

to market-based tariff. Seeing the rapid growth of Short-

term power market as mentioned above, a no. of IPPs has

shown interest. It is expected that in coming years, private

investment will be in excess of 30%. In 12th plan period as

well, this trend of increased private sector participation is

likely to continue but some issues need to be addressed if

we are to have sustained interest of private sector. We must

realize that there are competing opportunities in the sector

and there is large money chasing few good projects. Private

players have been showing increased interest from past few

years in the sector (45% of total capacity addition in 2009-10

was from private sector, 35% in 2010-11). Private share in

installed capacity has increased from 12% to ~23% in last five

years. The changes undergone in Indian Power Sector can

be summarized in a diagram as under:


Power market in India has progressed well in the past decade

but compared to developed nation and International markets

like Nordic pool, we can still say that it is still evolving. The

future may introduce concepts like spot market and real time

balancing markets on-line trading which are the prevalent

concepts in more developed markets.

The relevant system data which are required for Traders and

Market operators are Total Transmission capacity or Transfer

Capability Report from RLDC, STOA Scheduling Report for

RLDC, Daily Power Supply Report &Gen Outage Report,

Market Snapshot From IEX, Market Clearing Volumes

and Clearing Prices At IEX, Market Volume Profile Report

At PXIL, DAM Clearing Volume and Price At PXIL, DAM

Unconstrained Clearing Volume and Price At PXIL, PXIL Daily

Report, Monthly MMC Report From CERC, Daily Generation

Report (Sub Report 18) From CEA. These data are mostly

in public domain but are in different formats and there is

great degree of non-uniformity in the data presentation by

different RLDCs. The first power exchange in the country

started operating in the year 2008. Presently bids and offers

in the exchange are placed online and are cleared online.

However there are several stages of the information and

transaction flow which are still carried out offline. Interface

with the customers and suppliers and a common platform is

deployed and running successfully for last couple of years

as an electronic marketplace.

Market operator and players require seamless flow of

Market and Power-system data. The information is sourced

from different sources and stakeholders such as System-

Operator, Exchanges, Utilities and large consumers. This

would require integrated planning and IT deployment which

would go beyond the SCADA system deployed in NLDC

and RLDC control centers or Exchange Platforms deployed

by IEX and PXIL. It would be an integrated solution based on

open source protocols to source data from all the important

constituents. The Network planning, Architecture and market

applications must be customized to Indian power market.


There is a need for power electricity price forecast

for the competitive power markets which can help

Utilities and other market participants, financial

institutions, and even regulators as the basis for

strategic investment and operational decisions. The

software applications may generate forecasts for

both a base case and scenarios, such as high and

low coal and gas supply costs, high transmission

costs / wheeling charges, Congestion charges.

Market Management Information

The utilities need to have a close watch on the over

drawls and therefore the schedule vs. actual drawl

in terms of the monetary value need to be closely

monitored round the clock. The check on losses

due to UI can be achieved by incorporating smart

reduction of load and load balancing. Any effective

Utility is required to keep a close monitoring to see

where waste is occurring from. And, for that, Indian

Utilities and Discoms need an effective automatic

monitoring and targeting system (aM&T) based on

ICT. This is a tool for multi-utility energy analysis,

and will enable to view and analyse 15minutes

meter data using a single software application.

This innovative analytical techniques is to detect

and eliminate energy waste and gain detailed and

broad picture of where, how much and when

energy is consumed - across all utilities. In addition

to this there can be a software solution for Utilities

to combine meter data with the key, site-specific

parameters that influence energy use such as

Temperature, Daylight hours, Incoming water flow

etc. Application can rank the energy performance

of all major consumers in utility portfolio and publish

individual site-comparison reports to all users. The

DSM smart systems comes with a load limiter. This

mechanism sends a command to every energy user

to reduce electricity usage when the demand for

energy gets out of control. The new smart system

informs Indian consumers about power shutoffs by

sending text messages to cell phone or the in-home

displays on the smart deter. The smart meter makes

a buzzing sound to let a ratepayer know that the utility

company has sent a message. This same process

will be used to notify consumers that some drastic

load shedding of a power outage is scheduled.

The Market management information system is to

collect, compile, sort, analyze and anticipate the

market related information in most scientific manner.

The MMIS is required to be designed specifically

to support Client utilities, IPPs / supplier- Power

Generators, Discoms, OA Consumers, Retail

customers, Traders and all other market participants’,

in taking more informed decisions related to Purchase

/ Sale of power via Power Exchanges, Day-ahead

Bilateral or Contingency Market.

Market Management Information System seems to

be a logical step in a world where all communication

is digitalized and standardized (Internet, E-mail,

SMS, chat boxes etc.) and where cost of digital

intelligence are still rapidly decreasing. This would be

a great enabler for optimizing the power procurement

cost for Utilities. There is also monitoring need of

Regulators which is Systematic analysis of market

behavior – in terms of prices, competition, Profiling

markets and key references, Conducting formal/

informal survey of demand-supply conditions, Market

decision making, trading behavior, Monitoring and

removing bottlenecks for smooth market operation

and Cross checking the fairness. The UI bills which

runs in hundred of crores can be reduced drastically

with this deployment. It will help Utilities to monitor

the deviations from schedule. Market Management

software can be installed at centralized Data

center with pay to use membership for willing state

utilities and large industrial consumers. Single point

installation and pooling of resources would reduce

the deployment cost substantially for the Utilities.

There is a need

for power electricity

price forecast for the

competitive power markets

which can help Utilities

and other market

participants, financial

institutions, and even regulators

as the basis for strategic investment

and operational decisions.


ptchronicle-july2012.pdf

Documents

power sector

ptc india limitednot

property of ptc india

indian power distribution

power distribution woes

competitive power

edition of ptchronicle

effective power market