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Challenges in implementing Open Access, Shri R V Shahi, Former Secretary, Ministry Of Power

Challenges in implementing Open Access
[R V Shahi's Weekly Column for Infraline, March 31, 2008]

There are a number of features in the Electricity Act 2003 which aim at radical restructuring of the sector and at facilitating creation of competitive environment. The central theme, in fact, of the whole Act is protection of consumers' interests. Open access is one of the most powerful tools provided in the Act inasmuchas it creates scope for giving options to consumers to choose their suppliers. In the Act, open access has been defined under Section 2 (47) as "Open access means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission". It may be seen that the option has been provided for consumers, for intermediaries like trading licensees or distribution licensees or even to generating companies. Each one of them is entitled to the use of transmission system or distribution infrastructure in a non-discriminatory manner.

When the Electricity Bill had been referred to the Standing Committee of Parliament on Energy by the Parliament, the issue of open access was deliberated at length. In their report the Standing Committee has particularly emphasized the need for introducing this important instrument of bringing about competition in the sector. An extract from the report of the Standing Committee is given below:

"The Committee feel that provision of open access is key to the power sector reforms particularly on distribution. However, due to different ground realities in each state it may not be possible to do so from an appointed date. The Committee, however, recommend that open access may be introduced in a phased manner, within a definite time frame."

Of late, concerns have been raised about the slow pace of open access so much so that even after more than five years of power trading, the volume continues to be hovering around 3%. To discuss all the issues concerning open access and more particularly the problems which stand in the way of open access in distribution, as well as in transmission moving forward speedily, a Round Table was organized, on 26th March; by Infraline Energy in association with IDFC. I had the privilege of introducing the subject and coordinating the discussion. In the introductory remarks I made the following observations:

  1. When the Electricity Bill was being debated in the Parliament (Lok Sabha), I recall, several Hon'ble Members mentioned about the Sections relating to "Open Access". In the Bill, the introduction of open access had been left to the Regulatory Commissions of the States to introduce this system in distribution in phases. The concern of the Hon'ble Members was that this left a lot of discretion with the Commissions. There could be a situation in which the Commissions could prolong this process, may introduce it in a manner and in a time frame that they could decide and that such a time frame could be as long as ten to fifteen years. This was not really the spirit of the Electricity Bill. Therefore, this provision needed to be more focused so that there was a compulsion on the Regulatory Commissions to introduce open access in a time bound manner. This was also the recommendation of the Standing Committee of Parliament.

  2. Though the Bill was passed in the Lok Sabha without any amendment, and therefore the provision remained as it was, when the Bill came to the Rajya Sabha, it got stuck-up. There were a number of amendments that were proposed by Hon'ble Members of several parties including Congress which was then in opposition. More than eighty amendments had been suggested. We discussed with the Hon'ble Members outside the Parliament and tried to understand the concerns as also utilised these opportunities to clarify the rationale and the view points of the government. Finally only four issues remained unresolved. On the specific understanding that the government would introduce amendments in the next session of Parliament on these four issues, the Bill was passed without any change. The most important of these four issues, on which amendment was agreed, was in relation to the open access. Accordingly, in the amendment was introduced and subsequently passed in January, 2004. The Regulatory Commissions were obligated to introduce open access, in a time bound manner, latest by January, 2009.

  3. Section 42 (2) provides that the State Commission shall introduce open access in such phases and subject to such conditions as may be as specified within one year of the effective date of the Act and will specify the extent of open access in successive phases. It is this provision which was required to be amended in a manner that the compulsion on Regulatory Commissions for introduction of open access in a time bound manner ensures removal of wide discretions. Accordingly, the following provision was added through the amendment.

"Provided also that the State Commission shall, not later than five years from the date of commencement of the Electricity (Amendment) Act, 2003, by regulations, provide such open access to all consumers who require a supply of electricity where the maximum power to be made available at any time exceeds one megawatt.

  1. Where any person, whose premises are situated within the area of supply of a distribution licensee, (not being a local authority engaged in the business of distribution of electricity before the appointed date) requires a supply of electricity from a generating company or any licensee other than such distribution licensee, such person may, by notice, require the distribution licensee for wheeling such electricity in accordance with regulations made by the State Commission and the duties of the distribution licensee with respect to such supply shall be of a common carrier providing non-discriminatory open access.

  2. Where the State Commission permits a consumer or class of consumers to receive supply of electricity from a person other than the distribution licensee of his area of supply, such consumer shall be liable to pay an additional surcharge on the charges of wheeling, as may be specified by the State Commission, to meet the fixed cost of such distribution licensee arising out of his obligation to supply."

  1. The priority of this issue was considered so seriously that when the National Electricity Policy was decided by the Union Cabinet, and notified by the Ministry of Power in February, 2005, the need for time bound actions was further reiterated. Clause 5.4.5 of the Electricity Policy obliges the Commissions to notify regulations on open access by June, 2005.

"5.4.5.The Electricity Act 2003 enables competing generating companies and trading licensees, besides the area distribution licensees, to sell electricity to consumers when open access in distribution is introduced by the State Electricity Regulatory Commissions. As required by the Act, the SERCs shall notify regulations by June 2005 that would enable open access to distribution networks in terms of sub-section 42 which stipulates that such open access would be allowed, not later than five years from 27th January 2004 to consumers who require a supply of electricity where the maximum power to be made available at any time exceeds one mega watt. Section 49 of the Act provides that such consumers who have been allowed open access under section 42 may enter into agreement with any person for supply of electricity on such terms and conditions, including tariff, as may be agreed upon by them. While making regulations for open access in distribution, the SERCs will also determine wheeling charges and cross-subsidy surcharge as required under section 42 of the Act."

  1. Unfortunately most of the Regulatory Commissions have remained heavily preoccupied on issues concerning tariff determination and their role to develop electricity market has more or less remained in the background. For initial few years of the Regulatory Commissions such an approach was in order. No doubt, a number of Commissions have come out with various regulations and judgements of far reaching consequences, and these are positive developments. But, even after five to six years, the fact that electricity market development related initiatives have remained rather subdued, is a matter of serious concern. National Electricity Policy 2005 expected very definite and meaningful contribution from the Commissions. Clause 5.7 of the Electricity Policy amply explains the expectation from various authorities and agencies.

"5.7 Competition aimed at consumer benefits

5.7.1 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.

For achieving this, the policy underscores the following:-

  1. It is the function of the Central Electricity Regulatory Commission to issue license for inter-state trading which would include authorization for trading throughout the country.

  2. The ABT regime introduced by CERC at the national level has had a positive impact. It has also enabled a credible settlement mechanism for intra-day power transfers from licenses with surpluses to licenses experiencing deficits. SERCs are advised to introduce the ABT regime at the State level within one year.

  3. Captive generating plants should be permitted to sell electricity to licensees and consumers when they are allowed open access by SERCs under section 42 of the Act.

  4. Development of power market would need to be undertaken by the Appropriate Commission in consultation with all concerned.

  5. The Central Commission and the State Commissions are empowered to make regulations under section 178 and section 181 of the Act respectively. These regulations will ensure implementation of various provisions of the Act regarding encouragement to competition and also consumer protection. The Regulatory Commissions are advised to notify various regulations expeditiously.

  6. Enabling regulations for inter and intra State trading and also regulations on power exchange shall be notified by the Appropriate Commissions within six months."

  1. A lot of suggestions have been made in various forums with regard to the computation of cross subsidy surcharge. Various State Regulatory Commissions have also determined and notified the rates of cross subsidy surcharge to be borne by consumers of open access. The general perception is that except for a few States, in most cases they are very high and therefore restrictive of this initiative to be effectively implemented and availed of. In this regard it may be relevant to give an extract of the Electricity Tariff Policy notified in January, 2006, in relation to the cross subsidy surcharge as brought out in Section 8.5.

"A consumer who is permitted open access will have to make payment to the generator, the transmission licensee whose transmission systems are used, distribution utility for the wheeling charges and, in addition, the cross subsidy surcharge. The computation of cross subsidy surcharge, therefore, needs to be done in a manner that while it compensates the distribution licensee, it does not constrain introduction of competition through open access. A consumer would avail of open access only if the payment of all the charges leads to a benefit to him. While the interest of distribution licensee needs to be protected it would be essential that this provision of the Act, which requires the open access to be introduced in a time-bound manner, is used to bring about competition in the larger interest of consumers."

  1. While these observations are advanced to suggest that at macro level whether it is the aspect of legislation or of policy instrument, a number of provisions have been made but it is equally important that implementations are seriously pursued by concerned authorities as well as relevant stake holders. Having laws and policies may be important requirements but merely having them may not be enough. They could lead to desired benefits only if implementation is serious and committed.

Shri J.L. Bajaj, the first Chairman of the U.P. State Regulatory Commission made very important observations and raised a few important issues:

  1. The provision of open access is a very major strength to consumers because it gives them a freedom to choose their suppliers. Obviously therefore this provision would, to a great extent, condition the response and behavior of distribution utilities in a manner which could be of great benefit to their consumers.

  2. The Appellate Tribunal for Electricity heard an appeal against the judgement of the Andhra Pradesh Electricity Regulatory Commission and the following observations from their judgement are of great relevance:

  1. The provision relating to open access in the Electricity Act is the backbone of competition and corner stone of the Act.

  2. The Tribunal did not agree with the Regulatory Commission that the Govt. of India did not have the authority to suggest about the cross subsidy surcharge.

  3. They directed the Andhra Pradesh Regulatory Commission to re-work the cross subsidy surcharge.

  4. The Tribunal also observed that nowhere in the Act or in Policy it has been specifically stipulated that the cross subsidy surcharge has to be equal to the level of cross subsidy. Therefore such a surcharge need not be equal to the cross subsidy. The judgement of the Appellate Tribunal is unambiguous and sets at rest all the uncertainties whether the extent of cross subsidy surcharge should be so high in order to cover the cross subsidy that exists in the tariff structure.

  5. In the last five years, Transmission has received more attention than ever in the past. In spite of this there is a fairly wide gap between capacity of the system and capability of the system. It is understood that capability is only about 70% of the capacity. At State level we need to augment the State transmission and sub-transmission where the gaps are even much more. Fortunately agencies like Asian Development Bank (ADB) and Japanese Bank of International Cooperation (JBIC) have been very active in some of the States.

  6. In the perception of many, Unscheduled Interchange (U.I.) charges are seen as solution to all the power problems. It is, no doubt, a useful tool, but it does not have the ability to adequately address many of the issues, e.g. it cannot and it is not able to enlarge the transmission capability and cannot handle the problems relating to transmission constraints. In fact if we say that in some ways UI Mechanism has been a road block in promoting trading, this may not be an over statement.

  7. The Transmission Regulation issued by Central Electricity Regulatory Commission in 2004 led to escalation of transmission charges because of pancaking of transmission charges of different regions.

  8. There are instances where it is seen that when captive plants approach for open access State Load Despatch Center (SLDC) neither accords approval nor does it refuse. There is no accountability to handle such situation of the stalemate. Many States have yet to fix the transmission charges and wheeling charges. U.P. and Uttranchal have decided to determine cross subsidy surcharge on a case to case basis. How would any generator or trader or consumer be able to work on any of their initiatives in such an uncertain situation?

  9. Some of the State Regulatory Commissions have notified the cross subsidy surcharges which are so high that practically open access would be impossible. The rates are Andhra Pradesh (181 Paise), Tamil Nadu (108 Paise), Gujarat (100 Paise), Madhya Pradesh (103 Paise), Assam (137 Paise), Himachal Pradesh (149 Paise). As against these there are also State Commissions which have tried to bring them within workable limits - West Bengal (50 Paise), Maharashtra (13 Paise).

  10. While it is necessary that all steps should be taken to encourage open access, it is equally necessary that we examine some of the following issues so that open access, if implemented to a reasonable level, yields desired benefits:

  1. Will the reliability of supply improve through open access?

  2. Will the distributor ensure exemption from load shedding?

  3. Regulators need to set service standards for network operators?

  4. Is open access going to lead to higher generation capacity?

  5. Even Ultra Mega Project launched by Ministry of Power did not provide for 15% of the capacity to be sold on merchant basis?

Let me attempt to elaborate and clarify these issues brought out by Mr. Bajaj :

  1. Will the reliability of supply improve through open access? Reliability would not depend only on supply of power up to the distribution utility which will be the infrastructure provider. If the distribution utility carries the power of some other supplier for a customer, it will depend on the type of the distribution network, its maintenance and promptness with which the network related problems are attended to. Unless that happens open access, as such, cannot lead to reliability of supply.

  2. Will the distributor ensure exemption from load shedding? If an open access consumer pays for transmission charges, wheeling charges, cross subsidy surcharge, he would obviously expect that he gets uninterrupted power supply. This can be ensured provided the Regulatory Commissions notify orders to this effect. This alone can raise the level of confidence of all the participants of open access.

  3. Regulators need to set service standards for network operators? Normally, almost all the Regulatory Commissions have notified the service standard for distribution licensees. What is important is their enforcement. If open access has to succeed, and for which creating right level of confidence among open access consumers as well as their suppliers would be a prerequisite, enforcement of service standards would be a must.

  4. Is open access going to lead to higher generation capacity? Expectations about success of open access divorced from availability of larger amount of power would be meaningless. Certainty about providing transmission system, appropriate congestion management, a friendly approach of commission on this issue, a less hostile attitude of the State Distribution Utilities/Private Utilities alongwith the State governments, will lead to a level of confidence among merchant plant developers, and other power generators having excess capacity, which eventually has the potential of creating and providing larger amount of power in the system. A lot will therefore depend on the approach of all these concerned agencies on this subject. If such an approach is positively oriented with a factor of allowance and benefit of doubt, the open access will succeed and fetch more generation. If on the other hand they approach it with doubts and suspicion and with a degree of skepticism it is bound to fail and, therefore, would be unable to bring more such generation capacities untied with long term contracts.

  5. Even Ultra Mega Project launched by Ministry of Power did not provide for 15% of the capacity to be sold on merchant basis? It needs to be clarified that when we conceptualized the UMP Scheme, we were quite clear that for the first two projects we may allow the total capacity through PPA so as to raise the level of confidence of developers as well as lenders, and for subsequent projects 15% of capacity could be allowed to be kept out of PPA. This might lead to even better tariff to be quoted by developer. This is an important matter and needs to be pursued with the Ministry of Power.

Shri Shashi Shekhar, Director, Power Trading Corporation & Managing Director of India Energy Exchange, brought out a number of important points as summarized below:

  1. When the Standing Committee of Parliament examined the Electricity Bill, it had recommended 15% of capacity for developing power market. We need to work towards this.

  2. As per the Electricity Act, January 2009, is the deadline for open access in distribution for all consumers of more than 1MW. The progress and preparation is such that it seems unlikely that this could be done in a meaningful way.

  3. The following issues need consideration to introduce open access and derive the desired benefits:

  1. At present the open access in transmission is either on short term basis covering periods upto three months, or on long term basis of 25 years. These are not realistic stipulations. Power markets having different types of options will have to be provided. Obviously the present dispensation disallows transactions of one year, five years, ten years or so. The ground reality could be that this type of sale and purchase may be very extensive. Besides, combined cycle power projects have the life of 15 years, imported coal arrangements of long term nature could be of 5, 10 or 15 years tenure. In the light of these following time slots could promote, in a practical way, open access on transmission:

  • Short term - 3 months

  • Intermediate term - 3 months to 5 years

  • Medium term - 5 to 15 years

  • Long term - more than 15 years

  1. Even in the best possible situation, when a generator or a trader has made arrangement for short term supply of power to a distribution licensee or to a consumer, it is quite practical to expect that within that short duration there could be eventualities like temporary outages of a power generating set and therefore the amount of power supplied during that period could reduce. In such situations downward revisions of schedules should be permitted. Unless such ground realities are accepted and appropriately dealt with, there could be only discouragement for open access initiatives.

  2. When Power Exchange becomes operational, we could expect discovery of rates in the most transparent manner. At present a lot of capacities are locked up in captive plants in co-generation plants and even in bio-mass power generation facilities. These need to be facilitated and brought to the grid.

The Executive Director of Power Grid Mr. S.K. Sonee, who has the responsibility of National Load Despatch Center and also indirectly the Regional Load Despatch Center, and handles the requests for open access on short term basis, made the following observations:

  1. Open access should be seen as a success story. So far almost 17,000 applications for open access have been processed and transactions have happened. 90 billion units of power have been handled through short term open access. More than 95% of requests received were cleared. Only in about 1% cases transactions could not take place because of system constraints. Of course, in 3 to 4% cases transactions could not take place due to refusals by State Load Despatch Centers.

  2. By and large, no generation is bottled up today on account of transmission constraint. Almost 100 players (generators, traders, open access customers including licensees) are participants in the process.

  3. It has been possible to carry power from plants in Kerala to Punjab and similarly from plants in West Bengal to Punjab and Rajasthan. This has resulted in reducing the shortages in these States and also enabled improved generation and increased Plant Load Factor in a number of power stations.

  4. On a single day (last Holi festival) as against the total supply of 70,000 MW, as much as 8,000 MW was transacted through open access system.

  5. It is often mentioned that we should have improved Congestion Management. It is to be noted that in our country we have one of the least congestions. If we want to have totally congestion free situation, we may need to over invest in new lines and sub-stations, which may perhaps not be economical.

  6. It is true that excessive reliance on unscheduled interchange arrangement, for which higher payments are required, is not good and therefore we must find out other methods also to handle the situation. Another problem with UI is that it does not differentiate the rate from one location to another. Unless this is recognized and differentiation is introduced there would be some inhibiting effect on open access.

  7. One of the reasons for open access not being fully encouraged is lack of functional autonomy to State Load Despatch Centers. They should operate with the required degree of freedom as in case of Regional Load Despatch Center.

These presentations were followed by very useful exchange of views and extensive interactions. Some of the useful conclusions which emerged are outlined below:

  1. The present arrangement of short term upto three months and long term of 25 years needs to be restricted if we have to take into account the practical requirements of the industry and consumers. The classifications of 3 months, 3 months to 5 years, 5 years to 15 years and more than 15 years could perhaps be more workable groupings which will meet the requirement and encourage the process of open access.

  2. The contention, that aiming at eliminating congestion with large investments may not be optimal, needs to be challenged. This approach could be fully in order for a system which is stabilized and augmentation required is only marginal. In Indian context when the growth of power sector is slated to be 8 to 10% per year, we need not be unduly concerned on excess build-up on transmission. Any so called excess, in a couple of years, can be experiencing the need for further expansion.

  3. Cross subsidy surcharge should be re-worked in a manner that it encourages and facilitate open access rather than constraints this initiative. There is already a direction of the Appellate Tribunal, with unambiguous approach on the subject, which needs to be implemented.

  4. Open access in distribution to consumers of more than 1 MW could be reality only if the network providers are required to maintain the system in a manner that such consumers get reliable power supply and they are not subjected to load shedding. This stipulation needs to be clearly brought out through regulations by State Regulatory Commissions.

  5. Developing Merchant Capacity in new projects or through expansion in old projects should receive right encouragement.

  6. The procedure of permitting short term Open Access must recognize practical problem of outages of generating sets and therefore downward revision of schedule should be allowed.

  7. Ministry of Power may need to take action on future Ultra Mega Projects providing 15% of Merchant Capacity in line with the thinking earlier.

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