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Regulatory Interventions for Electricity Market Development, Shri R V Shahi, Former Secretary, Ministry of Power

The momentum that was created post Electricity Act 2003 and the associated policies, such as National Electricity Policy and Electricity Tariff Policy, gave rise to expectation all around that electricity consumers may also legitimately desire and get the benefits of a competitive market structure. The situation of shortages, which has been a regular feature of the electricity industry over several decades, will ultimately vanish and abundance will characterise the sector. Consumer would ultimately have choices, and it is the quality, reliability and the price of power which will determine the nature of this industry.

Ever since Electricity Supply Act 1948 came into being, State Electricity Boards had been functioning as the monopoly electricity supplier. In some places where electricity distribution utilities, including some of them in the private sector, were the suppliers of power, the situation was only marginally different. I recall, when I presided over one of the best, if not the best, electricity distribution utility in India, viz. the BSES supplying power in Mumbai, in the Annual General Meeting of the Company in 1995, I said that electricity consumers did not get what they deserved and even private sector distribution utilities including BSES were behaving as if they were doing a favour to the electricity consumers. This sector has remained so much monopolised - whether public sector monopoly or private sector monopoly - that the consumers always got a raw deal, in getting new electricity connections, getting their electricity supply problems or disruptions sorted out or in getting their commercial issues including electricity bills resolved. Lack of competition in this sector, is a situation which continues even now and has deprived the electricity customers of their rightful entitlements and fulfillment of their genuine desires.

It is now about six years since the Electricity Act 2003 was operationalised, about four years since the National Electricity Policy was notified and about three years since the Electricity Tariff Policy came into existence. Except for a brief period of about a few months, when the UPA Government assumed office, and when the Left Group raised certain concerns about the Electricity Act 2003, which were subsequently adequately taken care of, there has been complete clarity and certainty about the legislation as well as about the Policies. Obviously, this has given rise to legitimate expectations of the people at large that a major change would happen in the electricity sector, a change that was deserved and a change that would provide to the consumers the quality of services that they always deserved. And, this would get created out of a competitive structure that would emerge in the electricity sector rendering to the customers several options to choose from.

It would be important to mention that it is the Government which regulated the sector for several decades. Through Electricity Act 2003, Regulatory Commissions were further empowered, and many of the deficiencies, that existed in the erstwhile legislation viz. Regulatory Commission Act 1998, were suitably overcome. It is the Regulatory Commissions which have been envisaged as the major and most powerful instrument of change in the Act. There are questions that are now being raised that if in the telecommunication sector, transformations could be brought about and the advantages of competition could be provided to consumers in such a significant way, how is it that the regulatory system in the power sector has been unable to do so. Many of us in the power sector have been answering this concern saying that the basic difference between the electricity sector and the telecommunication sector, which the Constitution of India has provided by way of administrative jurisdiction of the State Governments and the Central Government, make the situation completely different. The fact that electricity sector has been largely controlled by the State Governments and the fact that even now every State has its own Regulatory Commission, makes the task not only different but substantially difficult to achieve what we wish to achieve. These arguments are valid, but only upto a point. These arguments are accepted by power professionals, but they don't convince consumers at large. They expect results.

The issue of role of Regulators for developing an Electricity Market was brain- stormed in a recent discussion. Quite often any discussion on electricity sector can get derailed by bringing several extraneous issues, such as environmental clearance, State Government's interference and unavailability of fuel and so on. If all such issues are allowed, the whole discussion can get defocused and the deliberations would not be able to render any workable conclusions and line of action. Therefore, utmost care was exercised to ensure that the discussions remained focused only on Regulators' roles in exclusion to the jurisdictions of other authorities and agencies.

It is heartening to suggest that there are a number of things which can be done and should be done so that an appropriate competitive electricity market develops in the shortest possible time. Power generation leaves behind the situation of shortages, consumers are enabled to opt for their suppliers, multiple distribution infrastructure providers emerge and so on. Coming to the Regulatory framework, under the Act, there are jurisdictions for the Central Regulator and there are areas which are under the purview of the State Regulators. But, there are interlinking provisions which can be used by the Central Regulator to also take care of many of the issues, in a coordinated manner, which apparently fall under the purview of the State Regulators. Also, when we made a statutory provision in the Act for creation of a Forum of Regulators, it was envisaged that this Forum would be able to generate consensus on common issues so that there is a uniform and consistent approach on such issues throughout the country. Later on, when the rules on Forum of Regulators were notified by the Ministry of Power, the objective was further reinforced. The Chairman of the Central Electricity Regulatory Commission, as per the Act, is also the Chairman of the Forum of Regulators. This provision also is, in an indirect way, a further empowerment of the Central Regulator. The outcome of the brain storming exercise is summarised below under two broad heads - (a) Proactive role of Regulators on capacity development, and (b) Initiatives to promote market development.

  1. The role of State Regulators, in the matter of enforcing on the State distribution utilities to carryout reasonable demand forecasting, formulating concrete programmes to meet these demands and periodically in reviewing the implementation of such programmes, needs a proactive approach. In the initial years of Regulatory Commissions, people at large gave an allowance for the required gestation periods for such preparations and actions, but almost after ten years of regulation they are unable to appreciate as to why this is not being done in most of the States. There are a few States, only by way of exceptions, where these exercises are being done. In most of the large States, we continue to have severe mismatches between demand and supply. What is recommended is that as a regular exercise this should be done for a five to seven years period, the details should be revisited every year to update and there should be a mechanism by which the Regulator should be in a position to monitor the progress. The programme of action should be notified by the Regulator so that all the stakeholders are enabled to appreciate what is being done and also compare the same with the progress and outcomes. This initiative, if implemented properly may be able to ensure more committed and timely actions on the part of the distribution utilities to prepare for getting power, as required, from time to time.

  2. The Competitive Bidding Guidelines issued by the Government of India provide for Case-I Bidding as well as Case-II Bidding. Very few State Regulators have been proactive on either of these two alternatives. Ultra Mega Project initiatives under Case-II Bidding was an initiative of the Ministry of Power. Under Case-II Bidding some States have initiated action to identify developers, on the basis of Competitive Bidding on tariff, to develop well identified specific projects with available fuel linkages and sanctions and clearances. This, as decided earlier, was on the model of Ultra Mega Project Scheme. Similarly, very few States have issued tenders, under Case-I Bidding Scheme, inviting power project developers to bid for notified amounts of power capacity from the projects that the developers would themselves identify and set up. In this Scheme, however, different practices across the States have started surfacing, giving rise to uncertainties and confusions. Both these types of exercises, however, are limited to only a few States. With the intervention of the CERC, State Regulators could be advised to catalyse these processes and have capacities developed and tied up in a time bound manner.

  3. Captive power plant capacities constitute a significant proportion of overall installed capacity in the country. Though this issue has been discussed at great length in last three to four years' even now several State Regulators have not been able to straighten up many of the thorny issues which stand in the way of a smooth implementation of grid connectivity, commercial transactions and sale of power to needy distribution utilities or large consumers. There have been occasions when States have faced power shortages, such captive generation was available but non resolution of these issues has resulted in such States not being able to access power and captive generators not being able to produce such power. This had been particularly true when inter-State transmission of power was involved. A clear cut Policy with specific directions to State Regulatory institutions and Load Despatch Centres by the CERC could resolve this problem. The Guidelines should cover not only intra-State transactions but also inter-State sale of power. Another linked issue on captive generation relates to a very peculiar situation of certain States requiring these generators to necessarily transact through State agencies. It is these agencies which have been authorised and captive generators are being pressurised to sell to only these agencies their surplus power. This is with the objective that the State agencies could make huge profits on these transactions. This desire of the States is constraining the process. Regulation by the CERC in consultation with the State Regulators could streamline this process.

  4. In last couple of years, a few States, particularly the coal bearing States, and in some cases even hydro rich States, have been prescribing their own policies requiring the power project developers to allocate to them a large proportion of power that is generated from the power stations set up in these States. This again is with a view to taking advantage of shortages and making huge profits. This desire is constraining the process of setting up of power plants on merchant capacity basis and thereby inhibiting the process of competitive market structure to develop. CERC may, on the basis of petitions, or on suo-moto basis, take up this issue in order to stop this practice of State Governments interfering with the process of electricity market development which, under the Act, is the sole jurisdiction of the Regulatory Commissions.

  5. An analysis of new power projects proposed to be developed in some of the States such as Orissa, Chhatisgarh and hill States (for hydro projects) indicates that developers are experiencing enormous difficulties in tying up arrangements for transmission of their power. Some steps have been taken by the Central Electricity Authority. A proper electricity market development would require, as a prerequisite, good additional capacities in the transmission systems so that they can cope with transmission of such power which was not identified for the purpose of its final destination when the projects were conceived. It is understood that a cushion of the order of 30% is being provided to take care of such unforeseen movement of power. It is, however, required to be appreciated that even if there is an error of judgement on the higher side and as a result larger cushions get created, it would not do any harm because power generation capacities are getting added on a continuous basis and proper utilisation of these systems would definitely happen. Transmission infrastructure has to precede power generation just as road network. Both CERC and SERC's, in a co-ordinated manner, can proactively determine Guidelines, so that because of likely uncertainty on account of transmission, merchant capacities do not get handicapped.

  6. Open Access on transmission, whereby a number of distribution utilities have been able to arrange short term off-take power through Trading or through Power Exchange, has, no doubt, made a meaningful contribution in developing short term electricity market. But, this market has evolved more as an outcome of a distress situation responding to day ahead crisis rather than a well structured approach providing for various options to both buyers and sellers - option to buy for weeks, for months and for a few years. The present Guidelines provide for either three months or twenty five years of arrangements. True market will develop when buyers of power are able to fill up slots of different durations, say two years, five years, ten years or so rather than either twenty five years or nothing. Large merchant capacities can get created when Open Access provision relating to transmission access are structured with various permutations and combinations.

  7. Separation of State Load Despatch Centre, Regional Load Despatch Centre and National Load Despatch Centre from the organisational structure of the concerned Central or State transmission utilities, though agreed in principle to be a desirable proposition, has not happened on ground. Intervention by the Regulatory Commission by way of a specific direction in this regard may lead to such separations in a time bound manner. This is considered necessary to inspire confidence among generation project developers, trading agencies, distribution utilities and other large consumers.

  8. Open Access on transmission, right from the beginning, was provided in the Electricity Act itself, and it has happened, though with some difficulties as described above. However, Open Access in Distribution has been mandated by the Law to happen latest by January 2009 for all customers below 1 MW of load. A lot of preparatory exercises were required so that progressively the figure of 1 MW customers is reached. However, in most States these exercises have either not been carried out or wherever they have been done, there are considerable amount of gaps and loose ends. This issue is entirely in the domain of State Regulators. But, since Open Access in Distribution also involves inter-State transmission, and it is one of the most powerful tools to develop electricity market, CERC can definitely intervene in consultation with the Forum of Regulators to come out with comprehensive Regulations to make it happen. A linked important issue for the Open Access for consumers is the issue of Cross Subsidy Surcharge. This again has been responsible for throttling the very process of Open Access. Based on experience, proper Guidelines to be followed by various States may be notified after due consultation with the Forum of Regulators, by CERC. Another connected issue is the management of Cross Subsidy itself. If this is properly structured in line with the Tariff Policy, the whole issue of Cross Subsidy Surcharge will fall in place.

  9. Emergence of Power Exchange, by the orders of the Central Regulatory Commission, is a positive development. It has already started impacting the day-ahead transactions in a transparent manner. However, as mentioned earlier, day-ahead sale and purchase is an outcome of distressed state of affairs and it responds only to crisis situation. Power Exchange can be made to play greater and more meaningful role if transactions are extended to longer durations which will catalyse the process of capacity development on merchant basis. This will also stabilise the Power Exchange initiative. If Power Exchanges are kept limited to day-ahead transactions, their future might be somewhat uncertain. Besides, this initiative would be deprived of the opportunity to play the required role, in the true sense, for developing electricity market.

  10. The last but not the least, supply of electricity in rural areas, development of rural economy and enhancing the quality of life of villagers are important issues of concern. Electricity Act and Electricity Policy have made very important provisions which may have far reaching positive consequences towards meeting the above objectives if these provisions are implemented in a proper way. Not much seems to have been done by most of the Regulators in this regard. In a situation of shortage, it is the common experience that the first attack of load shedding goes to rural areas. Comprehensive Guidelines leading to specific actions in a time bound manner to mitigate these problems can be attempted by the CERC in consultation with the State Regulators. Initiatives could include Franchisees, Decentralised Distributed Generation, Bulk Purchase by identified agencies and Supplying power to consumers for which they may have to be allowed to use the available distribution infrastructure etc. are some of the possible options. More alternatives could be created through a brain storming session.

The above ten initiatives could be taken up by the CERC. In many of these, Forum of Regulators will need to play a major role. But, CERC's proactive approach may go a long way in catalysing the process of electricity market development in a significant way. We must recognise that these steps may not turn the situation from a nil market structure to a matured one just in a period of one or two years. It must be stated that this is not a quick fix. However, these steps can definitely lead to a powerful take off towards development of a sound and significant electricity market which may, in a period of three to five years, establish that competition leads to abundance and choices and choices lead to improved quality of service to consumers.