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Regulatory Issues in Power Sector - Pending Agenda, Shri R V Shahi, Former Secretary, Ministry of Power

Regulatory Issues in Power Sector - Pending Agenda
[R V Shahi's Weekly Column for Infraline, September 8, 2008]

As we all know, power sector was regulated, right from the early stages of its development, directly by the Government. The two legislations which regulated the sector were Electricity Act 1910 and Indian Electricity Supply Act 1948. During the entire development process for several decades, with these two laws and the enforcement agencies and authorities, what emerged in the sector can hardly be said to be satisfying. Consequences of legislative, policy and administrative interventions, throughout almost 60 years of power sector development, could be summarised as follows - (a) A highly mismanaged power industry not able to support even its day to day working capital requirement let alone creating a surplus for growth and expansion, so badly needed to meet the ever growing demands, (b) Severe mismatches between demand for electricity and supply. People often said that during 60's, whatever was the extent of demand, atleast in towns and cities electricity was available and supply was better. In our anxiety to provide power in towns, cities, industrial estates, rural domestic and agriculture, we have not only been not able to meet, in anyway, the requirement of rural India, even the supply in towns and cities has been far from being satisfactory, (c) Electricity consumers - atleast the paying consumers - have been deprived of the quality of services that they deserved, (d) There is no other industry sector which is so predominantly under the control of Government as the power sector. (e) Also there is no other industry, even under the control of Government, which has been subjected to the type of political pressures and expediencies as the power sector. If any benefit has to be distributed among the public at large, the first target of attack by the political dispensation becomes the power sector - whether it is providing power free of charge, or at highly subsidised the rates, or protecting the defaulters of huge payment outstanding, various permutations and combinations of concessions are configured around electricity.

In the wake of dismal failure of the 1991 Private Power Policy of the Government, it was found that none of the Policy initiatives, nor even reviews of these Policies to make them more attractive, were working out, and not only the private sector from India and abroad were totally lukewarm but were insensitive to these Policy impulses. A consensus emerged that cosmetic changes in Policies might not be adequate but what seemed essential for the sector was its total overall- structurally and legally. One of the strong conclusions that found favour across the country was that this sector could not be allowed to be regulated directly by the Government, that State Governments would, invariably be under political compulsions, and that those compulsions would drive them to decide in the manner they should not decide. Therefore, it was considered essential that this sector needed to be regulated through an institution which is not so much under the control of Government, much so under the control of the State Governments. This recognition gave rise to the need for Electricity Regulatory Commissions Act. This was finally enacted, after extensive consultations with the State Governments, in 1998.

Since in this article we are going to evaluate the outcomes of the regulatory process which commenced in Orissa in 1995, but in most cases from 1998, it may be relevant to recall the deliberations at the stage of drafting exercises for the Electricity Regulatory Bill. There were two schools of thought. According to one view, if management of electricity sector had to be depoliticised and this sector had to be taken out of the mess in which it had been brought over last few decades, mainly on account of political considerations, it would be desirable that the regulatory institutions were kept away from the jurisdiction of the State Governments. The proponent of this school of thought - and I also belonged to this view - were of the opinion that at the federal level we could have Central Regulatory Commission, and since electricity is a large industry and its presence is significant in all States, for States there could be mechanism of Regional Regulatory Commissions and not State level Regulatory Commissions. This group articulated that whatever we do to insulate such a quasi judicial institution from the State Governments, the electricity as a subject is so much entrenched into the political decision making process, possibilities of State Government's interference could not be totally ruled out. The second school of thought was of the view that, whatever be the merit of the model which distances the Regulatory Commissions from the concerned State Governments, it was unlikely that an effort to create Regulatory Commissions for State power sector outside the jurisdiction of the State Governments would at all be accepted by these Governments. An attempt to legislate the Regulatory Commission Bill, keeping the State Government's role in setting up the State level Commissions either totally out or diluted, is fraught with the risk of serious reservation and resistance by these Governments. Perhaps, this school of thought was right because later when an option was given to set up the Commission many of the State Governments did not constitute State level Commissions. Many gave the Commissions highly truncated authority and responsibility. The view of the first school of thought has equally been vindicated seeing the experiences of last 10 years during which independent functioning of the State level Commissions has not been free from stresses and strains.

Electricity Act 2003 further reaffirmed the essential need and rationale of independent regulation. The weaknesses that existed in the erstwhile Regulatory Commission Act 1998 were not only removed but additional provisions, aimed at empowering sufficiently Regulatory Commissions, were included. Also, any possible attempt by the State Governments to impose their decisions in conflict with the requirement of a disciplined working of the sector, to a great extent, has been addressed in the new Act. For example, if any State Government wants to differ from the decision of the Commission in the matter of tariff and subsidise a particular section of consumers, it shall have to provide for the same in the State Budget and pay to the concerned utility. Therefore, the spirit of the Electricity Act is unambiguously clear and it wants no undue interference by the Government in the functioning of the system. Even otherwise it needs to be underscored that if the decision of the Government had to prevail why we needed to have the Regulatory Commission at all. This institution has been created to streamline and regulate the functioning of the sector.

I had the privilege of coordinating a Round Table discussion on "Pending Regulatory Issues" on 3rd September, 2008. The Chairman of the Central Regulatory Commission Dr. Pramod Deo presented the key note address. We had all the Members of the CERC besides a number of eminent experts. Before we analyse the items which are yet to be addressed by the regulatory institutions both at the Central and State levels it would be fair to briefly outline some of the important achievements these institutions have been able to secure and, therefore, provide directions to the sector. Even though the scope of this paper is not to describe the outcomes achieved but elaborate the items yet to be done, there could be a risk of a distorted presentation and perception if the salient gains of the initiatives by Central Regulatory Commission and the State Commissions are not highlighted. Therefore, I briefly outline some of the major achievements in the last few years.

  • Grid Codes prepared and notified by the Central Commission and also by many of the State Commissions relevant to the Intra-State Grid Operations have gone a long way in establishing and maintaining grid discipline. As a result, the incidents of grid disturbances have definitely reduced.

  • Frequency based penal charges for unscheduled interchanges, as also the incentive for additional electricity generation by power plants during low frequency regime, have contributed significantly towards balancing and stabilising grid operations.

  • A transparent process of tariff determination has not only helped in dissemination of information among all concerned, but also level of confidence on these decisions has increased.

  • The discipline of commercial working, establishing base line data on various performance parameters in respect of distribution business, though not to the extent one would have desired, has been able to bring about commercial orientation in working of the distribution companies. Because of regulatory interventions and requirement of submitting Annual Revenue Requirements (ARR) the correct picture about the distribution losses and commercial losses has slowly started emerging. For decades the sector had kept all concerned in dark about the extent of technical losses, theft of electricity etc.

  • By asking the distribution companies to ensure competitive procurement of power, a greater sense of discipline of power purchase has been introduced and it has helped the larger interest of consumers.

From the above it may be seen that both the Central as well as State Commissions have been able to decide issues in relation to tariff determination and in this regard their contribution towards bringing about overall consciousness about the commercial working has been significant. However, one of the most important requirements of regulation, which is to develop electricity market, has somehow remained in the background. While everybody appreciates that tariff has always remained a vexious issue and its importance in the effective working of electricity sector cannot be undermined, to accept that the Regulatory Commissions should remain so much preoccupied, and that too for such a long period, primarily with this issue and thereby not focusing, the way it is required, on the electricity market development, may be difficult.

Preamble to the Electricity Act provides that competition is an important requirement of a sound electricity sector. On this account not much has been done either by the Central Commission or by the State Commissions. Preparing the concerned agencies to develop power projects in accordance with the Tariff Policy which encourages selection of developer on the basis of competitive bidding is a job which the Commission never took up. Strictly speaking the initiative of Ultra Mega Project which was launched by the Ministry of Power could perhaps have been better handled under the auspices of the Central Regulatory Commission. Similarly the mirror image of Ultra Mega Project, for which the State Energy Departments and the distribution companies were advised to initiate the process, could have been done better and faster if the concerned State Commissions were to step in.

Under the Competitive Bidding Guidelines issued by the Ministry of Power, under the Case-I option, the suppliers of power have to be selected on the basis of competitive bids for tariff. This option has a powerful potential to catalyse the process of development of power projects on competitive basis under merchant plant category. Merchant capacities hold important key to developing electricity market. Under the merchant category, there are a number of issues which can be resolved by regulatory interventions. In absence of these, the process is definitely slow and, in many cases, even taking off of these projects appears doubtful. Some of the issues are as follows:

  1. Under Case-I Bidding, location of power project is left to the developer who chooses the fuel, decides about the project location and has to provide the price at which power can be supplied. Open Access on transmission system and the transmission charges from one corner of the country to another do prove to be problematic in this Bidding exercise. Both these issues can be better examined and resolved by the Regulatory Commission.

  2. National Transmission Tariff, on a zonal postage stamp basis, itself has remained an item pending with the Regulatory Commission for long. The Electricity Policy (2005) and Tariff Policy notified in January, 2006 had provided the deadline of April 2006 by which this should have been done. Non existence of such a tariff structure is not only standing in the way of smooth power trading but also it is adversely affecting development of merchant capacities in the country.

  3. The National Electricity Policy has also stipulated that for development of electricity market atleast 15% of power should be outside the long term Power Purchase Agreement. For the Regulatory Commission there were two options - one, to respond to certain initiatives taken by others like generating companies, distribution companies, governments etc., and secondly to proactively cause this to happen. What one would have liked the Regulatory Commission to do, keeping in view their role for market development, to proactively initiate such actions and take such facilitative measures that, within a time frame, the electricity industry has the benefit of 15% of power in the system being outside long term contract arrangements. It is my considered view that if any one agency could do this most effectively, it is the Regulatory Commission; efforts by others could only be sub-optimal solutions.

A related issue on trading and merchant capacity is about a thought on capping the price of such power. This will not help. What is needed is more of such power in the system, which needs to be facilitated. Example of Telecom industry, in the early years of liberalisation, is before all of us.

  1. It may be recalled that after the Electricity Bill was passed in the Lok Sabha, it got struck up in the Rajya Sabha. Apart from a few other issues, the most important point on which there were reservations was in relation to an open ended provision in the Bill about Open Access in electricity distribution for consumers. Regulatory Commissions had been given a discretion to introduce this provision in sequence and in a phased manner. The Government assured that this being a powerful provision for introducing competition in the electricity sector, an appropriate amendment would be introduced so that Regulatory Commissions are mandated to provide and facilitate Open Access in distribution in a time bound manner rather than leaving it loose and open ended. This amendment was brought about in January 2004 according to which Regulatory Commissions are now obligated to introduce, for all consumers of above 1 MW requirement, Open Access latest by January 2009. This is one of the very important pending items on which not much seems to have been done by most of the Regulatory Commissions in the manner that this becomes a reality in application rather than a theoretical exercise which does not take off.

  2. Electricity Act (Sec 86 (1)(e)) provides that every State Regulatory Commission will fix a specified proportion of total power to be procured from renewable sources of energy. It also provides that the Commission will take suitable measures for grid connectivity. Some State Regulatory Commissions have done reasonably well in this regard. Most others have provided a lip service and a large number of them have practically done nothing. Many of them have misunderstood the whole requirement as if it was in terms of proportion of capacity. With all the efforts of some of the serious and sincere Regulatory Commissions, Central Ministry of New and Renewable Energy and some of the State level Renewable Energy Development Authority, all that we have been able to achieve so far is about 8% of the total capacity coming from Renewable Energy, but in terms of proportion of generation it is hardly 3 to 4%. A lot needs to be done in the field of Renewable Energy generation. National Electricity Policy provided a direction. State Commissions can deliver this, as they are the most appropriate and empowered authorities. This again is a very important agenda, it is delayed, it does not brook any delay further, it requires immediate and urgent response.

  3. Financial health of the electricity sector has been the most serious issue. In fact, the genesis of Electricity Regulatory Commission, as articulated earlier, can be traced to the dismal financial health of the sector. Apart from pilferage of electricity through various means by a large cross section of consumers in many States, another issue which has been identified as an important cause of poor financial health is the absurd cross subsidy structure in the tariff system. Except for a few States, most Regulatory Commissions have not been able to address this issue in a systematic and serious manner. Here again the Tariff Policy provides a direction. In a period of five years from January 2006 i.e. by January 2011 the upper and lower limits of tariff bands have been specifically provided in the Policy, to be + 20%. Regulatory Commissions were expected to draw a road map, latest by July 2006, to reach this range of cross subsidy during a period of five years. The requirement was that while the goal can be reached in five years, the road map could provide intermediate milestones. Not much has been done on these lines by most of the State Regulatory Commissions.

  4. There are a number of examples when captive capacities were available to generate power and to supply to the grid for onward transmission to the areas of deficits. Unfortunately because of reasons, which could have been resolved, but were not resolved, no such power generation and consequently no supply to these areas could take place. The reasons could be resolution of commercial issues or non acceptance by the State Load Despatch Centers to facilitate this process. There are few examples of the former category but a number of examples of the latter type. Commissions have appeared silent spectators and have allowed this type of a non responsive approach to have been adopted and to have continued. Invoking their authorities, passing judgments and giving directions to be followed, was necessary. If any SLDC felt otherwise, it could have gone in appeal to the Appellate Tribunal. One could feel confident that the approach of the Tribunal or even of higher legal authorities could not have been different in a case when a distress situation is not being allowed to be addressed by a legal method of generating and supplying just because some of the SLDC's decide to act in a manner they choose.

  5. It is true that every State Regulatory Commission is an authority by itself in its jurisdiction, and therefore, Central Electricity Regulatory Commission does not have any over-riding power. It is also true that in view of existence of State Commissions in every State a situation of totally different approaches on similar issues could create avoidable problems. The Electricity Act, therefore, recognised the need for a body like Forum of Regulators which could deliberate on such common issues to generate consensus so that a consistent and, wherever required, uniform approach could be followed by different Regulatory Commissions. It may be recalled that the Electricity Regulatory Commission Act 1998 did not provide for such a Forum. Forum of Regulators were set up and they were functioning even though statutorily no such requirement existed under the previous Act. Since the need for such a consultation process to evolve consistent approach was recognised the new Act explicitly provided for it. To further strengthened this provision, the Ministry of Power notified the rules in this regard providing for areas to be covered by the Forum. Therefore, even though CERC does not have a role of an authority over the State Commissions, the Chairman of CERC, being the Chairman of Forum of Regulators, as provided in the law, is expected to render a leadership role so that some of the issues which have remained either unresolved or issues where varying types of practices have cropped up, are appropriately dealt with. This Forum and the expectation from this Forum provide a long list of items which need to be deliberated and concluded as Guidelines so that different Regulatory Commission deal with them appropriately.

  6. Development of Transmission Systems, through Competitive Bidding, in which both public and private sectors are allowed to participate, has not taken off at all. This needs to be done for national/regional grid as well as for intra-state grid. CERC and SERC's roles in this regard are crucial. Unless this is done bench mark prices, as in cases of ultra-mega projects, would not emerge.

  7. To introduce competition in electricity distribution, the Electricity Act has also provided for multiple Distribution Licenses. Electricity Policy and Tariff Policy have further elaborated on this. A pro-active approach by State Commissions may definitely yield a few new starts. These will need to be supported so that more such players enter the electricity distribution sector. This provision has, more or less, remained untouched and unattended.

The points mentioned above are the important items which need immediate attention, and I have deliberately tried to exclude issues of mundane nature. One of the other issues that I will like to highlight is the initial feeling of helplessness among a number of State Commissions. This development appeared, in a very subdued way, about two years back and interactions with Members and Chairmen of a large number of Commissions indicated that over bearing approach by some of the State Governments were coming in the way of their independent functioning and implementation of various decisions. In the recent past, this feeling is becoming deeper and is spreading to a number of States. This obviously is neither a positive nor a satisfying development. There is a feeling that Commissions have not been bold enough to act. They have considerable authority which they need to exercise. Two suggestions can be considered - (a) Commissions are sufficiently empowered. They can follow the process prescribed, arrive at their decisions and notify the same. In case not implemented this may be escalated to Tribunal level and if required to the next higher authority i.e. the Supreme Court. We need to test some of these through escalations like this. If the feeling of helplessness is allowed to grow and Commissions start taking it lying low, there is every danger that the whole objective and purpose of setting up of these Commissions as suitably empowered authorities to reform the sector, may get defeated, (b) Simultaneously Ministry of Power could organise a brainstorming Session with participation of CERC, SERC's and State Governments to discuss how to make regulatory institutions deliver the desired results. This process, it may be expected, may bring about closeness in approaches of different agencies and authorities.

This paper, as mentioned earlier, was not intended to highlight and project the achievements of the Regulatory Commissions. And, therefore, it has addressed only the areas of deficiencies and attempted to suggest remedial measures. However, I want to emphasise that the Regulatory Commissions, both at the Central and State levels, have done remarkable jobs on many of the areas and have succeeded in resolving many of the complicated issues. This sector itself has been infected with serious problems of chronical nature for several decades. Obviously resolution of all the issues, in a definite time frame, could not be possible. It also needs to be appreciated that many of the Commissions had to undergo, during the initial years, several teething problems. Having said this, it is equally important to reemphasise that it is now time that the issues highlighted above are attended to with seriousness and urgency that they deserve.