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Ashok Lavasa, Additional Secretary, Ministry of Power

16 Dec 2011

Tariff inadequacy is the root cause of the problems of the power sector

Amidst the discoms' demand for a cost-reflective tariff and the need of the consumers for better transparency, the Delhi government has agreed to have "occasional" audits of the private discoms by the Comptroller and Auditor General. In this backdrop, InfralineEnergy's Chhavi Tyagi spoke to Ashok Lavasa, Additional Secretary, Ministry of Power. Lavasa delved on the need to maintain a fine balance between the need to bring in the required transparency in the system and the rights of the distribution companies, the need of the Indian power market to have long-term PPAs and steps to boost the development of the short-term market.

Edited excerpts

Delhi government has agreed to "occasional" audits of its private discoms by the Comptroller and Auditor General (CAG) of India. Is this going to set a trend to bring in transparency in the sector?
These can be exceptional cases, but a high degree of public interest or suspicion has to exist in the functioning of any particular company before the government resorts to such a step. If tomorrow somebody demands that all the private companies should have their accounts audited by the CAG that will not be a justified demand. In all cases, the present system is sufficient. Every company has to get its accounts audited by the statutory auditors and these statutory auditors are appointed as per a certain provision in the law.
Don't you agree that in the absence of an independent audit, it is hard for consumers to have complete faith in the discoms?
You are right. However, there is a system of several checks and balances; for instance, there is a Companies Act, there are statutory auditors and all of these are expected to perform in a transparent fashion. All these institutions have been created by the law and they have to be accepted.
"The cost of power procurement has gone up, the level of salaries have gone up, the cost of equipments, O&M cost, all of this has gone up. How is the sector expected to bear this cost without any corresponding increase in the tariff?"
Moreover, the regulator is an independent, quasi-judicial authority in itself. All the accounts are scrutinised by the regulator based on which the ARR is filed. If somebody is not satisfied with the decision taken by the regulator, that person has the option of approaching the Appellate Tribunal. There is an entire system in place and sometimes the questions over the transparency of the process are made because the hard reality is that the consumer does not want to pay the additional tariff.
Privatisation of distribution business has come under the scanner for the monopoly of the companies, lack of choice for the consumers, lack of independent audit system and mounting losses. Do you think that the insistence on privatisation is valid given that such doubts are being raised?

I don't think that any one activity can be the answer to all the problems of any sector. Though the involvement of the private sector is being advocated, yet it has its own merits and demerits. That said, so far the experience of the private sector involvement in the delivery of the public services has only led to a greater degree of efficiency not only in standards of performance but also in bringing down the cost. Take for instance the telecom sector. Even when it comes to private participation in the distribution sector, there are good stories and there are stories where such questions have been raised. Such questions are not raised in the case of Surat or Ahmedabad or Mumbai.

The most important factor is the tariff inadequacy, which is the root cause of most of the problems in the power sector, be it private or public companies. The consumers feel that there should not be any annual increase in the tariff, which is an unrealistic demand, given that in every part of the economy, there is an increase in the input costs and in the cost of services. How can the power sector remain immune to an increase in the cost?

If you look at the distribution utilities, the cost of power procurement has gone up, the level of salaries have gone up, the cost of equipments, O&M cost, all of this has gone up. How is the sector expected to bear this cost without any corresponding increase in the tariff?

The Forum of Regulators (FoR) has suggested that the discoms can renew their tariffs on a quarterly basis in order to recover the cost of additional power purchased from the short-term market without any prior regulatory approval. What is your view on this?

The way the state utilities function is that they have to wait to file their ARR in order to seek approvals from the state regulatory commissions for any increase in cost in the power supply. However, in between that they have to make good on their payments to the generators from which they have bought power.

Therefore, the FoR has decided to replicate the kind of arrangement that exists between the Central Electricity Regulatory Commission (CERC) and the central generators so that the SERCs can also suggest a formula to the distribution utilities which enables them to pass on the increase in fuel cost to their consumers without the need of approaching the regulator every time.

In order to execute this, the CERC has laid down a broad formula according to which any such increase in the cost of fuel is passed onto the consumers. However, this does not mean that the regulator will not be aware of the extra cost passed on to the consumers as there is a system of keeping the regulator informed. Also, at the end of each year, when the discoms file their ARR they have the obligation to put up a consolidated account showing the amount of the additional costs and the costs recovered.

"In the overall interest and stability of the power market, it is imperative that a substantial amount of power is tied through long-term PPAs, while the short-term market is necessary for meeting unpredictable and seasonal demand."

FoR has not proposed that discoms can pass the cost of procuring power to its consumers without the approval of the regulators. All that has been said is that the increased cost of procuring power through the long-term arrangements, which results on account of increase in the cost of fuel procured from the regulated market, increase in transportation costs by the Ministry of Railways, etc. can be passed on without awaiting the approval of the regulators.

When such increase in cost happens, the generating companies have no way left, but to pay the increasing cost of freight or the increasing cost of coal or gas. In this process, it becomes a little hard for the discoms to bear the additional burden of the increased costs till they wait for the approvals to be granted by the regulator. The new arrangement only discusses the passing on of this cost.

However, when it comes to short-term power procurement, no regulator has either proposed or permitted the discoms to procure power and pass on the increase in cost to the consumers without first getting the approval from them. Neither has this been proposed by the discoms.

If discoms evolve a plan for short-term power procurement in the future, how will it impact the private power generators?

Typically, the discoms in India meet their power requirement through long-term PPAs (Power Purchase Agreements) while the short-term power market takes care of the additional demand. The long-term market is essential to provide security not only to the distribution companies and to the consumers but also to the generators. Considering this, we feel that generally 85-90 percent of the energy requirements of any discom should be met through long-term PPAs. These discoms essentially procure power from the short-term market because of three reasons: in order to meet peak demand requirements, seasonal demand overload and to meet load growth requirements for which adequate capacities have not been tied up.

"As a measure of financial discipline, we have requested the state regulators to decide, within their states, a ceiling based on the financial condition for procuring power from the short-term market."

When we look at the other side of the equation, while private generators do have a scope of offering power in the short-term market, they prefer to sell a substantial amount of their power through long-term PPAs. Therefore, in the overall interest and stability of the power market, it is imperative that a substantial amount of power is tied through long-term PPAs, while the short-term market is necessary for meeting unpredictable and seasonal demand.

Are you saying that short-term market will always be a substitute for long-term PPAs? Who do you think would then form the essential customers for the short-term market?
There can't be any categorisation of consumers in terms of power procurement either for the short-term market or for the long-term buying arrangements. Such a division is not feasible. Even in short-term market, it won't be the individual consumers accessing the short-term market, but it would be the distribution licensees or aggregators, who will consolidate the demand of other small consumers and they would be the medium through which short-term power procurement will take place.
The findings of a RTI query filed by us suggest that the discoms go for indiscriminate procurement of power from short-term market. How can this issue be addressed?

It is a fact that the distribution utilities have to procure short-term power to meet their peak demands and also sometimes, to meet the shortfall arising from default of long-term suppliers. However, in order to counter instances of indiscriminate procurement of short-term power and to understand and come out with a way to limit the need of the utilities to buy expensive short-term power, we are proposing a system. The State Regulator under the provisions of the Electricity Act will decide with the concerned distribution utilities the gap between the long-term power tied up and the actual demand, based on the concerned utilities' historical trends and the growth of the demand in the market.

As long as the price of the short-term power is INR 3 per unit, there is no harm in the utilities buying this power to meet the requirements of their consumers. However, the problem arises when the short-term power becomes more expensive. Therefore, as a measure of financial discipline, we have requested the state regulators to decide, within their states, a ceiling based on the financial condition for procuring power from the short-term market. The regulators can also mention that since the average cost of procuring power of any utility is X, therefore, they cannot procure short-term power at more than X multiplied by INR 1.25 or 1.20.

"It is wrong to assume that an open access consumer only goes to the open market, if he gets cheaper electricity. There are many consumers in the market, who do not mind paying 10 percent extra for good services."

This regulation, if it comes into place, will restrain indiscriminate procurement of short-term power and consequently, it will also help in supporting the financial conditions of the utilities.

How will the movement of big industries towards open access affect the domestic consumers of a discom? Will they be asked to pay more?

To start with, the assumption that if some consumers opt for open access, then the tariff for the remaining consumers will increase is not correct. It varies from situation to situation and from utility to utility.

Let's not forget that no state in India can claim saturation in the demand for power. There is still a lot of demand for electricity. As per the Electricity Act and the tariff policy and all the regulations that have been laid out, the tariff paid by the consumers comprises several components of which energy charge is just one. Wheeling charge, transmission charge, cross subsidy provided by law to compensate distribution utilities, the provision for additional surcharge which becomes relevant in certain circumstances, all these make the other components of the tariff.

It is precisely to take care of this apprehension that the law provides the open access consumer to pay a wheeling charge, a transmission charge and a cross subsidy surcharge, if s/he has to go out and buy energy from the open market. So, that amount of compensation is available to the distribution utility.

Will not levying such charges on open access consumers come in the way of the development of the open market?

It is wrong to assume that an open access consumer only goes to the open market, if he gets cheaper electricity. There are many consumers in the market, who do not mind paying 10 percent extra for good services. Equally wrong is the belief that a consumer might not be able to go out in the market because of a cross subsidy surcharge. While in some cases, where the cross subsidy surcharge is very high, it might influence a few consumers' decision to opt for open access. However, it will not prove to be a deterrent in the manner in which the scheme has been envisaged.

"The bidding rules, which have been designed can be changed and evolved as you have to continuously align these documents with the wisdom the sector gains with time. However, it will not be considered ex-post facto."

Moreover, it is provided in the Electricity Act and tariff policy that this cross subsidisation surcharge has to be reduced. All state regulators will aim to reduce cross subsidisation by about 20 percent per year.

How can we achieve greater application of the Open Access mechanism?

Tamil Nadu, Punjab, Uttarakhand, Haryanaand Gujarat are a few examples of the states that have a number of open access customers. However, I do agree that a lot of market development is further required. The state regulators need to put in place a mechanism which would make things smoother.

If somebody decides to be an open access consumer for all times to come, s/he must ensure a secure source of supply. For that to happen, there must be people in the market, who are willing to enter into long-term contracts to provide him/her electricity. However, if there is no one in the market who is willing to sign long-term contracts in the open market, the consumer does not have any option but to remain with the distribution utility.

Therefore, open access is an important subject and I feel that the concept will become more visible in the market as more and more private capacity builds up. Through a wider acceptance of the open access principle, the short-term power market development will also take place.

Don't you think that the charges for an Open Access consumer are too high?

One has to consider both the sides. Unfortunately, what happens is that some people argue in favour of the discoms and others in favour of the consumers.

The distribution utilities are only looking for some arrangement with the open access consumers in case of an unforeseen eventuality which might force the consumers to come to the discoms. Such contracts would come in handy in order to govern the supply of energy during such eventualities. The problem is that the consumers want both the sides of the coin.

However, it does not work that way and even the consumer will have to take some risk. When a consumer buys an insurance policy, he accepts the terms and conditions of the insurance company without bargaining on it. The consumer has to treat the dealings with the discoms in the same manner. The distribution company has a universal service obligation and if suddenly an open access consumer goes back to the utility and asks for 50 MW, how will the discoms arrange for it? Therefore, there is a need to have an equitable arrangement.

What is your view on the changes demanded by the Association of Power Producers in the standard bidding document of UMPPs, given the increase in prices of the imported coal?
All these projects were awarded on the basis of a certain bidding document. RFP was published. The bidding parameters were known to everybody and bidding took place in a very transparent manner. The winners of the bid entered into a contract with two or more parties, the suppliers and the procurers. Now, whatever happens has to be within the terms of the contract. All contracts in the country are governed by a law with the signatories to the contract essentially deciding as to how the contract will be enforced. As things stand, the Government of India is not a signatory to this contract and therefore, this is an issue, which the generator and the procurer have to sort out amongst themselves.
Will there be any changes made in the bidding document for the new projects?
We are open to all kinds of ideas. The Working Group in the XII Plan for the power sector has considered the required policy changes based on suggestions given by various stakeholders. There have been discussions on the changes required in the law and the policy of the bidding document. The bidding rules, which have been designed can be changed and evolved as you have to continuously align these documents with the wisdom the sector gains with time. However, it will not be considered ex-post facto.
The Ministry of Power has said that in the XII Plan priority in terms of coal linkages will be given to those players who have tied up 85 percent of their plant's capacity in long-term PPAs with the state utilities. Don't you think that this policy is completely skewed towards the central and state governments?

For a stable power market, it is very necessary that both the distribution licensees and the power generators have a substantial part of their requirement and power, respectively, tied up through long-term contracts.

If you speak to a financier, s/he will feel more relaxed, if somebody is putting up a 1,320 MW plant and has a long-term PPA in place. Long-term PPAs not only brings security to the distribution utilities, but also to the power generator and the project financier. Short-term market brings with them volatility and 85 percent was thought to be of the optimum level.

As for the percentage, you can ask the IPPs, if they want 35 percent of their power untied? Do they have such deep pockets to play in the market?

We have to look at the ground realities. How many IPPs are there who have their plants commissioned but do not have any long-term PPAs? Even looking at the consumption patterns, there is not much variation when it comes to the base load and the peak load. The fact is, India is not a power surplus economy. You cannot decide on keeping separate capacities for spinning reserve and for peaking power, as this will make power more expensive. It would mean that so much capacity will be stranded and will be used only seasonally or periodically. All these factors suggest that you cannot allow too much of electricity to be free floating in the market.

As far as the percentage is concerned, it could be brought down to 80 percent from 85 percent; however, if you analyse the profile of the distribution companies, there is no utility which is procuring 20 percent short-term power. Similarly, when you look at big consumers, none of them are purchasing 20 percent of their power requirement from the open market.

(InfralineEnergy thanks Ashok Lavasa, Additional Secretary, Ministry of Power for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)