PTchronicle July2012 PDF

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Journal from PTC India Limited

July 2012
Channelising
Distribution
JULY 2012 | PTC INDIA LIMITED | 1
2 | PTC CHRONICLE | JULY 2012
Dear 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.
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.
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 Director
PTC India Limited
Design & Printing by:

Colour Bar Communications, New Delhi
forEwOrd
From the
Chairmans Desk
July 2012
Contents
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
Contents
Will the New Guidelines benefit the

Short Term Bilateral Market?.....................................................42
Harish Saran, Executive Vice President, PTC India
Proposed Amendments to Electricity Act 2003..........................45
Dr. Atmanand, MDI
Next Generation Power Market Intelligence ................................47
Dr. Rajiv K. Mishra, Executive Director, PTC India
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

marketing@ptcindia.com
sebS bAIL OUT
SEBs Bail Out- A Moral Hazard

balance sheet of state power utilities and ensure that no further
losses are incurred.
Sh. Tantra Narayan Thakur
Chairman & Managing Director, PTC Group

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 Committees 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
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 Tribunals 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
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 dont 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.
The era of
cheap power
is almost
over. Public
has to be
sensitized
accordingly
that rise
in cost of
electricity is
inevitable.
Also Published in Financial Express, 28 May, 2012
MARKET
WATCH
Max. Price : 7.04
Min. Price : 2.59
Avg. Price : 3.56
Daily Prices - Indian Energy Exchange (IEX)
Weighted Average Prices 2012 (March - May)
OTC prices were in general higher than IEX and PXIL prices
in March of 2012 - a premium for certainty in OTC contracts
Max. Price : 6.67
Min. Price : 3.06
Avg. Price : 4.32
Daily Prices - Power Exchange India Limited (PXIL)
Short-term contract volume for March 2012 was

1647.71 MUs, 3240.76 MUs in April 2012 and for the
month of May 2012, it was 2744.28 MUs.
Out of the OTC volume for the period of March-May

of 2012, 34.9% (1862.04 MUs) was contracted above
Rs. 4.00/kWh.
Banking transactions are increasing in the market

predominantly due to the poor paying capability of
discoms.
The market has prefered shorter duration contracts

for the period March-May of 2012 due to prevailing
uncertainties.
Over the period from March-May of 2012, PTC has led

the market by undertaking 172 contracts (49% of total
market contracts)
Contributed by Coorporate Development Team

PTC India Limited
OTC prices were generally lower than IEX and PXIL prices
in April and May of 2012. This is because of higher prices
discovered in Power Exchanges for Southern Region over
congestion in tranmsission corridors.
Total Short Term Contract Volume 2012 (March - May)
Total Volume Traded in Short Term vs Total Generation 2012

(February - April)
Top 5
Sellers
Delhi
Top 5
Buyers
Uttar Pradesh
Gujarat
Volume of Unscheduled Interchange 2012

(February - April)
Jindal Power
Maharashtra
Sterlite Energy
Rajasthan
Lanco Amarkantak Power
Haryana
Tamil Nadu
Poor financial health of the buyers make them buy from Power
Exchange only during acute distress.
Banking transactions have risen as they are cashless
transactions.
Bilateral (direct) has been increasing as generators do not see
effective payment security with majority of traders.
(Excluding UI)
Percentage of Different Segments in Short Term Market 2012

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

Solar RECs commenced trading from May 2012 with volumes increasing in
June 2012
Non-Solar RECs Price Trend - PXIL (May 2011 - June 2012)
In June 2012, 336 Solar RECs were traded at IEX for clearing price of Rs.12750
per REC whereas 6 Solar RECs were traded at PXIL for Rs.12506 per REC
Source:
CERC Market Monitoring Report
REC Registry India
Indian Energy Exchange
Power Exchange India Ltd.
Non-Solar RECs Price Trend - IEX (May 2011 - June 2012)

M a r k e t Ou t l o o k
REC Price Trends
Power Glance
Overview
Tamil Nadu hikes

power tariff after
9 years
Installed power capacity
crosses 2 lakhs MW
CERC tightens
grid frequency
Biomass-based power
producers seek tariff
revision in few States
Power generation up 6%
despite low fuel stocks
April
May
Week 1
Week 2
Week 3
3200 MW of wind
energy capacity
added in 2011-12
Windmill developers
to lose tax breaks
Week 4
Jharkhand's
energy policy
finalized
Power crisis hits
industry in
Andhra Pradesh
Solar sector sees

$ 329-mn
VC funding
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 : April 13, Hindu Business Line
Record power
capacity added
in 11th plan
Week 1
Week 2
Power Min for

amendments to
Electricity Act 2003
National Electric
Mobility Mission likely to
launched by July
Power distribution companies' losses

cross Rs 2 lakh crore, says Crisil
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.
Source : May 4, Business Standard
Power Min evaluating

14 smart grid project
proposals
Toe W Bengal
power tariff
model: PMO
Policy uncertainty
threatens capacity
addition in wind sector
Power deficit
touches 11000 MW
in April
Week 3
India to supply
500 MW to
Pakistan
June
Week 4
Week 1
Spot power prices

may go up 17% by
June
Week 2
Week 3
Government issues
guidelines to discoms for
short term power purchase
PFS to fund
electricity
purchase
Power Exchanges
begin trading of solar
energy certificates
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) andPower Exchange India
Ltd.(PXIL) commenced trading of solar Renewable
Energy Certificates (RECs) on Monday amidst
keen interest within the power sector
Source : May 21, Economic Times
Source : June 4, Economic TImes
Rakesh Kalsi
PTC India Financial Services Limited
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 DTRs) 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 ARRs 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
P OW E R D I STR I B U T I ON
The Burden Brunt

by State Discoms
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
09-10
Eastern
0.48
0.49
0.51
0.33
0.36
0.33
0.24
0.38
0.31
North Eastern
0.50
0.33
0.81
0.4
0.3
0.78
0.45
0.49
0.91
Northern
0.95
1.11
1.34
0.41
0.41
0.45
0.69
0.83
1.17
Southern
0.51
1.09
0.96
0.17
0.49
0.47
0.21
0.83
0.79
Western
0.15
0.26
0.34
0.06
0.15
0.21
0.20
0.41
0.29
National
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
2009-10
Loans from State Govt.
41857
43868
44408
Loan from FIs/ 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
Tamil Nadu
West Bengal
Madhya Pradesh
Jharkhand
Delhi
Chattisgarh
Bihar
Kerala
Gujarat
Mizoram
Nagaland
Andhra Pradesh
Maharashtra
Uttar Pradesh
Manipur
Orissa
Meghalaya
Punjab
Karnataka
Himachal Pradesh
Haryana
Sikkim
Puducherry
Assam
Arunachal Pradesh
Tripura
Uttarakhand
Rajasthan
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%
Tamil Nadu
22%
35%
54%
Andhra Pradesh
31%
2%
31%
44%
Haryana
38%
3%
26%
31%
Karnataka
35%
10%
22%
32%
Maharashtra
22%
10%
45%
51%
Madhya Pradesh
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.
POWER
PARLANCE
It would be harmful for

the country to pass an
ordinance on denial of
nuclear power
Dr. Manmohan Singh
Honble Prime Minister of India
The Hindu, 16 May, 2012
India to be worlds 3rd

largest energy consumer
by 2020
Shri Sushil Kumar Shinde
Honble Minister of Power, GOI
Economic Times, 21 April, 2012
Opening up of coal sector

for commercial mining is
not possible now
Shri Sriprakash Jaiswal
Honble Minister of Coal, GOI
DNA India, 10 April, 2012
Nuclear energy is one

part of more towards lowcarbon future
Montek Singh Ahluwalia
Deputy Chairman, Planning
Commission of India
The Hindu Business Line, 01 May, 2012
India is wasting hydro

potential
A. B. L. Srivastava
CMD, NHPC
The Hindu Business Line, 27 June, 2012
- Need for a Fresh Outlook
D. P. Bagchi
is 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
V. K. Sood
is the Ex-Chairman of Delhi Electricity Regulatory Commission & Ex-CEO of Reliance
Energy Distribution Company for Orissa.
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.
P OW E R S E C TOR R E FOR M S
Power Sector Reforms
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.
but also penalize the person for wrongful or unauthorised

use of power.
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.
b) need for an effective and forceful communication

strategy;
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
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;
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
commitment;
cross-subsidies
showing
political
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
quality of power supply and low investments

remain.
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.
Reforms today Its 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
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
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 March2010 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 arent 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.
2222 | PTC
CHRONICLE
April
2012 | JULY 2012
Dr. Pawan Singh
Director - Finance
PTC India Financial Services Limited
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
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 players nominees in the board
of Discoms and therefore, they can preaudit the Capex of
Discoms. 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
Discoms. 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 Discoms 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, its 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 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 Delhis 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.
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.

6. Incentive Based System

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
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

All load requirement were met without any Govt. 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 I: Peak Demand (MW) of Delhi
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 Ltd
48.10
57.20
48.10
Year
Target Level
Achieved
Target Level
Achieved
Target Level
Achieved
2002-03
47.55
47.40
56.45
61.89
47.60
47.79
2003-04
46.00
45.06
54.70
54.29
45.35
44.86
2004-05
42.70
40.64
50.70
50.12
40.85
33.79
2005-06
36.70
35.53
45.05
43.89
35.35
26.52
2006-07
31.10
29.92
39.95
39.03
31.10
23.73
2007-08
27.34
27.51
34.77
30.23
22.03
18.29
2008-09
23.46
20.59
30.52
24.02
20.35
14.82
2009-10
20.00
19.02
22.00
23.11
17.00
13.25
2010-11
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 Delhis 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)
---
348.13
10.33 (GNCTD)
IPGCL
---
81.67
81.53
---
---
163.20
BRPL
234.60
690.00
29.04
---
159.95
1113.59
BYPL
59.16
174.00
7.32
---
117.07
357.55
NDPL
187.68
552.00
---
117.21
139.26
996.15
Total
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 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
Total
NDPL
Actual
48.51
281.46
338.2
430.93
270.51
245.11
288.57
374.09
2277.38
BYPL
Actual
58
85
416
357
283
281
295
247
2022
BRPL
Actual
72
115
538
711
399
128
391
475
2829
Total CAPEX
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 V
Exhibit VI
Illustrations depicted
here, sourced from
recent CRISIL report
clearly brings out how
PPP model in Delhi has
placed Delhi among the
best placed in terms
of states fiscal health
and financial position
in comparison to other
state power utilities.
CONCLUSION
Economic 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.
Power Glance
Coal-Slaw
Power Min wants

rider on coal
allocation
Govt working on
PPP model for CIL
mines
Coal imports increase 24%

to 11.6 million tonne in
march
Coal India to sign fuel

supply pacts with
minor penalties
CIL may sign fuel

pacts with 50 firms
April
May
Week 1
Week 2
Week 3
Chhattisgarh coal block

allocation faulty - CAG
Govt directs Coal

India to sign supply
pacts with power
producers
Week 4
Week 1
Coal India to sign fuel

supply pacts with
minor penalties
Coal stock for
just four days at
25 power plants
Coal ministry revises

guidelines for mine
closure plans
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
India, the worlds third-largest coal user, imported

24% more of the fuel in March as power plants
increased buying before summer, according to
shipping data.
Source : April 3, Hindu Business Line
Source: April 17, Financial Express
Raise penalty in
fuel supply pacts,
Power Ministry
tells Coal India
Power Min - CIL must supply coal

via MoU route till FSAs in place
Demand supply gap in coal

rises to 161 MT in 2011-12
Coal India says ready

to review force
majeure in FSA
Coal India to
tweak fuel supply
pact clauses
June
Week 2
Week 3
Week 4
Week 1
CIL told to examine

FSAs flagged by
power companies
No changes in fuel
supply pact clauses,
says Coal India
Power Cos to get coal
blocks without bidding
Coal shortage
situation in thermal
plants worsens
Week 2
Week 3
CIL can assure

only 60 % supply
Changes in FSA
penalty clause to
hit finances - CIL
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.
Source : May 11, Indian Express
Source : June 6, Hindu Business Line
Prabir Neogi
Introduction
is CEO, New Initiatives on Fuel & Power Distribution and

Director, Training Institute of CESC Limited at CESC Limited.
The root cause of the ills plaguing the countrys 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
urban centres alone will not help, as the benefits will accrue
and transformers, if subject to faults, take days to repair or
to a privileged few. The idea is also not to create centres of
replace, and both brown-outs and black-outs arising out
excellence surrounded by vast areas served by inefficient
of sub-standard supply voltage are far too common. In the
and inadequate power, leaving unviable businesses in
end in the garb of cheap power, there is no power.
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.
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
Genesis
lobby that resists any change, which will be to the detriment
The solution, however, is not as simple as it may appear.
of their own narrow interests. In any case, the beneficiary is
Rural supply in its present form has many pitfalls. In the
not the lifeline consumer, nor the landless farmer.
first place, there is the concept of flat tariff, which is not
Local Governance
consumption-linked. There has been little or no move to
In a country like India, electricity as a subject will continue to
metering supplies, so neither the actual consumption nor
have a social dimension, which will have profound impacts
the commercial loss is known. Because the business is
in situations where communities congregate and conflicts
unattractive, the power utility is least interested in upkeep
of interest arise. The problems facing rural electricity supply
of the network. Extensions to provide new connections
will, therefore, be best addressed if the solutions are
follow the least cost approach as there is no system of cost
targeted to benefit the community at large, and not externally
recovery by way of contribution from the consumers, nor
imposed. What is important is that such solutions must also
there is the guarantee of a future revenue stream. Worse
appear to be the outcome of initiatives undertaken by the
still, the consumers are reluctant to pay their dues even at
local population, so that there is a sense of ownership of
the subsidised rates. Attempts to enforce revenue collection
the decisions to be implemented for enforcing commercial
often meet with resistance from local pressure groups
discipline. The principles of self-governance, leading to the
having constituencies to nurture.
formation of Village Councils, have been successfully tried
The question is whether the present system is serving any
out for accelerating local development programmes under
purpose. For one, rural areas have restricted power supply
decentralised set-ups. It is proposed to bring into play
thus a 24-hour schedule is not considered sustainable.
similar concepts for administering the electricity supply in
Supply conditions do not follow any minimum standards,
villages, particularly metering, billing and collection.
resulting from a dilapidated, ill-conceived and neglected
To implement the proposal, a two-tier approach is
distribution system that poses hazards to life and property.
suggested. A distribution intermediary, which can be a local
Safety risks increase as the lines are tampered with
body, a consumer co-operative or an NGO, will receive bulk
for unscrupulous access to free electricity that is often
supply from the power utility and undertake the responsibility
the handiwork of organised groups. The influence is so
of retail supply. The bulk tariff will attempt to recover the cost
pervasive that even the conscious consumer falls prey to the
of supply, at least in stages if not possible initially. In turn,
temptation, notwithstanding that it is only a nominal amount
the distribution intermediary will charge commercial tariff that
he has to part with against authorised consumption. All
at the minimum will be consumption-linked. Clear clusters
these give rise to a vicious cycle as there is a huge burden of
of the population will be identified that will have the ability
unaccounted for energy, revenue losses keep mounting, the
to pay. The willingness to pay will follow once the promise
power utility does not invest in the network nor undertakes
of 24-hour supply, backed by reliable service, translates
maintenance, and the supply keeps degenerating. Lines
into reality. There will still be pockets in the village inhabited
by the weaker sections. Concessional rates under lifeline
Committee an amount per consumer for each activity, say,
tariff will be made to apply to these selected groups who
Rs.0.60 for every meter reading, Rs.0.40 for bill distribution
are known to live below the poverty line. The revenue gap
and Rs.1.00 for collection, so as to cover the administrative
that will arise due to inadequate recovery of the costs will
costs incurred. The Committees services will be voluntary in
then be made good by the State in the form of a direct
nature, and the surplus cash that will be left at year-end after
subsidy or grant, the quantum of which will be assessed
meeting the costs will be available for disbursement equally
in advance and provided for against budgetary allocation.
among the 3 employees of the distribution intermediary to
The least advantage that will accrue is that the State will not
provide them an incentive in the form of annual benefits. In
be required to fund unquantified losses in a defined area of
addition, they can also undertake minor electrical repairs at
supply.
consumers premises, and the income from such work can
To bring in the concept of self-governance, a Village
be equally shared if overseen by the Village Committee.
Committee made up of bona-fide representatives can
The approach can lead to interesting results. Supply will be
be constituted to oversee the routine operations of
secure, so will be the collection of user charges. Energy
meter reading, bill delivery and revenue collection. Such
accounting will be realistic, as metered readings will be
intermediation
commercial
relied upon. Aberrations in the system, including consumer
discipline amongst the electricity users, discourage thefts
mischief, will be highlighted and addressed by the village
and protect the interests of genuine consumers who are
elders. Local employment is generated, and the village
willing to pay. In short, community involvement is sought
economy as a whole improves.
is
necessary
to
cultivate
as a means to act as a social deterrent to the present

mal-practices of unauthorised use of electricity. The hardcore 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
Innovating & Improving
of basic amenities, like education, sanitation and healthcare.
The arrangement, however, cannot succeed on a stand-
Energy reforms in such context can succeed when there
alone basis. As a means of seeking continuous improvement
is community mobilisation to create social barriers against
in electricity supply, new investments in capital assets will
electricity thefts and commercial malpractices.
be necessary. The Rural Electrification Corporation (REC)
The argument that can be advanced is that commercial
can lend meaningful support by advancing soft loans at
principles will not work in a rural setting. Metering too is
concessional rates to the distribution intermediary, which
considered a difficult proposition, as it leads to additional
can then undertake these new investments. To increase
pressure on staffing and costs. The truth is that there is
consumer accountability, smaller clusters of supply fed by
no other option if rural supply is to be put back on track
dedicated low-capacity transformers can fetch handsome
with some semblance of quality, reliability and affordability.
returns in improving collection and reducing losses. Metering
Wherever metering has been tried, it has served as a
of supplies too can be financed by institutional funding, as
differentiator between reliable power and cheap power,
has been the practice elsewhere in the Sector. Promotional
which gives little or no guarantee of supply.
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.
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 cooperative 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 nonprofit 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 Indias
countryside calls for local solutions that can address villagespecific 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
Conclusion
benefits of the system. A good communication strategy will
In their Paper titled Better energy services for the poor
be important in establishing that the change process, after
(2000), Brook and Besant-Jones (2000)7 observe that
all, is in greater public interest, and hence legitimate.
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
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.
Power Glance
Sector Finance
Finance of state
power utilities
precarious:RBI
SEBI takes over
regulation of
private equity
industry
Rupee-hit power
producers seek stable
gas prices now
New Sebi norms

reduce listing-day
volatility
Govt eases foreign investment

norms for commodity exchanges
Investor protection
group files ease against
SEBI, exchanges
April
May
Week 2
Week 1
Week 3
SEBI to amend
exchange regulations
Bank may recast

power loans worth
Rs 15000 Crore
ECB norms for

power cos eased;
RBI to issue
guidelines in 7 days
Week 4
Week 1
Week 2
Private Equity investors line

up to cash in on wind
energy sector
Rs free fall against
greenback hits PE
investment portfolios
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
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.
Source : April 3, Business Standard
Source : May 18, Indian Express
Power Discoms
may issue bonds
against losses
SEBI shuts the consent

route for insider traders
front runners
Banks recast
Rs 75,000 Cr
SEB loans
Rs 2 lakh cr needed to
harness states hydel
potential
June
Week 3
Week 4
Week 1
SEBI notifies alternative

investments fund regulations
Week 2
Week 3
RBI likely to relax

norms for NBFCs
RBI leaves key rates

unchanged disappointing
industry market
Restructuring of power sector loans have picked

up in the March 2012 quarter. Public sector banks
have been reported inFinancial Expressto 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
Source : May 23, Business Standard
Source : June 16, Business Standard
O P E N A C C E SS
Making Open Access

a Reality at Retail Level
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,
Rupa Devi Singh
Managing Director & CEO, Power Exchange India Limited

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
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.
regulation specified by the appropriate commission. It is
Recently, Ministry of Law and Justice and learned Attorney
therefore evident that open access essentially offers choice
General of India have opined that all 1 MW and above
for consumers, for intermediaries like trading licensee or
consumer are deemed to be open access consumers and
distribution licensee or even generating companies. Each
Discoms are required to comply with open access which
one of them is entitled to the use of transmission systems
facilitates power supply with demand above 1MW.
or distribution infrastructure in a non discriminatory manner.
Key Areas of Concern:
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.
Apprehension of losing high revenue cross subsidizing

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
subsidies for revenue neutrality. Similarly for a power surplus
An open access consumer who procures power from an
utility retail level open access may help in trade of surplus
external supplier after paying for transmission charges,
power and additional revenue.
wheeling charges, cross subsidy surcharge, would obviously
High levels of cross subsidy surcharge:
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
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 consumers
power should not be interrupted if scheduled .
economically attractive to him after taking into account the
cross subsidy charges and the transmission and wheeling
Inadequate transfer capability between Southern and NEW
charges.
(Rest of India) grid results in uncertainty and volume risk
Cross subsidy charges need to balance the twin objective
for retail open access buyers. Similarly inadequate transfer
of encouraging competition in the sector as well as being
capability inside some states also pose considerable volume
fairly compensatory to the Distribution Utility. The additional
risk for retail customers prohibiting the growth.
production that the state would witness as a result of
Conclusion
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.

Lack of credible balancing and settlement mechanisms
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:

and support to allay their apprehension about losing
Retail level open access calls for setting up Intra-state ABT

balancing and settlement. Its absence in some states
high revenue cross subsidizing customers

Requirement of support infrastructure for open access:
The Regulatory and technical barriers need to be

eased out to bring greater clarity and assurance to
poses serious road-block in retail level open access.

Create awareness among Distribution Utilities and

provide them appropriate Govt/ Regulatory flexibility
at the state level:

mechanisms across the states to ensure efficient energy
Availability of sufficient transfer capability:
open access customers

Augmentation of transmission capacity in line with
Intra state ABT requires implementation of special energy
generation capacity to ensure a de-bottlenecked
meters on the periphery of all the entities. The interface points
transmission system for power evacuation and transfer
such as CPP with the grid and open access consumers
An appropriate transmission pricing regime that
with the grid will have to be metered. Adequate & reliable
provides the right locational signals and does not
communication facilities should also be established by the
discourage transfer of power over long distances
Distribution Utility / STU to enable speedy data transfer.

Proactive support to Merchant Power capacity addition
Requirement of assurance of uninterrupted power
through facilitatory measures such as timely fuel
supply through the open access route:
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
Harish Saran
Executive Vice President, PTC India Limited

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 longterm 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
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 procurers
periphery.
Each bidder should submit an Earnest Money Deposit
(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.
O P E N A C C E SS
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.
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, overregulation 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 authors personal opinions, and they do not reflect in any way
those of the institutions to which he is affiliated.
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
Dr. Atmanand
Professor of Economics & Energy

Former Dean
Management Development Institute, Gurgaon
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
Legislation is a law enacted by a Governing Body; it is an
transformation of business ideas. From barter trades to
establishment of statutory framework to which respective
e-procurement, change in shift of consumer behavior is a
businesses refer every day every hour. Laws under legislation
determinant of market restructuring as a result of an intrinsic
are inviolable, sacrosanct and framed for the amelioration
growth.
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.
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
In India, the most welcomed, needed and effective legislation
growth, both call for certain amendments to the provisions
for power sector has been The Electricty Act 2003 It
of the Electricity Act 2003.
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,
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 Shortterm (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.
Section 60 (Market Domination):
Regulatory Commissions and establishment of Appellate
The Appropriate Commission may issue such directions
Tribunal and for matters connected therewith or incidental
as it considers appropriate to a licensee or a generating
thereto.
company or a power exchange if such licensee or generating

company or power exchange enters into any agreement or
E L E C TR I C I T Y A C T 2 0 0 3
Proposed Amendments to
Electricity Act 2003
abuses its dominant position or enters into a combination
Hence, a clarification note could be introduced in the Act
which is likely to cause or causes an adverse effect on
so as to ensure that both the alternatives are available to
competition in electricity industry.
the distribution licensees. This will also help in reducing
- Section 66 (Development of Market):
uncertainties that the private IPPs are facing to sell their
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.
PX should come under the purview of Commission and
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, to be in line with the spirit of EA 2003, there should
be no discrimination amongst the various players.
Hence, in case of curtailment due to congestion, PX
should not be given priority over traders.
Section 62, 63, 79, 86 Amendment required to avoid
different interpretations.
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) and content (retail supply) business of
all existing discoms should be unbundled and separated
to avoid cross subsidization. This will lead to separation of
content (Competitive) and carrier (Regulated) segments.
Section 11
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
Section 62 and 63 of the Electricity Act - 2003, provide
the provision. This clarity will help in not subjecting the
for two alternatives available to the distribution licensees
provision to different interpretations and strengthen the spirit
to procure power with the approval of tariff by the
of Act which is competition and non-discriminatory Open
Appropriate Commission, viz:
Access (OA).
Under section 62, Appropriate Commission shall
There have always been debates and discussions
determine tariff for supply of electricity by a generating
about selection of regulators and independence of the
company to a distribution licensee
regulatory bodies from the Government control, first
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.
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
Further to above, National Tariff Policy (NTP) and
and thought-provoking for initializing any change. These
National Electricity Policy (NEP) were framed under the
amendments would frame the EA 2003 subjects to todays
provisions of the EA-2003 and these are subordinate
market. Such amendments may promote an even effective,
legislations and cannot override the provisions of the
fair and competitive market than ever. A revised legislation
Act and in case of a conflict between a substantive Act
may also propel support to further growth and market
and subordinate legislation, the former shall prevail in
restructuring suiting our growing economy. Nonetheless,
as much as subordinate legislation must be read in the
the EA 2003 has been a key framework in the growth of our
context of the primary/legislative Act and not vice versa.
power sector and appropriate revisions in future shall be as

revered with compliance as ever.
Next Generation Power Market Intelligence
Dr. Rajiv Kumar Mishra
Executive Director, PTC India Limited

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 investors 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
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 Shortterm 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
Market operator and players require seamless flow of
but compared to developed nation and International markets
Market and Power-system data. The information is sourced
like Nordic pool, we can still say that it is still evolving. The
from different sources and stakeholders such as System-
future may introduce concepts like spot market and real time
Operator, Exchanges, Utilities and large consumers. This
balancing markets on-line trading which are the prevalent
would require integrated planning and IT deployment which
concepts in more developed markets.
would go beyond the SCADA system deployed in NLDC
The relevant system data which are required for Traders and
and RLDC control centers or Exchange Platforms deployed
Market operators are Total Transmission capacity or Transfer
by IEX and PXIL. It would be an integrated solution based on
Capability Report from RLDC, STOA Scheduling Report for
open source protocols to source data from all the important
RLDC, Daily Power Supply Report &Gen Outage Report,
constituents. The Network planning, Architecture and market
Market Snapshot From IEX, Market Clearing Volumes
applications must be customized to Indian power market.
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.
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.
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.

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NOT FOR SALE

Journal from PTC India Limited

JULY 2012 | PTC INDIA LIMITED | 1

2 | PTC CHRONICLE | JULY 2012

This edition discusses the issues and challenges attenuating

Design & Printing by:

JULY 2012 | PTC INDIA LIMITED | 3

SEBs Bail Out-A Moral Hazard.....................................................6

Will the New Guidelines benefit the

4 | PTC CHRONICLE | JULY 2012

All the contents of PTChronicle are only for general

Your feedback is valuable to us. Kindly share them at

JULY 2012 | PTC INDIA LIMITED | 5

sebS bAIL OUT

SEBs Bail Out- A Moral Hazard

Sh. Tantra Narayan Thakur

Chairman & Managing Director, PTC Group

Earlier, a bailout was given about a decade back when Montek

reason seems that SEBs have yet to adopt the

For the over-all system to be viable, interests of

Also Published in Financial Express, 28 May, 2012

JULY 2012 | PTC INDIA LIMITED | 7

Min. Price : 2.59

Avg. Price : 3.56

Daily Prices - Indian Energy Exchange (IEX)

Weighted Average Prices 2012 (March - May)

Min. Price : 3.06

Avg. Price : 4.32

Daily Prices - Power Exchange India Limited (PXIL)

Short-term contract volume for March 2012 was

Out of the OTC volume for the period of March-May

Banking transactions are increasing in the market

The market has prefered shorter duration contracts

Over the period from March-May of 2012, PTC has led

Contributed by Coorporate Development Team

8 | PTC CHRONICLE | JULY 2012

Total Short Term Contract Volume 2012 (March - May)

Total Volume Traded in Short Term vs Total Generation 2012

Volume of Unscheduled Interchange 2012

Lanco Amarkantak Power

Percentage of Different Segments in Short Term Market 2012

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

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

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

REC Price Trends

Tamil Nadu hikes

Solar sector sees

With the commissioning of a 660 MW unit of a power

Source : April 13, Hindu Business Line

10 | PTC CHRONICLE | JULY 2012

Power Min for

Power distribution companies' losses

The ministry has proposed amendments to Section

Source : May 4, Business Standard

Power Min evaluating

Spot power prices

In signs of worsening power supply situation for

The two power trading exchanges Indian Energy

Source : May 21, Economic Times

Source : June 4, Economic TImes

JULY 2012 | PTC INDIA LIMITED | 11

12 | PTC CHRONICLE | JULY 2012

PTC India Financial Services Limited