CII – PTC Conference onThe Power Market Post Electricity Act 2003:

Entities, Business Models and Implications

byKarthikeya Pisupati

Deloitte Touche Tohmatsu India Pvt Limited

October 15, 2003

SESSION II : EMERGING SHAPE OF DOWNSTREAM LINK - TRANSMISSION & DISTRIBUTION

Context

• More than 10 years of Reforms in the power sector

• Some states have developed their own “reform Acts”– Unbundled their SEBs into G, T & D’s

– Setting up of Electricity Regulatory Commissions

– Privatisation of distribution (Orissa, Delhi)

• Others yet to unbundle their integrated utility

• Need to give thrust to reforms (in order to realise efficiencies)– Introducing markets, open access, contestability of customers etc

• This presentation looks at the business models of T & D in the light of new Electricity Act, 2003

India Is Following Established Path Of Industry Evolution

MonopolyMonopoly TransitionalTransitional CompetitiveCompetitive

Italy Canada

New ZealandAustralia

Mexico

South Africa

India (2003)Russia/CIS

Asset Management Customer Management

Cu

sto

mer

Co

nte

stab

ilit

y

Brazil

Pakistan

U.K.Scandinavia

Argentina, Chile

United StatesGermany

France

States position – Circa 2003 – Still Monopolies

Eff

icie

ncy

Lev

els

Low

High

Integrated Unbundled “D” Privatised

Orissa

Delhi

KarnatakaHaryanaRajasthan

UP

AP

Uttaranchal

MP

GujaratTNHP

Maharastra

Punjab

Assam

Nagaland

Bihar

Tripura

Sikkim

Ar.Pradesh

Mapping based on the Report on Rating of SEBs, ICRA & CRISIL

EngineeringEngineering Finance/Finance/MarketingMarketing

AssetsAssets CustomersCustomers

Monopoly Model Competitive Model

KeyCompetencies

Management Focus

Transmission/Distribution

Generation/Retail

Applicable Segments

PhysicalPhysicalPortfolioPortfolio

CustomerCustomerPortfolioPortfolio

Value Lever

Value Drivers - By Segment

What’s the new Business Model for T & D?

Txn

Wires

SOBulk

Supply

TRANSCO

Retail

Supply

Dist

Wires

Large Consumers

Other Consumers

Franchise Consumers

DISCOM

Open Access Unbundling Functions Trading Non-exclusivity

Txn

Wires

SO

Wholesale

Supply

Retail

Supply

Dist

Wires

Large Consumers

Other Consumers

Franchise Consumers

TRANSCO DISCOM(S)

TRADECO (S)

Contestable ConsumersGRID

CO (S)

Implication of new business model

Functionally, under T & D segment of the business,

• Trading

• System Operation

• Transmission wires

• Distribution wires

• Retailing – Non contestable consumers, Tariffs

Covered in the subsequent slides

Trading

• Creation of Multi-buyers & Multi sellers• Define Trading models

•Scheduling & Dispatch•Imbalances

•Pricing of energy•Bilateral•Spot

•Treatment of subsidies/ cross-subsidies in a transparent way•Move to pricing signals – SRMC/ LRMC

•Balancing & Settlement modalities•Shortage of capacity•Pricing of ancillary services•Non-exclusivity of area of supply•Grid available to move power over different regions•Pricing for HT/ LT

Physical Pricing Issues/ Concerns

• Act specifies “Non-Discriminatory” access to users• Multiple Licenses• CERC/ SERC to fix surcharge for open access with Special treatment for

captive

System Operation

•Scheduling & Dispatch – Merit Order•Treatment of Imbalances

•Spot•Ancillary services•Balancing & Settlement – need to know the physical contracts for settlement

• Pricing of Imbalances•Pricing of Ancillary services• Settlement

•Contract•Balance

•Sophisticated system (within state)•Demand management

•Treatment of shortages•minimum hrs of supply for Agriculture/ rural

• Dispatch of Non-conventional

Physical Pricing Issues/ Concerns

• Act specifies Balancing & Settlement functions with LDCs

Transmission wires – Inter & Intra state

• Accurate Measurement of energy & capacity handled•Congestion Management• Availability of system

• Unbundling the “Average charges”

• Contract Path•MW mile•Postage stamp/ Incremental Postage Stamp

•Congestion pricing

•Adequate pricing signal for maintenance of system•Determination of contract path pricing within the state•New capital expenditure

•Incentive to build?

Physical Pricing Issues/ Concerns

• Act specifies only transmission wires for CTU/ STU along with system operator function

Distribution Wires

• Accurate Measurement of energy & capacity handled•Loss reduction investments

•HT/LT ratio•Transformer loading

•Availability of system

• Unbundling the “Average charges”

• cost to serve various loads

•Defining “wires” cost for multiple licensees

•Pricing signal for new investment (adequate for good load development)•Right to connect (for all categories immediately?)•Duplication of wires?

Physical Pricing Issues/ Concerns

• Act specifies only metered supply after two years• Allows “inset” franchising• Special Policy for Rural distribution

Retailing – Franchise consumers

• Accurate measurement of LT system•Metering •Billing efficiency•Reduction of “theft” & other commercial losses

• Pricing to consumers

•Cost to serve•Retain customers •Customer service

•Managing demand of Agriculture•Allocation rules – position in case of multi buyers system•Need to retain the creamy layer from competition•Tariff rebalancing

Physical Pricing Issues/ Concerns

• Act allows for special Policy for treatment of rural electrification• National tariff Policy?

General System Issues

• Long term PPA signed with IPP’s & other generators

• Pricing pressure on adverse hydro/ thermal mix of generation

• Limited number of trading players initially?(from capital adequacy, capacity to bear loss positions)

• Major cash flow problems – need to still depend on large subsidy from state government

• Affect private participation in the existing distribution businesses of state

• Tariff principles (cross-sub elimination, agriculture tariffs, multi-year tariffs)

• Competitive bid tariff route (binding)– How to define it for Trading, Wires?

What are the pre-requisites for Competitive Market?

• Tariff reforms

• Transparent/ clear understanding of Value chain and associated costs

• Elimination of supply shortage

• Multi-buyer and Multi seller

• Price responsive Demand and Supply

• Position for generators to participate in spot market

• Access to Transmission and Distribution wires

• Interconnectivity to trade power across states/ regions

Enablers in Electricity Act 03

• Allows Electricity Boards to unbundle/ transfer to new corporate entities

• Unbundling of wires & Trading business

• Fixed time frame for enunciating policy and action plan– Provision of open access

– Tariff policy

– Rural electrification

The Act is in the right direction

Modalities to be worked out - by States & Centre jointly……..