Lecture by Professor S L Rao at IPPAI workshop, Washington DC, 04th November 2009

OUTLINE

1. Regulatory Principles
2. Regulatory legislation on Electricity, CERC, SERC, AEC
3. Regulatory legislation on Atomic Energy
4. Alternatives in Tariff Determination
5. Power Purchase Agreements
6. Subsidies
7. Nuclear Power and the Regulator
8. Issues to be addressed.
9. ANNEXURES 1 to 4

1. Regulatory Principles

The independent regulatory commissions in some infrastructure sectors (telecom, electricity, tariffs of major ports, controlled by the centralgovernment) date back to 1994. Electricity in India is in the Constitution, a subject over which both the Centre and the states have legislative power. However, central legislation takes precedence over state legislation. We therefore have a Central Electricity Regulatory Commission (CERC) and about 20 or so State Electricity Regulatory Commissions (SERCs), covering all the states of India. There are other sectors in Energy that are regulated departmentally by government-namely, Independent Regulatory Commissions: CERC; 20 or so SERCs (with a combined one for 9 Union Territories); downstream Oil and Gas Regulatory Board; Atomic Energy Commission. Each has its own Act of Parliament, and Government departmental or controlled Regulators: Director-General of Hydrocarbons (for upstream regulation); Coal; tariffs for Oil and Gas; Atomic Energy, Oil and Gas, Renewable Energy.

2. Regulatory Legislation on Electricity (See Annexure 1)

1. Central Electricity Regulatory Commission-CERC
   
   • Regulates central government owned undertakings (NTPC, NHPC, NLC, Power Grid Corporation, REC but not AEC), determines their tariffs;
   • Interstate transactions-trading, transmission, exchanges and spot and futures trading
   • Adjudicating inter-state disputes
   • Specifies Grid Code
   • When I was the regulator I also started determining advance tariffs for a new project. This was to help developers raise finances
2. State electricity Regulatory Commissions (SERCs)
   
   • ?There is one for each State and 9 for the Union Territories. While the SERC determines the tariffs of electricity generated within the state,
   • It has to approve the tariff paid for electricity bought from outside the state. So even when CERC has approved the tariff for a central generating company, the SERC could change the tariff that the local distributing company is allowed to pay.
   • The SERC approves purchases by the distribution company in relation to its estimated requirements for the period. The SERC will approve the purchases up to the point where the demand forecasts are met. It will do this by stacking the offers, with the least cost offers being at the bottom (merit order) and hence the first to be procured. It is possible therefore for the more expensive ones that are beyond the forecasted requirements, to fall off the stack and not be procured.
   • The SERC is also to approve open access and decide on a surcharge to be paid over the transmission tariff.
3. Appellate Tribunal for Electricity This body will hear appeals on Orders of the ERCs . (See Annexure 2)

3. Regulatory Legislative provisions on Atomic Energy

(See Annexure 3)

• In the Atomic Energy Commission (AEC) 1962, amended in 1987 and the Electricity Act 2003, as far as regulation and tariffs of atomic energy are concerned the AEC will coordinate with the CEA (and later the CERC) whose decision shall be final. But that is not what the Chairman of the AEC wrote to me when I was Chairman of CERC and came out with a Grid Code for India, pointing out that the Grid would not be able to distinguish between atomic and other power. He said that they would follow all our rules but would not obey us.
• The Electricity Act 2003 also has similar provisions, excluding atomic power from the jurisdiction of the CERC. (See Annexure 3)

4. Alternatives in Tariff Determination

1. The policy is required to reconcile two conflicting objectives: stimulate growth of the sector which means encourage investment, and safeguard the interests of the consumer.
2. Electricity tariffs are determined under the tariff policy of the GOI. “Accelerated growth of the generation capacity sector is essential to meet the estimated growth in demand. Adequacy of generation is also essential for efficient functioning of power markets. At the same time, it is to be ensured that new capacity addition should deliver electricity at most efficient rates to protect the interests of consumers”.
3. Procurement of power
   
   • Government policy states that power procurement for future requirements should be through a transparent competitive bidding mechanism using the guidelines issued by the Central Government. These guidelines provide for procurement of electricity separately for base load requirements and for peak load requirements. This would facilitate setting up of generation capacities specifically for meeting peak.
   • A two-part tariff structure should be adopted for all long term contracts to facilitate Merit Order dispatch. According to National Electricity Policy, the Availability Based Tariff (ABT) is to be introduced at State level by April 2006. This framework would be extended to generating stations (including grid connected captive plants of capacities as determined by the SERC). The Appropriate Commission may also introduce differential rates of fixed charges for peak and off peak hours for better management of load.

5. Power Purchase Agreement (PPA)

Should ensure adequate and bankable payment security arrangements to the Generating companies in case of persisting default in spite of the available payment security mechanisms. Accelerated growth of the generation capacity sector is essential to meet the estimated growth in demand. Adequacy of generation is also essential for efficient functioning of power markets. At the same time, it is to be ensured that new capacity addition should deliver electricity at most efficient rates to protect the interests of consumers. This policy stipulates the following for meeting these objectives.

1. In practice this has led to the evolution of different tariff methods available to generating companies:
   
   • ?Power Purchase Agreements with interstate selling price decided by CERC and state level purchase price by distributing company decided by SERC so that the tariff is in the merit order
   • Tariff based Competitive Bidding: this is usually with special fiscal preferences and in the case of domestic coal, with the allocation of captive coal mines from those available with the nationalized coal companies.
   • Merchant Power-Spot, medium term (month) and soon futures contracts; also long term purchase agreements. The idea here is that these tariffs are outside the regulators purview. Private long term purchases are possible. However the tariffs on such contracts will be much lower than available on opportunistic spot or medium term transactions.
   • Unscheduled Interchange surcharge is a penal charge enabling a commercial mechanism to stabilize frequency in the Grid. It is also used as price by some unscrupulous state agencies that starve their customers to take advantage of these high penal charges and helping to stabilize the frequency.
2. Annual Revenue Requirement (ARR)

As far as retail tariffs are concerned, they are determined by the SERCs on the basis of an ARR...Various norms are in force for Operating Norms; capital costs; ROE; fuel escalation costs. Today such information on atomic energy is not in the public domain.

6. Subsidies:
(See Annexure 4)

Subsidies are specifically mentioned in Section 65. The provision relates to reimbursement of subsidies to the distributing companies who are required to sell below costs to certain consumers. There is no provision regarding central government reimbursing subsidies. If nuclear power is more expensive, there may be need for such reimbursement by central government to enable it to be on the merit order for SERCs.

7. Nuclear energy and the Regulator

• When I was a central regulator and issued the first national Grid Code, I asked the chairman of the AEC as to how he proposed to operate in the circumstances of the exemption to AEC from my commissions jurisdiction. He replied that they would follow all the rules but not be subservient to my commissions. It needs to be clarified as to how this matter will be settled since there will be the existing government owned plants in addition to any new privately owned plants.
• There is also the question of capital costs (said to be escalating @ 15% per annum) and the high operating costs, said in Europe to be many times thermal generation costs in India. There is also the question of accident liability and the inclusion of that in the tariff calculations. If the end result is that nuclear energy is much more expensive than others, there will have to be a subsidy mechanism from government funds if the nuclear energy is not to fall off the electricity Regulators Merit Order.
• Finally of course, any Public Private Partnerships structures must fit in to the regulatory regime of the Nuclear Suppliers Group, Atomic Energy Regulatory Board of India, International Atomic Energy Agency, as well as the Indian Electricity Act 2003, the Indian Contract Act, 1860, and the Atomic Energy Act 1962. If there are additional costs in conforming to these, they will also have to come into the calculations.

8. Issues to be addressed:

• Who is to regulate tariffs?
• Costs disclosure; so far it is not in the public domain. Will it be so for private sector or private-public partnerships?
• If atomic energy costs are high, will there be subsidies to enable it to be in the merit order? Who will pay and when? What is the certainty of payment?
• Will atomic power plants come under the jurisdiction of the ERCs?
• Long term power purchase agreements are vital for “must run” generation plants as are nuclear power plants. Will these have to be approved by Government of India (GoI) or will there be a policy directive from GoI instructing the regulator to accept the PPA as approved by government?
• How will a two-part tariff structure and a competitive bidding process work for atomic energy? Plants would have been set up on a Public-Private Partnership or invitation basis and costs may prevent the tariff from being competitive.

ANNEXURE 1

Provisions of Section 73, The Electricity Act 2003

• to regulate the tariff of inter-state generating companies and of central government owned generating companies
• to regulate the inter-State transmission of electricity iii) to determine tariff for inter-State transmission of electricity iv) to issue licenses for inter state electricity transmission and trading. v) to adjudicate upon inter-State disputes e) to specify Grid Code
• to specify and enforce the standards with respect to quality, continuity and reliability of service
• to fix the trading margin viii) it also has advisory functions, such as formulation of National electricity Policy and tariff policy; promotion of competition, efficiency and economy in the activities of the electricity industry; promotion of investment in electricity industry; any other matter referred to the Central Commission by the Central Government)

State Electricity Regulatory Commissions- SERC’s:
(Provisions of Section 86 of The Electricity Act 2003

• determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail within the State
• regulate electricity purchase and procurement process of distribution licensees
• facilitate intra-State transmission and wheeling of electricity
• issue licenses for intra state transmission, distribution and trading.
• promote co-generation and generation of electricity from renewable sources of energy
• adjudicate upon the intra-state disputes
• specify or enforce standards with respect to quality, continuity and reliability of service by licensees;
• fix the trading margin in the intra-State trading of electricity
• They also have advisory functions, that include promotion of competition, efficiency and economy in activities of the electricity industry; promotion of investment in electricity industry; reorganization and restructuring of electricity industry in the State; matters concerning generation, transmission, distribution and trading of electricity or any other matter referred to the State Commission by that Government.

ANNEXURE 2

Section 120 of electricity Act 2003: Procedure and powers of Appellate Tribunal. The Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other provisions of this Act, the Appellate Tribunal shall have powers to regulate its own procedure. 5 of 1908

1. The Appellate Tribunal shall have, for the purposes of 5 of 1908discharging its functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:-
   
   • summoning and enforcing the attendance of any person and examining him on oath;
   • requiring the discovery and production of documents;
   • receiving evidence on affidavits;
   • subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872, requisitioning any public record or document or 1 of 1872 copy of such record or document from any office;
   • issuing commissions for the examination of witnesses or documents;
   • reviewing its decisions;
   • dismissing a representation of default or deciding it ex parte;
   • setting aside any order of dismissal or any representation for default or any order passed by it ex parte;
   • any other matter which may be prescribed by the Central Government. 5 of 1908 1 of 1872 45 of 1860.
2. An order made by the Appellate Tribunal under this Act shall be executable by the Appellate Tribunal as a decree of civil court and, for this purpose, the Appellate Tribunal shall have all the powers of a civil court.
3. Notwithstanding anything contained in sub-section (3), the Appellate Tribunal may transmit any order made by it to a civil court having local jurisdiction and such civil court shall execute the order as if it were a decree made by that court. 45 of 1860.

All proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian of 1974. Penal Code and the Appellate Tribunal shall be deemed to be a civil court for the purposes of section 345 and 346 of the Code of Criminal Procedure, 1973.

ANNEXURE 3

Provisions of Section 22, AEC Act 1962, amended in 1987: Notwithstanding anything contained in the Electricity (Supply) Act, 1948, (superseded by the electricity Act 2003) the Central Government shall have authority —

• to develop a sound and adequate national policy in regard to atomic power, to co-ordinate such policy with the Central Electricity Authority and the State electricity Boards constituted under sections 3 and 5 respectively of that Act and other similar statutory corporations concerned with the control and utilization of other power resources, to implement schemes for the generation of electricity in pursuance of such policy and to operate either++ by itself or through any authority or corporation established by it or a Government Company, atomic power stations in the manner determined by it in consultation with the Boards or Corporations concerned, with whom it shall enter into agreement regarding the supply of electricity so produced;
• to fix rates for and regulate the supply of electricity from atomic power stations either+++ by itself or through any authority or corporation established by it or a Government Company in consultation with the Central Electricity Authority.
• to enter into arrangements with the Electricity Board of the State in which an atomic power station is situated either by itself or through any authority or corporation established by it or a Government Company, for the transmission of electricity to any other State; Provided that in case there is a difference of opinion between the Central Government or such authority or corporation or Government Company as the case ++ Inserted vide the Atomic Energy (Amendment) Act 1987 (No. 29 of 1987) +++ Substituted vide the Atomic Energy (Amendment) Act 1987 (No. 29 of 1987). may be, and any State Electricity Board in regard to the construction of necessary transmission lines, the matter shall be referred to the Central Electricity Authority whose decision shall be binding on the parties concerned.
• No provision of the Indian Electricity Act, 1910, (superseded by Electricity Act 2003) or any rule made there under or of any instrument having effect by virtue of such law or rule shall have any effect so far as it is inconsistent with any of the provisions of this (AEC) Act.
• Save as otherwise provided in this Act, the provisions of this Act shall be in addition to, and not in derogation of, the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948)

Provisions of Section 184 of Electricity Act 2003: The provisions of this Act shall not apply to the Ministry or Department of the Central Government dealing with Defence, Atomic Energy or such other similar Ministries or Departments or undertakings or Boards or institutions under the control of such Ministries or Departments as may be notified by the Central Government.

ANNEXURE 4

Provision of Section 65 of Electricity Act 2003: “If the State Government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commission under section 62, the State Government shall, notwithstanding any direction which may be given under section 108, pay, within in advance in the manner as may be specified , by the State Commission the amount to compensate the person affected by the grant of subsidy in the manner the State Commission may direct, as a condition for the license or any other person concerned to implement the subsidy provided for by the State Government:

“Provided that no such direction of the State Government shall be operative if the payment is not made in accordance with the provisions contained in this section and the tariff fixed by State Commission shall be applicable from the date of issue of orders”

The author is Former Chairman, Central Electricity Regulatory Commission and can be contacted at raosl@hotmail.com