Separate carrier & content: A roadmap for power sector reforms

November 23, 2020 5:00 AM

Separate distribution and supply licences can be provided by the state electricity regulatory commissions (SERCs) after effective date of notification of new amendments and existing licences of the incumbent distribution licensee to continue only till its expiry or renewal, whichever is earlier

Only normative technical losses for distribution should be allowed for the distribution network.Only normative technical losses for distribution should be allowed for the distribution network.

By Raj Pratap Singh

While unbundling of generation and transmission sectors happened long ago, the distribution sector unbundling has remained a non-starter. Now and then, efforts made for discom privatisation could not gather support because these were in the form of replacement of public monopoly with private monopoly. Access to affordable quality power availability will remain a dream only, until the distribution sector is exposed to competition. Only competition is expected to provide consumers with choice of supplier, affordable and reliable power. All other network businesses, such as telecommunications and DTH, have already been unbundled, and it is high time that the distribution sector is also unbundled separately into distribution (carrier) and supply (content) so that private and public players can compete with each other to bring in efficiency and transparency.

The last serious efforts to unbundle distribution were made in 2014 by the Ministry of Power through a draft amendment Bill for amending the Electricity Act.

The draft Bill reached the then Standing Committee headed by Kirit Somaiya. While the committee was broadly supportive of the reforms, it gave few suggestions like providing flexibility to the states, transparent handling of existing discom PPAs, addressing consumer concerns, universal service obligation, etc.

Somehow, no progress could be made after that. However, the carrier & content (C&C) segregation still remains a low-hanging fruit for reforms and could be a win-win for all the stakeholders—consumers, discoms and the government.

The C&C segregation involves separation of the function of supply of electricity from the business of distribution of electricity, and hence there are two licensees—namely the distribution licensee (for providing non-discriminatory access to their distribution network system on payment of regulated network access charges), and the supply licensee (competing with each other to supply electricity to consumers in a particular area and use the distribution system for such purpose).

As a prerequisite for segregation of C&C business of incumbent discoms, appropriate amendments are required in the Electricity Act. Further, assets and accounts of incumbent discoms are also required to be separated into distribution and supply functions. However, this is only possible after attaining 100% metering of all consumers, feeders, substations and distribution transformers.

The existing PPA portfolio of the incumbent distribution licensee is required to be frozen and transferred to an intermediary company backed by the government. This intermediary company should be responsible for working as counterparty to all the existing PPAs, selling power procured through these PPAs through the existing wholesale market/trading/exchange, and socialising all profits/losses through a universal charge/payment to all existing suppliers according to a pre-agreed formula—let’s say, weighted average cost of power procured.

Separate licensing

Separate distribution and supply licences can be provided by the state electricity regulatory commissions (SERCs) after effective date of notification of new amendments and existing licences of the incumbent distribution licensee to continue only till its expiry or renewal, whichever is earlier. On the expiry of the term, the incumbent distribution licensee needs to be split into separate distribution and supply licences for the area, respectively. The incumbent distribution licensee may retain the supply licence to function as a provider of last resort till new supply licensees step in. The distribution licence may be issued for a longer duration of 25 years, whereas the supply licence can be issued for a shorter duration of 3-5 years, both having universal service obligations and standards of performance. To reduce regulatory discretion, a provision of deemed licensing may be introduced for supply licensees, provided they fulfil the norms on capital adequacy, creditworthiness and code of conduct rules.

Allocation of power from existing PPAs: This is necessary to ensure continued servicing of legacy PPAs of the incumbent discom. While it will initially limit the supply licensees’ ability to source cheaper power to offer best price for their consumers, it is essential in national interest so that these economic assets remain useful till their lifetime and do not become NPAs. The intermediary company should service existing PPA obligations through the revenue stream generated by supply licensees/resale of power through exchanges, etc. It will analyse and compute year-wise weighted average power purchase cost (APPC) as per prevalent laws (MoD, RPO, must-run, coal availability, demand, etc) and will allocate weighted average fixed charges (for all existing contracted capacities) and weighted average of energy charges to the incumbent supply licensee.

All supply licensees should procure power only from the intermediary company’s PPA portfolio in proportion of their contracted capacity till these PPAs are either exhausted or expire over time. On exhaustion or expiry of intermediary company PPAs, supply licensees shall be free to procure power from sources of their choice.

Distribution and supply tariffs: The success of the whole scheme of things will hinge upon how retail tariffs evolve over time. Unless there are long-term benefits to consumers in terms of price, reliability, quality and value-added services, etc, reforms are not likely to be have the consumer’s acceptability.

Therefore, the design of distribution network access charges/fixed charges for the distribution licensee needs to be regulated keeping in view the growth in load and consumers, meeting quality and performance of standards, and distribution losses. Only normative technical losses for distribution should be allowed for the distribution network. Similarly, no commercial losses (related to billing and collection) should be allowed for supply licensees by SERCs while fixing the retail supply ceiling, albeit nominal bad debt provision may be considered.

Input cost of power for the supply licensee should be based on the weighted average power purchase cost from the intermediary company, plus network access charges, wheeling charges and distribution losses. To promote competition, only a ceiling tariff should be provided by the regulator for supply licensees of an area. Within that ceiling, the supply licensee can provide various incentives, TOD (time of day) tariff, etc, by improving its operational efficiency and reduction in its ROE/profit. All billing and metering at the retail level should be done by the supply licensee including installation of new meters by the supply licensee based on consumer choice (plain vanilla or TOD, etc). Any subsidy from the government should go as DBT directly to the consumer’s account. A portability framework needs to be developed by the regulators so that consumers have a choice to switch from one supply licensee to another (only after a minimum lock-in period).

If implemented diligently, unbundling and introduction of a separate C&C business in the power distribution sector will bring in benefits of competition and choice to retail consumers. However, all the associated risks and challenges need to be appropriately mitigated by the government, the legislature, and the regulators so that benefits of this reform reach one and all.

The author, a former IAS officer, is the chairman of the Uttar Pradesh Electricity Regulatory Commission. Views are personal

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