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Conference on Managing Cost Of Energy: Strategies For Industrial & Institutional Customers July 14-15, 2004, The O PowerPoint Presentation
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  1. Conference on Managing Cost Of Energy: Strategies For Industrial & Institutional Customers July 14-15, 2004, The Oberoi, New Delhi Mohit Saraf Partner, Luthra & Luthra Law Offices L&L Confidential

  2. Making of the Electricity Act • The Electricity Act – after considerable political debate • Standing Committee of Energy comprising of different political parties reviewed the Act • Suggestions/recommendations of Standing Committee were considered in the finalization of the Act L&L Confidential

  3. Review of the Electricity Act • Common Minimum Programme (CMP) • Pretense of consensus where there is none • Proposes review of the Electricity Act, 2003 • Resulting uncertainty for all the stakeholders and the electricity industry • Resulting concerns emanating from statements of political leaders L&L Confidential

  4. Review of the Electricity Act • CMP proposes extension of the deadline for unbundling of SEBs; (already extended) • CMP reiterates the commitment to, “an increased role for private generation of power and more importantly power distribution” L&L Confidential

  5. Statements – at a glance • Left Parties not opposed to unbundling in principle – but against privatisation • Finance Minister’s statement – Unbundling is not a pre-condition for Private Participation in the generation & distribution. • Left Parties advocate continued cross-subsidization/differential tariff • Power Minister’s statement – subsidization through budgetary allocation which is in line with the scheme of the Act • Power Minister’s statement – No further review of the Act is required. L&L Confidential

  6. Proposed Review of the Act • Unbundling of SEBs – whether stalled? • Phasing out of cross-subsidization – whether shelved? • Power Reform with ‘human face’ – Rural electrification L&L Confidential

  7. Extension of unbundling and its effects... • Extension of the deadline for unbundling of SEBs • Can this extension derail the whole process of introduction of power sector reforms ? • Unbundling is a means to bring in effective ‘open access’ • World over, ‘open access’ is seen as an important facilitator of a free electricity market • Standing Committee proclaimed open access as the “panacea for ushering in power sector reforms, especially for private sector participation” • Delay in introducing open access – implies delay in competition and private investment L&L Confidential

  8. Extension of unbundling and its effects... • No surcharge for open access in case of: • Licensee [Sec. 40 and Sec. 42] • CPP [Sec. 40 and 42] • ‘Open access’ – would transform the electricity industry • Choice & competition • Multiple buyer model • Reduction in tariff • Differentiation between carrier and content L&L Confidential

  9. Extension of unbundling and its effects... • Act mandates – non-discriminatory open access by 2008 [fourth proviso to Sec. 42 (2) – as amended] • To ensure non-discriminatory open access Act provides that the transmission licensee shall not undertake trading in electricity [third proviso to Sec. 41] • Open access : Distribution v. Transmission Network L&L Confidential

  10. Extension of unbundling and its effects... • Open access – still subject to availability [proviso to Sec. 9(2) and CERC Regulations on Open Access] • Extension of unbundling possible without amendment of the Act • State Government may authorize the SEB to continue as State Transmission Utility or a licensee for such period as may be mutually decided by the Central Government & the State Government [proviso to Sec-172(a)] L&L Confidential

  11. Cross-subsidy & Subsidy Cross-subsidy • Left parties advocate continued cross-subsidization and differential tariff regime. • Act mandates – “surcharge and cross-subsidies shall be progressively reduced and eliminated….” (third proviso to Sec-42(2)) • Surcharge on open access shall be utilized to meet the requirements of current level of cross subsidy (second proviso to Sec-42(2)) • N.K. Singh Committee – recommended elimination of cross-subsidy within a period of five years (now Government states that the matter regarding cross-subsidies will be further examined in light of its sustainability after five years • Cross-subsidy and open access are closely related L&L Confidential

  12. Cross-subsidy & Subsidy • Possible consequences of continued cross-subsidization: • Moving away of HT Consumers from SEBs to alternatives Subsidy • No restriction on subsidy by the State Government – State Government may grant subsidy to any consumer or class of consumers provided it shall pay in advance the amount of subsidy to the licensee or any other person concerned to implement the subsidy (Sec-65) • Power Minister confirmed – subsidization through budgetary allocation L&L Confidential

  13. Review – A Rhetoric? • The continued rhetoric for review could be a political compulsion for the Government. • On a conceptual basis, no review is warranted to meet goals set up by CMP – • Due to political compulsions the Government may not be in a position to abandon “review” process – this, however, could be an opportunity to provide adequate clarity to certain provisions of the Act. • Every State Regulator may come up with different interpretation of the Act L&L Confidential

  14. The Act…..concepts and issues • Generation - De-licensed • Supply directly to consumers – subject to Open Access Regulations S. 10(2) • Whether supply by generating company to consumers through dedicated transmission lines or through the Grid amounts to distribution of electricity? • In case Generating companies require a distribution license it would be a step backwards and discourage private investment (Sec. 43 mandates distribution licensee’s obligation to supply on demand) L&L Confidential

  15. The Act…..concepts and issues Captive Generating Plant • Sec. 2(8) “…. means a power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association” L&L Confidential

  16. The Act…..concepts and issues • Captive generation of electricity • Benefits under the Act: • Right to Open Access [Sec. 9(2)] • No surcharge [proviso to Sec. 42(2)] • Definition of Captive generation – has scope for more than one interpretation [Sec. 2(8)] • “…. and includes …. set up by an AOP and Cooperative” Not clear whether generation of electricity by a company for its members would qualify as captive generation • Supply of surplus energy by a captive plant – no explicit provisions [“primarily for his own use”] L&L Confidential

  17. The Act…..concepts and issues • Surcharge and Open Access – • Distribution and Transmission Surcharge • As per proviso to Sec. 42(2) – “….open access may be allowed before cross-subsidies are eliminated on payment of of a surcharge in addition to the charges of wheeling …..” • As per Sec. 40(c)(2) “….when such open access is provided by State Commission ………, on payment of the transmission charge and a surcharge thereon, ….” • Purpose of surcharge - cross-subsidy • Whether surcharge is payable in case of supply through dedicated transmission lines? L&L Confidential

  18. The Act…..concepts and issues • Additional Surcharge [Sec. 42(4)] applicable in scenario of distribution open access to compensate the distribution licensee’s for his fixed cost arising out if his obligation to supply. • Additional surcharge is payable on the charges of wheeling • Whether Additional surcharge is payable in case of: • Existing consumers of the utility who are installing stand-by set. • Existing consumers of the utility going out of the system due to installation of stand alone set. • A new consumer not opting to get the power from the utility and deciding to operate his own stand-alone set. L&L Confidential

  19. The Act…..concepts and issues • Multiple Distribution Licensees • Pre-supposes setting up of parallel distribution system Vs. Open access on existing network [Sixth proviso to Sec. 14 and Sec. 42(1)] • Supply of electricity by a distribution licensee outside the area of licence • Whether permissible? [Sec. 42(3)] • Can the distribution licensee extend its own lines outside the area of licence? [Sec. 67 and Sec. 68] L&L Confidential

  20. The Act…..concepts and issues • Determination of Tariff • Section 62(1) vs. Section 86(1)(a) • Sec. 62(1)(a) – Tariff between generating company and distribution licensee • Sec. 62(1)(b) – Transmission tariff • Sec 62(1) (c) – Wheeling tariff of a distribution licensee • Sec. 62(1) (d) – Tariff for retail sale of electricity • Sec. 86 (1) (a) – State Commission to determine tariff for “…generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail…” L&L Confidential

  21. The Act…..concepts and issues • Tariff between generating company/captive and consumers whether through dedicated transmission lines or through the grid is not regulated by the commission. [Section 49] • Trading margin to be regulated. L&L Confidential

  22. Thank you L&L Confidential