l PRAYAS 16 th April 2015 To, The Secretary MERC Mumbai. Ref: Public notice in Case no 121 of 2014 Dear Sir,

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1 l PRAYAS Initiatives in Health, Energy, Learning and Parenthood Amrita Clinic, Athawale Corner, Karve Road Corner, Deccan Gymkhana, Pune ; INDIA Tel.: (020) : Fax: (020) E- mail: Web- site: To, The Secretary MERC Mumbai. 16 th April 2015 Subject: Suggestions and Objections from Prayas regarding the Maharashtra State Electricity Distribution Company Limited s Petition for Multi Year Tariff for FY to FY Ref: Public notice in Case no 121 of 2014 Dear Sir, In response to above matter, please find enclosed the comments/suggestions on behalf of Prayas (Energy Group). The gist of this submission has been presented during the public hearing dated 10 th April 2015 in Pune. The said presentation is also attached for ready reference. We request the commission to take this submission on record and allow us to make further submissions in this matter, if any. Thanking you Sincerely Ashwini Chitnis Prayas (Energy Group) Athawale Corner, Karve Road, Deccan Gymkhana Pune, India Tel ,

2 Before the Maharashtra Electricity Regulatory Commission Comments, Suggestions and Objections on Maharashtra State Electricity Distribution Company Limited s Petition for Multi Year Tariff for FY to FY (MERC Case No. 121 of 2014) by Prayas (Energy Group), Pune April

3 Table of contents I: Aims and objectives of Multi Year Tariff (MYT)... 4 II: Inconsistencies in the petition: Failure of technical validation process... 5 III: Neglect of supply and service quality concerns IV: Precarious financial position of MSEDCL and possibility of further losses V. Lessons, challenges and way forward

4 I: Aims and objectives of Multi Year Tariff (MYT) 1. Inordinate delay, lack of consistent approach and wilful negligence by MERC: The Maharashtra State Electricity Distribution Company Limited (MSEDCL) has filed a Petition for Multi Year Tariff for FY to Motivation behind introducing a MYT process can be detailed as follows: Provide regulatory certainty to consumers, utilities and investors To minimise perception of regulatory risk Facilitate sound planning practices and processes Address risk sharing mechanism between utility and consumers based on controllable and uncontrollable factors Improve operational efficiency and reduce tariff in the long run Therefore, for any MYT exercise to the successful, there needs to be: Reliable baseline data for making future projections Rigorous and scientific demand forecast Long term power purchase and capital expenditure plans which should be followed with necessary coordination between different utilities and generators Continuous monitoring and evaluation of trajectories for various performance parameters. Co- relating MYT exercise with supply and service quality and financial performance of the utility, benefits of which should accrue to consumers in the form of predictable costs and reliable service. The MYT regulations 2011 mandated the regulated utilities to file business plans for a five year control period with detail forecast regarding sales, power purchase, capital expenditure and operational costs. If implemented properly, this would have helped to identify certain important areas of concern as well as improvement. After much delay, the business plan petition was filed by MSEDCL for a curtailed control period of three years in March 2013 and subsequently, an order approving the same was passed by the Commission in August However, the present petition, being filed in the last year of the control period, relies on actual performance data and new projections based on the same and thus has no relevance with the Business plan that has been approved. It does not provide comparison with business plan approved targets, rendering the process of planning and forecasting entriely meaningless. MSEDCL has clearly not shown any eagerness to implement the MYT, but the Commission is empowered under the various provisions of the Electricity Act 2003 (Section 62 (2), Section 142, and Section 146) and its Tariff Regulations to obtain the necessary information and to undertake a suo- motu tariff determination process. Given the circumstances, the Commission could have demanded timely compliance with its regulations and orders, but it chose not to do so. In fact, in Case no 95 of 2013, the commission did act suo- motu to revise MSEDCL tariff, but it did so to only true- up certain costs and without holding due public process. The commission owes the consumers a detailed explanation as to why it chose to delay the MYT implementation for past two years and it should provide the rationale for willfully refraining from using its suo- motu powers to undertake due process for MYT implementation, at least after the business plan was approved. The Commission should also provide reasons for not using sections 142 and 146 of the Electricity Act 2003 to make MSEDCL accountable for its duties. Therefore, any burden arising from this inefficiency of the commission and utility on account of such willful negligence and delay cannot be passed on to the consumers in the form of carrying cost for deferred payments and/or regulatory assets. 4

5 2. Review of MYT process and true- up for : A crucial objective of the MYT exercise was to address risk sharing mechanism between utility and consumers based on controllable and uncontrollable factors. Such a mechanism can ensure that only prudent costs are passed through to the consumers and will assist in holding MSEDCL accountable for its performance. Such an exercise was intended to be conducted in the mid- term review process and at the commencement of the next MYT control period. According to Regulation 19.2 of MERC s MYT Regulations, 2011 an application for Mid- term Performance Review under MYT framework was to be made by December As the present petition is being filed in the last year of the control period, there is no scope for mid- term review. As the year is completed and the auidted actuals are also available, this process should also complete the final true up for FY14 and also conduct the performance review for FY15. In other words, post the current tariff revision exercise, there should not be any tariff determination for FY on any account. Also, since this process is happening in the last financial year of the control period, it is inappropriate and misleading to term it as an MYT exercise. Instead, this process must be termed as final true- up of FY , performance review of FY and tariff determination for FY II: Inconsistencies in the petition: Failure of technical validation process In the past, MERC has shown a strong commitment to transparency and public participation. It used to be a routine procedure to undertake Technical validation sessions (TVS) in the presence of the consumer representatives for all tariff related matters. The main purpose of the TVS is to scrutinize completeness of the petition, so that it can facilitate an effective and informed public process. All the previous tariff orders of MSEDCL, as well as other licensees, highlight the important contribution of TVS in improving the petition and hence the public discourse. Even in this present matter, a TVS session was conducted on 24 th December During the said TVS, several important issues were raised by the consumer representatives and it was collectively demanded that a subsequent TVS should be conducted to resolve many of these issues. However, the Commission chose not to conduct the second TVS. In absence of a thorough scrutiny, there is a lack of clarity regarding the petitioner s overall approach towards tariff review process and uncertainty about appropriateness of sales estimate, surplus availability as well as operational costs. The following paragraphs highlight serious lacunae and inconsistencies regarding the estimates and assumptions used in the petition. 1. Assumption for sales projections and implications on revenue: MSEDCL s assumptions for sales projections for FY15 and FY16 are to be based on historical trend while accounting for future contingencies. However, Table 1.1 below shows that historical trends were not considered while projecting sales for categories which accounted for 57% of the sales and 62% of the revenue in As shown in Table 1.1, MSEDCL sales have been falling over the years, especially in cross subsidising categories. However, the growth rate assumed for projections are much higher in order to account for withdrawal of staggering day for all HT industrial consumers, the impact of GoM s investor friendly Industrial Policy, reduction in load shedding and improved collection efficiency. Though these factors are important, they do not seem significant enough to reverse a trend of sales decline. Moreover, MSEDCL has not considered other momentous changes which are currently affecting its sales and which will greatly deteriorate sales in certain categories in the near future. These are discussed below: 5

6 Categories Year on year growth 3 Year CAGR 5 Year CAGR HT Industrial - 11% - 4% 2% 7% HT Commercial - 5% - 1% 16% 7% HT Others 4% 6% 6% 5% LT Domestic 5% 6% 8% 10% LT Commercial - 2% 1% 6% 7% LT Agriculture 4% 10% 11% 4% LT Industrial 6% 5% 7% 7% LT Others 9% 12% 8% 10% MSEDCL Total - 1% 3% 7% 7% Table 1.1: Inconsistencies in sales growth projections CAGR Considered i. Migration of cross subsidising consumers to Open Access: In the interim order for Case 38 of 2014, it was noted that the discrepancy between projected sales for and actuals for the same year for the HT Industrial category alone was around 3500 MU about 70% of which was due to migration of these cross subsidising consumers to open access. This also resulted in revenue loss of Rs crores. HT Industrial and commercial categories have seen a 11% and 5% drop in sales between FY13 and FY14. Given the high tariffs in Maharashtra, this trend is bound to continue with more and more large consumers switching to other viable supply options. ii. iii. Increased viability of renewable energy supply options: Currently 10% of MSEDCLs consumers who account for 28% of the sales and 44% of the revenue have such high tariffs that it would be financially viable for them to switch to renewable energy options such as grid connected solar. This implies further erosion in MSEDCL sales in the near future especially with the rapid fall in cost of renewable energy technologies. Even large LT domestic, industrial and commercial consumers can make this switch therefore leaving MSEDCL at the risk of losing even its LT cross- subsidising consumers. Increased switching to captive sources: Consumers who can afford to invest in power plants can even switch to power procurement from captive plants especially once the coal sector issues begin to get resolved. As in other states such as MP, Haryana and Tamil Nadu, this will lead to significant loss in high paying consumers in the near future without any compensatory surcharge provided to MSEDCL. Additionally the proposed Electricity Act Amendment may mandate the migration of all +1MW consumers to Open Access along with creating the option of multiple supply licensees in a given area of distribution. In case Maharashtra decided to opt in for Carriage and Content separation, MSEDCL also faces the risk of losing many consumers with high contracted demand to new supply licensees. Thus, MSEDCL is bound to lose more of its high paying consumers and must plan accordingly. 6

7 2. Assumptions regarding MSPGCL generation: MSPGCL accounts for about half of the total power purchase cost cost and quantum of MSEDCL. Therefore, assumptions regarding MSPGCL generation signficantly affect MSEDCL s revenue requirement. MSEDCL and MSPGCL are sister concerns and are both regulated entities governed by the same tariff regulations. Incidentally, MSPGCL has also parallely filed a case of its midterm review under the same MYT regulations under which present case is being heard. However, there seem to be quiet a few important gaps and inconsistencies regarding both cost and quantum of generation as assumed by MSPGCL and MSEDCL for the same years and the same plants. These are listed below: i. Discrepancies in Audited Actuals: As per MSPGCL actuals for the year total net generation amounts to 40,713 MUs 1. However, MSDECL reports that the energy purchased from MSPGCL for the same year was 41,336 MUs, which is 623 MUs higher. This discrepancy could be because of post facto accounting and settlement. From the energy balance projected by MSEDCL, the MUs available for sale and actual sales match exactly but MSEDCL reports a surplus of 484 MUs which it claims it has sold at Rs per unit. However, a closer look at the energy balance and the discrepancy between MSEDCL and MSPGCL numbers makes one think that the so called suplus is infact UI exchange, which also means that no active effort was made to sale this power. In case of power purchase costs, the MSPGCL estimations for the same year is Rs crores higher than the audited actuals provided by MSEDCL. This difference is not explained in the current petition, and unlike the difference in the generation quantum this is difficult to understand. If MSPGCL revenue estimates are used, it will increase the revenue requirement by 4% for FY 2014 itself. Such a large deviation deserves an explanation and must be investigated by the commission (who is also simultaneously reviewing MSPGCLs performance) in this process. ii. Assumptions regarding quantum and cost of power to be procured: There is significant variation even in the estimates for installed capacity in , as assumed by MSEDCL and as stated by MSPGCL. Similarly, MSEDCL seems to assume that about 4-6 new units in would be commissioned in FY 2015 resulting in an increase in installed capacity by 3230 MW in that year. However, for the same year, MSPGCL claims to add only about 842 MW (Chandrapur Unit 8 and Koradi Unit 8 ) 2. Besides, the said year is over and even the 842 MW considered by MSPGCL has not been added. The table 1.2 shows the variation in MSEDCL and MSPGCL estimates for each year concerned. If MSPGCL estimates are used, then there will be a power shortage of 610 MUs in FY15 and a surplus of MUs 3. As against this, if one goes by MSEDCL estimates, there will be a power surplus of 6500 units in FY15 and a power surplus of 13,200 units in FY16. If MSPGCL estimates for power purchase cost are used then revenue requirement from retail tariff for FY 14, FY 15 and FY 16 as per MSEDCL estimations will increase by 3%, 2% and 8% respectively. iii. Assumptions regarding MSPGCL capacity addition: Regarding 1820 MW of the planned capacity of MSPGCL (Chandrapur 9 and Koradi 9 and 10) there is no clarity regarding the potential schedule of commissioning. The table 1.3 below shows MSPGCL s estimate of this capacity addition, which has already got delayed by more than a year. Even the capacity 1 Net generation of all old stations from petition submitted for Case No.15 of 2015 and net generation for Bhusawal 4 &5 as per petition in Case 201 of Without accounting for migration of sales due to on-site renewables, open access and captive sources. 7

8 that was expected to be commissioned in the current month and the last month has not been commissioned. Therefore, there seems practically no point in considering generation from this 1820 MW in FY 16, as even if MSPGCL estimates are considered, this capacity may not be available for most of the current financial year. However, MSEDCL seems to have assumed all this capacity to be available in FY 2016 making it difficult to meaningfully evlauate its surplus estimation. It is indeed unfortunate that a petition with such serious lacuane in power purchase estimation has been admitted for such crucial a tariff process. Particulars MSPGCL estimates MSEDCL estimates FY14 FY15 FY16 FY14 FY15 FY16 Installed capacity (MW) Power purchase (MU)* Cost (Rs. Cr)* Per unit cost (Rs./kWh) Increase in power purchase cost if MSPGCL estimates are used (Rs. Cr) Table 1.2: Variation in numbers provided by MSEDCL and MSPGCL *For calculating estimations by MSPGCL of actuals and projections for net generation and revenue requirement for the old power plants, information provided in the mid- term review petition (Case No.15 of 2015) was used. For Bhusawal Unit 4 & 5, actuals and projections provided in Case 201 of 2014 by MSPGCL were used. For Chandrapur Unit 8,Parli Unit 8 and Koradi Unit 8 net generation for 366 days, 273 days and 303 days was estimated and revenue requirement as approved for MSPGCL in Case 54 of 2013 was used 4. These estimations were made from different sources as information was not provided by MERC,MSEDCL or MSPGCL in an easily accessible or updated manner. Unit MW MYT business plan Scheduled Completion date Parli U Sep 2013 Chandrapur U Nov 2013 Koradi U Dec 2013 Chandrapur U Jul 2014 Koradi U Jun 2014 Koradi U Jun 2014 Present estimate for commissioning as per MSPGCL website Expected by Apr 2015 Expected by Mar 2015 Expected by Mar 2015 Expected by Jun 2015 Expected by Aug 2015 Expected by December 2015 Table 1.3: MSPGCL estimates regarding its planned capacity addition Current Status Not yet commissioned Not yet commissioned Not yet commissioned The commission needs to deal with these inconsistencies as it affects the finances and performance of both MSEDCL and MSPGCL Fixed cost approved for was used for Chandrapur 8 and AFC approved for for less than a year was used for costs for FY16 for Koradi 8 and Parli 8. Variable costs approved for FY 16 was used for all new plants. 8

9 iv. Treatment of MSGPCL power stations while determining Merit Order Stack for Cross Subsidy Surcharge determination: While determining the Merit Order Stack, all MSPGCL stations are lumped together and their average cost is considered. This is not a true depiction of the merit order especially since there is a large variation in the cost of generation across MSPCGCL power plants as shown in Figure Variable cost Total cost Uran Chandrapur Khaparkheda Rs/kWh Paras 3 & 4 Koradi Khaparkheda 5 Nashik Parli 6&7 Bhusawal Parli Bhusawal 4&5 Figure 1.1: Variation in cost for MSPGCL plants for This variation becomes relevant in the face of surplus power where the possibility of high cost MSPGCL being backed down is significant. Such practice should not be allowed by the Commission. 3. Status of capacity contracted under competitive bidding and potential impact of Compensatory tariff : Till date MSEDCL has contracted 6115 MW from various projects at competitively discovered tariffs. Apart from these projects, MSEDCL also has share of 800 MW in the Coastal Gujrat Power Ltd s Mundra UMPP. The table 1.4 below shows the status of this capacity contracted by MSEDCL. As can be seen from the table, except the small capacity of 200 MW contracted with M/s Emco Power Pvt Ltd, almost all other PPAs are under litigation. Further there is no clarity regarding the status of 1770 MW of contracted capacity. Developer Coastal Gujarat Power Ltd M/s Adani Power Maharashtra ltd Capacity (MW) Levelised tariff (Rs/u) Compensat ory tariff granted Rs/kWh Annual Impact on consumer tariff in Rs Cr Comments This tariff has been approved by CERC. MSEDCL has share of 800 MW from this UMPP, so the effective tariff impact will be Rs. 232 Cr Compensatory tariff is applicable for 800 MW out of 1320 MW 9

10 M/s Lanco Kondapalli Power Ltd M/s JSW Energy Ltd M/s Adani Power Maharashtra ltd M/s Indiabulls Power Realtech Limited M/s Emco Energy Limited M/s Adani Power Maharashtra ltd M/s Indiabulls Power Realtech Limited Not known Not known Not known Not known No issues reported so far Status not know Status not know No issues reported so far Status not know Status not know Table 1.4: Status of capacity contracted by MSEDCL through bidding Project was supposed to be commissioned in Status of the project and/or of legal steps taken by MSEDCL not known. No review by MERC Project had sought compensatory tariff which was not granted, matter is presently before ATE The compensatory charge is calculated assuming linkage materialisation of 65% and is applicable only to the incremental generation from imported coal. The compensatory is calculated assuming linkage materialisation of 70% and is applicable only to the incremental generation from imported coal. The Appellate Tribunal has set aside the MERC order that approved this PPA. Further steps and status not known. The Appellate Tribunal has set aside the MERC order that approved this PPA. Further steps and status not known. In the last three- four years, on numerous occasions, including the MYT business plan approval process, it was submitted that the Commission should undertake a thorough review of the capacity addition and actual generation as it has direct bearing upon the power purchase expense as well as surplus and / or load shedding. However, the Commission chose to not undertake any such exercise. On top of it, the Commission has allowed competitively discovered tariff to be revised in ad- hoc manner. These decisions of the Commission are presently being challenged before the Appellate Tirbunal, but if allowed they will impose an additional tariff budern of more than Rs Cr per year on MSEDCL s consumers. 4. Lack of information regarding crucial parameters for operational efficiency: The MSEDCL runs a cost- plus business with some checks and balances for ensuring efficient performance. Given the fact that our distribution network is largely old and overloaded, there is certainly a case for undertaking capital expenditure (capex) to improve supply and service quality. Unfortunately, the regulatory 10

11 system that approves this expenditure does not undertake any post- facto cost benefit analysis or even inspection of the completed projects to check whether the stated objectives were met. The chart 1.2 below shows the changes in capital expenditure related tariff components over the last few years. In spite of repeated demands, there has not been third party independent evlauation of capex projects that have been implemented to evaluate their benefits. Further, these cost have not been treated as controllable which is also a serious issue. Capex related costs Amount in Rs Cr FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 (eslmates) (projeclons) Figure 1.2: Trend of MSEDCL caital expenditure related tariff components Net R&M Expenses Net A&G Expenses Net Employee Expenses Rs. Crore FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 Figure 1.3: Trend of MSEDCL operation and maintenance related costs Similarly, the chart 1.3 above shows that there has been a steep increase in the operational expenses during the period in which there was no meaningful scrutiny of MSEDCL s performance by the MERC. MSEDCL s repeated refusal to consider even such operational costs controllable has been a barrier for any meaningful debate on how these costs can be reduced. Once again, by admitting such petition the Commission has chosen to not make the utility accountable for its performance in this crucial area of its operation. The above points highlight serious inconsistencies and descripancies pertaining to projections and assumptions relating to various cost elements, which should have been captured at the time of technical validation session and such erroneous petition should not have been admitted by the Commission. Thus, the petition which has been considered for the public process is full of ambiguous assumptions and inaccurate projections making it impossible to meaningful evaluate the licensee s claims. 11

12 III: Neglect of supply and service quality concerns 1. No analysis of supply and service quality related concerns by MERC: The Electricity Act 2003 protects consumer interests by mandating the Commission to: a) notify regulations for ensuring certain standards of performance (SoP) pertaining to supply and service quality and b) monitor and publish data regarding compliance with these standards. Additionally, the Act also created a three- tier institutional structure for handling consumer grievances. The table 1.5 below shows the information published regarding reliability indices. However, there is no analysis or evaluation of the erratic variations in the utility s performance in this regard. Simply publishing such data does not serve any meaningful purpose from the consumer s point of view. Supply quality Indicators FY 11 FY 12 FY 13 FY 14 Instances where voltage was outside specified range SAIFI (no.) Not reported SAIDI (minutes) Not reported CAIDI (minutes) Not reported Table no 1.5: Variation in the reliability indices 2. Compliance with standards of performance: The MERC notified Standards of Performance (SoP) regulations in 2005 for all distribution utilities. In August 2010 the MERC decided to amend these regulations for MSEDCL and issued public notice inviting comments on the proposed draft. No action was taken on the comments and the public process for almost two years, after which a fresh public process was initiated in Finally, after delay of about 4 years, new SoP regulations were notified in However, little has been done by the MERC to publicise or indeed evaluate compliance with the said regulations. Only recently, some preliminary data is being published, but without any analysis or directions for improvement. Further, recently there has been a steep increase in the number of cases filed before the MERC regarding non- compliance of CGRF and Ombudsman orders. It is understood that any CRGF or Ombudsman order in favor of consumer is challenged by the discom before the High Court. Even in absence of any stay from the High Court, implementation is postponed. Consumers are thus forced to approach the Commission with a non- compliance petition, defeating the purpose of setting up locally accessible institutions such as the CGRF. Such experiences are already causing disillusionment amongst the few consumer activists who are working on such issues. Thus, not only has the Commission ignored serious lapses on part of the utility in its planning and performance, it has also ignored supply and service quality related issues thereby not giving the consumers any confidence regarding the Commission s keenness to solve these issues. 3. No active monitoring of supply quality: MSEDCL has undertaken 100% feeder separation and is supplying its agriculture consumers only 8-10 hours a day. There is a load shedding protocol based on which MSEDCL is supposed to distribute shortages and undertake load management. However, since the last two years there has been no public process to evaluate compliance with this protocol. Earlier, this process was linked with the tariff revision process but that practice has been stopped. There has been no independent evaluation or analysis by the Commission regarding utility s compliance with the protocol and/or reconciliation of load 12

13 management with agriculture sales and load shedding. Prayas (Energy Group) has started an independent initiative to track supply quality at consumer end under a project called Electricity Supply Monitoring Initiative 5. Through the said initiative data from Pune district shows wide variation in supply quality between urban, peri- urban and rural areas, as shown in chart 1.4 below. 60 Number of Interrupaons (>15 minutes) at ESMI locaaons across Pune District February 2015 Number of Interrupaons (>15 mins) Aundh Bajirao Road Baner Kothrud Baramal Bhosari Pimpri Saswad Talegaon Kondhanpur Nimgaon Pabal Paud Supa Pune City Other Municipal Areas Gram Panchayat Figure 1.4: Indicative data regarding supply quality Average hours lost due to interruption at ESMI locations across Pune District, February 2015 Pune City : Other Municipal Areas : Gram Panchayat : 4 hours 6 hours 30 hours The indicative data shown in the chart makes a strong case for the Commission to independently and actively track the supply hours and quality of supply across the State. Till date, the Commission has undertaken no such exercise. 5 electricity- supply- monitoring- initiative.html 13

14 IV: Precarious financial position of MSEDCL and possibility of further losses 1. Real versus stated revenue gap and tariff impact The last tariff order issued by the commission after a due public process with widespread consultation and which had adequate data and reasoning for its decisions is dated 19 th August 2012 in Case 19 of Following this, there have been several tariff revisions without consultation or adequate data or analysis. Details of subsequent these revisions are outlined in Table 1.6 below. Sr no Order Date Comments Case no 19 of 2012 Case No. 95 of 2013 Case no 38 of 2014 Case no 38 of Aug Sep Mar Jun- 14 Consolidated revenue gap for the 3 years, FY , FY and FY , and the impact of other claims Suo- motu determination of supplemental charges of MSEDCL Interim Order for approval of truing up for FY and FY , and other costs. Final order in the above matter. Regulatory asset of Rs Cr was created MSEDCL demanded Tariff increase MERC approved 7,623 6,921-5,432 6,984 5,022 9,312 6,661 Total 14,607 19,041 Table 1.6: Revenue gaps allowed since August 2012 In FY , approved revenue requirement of MSEDCL was Rs. 47,937 Cr which included approved revenue gap of Rs.5,932 Cr. As the table no. 1.6 above shows, in addition to this baseline, additional tariff increases have been given by the Commission on several occassions. As such tariff revision without consultation became a politicised issue, the government had to intervene. A high level committee was set up and eventually based on the Committee s recommendation the state government vide GR dated 29 January, 2014 provided relaxation in tariff for certain consumer categories. The effect of this reduction in tariff necessitated a revenue support of around Rs. 606 crore per month to the MSEDCL. This was in addition to the annual revenue subsidy of around Rs. 4,432 given by the Government for agriculture and powerloom consumers. The additional revenue subsidy of around Rs. 7,200 Cr effectively ensured that the consumers did not have to pay for the tariff increase approved by MERC since August 2012 Thus, for revenue requirement of around Rs. 50,000 Cr, revenue subsidy of more than Rs. 11,000 Cr was being given by the state government. It is against this background that MSEDCL is seeking a furher increase in tariff by Rs. 4,717 Cr, without mentioning this anywhere in the petition. However, the additional revenue support has been withdrawn and hence real impact in terms of 14

15 tariff increase that will be felt by the consumers on account of proposed revision is 27% and not 8% as being projected. This crucial information is not explicitly mentioned in the petition at all. 2. Impact of potential developments in the sector on sales and revenue As mentioned in earlier, several changes are taking place in the sector which can impact the sales and consequently the revenue received by MSEDCL. The impact of these changes is discussed below: a. Shift to Open Access: Table 1.7 below assumes a modest 6 shift of 11% of sales from HT Industrial Category 7, 13% of sales HT Commercial consumers and 1% of sales from other HT categories in FY16 to open access from non- renewable generation sources. In such a case, MSEDCL loses revenue from tariff but receives a cross subsidy surcharge, a wheeling charge and also imposes penalties in case the demand from the open access consumer exceeds the contracted demand from MSEDCL. Revenue loss (in crores) from OA in FY16 Current Proposed Tariffs Tariffs Revenue Loss from sales migration Revenue Gained from various charges Demand Surcharge 2 5 Standby Charge Cross Subsidy Surcharge Wheeling Charges Net revenue loss Table 1.7: Revenue loss due to Open Access Migration It can be seen from the above table that with increased open access, MSEDCL is bound to make a net revenue loss, despite the imposition of various charges with current tariffs and also in the case of higher wheeling and CSS charges as proposed by MSEDCL. b. Increased demand for renewables: Assuming that 0.2 % of HT Industry and 0.6% of HT Commercial sales migrate to renewable energy based open access, and among the cross subsidising LT consumers, there is migration of 4% of sales from high end domestic, 2% of sales from LT Commercial and 2% of sales from LT Industrial consumers, the revenue loss accruing to MSEDCL in FY16 is detailed in Table 1.8 below. With increasing viability of renewable energy options, consumers can choose to obtain supply via open access with a reduced cross subsidy surcharge or via roof top systems through net metering. 6 This is modest in the light of rising tariffs, past trends in shifting to open access and the mandate of the proposed Electricity Act Amendment, 2003 to shift all +1MW consumers to shift to Open Access. 15

16 Mode of loss of sales Loss of sales RE Open Access 0.2% from HT Industry, 0.6 % from HT Commercial RE Net Metering 4% from high end domestic, 2% from LT Commercial and 2% from LT Industrial Table 1.8: Revenue loss due to adoption of renewables Revenue Loss (in crores) at Current Tariffs Proposed Tariffs c. Increased switching to captive sources: If 4% of HT Industrial sales, 3% of HT Commercial sales and 0.4% of HT sales from other categories shift to sourcing power from captive power plants, the net revenue loss to distribution companies is detailed below in Table 1.9 FY16 Current Proposed Revenue Loss from sales migration Revenue Gained Contracted demand 1 2 Penalties CSS 0 0 Wheeling Net revenue loss Table 1.9: Revenue loss due to migration to captive sources d. Management of Surplus: The possibility of surplus largely depends on the performance of MSPGCL in FY16. The generation sector is currently in a state of flux largely due to the issues in the fuel sector and the related inability to address gross inefficiencies therein. As MSPGCL has in the past been struggling to increase its efficiency and performance, it is possible that the performance in FY16 may not be as per normative targets and the net generation could be much lesser, as shown in the Table 1.10 below. Commissioned plants PLF for FY14 (audited actuals) PLF estimated by MSPGCL For FY15 FY16: PLF projected MSPGCL FY16:PLF Assumed for estimation Net Generation as per MSPGCL Net Generation as per estimation Bhusuwal Chandrapur Parli Khaparkheda Koradi Nashik Uran Paras 3& Parli 6& Khaparkheda Unit

17 Bhusawal 4 & Hydro Total Table 1.10: Possibility of lower net generation in FY16. Additionally given the past delay in MSPGCL capacity addition, it is quite possible that only Chandrapur 8, Koradi 8 and Parli 8 are online and contribute to generation in FY16. In such case, additional power available to MSPGCL is detailed below in Table 1.11: Plants to be commissioned in FY16 Installed capacity (MW) Number of days of operation PLF Auxiliary consumption Chandrapur % 6% 1755 Parli % 6% 1309 Koradi % 6% 2905 Total Table 1.11: Projection of generation from upcoming plants Net Generation This will contribute to another 5969 MUs to MSEDCL. Even with the capacity addition happening, this could reduce the generation projected by MSEDCL from MSPGCL by 1223 MUs. Given the fact that there is no clarity in demand and supply from generation, there could be large variation in surplus after plausible migration of sales as shown below. Surplus for FY16 MSEDCL Projections Scenario: MSPGCL trend based performance, sales migration Scenario: MSPGCL projections, sales migration Power Purchase from MSPGCL Surplus Migration of sales Net Surplus Table 1.12: Possible variation in surplus As per MSEDCL projections FY16 will see MUs surplus, which at average power purchase cost will generate Rs.4394 crores. It is also possible that all of MSPGCL plants perform as projected and the 3 plants in the pipeline come online. In such a case, MSEDCL will be left with significant high cost surplus, to the tune of 20,704 MUs especially, if one considers significant sales migration. Even with realistic assumptions of sales migration and performance of MSPGCL, MSEDCL could be left with as much as 16,543 MUs of surplus. As the presence of surplus power will have significant impact on the utility revenue, it is crucial that scientific demand and supply estimation, accounting for possible scenarios and contingencies is conducted for MSEDCL. MSEDCL hopes to generate significant revenue from the sale of surplus power to offset the burden on tariff. However, surplus power available for sale, will be high cost as despatch occurs according to Merit Order principles. This implies that the power will need to be sold at a price higher than the average cost 17

18 of power purchase in order to earn a profit from surplus power. The quantum of surplus and the rate of sale will certainly contribute to MSEDCL s losses. For the year FY16, estimations show that surplus power projected by MSEDCL, as per merit order would need to be sold at an average rate of Rs. 3.98/unit in order to even recover the cost of the surplus power. If we assume a conservative level of sales migration as shown in the above sections, the quantum of surplus will increase. In such a case, in order to recover the cost of surplus power, the utility will need to sell the power at Rs. 4.06/unit. This rate will change with the quantum of surplus and will be even more if estimates assuming MSPGCL performance as per it s own trend are used. Even if the utility manages to sell surplus power at average cost of power purchase, there will still be significant loss in revenue due to the high cost of power. Such a revenue loss as estimated in the table below is high and well within the control of the utility. Thus, it should not be passed onto consumers. FY16 Without sales migration With sales migration Quantum of surplus (MU) Average cost of power purchase (Rs./kWh) Average rate to recover cost (Rs./kWh) Net revenue loss from sale of surplus power at APPC (Rs. Crore) Table 1.13: Potential impact on revenue on account of variation in surplus 3. Scale of the problem: Considering the already precarious financial position and further possibility of deterioration in revenue recovery from tariff, MSEDCLs revenue gap by the end of the year could be as high as Rs. 15,000 crores, as shown in the Table 1.14 below: Particulars (Figures in Rs. Cr) Current Tariff Proposed Tariff Revenue Gap projected by MSEDCL for FY 14, FY 15 and FY 16 3,442 3,442 Regulatory Asset Increase in revenue needed to offset even 50% of the costs projected by MSPGCL for FY14, FY15 and FY Revenue loss from sale of surplus power at Avg cost of power purchase in FY Revenue gap without considering sales migration 10,562 10,562 Revenue loss from migration of sales to: Open Access Captive Generation Renewable energy sources Additional impact if costs due to compensatory tariff are allowed for FY Potential accumulated losses 16,169 15,119 Table:1.14: Potential revenue gap after combining possible scenarios of surplus and sales migration Revenue gaps are usually recovered by increasing tariffs, creating regulatory assests and/or government making subsidy allocation. However, considering the scale of the present problem, recovering such a large revenue gap may be unsustainable for the following reasons: 18

19 1. Increase in tariffs: Tariffs for all categories of MSEDCL are already quite high. In order to compensate the current revenue gap, MSEDCL would need to increase tariffs by more than 20% from the current level which is unsustainable. Such high tariffs would force the migration of more and more cross subsidising consumers away from MSEDCL and will increase the burden on small consumers. It might also result in lower collection and therefore higher AT&C losses. 2. Creation of a regulatory asset: Creating a regulatory asset to address such losses will alleviate the tariff shock in FY16 but as the reasons for deterioration of MSEDCL s financial position will persist, the accumulated losses and its carrying cost will only increase with every year. Creating a regulatory asset to address such large losses could further weaken the financial position as seen in states like Tamil Nadu, Uttar Pradesh and Rajasthan whose distribution companies are buckling under the pressure of the loss burden and are unable to meet finances needed for day to day operations. Such approach also may lead to further sharp decline in supply and service quality, leading to more public unrest. 3. Subsidy support from State Government: The potential revenue gap projected the table 1.14 above is around four times higher than the State Budget revenue gap in and is as high as 1.3% of State Gross Domestic Product. The Government of Maharashtra has already committed to provide about Rs crores as subsidy in the budget for FY16, but most of it will be used to continue the existing support to agriculture and powerloom consumers. Additional support to meet the potential and real revenue gap would be as high as almost half of the fiscal deficit of the state in FY Therefore, meeting the revenue gap and/or financial losses of MSEDCL via revenue subsidy does not seem to be a viable or sustainable option. V. Lessons, challenges and way forward Given the various issues highlighted above, the major challenges before the state s power sector are as follows: 1. Massive and potentially unsustainable tariff increase in the near future: With the failure to implement MYT in a manner that would have improved efficiency, the state will have to face a massive tariff increase in near future. Migration of cross- subsidising consumers, inefficiencies of MSPGCL, revision of competitively discovered tariffs and the rising distribution cost will all lead to a sharp increase in the MSEDCL s revenue requirement. Except for agriculture and small domestic consumers, the tariff of the rest is already very high and hence there is very little room for expanding cross- subsidy. This is certainly not a sustainable model for the state government or the power sector, and may lead to serious political and/or governance issues. 2. Uncertainty of capacity addition and possibility of load- shedding: As highlighted before, almost all the capacity contracted through bidding is presently under litigation, raising serious concerns regarding both its availability and affordability. Secondly, delays in MSPGCL capacity addition may lead to shortages in the near future, instead of the surplus that has been projected. Further, if indeed there is surplus, it will be at high fixed costs making it difficult to either back down such capacity or sell this power in the market at high enough rates to offset the costs. 8 According to the revised estimates as per the Economic Survey of Maharashtra 2015, this amounts to Rs. 4,103 crores for FY14. 19

20 3. Poor and small consumers will be impacted most: As the tariff continues to increase, the big consumers will try to avail alternative lower cost solutions. For example, the tariff of many of these consumers is already much higher than the discovered rates of roof- top solar. Since the solar cycle matches most of the commercial demand, this may turn out to be a lucrative option for these consumers and is also perhaps desirable from a envirnmental and social point of view. While this will help the big consumers, loss of such high paying consumers will further cripple the MSEDCL s finances and the burden of the regulatory asset as well as inefficiency of the utility will have to be borne the small and agricultural consumers. These consumers often do not have the necessary political influence or the wherewithal to challenge the regulatory decisions that are not considerate of their interest, thereby leaving them at the mercy of the state policy and the regulatory commission. 4. Loss of credibility of the regulatory institution: This perhaps is the biggest challenge before the state today. Institution building is a long process that needs strong demonstration of commitment towards transparency and good governance. Recent regulatory experiences such as not taking any congnizance of the serious issues pertaining to agriculture sales estimates, the suo- motu tariff increase without due public process (case no 95 of 2013), public hearing only in Mumbai without a TVS and with a tariff hike being given on the next working day of the said hearing (case no 38 of 2014), willful delay in implementing the current MYT process, continued neglect of non- compliance by utility of CGRF and Ombudsman orders, etc. have severely eroded public faith in the regulatory institution. Without a credible and effective regulatory institution that is committed to transparency and public participation, it is impossible to deal with the mutlifaceted challenges that the sector is currently facing. So far, there have been no steps taken by the MERC to bridge this deficit in public trust. If the present situation continues, in the long run this might turn out to be the single most important failure for the sector. Given the scale of the problem, the relevance of the present MYT exercise becomes even starker. As the MYT process was to hold the utility accountable for performance, assist in medium term planning and provide certainty in tariff increase, one can conclude that the implementation of the 2 nd MYT exercise is a missed opportunity, which could have prevented the escalation of the crisis. However, the Commission and the utility must start taking actions that will arrest this downward spiral. In this context, the MERC should consider this tariff process as a first step towards the larger changes needed to be brought in to address many of the issues highlighted above. To begin with, it is important to clearly understand the nature and extent of the financial problem based on reliable data and sound analysis. This could be done by commissioning a study to thoroughly review MSEDCL s operations and performance considering the following aspects: a. Demand estimation: Undertake a proper scietific exercise based on macroeconomic indicators, progress of government development programs, environmental/resource factors (e.g.- power required by agricultural sector to access water etc.), historic trends of sales, elasticity of sales to tariffs, historic trends of migration of consumers to open access and renewable options, change in appliance usage and load patterns etc. b. Scenario building exercises to assess impact on future demand and utility finances on account of increase in open access, number of captive consumers, advances in renewable technology and its uptake, energy efficiency schemes and the proposed electricity act amendment, etc. c. Estimation of costs to assess impact of costs and power shortage due delay in commissioning of plants in pipeline and deferment due to not getting environmental clearances. 20

21 d. Exploration of options to tackle accumulating losses in the transition period via market borrowings, change in tariff design and State Government support etc. e. Exploring opportunities for curtailing inefficiency by undertaking a thorough review of operation and maintenance related costs and capital expenditure related costs of both MSPGCL and MSEDCL f. Institutionalising process for thrid party independent audits of post facto cost benefit analysis of capital expenditure schemes as well as compliance with standards of performance g. A thorugh review of supply and service quality related issues and institutionalising processes for suplly quality monitoring The scenarios and outcomes deliberated through such a study must be published as a white paper which can be used to debate the policy options available to all the stakeholders. Such a white paper must be available on the commission s website and should be widely publicised. The commission should also ensure consultations via public hearings across the state in order to debate the options available to MSEDCL and its small consumers. However, for the above suggestion to be effective the commission will have to demonstrate a strong resolve towards improving the state of affairs. Mere tokenism will only make matters worse. Further, the highest standards of transparency and participation will have to be followed in order to really make a difference and regain credibility of the regulatory institution. Ultimately, even the most credible and effective regulatory processes can only prevent bad decisions or mitigate the damages. Any constructive long- term changes will only happen when there is not only a strong regulatory will but also political and public support as well as utility s buy- in for implementing such suggestion at ground level. - - x- - 21