Karnataka Power Sector Reforms -Overview of Restructuring and Lessons Learnt- Resource persons: Tetra Tech and Dhiya Consulting Pvt. Ltd., August 23, 2010 Bengaluru
Contents Reform background Reform drivers Highlights of Reform Act Establishment of KERC GoK s role in restructuring Lessons learned
Electricity Sector in India India the world's 6 th largest electricity consumer with 3.4% of global use Electricity sector dominated by state-owned enterprises (GOI and States) Major PSUs in the generation of electricity include NTPC, NHPC, NPCI PGCIL is responsible for inter-state transmission of electricity and development of the national grid Several state-level corporations, e.g. KPCL, KPTCL, BESCOM are also involved in the generation, intra-state transmission and distribution of electricity There are a growing number of private generation (Reliance, Tata Power, Torrent, etc.), transmission (Kalpataru, Reliance Infra, Powerlinks, Teesta Valley Power, Essar Power etc) and distribution companies (BSES, CESC, Torrent, NDPL, etc.)
Electricity Sector in India The Ministry of Power is the apex body responsible for the development of electrical energy in India Prior to reform initiatives the State SEBs constituted under Section 5 of the Electricity (Supply) Act 1948 were in existence Since they were constituted under a special statue, they were not required to follow the Provisions of Companies Act 1956 with respect to maintenance of books of accounts The Electricity Supply Annual Accounts Rules (1985) brought uniformity but not full conformity with the Companies Act (there were certain deviation from accounting standards) Reforms initiative leading to Corporatization pushed the unbundled SEBs to follow common statue i.e. Companies Act.
Electricity Sector in India As legal entities, the unbundled erstwhile SEBs are companies owned by Government and not privatized except in Orissa and Delhi In June 2010, the installed power generation capacity of India stood at 162,367 MW The total demand for electricity in India is expected to cross 950,000 MW by 2030. Transmission and distribution losses in India are extremely high and vary between 25 to 45%. Demand supply gap is in the range of 15-18%. Due to the shortage of electricity, power cuts are common; this has affected India s economic growth Despite initiatives to curb theft of electricity, it is estimated that theft accounts for about 1.5% of India's GDP (India s GDP is US$1250 Billion)
Why the sector is suffering? Reasons for poor financial health of power sector Cost-revenue gap High losses Receivables HR issues High technical losses Agriculture due to under- BPL customers investment Economically inefficient tariffs Below-cost prices for Ag & marginal prices for Domestic cust Cross subsidies Rising Power Purchase cost Irregular subsidy flow High comm l losses due to lack of anti- theft law & collusion Poor MBC systems A lack of transparency and accountability Public lighting Water supply Coupled with frequent waivers of arrears Lack of incentives Poor discipline Inadequate training Inadequate tools Less accountability
Reform Drivers Power Sector all over the globe and especially in developing countries is experiencing a radical change in policies Reform are aimed at transforming government owned monopolistic utilities to a standard model characterized by vertical and horizontal unbundling of generation, transmission and distribution and the introduction of more customer-centric management approaches organized around competitive market-driven systems in an independently regulated environment. Initially, this assumed privatization but the slow pace of privatization has led to a focus on results (e.g. quality electric service and commercial viability) The need to curb losses (technical, commercial and financial) and attract needed investment are the two primary drivers of power sector reforms Many states in India have gone ahead with power sector restructuring
General objectives The objectives of reform are: To promote the development of an efficient, reliable, commercially viable and competitive power sector. To provide reliable quality and uninterrupted supply, at reasonable prices, to all consumer categories. To ensure that the social and environmental aspects are fully taken into consideration.
Reform Policy 1997 Karnataka Power Reforms Policy announced on 30.01.1997 Objectives of Power sector Reforms Policy: Attracting private investors to power sector, Establishing Regulatory environment, Provide incentives for energy conservation Use scarce Govt. resource for other priority sector, Un-bundling Transmission from distribution Setting up of independent Regulatory body : To restructure & rationalize power tariff Progressively reduce cross-subsidy Protect the interest of poor & marginal consumers Provide incentive for DSM & energy conservation
Highlights of Karnataka Reform Act KARNATAKA REFORMS ACT 1999 enacted w.e.f 1 st June 1999 Paving the way for creation of KPTCL and further unbundling of distribution and supply function, transfer of assets and liabilities, employees Need for Reforms Legislation: Corporatisation of KEB & formation of KPTCL Re-organization of KEB & formation of KPTCL, VVNL, Establishment of KERC, Specify powers & functions of KERC, Licensing and tariff designing under Regulatory control Constitution of the Advisory Committee,
Reform Initiatives KEB was corporatised by incorporating as KPTCL & VVNL KERC established w.e.f 1.6.1999 & operationalised from 15.11.1999 KERC consist of three members Selection panel for appointment of KERC members Retired Chief justice of High Court or retired judge of a Supreme Court Chief Secretary of the Govt of Karnataka Chairman of CEA or a retired chairman of Board served for three years Energy Secretary convener of selection committee Secretary & staff appointed by Commission to assist it. KERC have power as are vested with Civil Court
Functions of KERC: Reform Initiatives Issuing licenses for transmission or supply of energy, Regulating working of licensees, Regulate purchase, transmission, distribution, supply of power, determination of tariff, Ensure efficiency in the operations of the licensees, Ensure quality and reliability of power supply, Advise in matters concerning generation, transmission, distribution and supply in the State Specify codes, standards for performance of licensees,
Licensing Issues State Govt to issue provisional license for a) Transmission, b) Distribution & Supply including bulk supply, KERC to issue permanent License for: a) Transmission, b) Distribution & Bulk supply & retail supply Issue of provisional Distribution and Retail Supply Licenses to ESCOMs on 29.5.2002 Issue of Regular Licence to the ESCOMs w.e.f 1.2.2003
Application in prescribed format Remittance of filing fee Licensing Procedure Publishing the summary of the application Replying to objections Public hearing Issue of license As per the license conditions the applicant should identify the area of operation, submit the business plan etc., besides demonstrating the viability of operation before being granted license through a public hearing process. State-owned utilities did not have to go through these steps at the time of formation; they were given provisional licenses subject to finalization of the necessary commercial arrangements to be confirmed later by the Regulator
Licensing Conditions Definitions General conditions Compliance with Regulations and codes Acts requiring prior consent: acquisition, merger, assigning etc. Duties of licensee: develop and maintain the network, provide open access facility, payment of licensee fee, standards and procedure etc. Technical conditions Load forecast Power procurement procedure Co-operation with STU, SLDC and other licensees Consumer service compliance with supply code, customer charter, complaint handling procedure, RTI compliance etc. Expected revenue calculation and tariffs Tariff regulations Other conditions Introducing competition, Accounts etc.
ARR and Tariff Filing Procedure To be filed Four months before the ensuing financial year, To be filed in prescribed formats Transmission licensee for transmission business, Distribution licensee to file separate ARR for wire and supply business ARR application should cover Compliance to Directives Sales forecast Procurement Plan Capital Investment plan Loss reduction trajectory Other issues like sharing of gains and losses, proposal for rewarding efficiency etc. Tariff application to cover the gap if any
ARR and Tariff Filing Procedure Validation of application, Publication of summary of petition inviting objections Public hearings, Issues tariff order: Not amended more than once in any financial year Electricity Regulatory Commission issued Code of Conduct Regulations in businesses prescribing procedures like public hearings, formation of various advisory committees etc. They also issued methodology papers and finalized these with consultative approach to issue the final terms and conditions for filing ARR, MYT, etc.
Unbundling of KPTCL In June 2002, distribution & supply business was separated Four discoms were formed w.e.f. 1 st June 2002 W.e.f 1 st April one more discom was created All companies are independent companies Transfer scheme was notified by Government Provisionality period one year Final Balance sheets were notified after one year In all reforming States, Government Orders were issued as Transfer Schemes. Usually merger and acquisitions should go through a legal process to safeguard the interests of creditors, suppliers etc. This required large scale and time-consuming operations. To shorten the process, States use a legislative approach, safeguarding all interests through the transfer scheme and ensuring that no one is put to difficulty.
Policy Statement 1997 IPP Policy 2001 Karnataka Reform Act 1999 Anti Theft Legislation 2001 Electricity Bill 2001 Transfer schemes GoK s Role Policy & statutory measures Monitoring Arrangements Cabinet sub-committee Steering committee Reform implementn.task force Task Force for HRD issues In-house working groups Formation of KERC-99 Corporatization of KEB -99 Unbundling of distribution function Structural Arrangements GoK Financial Arrangements FRP BRP Funding of terminal benefits Appointment of consultants Fin. & Dist.Privatization, Institl. strengthening Environmtl. assessment study Social assessment study Implementation arngmts Special Reform measures One time regularization under ATL One time settlement of CPSU dues
Overall Lessons Learned Focus on long term model for the country, e.g. introduction of competition and market-driven business strategies Better consumer focus call centres, improved options for payment (like online, bill junction etc), Consumer Advisory Committee Clarity in Transfer pricing between Generation, Transmission, System Operation, Distribution Wires and Retail Supply Causation factors clearly shown in Cost to Serve consumer clarity on cost, tariff, cross-subsidies and Government support
Overall Lessons Learned Government must pay cash subsidies to discoms for its policy directives, notably so-called free power policies to agricultural sector Government / Employees still wary of letting go of its control either to a professional management or private operators Cultural Transit by state-owned enterprises is still a long way off, especially in achieving non-bureaucratic control that is further removed from political considerations, professional management, commercial financing (without recourse to Governments) and consumer focus Necessity of Ombudsman and Appellate Tribunal
Lessons from unbundling -Karnataka Gains For consumers Clarity of cost build up Improved services: call centres, grievance redressal through ombudsman, multiple payment options, internet access to accounts, operations of utility, access to information through company s web page, etc. Understands the Government support For other stake holders Independent company s approach Effectively addressed terminal benefits issues Transferred residual liabilities to GoK & not in a holding company
Lessons from unbundling -Karnataka Gains Anti-theft law (ATL) drive Greater attention for distribution and supply business Regulatory pressure to perform Significant improvement in performance of discoms, e.g. Reduced losses Improved billing and collection efficiencies Enhanced productivity
Lessons from unbundling -Karnataka Challenges Pressure to perform in Corporate structure Learning Customer Oriented approach Power shortages Issues of concern Still dependant on Government for support Professional management requires further development Power supply to agriculture Employees options Not finalized
Lessons from unbundling Andhra Pradesh Gains Improved customer service and clarity on cost build up No hike in domestic tariff in last 5-6 years Some reductions in industrial & commercial tariff Improvement in quality of service Successfully completed unbundling Three transfer schemes Finalization of employees options First state with Anti Theft Law Effectively addressing employees terminal benefit issues Challenges/Issues of concern Pressure to perform in the new environment Power shortages Continuing dependence on Government for subsidy support
Lessons from unbundling Delhi Gains Significant reduction in losses Financial turn around & self sufficiency Created a model for a successful Public-Private Partnership (PPP) Proactive support from State Government of Delhi + Rs.19,000 Crs. past liabilities taken over Rs. 3,850 Crs. transition support to Discoms Rs. 886 Crs. contribution to pension trust Challenges/Issues of concern Need to strengthen regulatory processes Monitoring of capital expenditure
Gains Lessons from unbundling Orissa First State in the country to go for reforms and privatize distribution Government has stopped financing the sector in the past 14 years Lessons Allowed AP, Karnataka and other States to learn and safeguard (like Tripartite agreement, Financial Restructuring support, Regulatory practice etc) Modification of risk allocation between State and Private players (followed in Delhi privatization like safeguarding cash flows in the initial years, revision of tariffs etc)
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