Revised power distribution directive: A more sustainable model for discomsAfter being stuck in dispute for nearly 12 years, the newly implemented DOA clause in the Electricity Act hopes to bring about a more competitive environment for power distribution companies and lead to further reforms. Can the new clause, which allows industries using over 1 MW to access power from anywhere in the country, provide the push to open access in retail power? Sunil Kumar explains.The introduction of the Open Access (OA) policy, as initially envisioned in the Electricity Act, 2003, brought in requisite action significantly through the wholesale markets to address persistent shortage of energy supplies to consumers, including industrial groups. We are now witnessing an increase in private sector participation from 21 per cent in the 11th Plan to about 65 per cent in 12th Plan, transactions in power exchanges, bilateral trades, UMPP projects and Case 1 projects. While significant progress has resulted from OA at the wholesale level (transmission), we have yet to see the developments in open access at the retail level.While there is substantial experience internationally in implementing OA at retail level, it is still a process which requires significant development of detailed rules, codes, and procedures. In India, it is further complicated by the presence of the non-cost reflective tariff system, which, in effect, requires the customers expected to be eligible for (deemed) OA to help fund subsidies to support lower-than-cost tariffs to other consumer categories.Issues in DOAOpen access at the wholesale level brought in significant benefits (albeit limited private investments), marginal capacity at competitive cost vis-à-vis regulated costs, discovery of market prices at the exchanges to some extent. The wider benefit that is apparent from such wholesale open access is the focus-shift; making need for fuel and policy (land, environment etc) reforms evident. The ongoing debate on definition and applicability of Deemed Open Access (DOA) brings in a few relevant areas of discussion:Competition in generation: The key positive element of this DOA directive is to bring in competition at the supply/generation business by giving a choice to the eligible consumers (>1 MW), which should help in adding MWs on the ground. OA at the retail level will broad-base the market and could make these benefits more sustainable and efficient. It is time for the policy and regulatory reforms to target economy-wide, rather than sector-centric, benefits.Better transparency in tariff setting: Deregulation of supply tariffs will enable competition for customers and hence create incentives for the utilities to reduce power procurement costs to compete with other suppliers. At present, the power procurements costs (excluding unapproved loss levels) are regulated and treated as pass-through to consumer tariffs. Although the utilities are mandated to procure power through competitive bidding, either through Case I or II approach, this process has not reflected competitive cost to the consumer. The new directive will help in making the tariffs (wheeling, supply, metering and billing) more transparent and cost-reflective.Customised contracts: Further, deregulation of supply tariffs will create incentives to offer contract terms tailored to each OA-eligible consumers. In India, the emphasis has been more on supply vis-à-vis demand response. The regulatory measures specified for demand response—TOD metering and billing, load factor-based incentive, customer categorisation, etc—have garnered limited benefits. Deregulation of supply tariffs could make demand response more dynamic by suppliers (including utilities) tailoring the contracts/tariffs based on usage, seasons (renewable), time-of-day (real-time instead of time blocks), UI and exchange linked etc. This should help the industry moving from institutionalised pricing by service class to ‘mass customisation’, which would help in better reflection of costs.Distinguishing DOA: PPAs from regulated ones: Distribution companies (discoms) typically hold a portfolio of Power Purchase Agreements (PPAs) with generation stations and generating companies. To comply with the directive of DOA, it is important to understand and assess which part of the existing PPAs need to be assigned to the competitive business (supply to >1 MW consumers) and which needs to be allotted to the regulated business. While this ring-fences the regulated and non-regulated businesses, it is critical to assess the implications of such allocations on end-tariffs. This will also impact assessment of cross-subsidies, subsidy transition and reduction path. If there is no ring-fencing of DOA consumers, there could be a possibility of regulated business subsidising the competitive business, against the principles of competition. The intended beneficial ownership of the PPA, together with the terms of its use and the rights to any trading profits earned through sales of surplus energy, should be clarified. These issues are also related to the general service obligations placed on the discom, as well as to the functional separation of the discom’s different retailing functions.Residual net financial impact: In general, it was found that with the National Tariff Policy’s cross-subsidy surcharge, discoms’ financial positions are generally held constant in the presence of OA, although there is some range (both positive and negative) of net residual financial effects as differing assumptions regarding the future level of OA are made: What happens to the power that gets freed if eligible consumers opt for other suppliers? Will it be replaced by industrial or non-industrial consumers, and at what tariffs will eligible consumers be served by the utilities? Dealing with this residual net financial impact on discoms of OA will be a task for Regulators in their future efforts to set appropriate tariff levels and to address the standard regulatory issues of distributor financial viability. While understanding the financial implications, it is important to understand that the Commission may have to exercise (limited) control over the ‘un-regulated tariffs’ using Section 60 (Market Dominance) of the Electricity Act, 2003.New service obligations: It is clear that setting a variety of service standards (eg, targets for network outage times, response to customer inquiries, metering and billing protocols, etc) is an important regulatory task in virtually all electricity industries. However, an important new issue of service obligations has been introduced with the advent of OA. In particular, the question of what obligations to serve DOA-eligible consumers within a discom’s service territory exist, and also whether those obligations might be different for an Eligible Consumer who has always been served by the discom versus one that has elected OA transactions for all or part of his load. This issue arises in many industry structures where there is the concept of retailing to “non-eligible” consumers. Solutions typically involve requirements of notification periods, negotiation of service terms or having back-up/supplier of last-resort contracts. The precise solution depends on the overall structure of the industry and the obligations that discoms have with respect to Eligible Consumers.Priority in network access: Although there appears to be wide agreement in regards to the concept of “non-discrimination” in regards to access to the network, there is some diversity of opinion regarding the ownership of the fundamental network access rights. Some views were that individual Eligible Consumers had the same rights of network access as each other and also as the overall group of non-eligible consumers. Others held views, for example, that non-eligible consumers were to have first priority to network capacity, with any spare remaining capacity to then be made available to Eligible Consumers who might then compete for it on some (non-discriminatory?) basis among themselves. This latter view is also sometimes evidenced indirectly through the imposition of quite different network access terms and conditions for Eligible Consumers (compared to a discom’s own served load) in some states. It would not seem feasible to attempt to apply concepts of “non-discrimination” without a pre-existing understanding of the fundamental allocation or network access rights. Such allocations are generally made on the basis of law and equity, though regardless of how they are made, they must be clarified and specified either in laws, regulations or licence conditions.All in allThe directive from the Ministry of Power on open access has come at the right time and with the right intent. At present, despite significant investments and progress, the industry faces certain risks and problems if further steps are not taken in this direction. Major risks include continued lower-than-desired service level to consumers, continued load shedding and suppressed demand in many areas leading to both direct and indirect costs for consumers, continued development of sub-optimal “parallel” captive systems, potentially difficult “obligations to serve” on distributors and complexities arising out of marriage between Retail Supply Tariff, OA and Imbalance Charge.DOA could be a boon for the consumers as well as the utilities, provided appropriate transition mechanisms and checks are factored in. To achieve a more economically efficient implementation of OA will require more work. Much of this work will be necessary to undertake regardless of the presence of OA, as efforts are made to regularise the increasingly decentralised operation of the electricity system, and to increase the financial and operational transparency of operating companies for both managerial and regulatory objectives.The Deemed Open Access has already had its influence on competition. The Ajmer Vidyut Vitran Nigam, the city’s discom, has issued a directive—effective 20 January—with new clauses of differential tariffs, non-peak hour discount of 10 per cent, and 20 per cent surcharge for evening peak hours for consumers who opt for discoms alone. Consumers who draw power exclusively from sources other than the Ajmer discom will need to pay 50 per cent higher tariff for any emergency drawing from the discom after a 48-hour notice. Those partially drawing power from the discom will pay at normal tariffs but 1.5 times higher the normal fixed charges.The author is Associate Director—Energy & Utilities Practice, PwC India.