Karnataka Power Sector Reforms

-Overview of Restructuring and Lessons Learnt-

August 23, 2010

Bengaluru

Resource persons: Tetra Tech and Dhiya Consulting Pvt. Ltd.,

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 6th 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

• Economically

inefficient tariffs

• Below-cost prices for

Ag & marginal prices

for Domestic cust

• Cross subsidies

• Rising Power

Purchase cost

• Irregular subsidy flow

• High technical losses

due to under-

investment

• High comm’l losses

due to lack of anti-

theft law & collusion

• Poor MBC systems

• A lack of transparency

and accountability

• Agriculture

• BPL customers

• Public lighting

• Water supply

• Coupled with

frequent waivers of

arrears

• Lack of incentives

• Poor discipline

• Inadequate training

• Inadequate tools

• Less accountability

Cost-revenue gap High losses Receivables HR issues

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 1st 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

Reform Initiatives • Functions of KERC:

• 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

Licensing Procedure • Application in prescribed format

• Remittance of filing fee

• 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. 1st June 2002

• W.e.f 1st 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.

GoK’s Role

Policy &

statutory

measures

GoK

Special

Reform

measures

Structural

Arrange-

ments

Implemen-

tation

arngmts

Financial

Arrange-

ments

Monitoring

Arrange-

ments

• Policy Statement 1997

• IPP Policy 2001

• Karnataka Reform Act 1999

• Anti Theft Legislation 2001

• Electricity Bill 2001

• Transfer schemes

• One time regularization

under ATL

• One time settlement of

•CPSU dues

• FRP

• BRP

• Funding of

terminal benefits

• Cabinet sub-committee

• Steering committee

• Reform implementn.task force

• Task Force for HRD issues

• In-house working groups

• Appointment of consultants –

Fin. & Dist.Privatization,

Institl. strengthening

Environmtl. assessment study

Social assessment study

• Formation of KERC-99

• Corporatization of KEB -99

• Unbundling of

distribution function

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

Lessons from unbundling – Orissa

• Gains

• 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)

Thank you