SUMMER INTERNSHIP REPORT

Study of electricity distribution system and Recommend on methodology for segregating supply and wire businesses in retail competition for MERC

UNDER THE GUIDANCE OF Mrs. Sreelatha Neelesh, Faculty, NPTI & Shri Rajendra Ambekar, Director (Tariff), Maharashtra Electricity Regulatory Commission

At Maharashtra Electricity Regulatory Commission, Mumbai

Submitted by

Vijay Chhabra ROLL NO: 94 MBA (POWER MANAGEMENT)

(Under the Ministry of Power, Govt. of India)

Affiliated to

MAHARSHI DAYANAND UNIVERSITY, ROHTAK AUGUST 2013

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Executive Summary

The hedge against volatility in the undulating/soaring electricity prices and the risks associated in the wholesale spot market or the price exchange by the electricity retail market is the future. The reason to choose this topic is obvious because of credentials MERC has as an initiator to revive its course of action. This State Electricity Regulatory Commission pioneers in cajoling the Distribution Licencees in segregating their accounting heads into Wire Business and Supply Business vide the power vested to it by the Electricity Act, 2003. The report aimed to generalize the ways in which apportionment of expenses to the respective businesses can be carried out for the prudence check by the Commission. The primary endeavor was to study the Regulatory framework. The competition in the distribution of electricity is not in a developed stage in India compared to the international level. The privatization and competition in generation in such countries was developed about a decade before EA, 2003 was framed, though the amendments take place as and when required. Transmission of electricity is still sought a monopoly in many Countries and controlled by the Government. The distribution network operators and retail suppliers are defined their roles. Segregation of their businesses invites competitiveness in a way that the utilities lure customers by their marketing strategies including schemes and offers to save on their electricity consumption and hence reduce the bills, akin to any other sector. The learning from international experience provided with the insight to the benefits and challenges to the sustainability of retail competition in India. The distribution Tariff Orders of the Distribution Licencees in the State of Maharashtra were compared. The business plan models were studied to derive the thinking or method to segregate the expenses into wire and supply businesses. Each accounting head for a utility was studied to analyze the impact on net Aggregate Revenue Requirement. The comparison continued with the Tariff Orders of other utilities. Trendline yielding equations for the graph were derived to assess its validity with that of the business model of other utility. The distribution utilities from the States of Bihar and Gujarat were also studied to analyze the segregation.
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Each accounting head is the function of dependent variables which also alter other independent variables. The return on equity, say is dependent on the power purchase expenses, Regulatory asset, opening GFA for the financial year computed by the Commission, etc. The Power Purchase expense is the function of energy sales, transmission and distribution losses; distribution losses are the function of the performance of the utility, and so on. The Operation & Maintenance expense, say comprise of three types of expenses. The segregation of expenses of one of the components is not in conjunction with that for the other type, as retrieved from the tariff plans. The distribution licencee differ from each other in the system operation, inclination towards energy efficiency or demand side management, capital investment plans in other businesses, etc. The challenge was to arrive at the generalized form or Statements taking care of the impact of rise in prices for the changeover consumers for the incumbent licencee. The scope of the study extends to the application of partial differentiation in the equations that can be formed. Forum of Regulators, the congregation of the law makers has been able to convince the Government for sustainability of retail competition in the country. The Regulatory Commissions of some States have imbibed for segregating the accounts, which others need to follow. The amendment in the Act would, definitely alleviate the risk of maintaining and managing separate accounts of the two businesses for the Distribution Licencees, which currently, they are obliged to do so in prerogative of the SERCs. The generalizations, arrived at would be of immense usefulness to the Commission while adopting the unified methodology, for apportionment or segregation of expenses into the respective businesses, to be followed by the licencees. I have also provided with my views on the examination of the business plans by the Commission and gave recommendations at places.

List of Abbreviations
CEA ARR ISO FERC CERC MERC GERC BERC BSES TPC-D RInfra-D MSEDCL Central Electricity Authority Aggregate Revenue Requirement Independent service Provider Federal Energy Regulatory Commission Central electricity Regulatory Commission Maharashtra Electricity Regulatory Commission Gujarat Electricity Regulatory Commission Bihar Electricity Regulatory Commission Brihan Mumbai Electric Supply and Transport Undertaking The Tata Power Company Limited Distribution Business Reliance Infrastructures Limiteds Distribution Business Maharashtra Limited UGVCL BSPHCL PJM LLC RTO CAMMESSA Uttar Gujarat Vij Company Limited Bihar State Power (Holding) Company Limited Pennsylvania New Jersey Maryland Interconnection LLC Limited Liability Company Regional Transmission Organization (Compaa Administradora del Mercado Mayorista State Electricity Distribution Company

Elctrico), administrator of Argentina wholesale electricity market

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DNO/DSO CTU STU PPE O&M A&G R&M GFA NTI CSD ARR ACoS RoCE NTP NEP RoE JERC

Distribution Network/Service Operator Central Transmission Utility State Transmission Utility Power Purchase Expenses Operation and Maintenance Administration and General Renovation & Modernisation Gross Fixed Assets Non-Tariff Income Consumer Security Deposit Aggregate Revenue Requirement Average Cost of Supply Return on Capital Employed National Tariff Policy National Electricity policy Return on Equity Joint Electricity Regulatory Commission

Table of Contents

Executive Summary...................................................................................................................... 2 List of Abbreviations .................................................................................................................... 4

List of Tables ....................................................................................................................................... 8 List of Figures ..................................................................................................................................... 8

Chapter 1 Introduction ................................................................................................................ 9

1.1 Background of Retail business ........................................................................................................... 9 1.2 Challenges in distribution system of electricity. .............................................................................. 10 1.3 Benefits and challenges for sustainability of retail competition in India. ........................................ 12 1.4 Segregation of distribution business ................................................................................................. 13 1.4.1 Functions of retail supply and wire network businesses ........................................................... 14 1.4.2 Regulatory structure .................................................................................................................. 17 1.5 Distribution models adopted in India and other countries. ............................................................... 17 1.5.1 (Maharashtra) India ................................................................................................................... 17 1.5.2 PJM ............................................................................................................................................ 19 1.5.3 Australia .................................................................................................................................... 21 1.5.4 New Zealand.............................................................................................................................. 23 1.5.5 United Kingdom ........................................................................................................................ 26 1.5.6 Argentina ................................................................................................................................... 28 1.6 Learning from international experience ........................................................................................... 29

Chapter 2 Methodology.............................................................................................................. 30
2.1 Research Objective ........................................................................................................................... 30 2.2 Problem Statement............................................................................................................................ 31 2.3 Limitations........................................................................................................................................ 32

Chapter 3 Data Collection.......................................................................................................... 33

3.1 Comparison of expenses computed by the Commission for MYT Business Plans of BEST, TPC-D and RInfra-D........................................................................................................................................... 33 3.2 Comparison of segregation of wire and supply businesses by the licencees in approved Multi Year Tariff Business Plans .............................................................................................................................. 35 3.3 Analysis of Expenses........................................................................................................................ 38 3.4 Analysis of O&M expense ............................................................................................................... 38 6

3.5 Impact of Net Expenses on ARR .............................................................................................. 40

Chapter 4 Analysis & Findings.................................................................................................. 41

4.1 Power Purchase Expenses including transmission Charges ............................................................. 41 4.2 Total Capitalization .......................................................................................................................... 41 4.3 Operation & Maintenance Expenses ................................................................................................ 42 4.4 Depreciation ..................................................................................................................................... 44 4.5 Interest on long term loans ............................................................................................................... 45 4.6 Interest on Working Capital ............................................................................................................. 46 4.7 Interest on Consumer Security Deposit ............................................................................................ 46 4.8 Provision for bad debts ..................................................................................................................... 46 4.8.2 System Average Interruption Duration Index (SAIDI) ................................................. 48 4.8.3. Customer Average Interruption Duration Index (CAIDI) ........................................... 48 4.9 Contribution to Contingency Reserves ............................................................................................. 52 4.10. Other Expenses including Incentive and Discounts ...................................................................... 53 4.11. Return on Equity............................................................................................................................ 54 4.12. Non tariff income .......................................................................................................................... 55

Chapter 5 Conclusions and Recommendations........................................................................ 56

5.2 Scope for further study ..................................................................................................................... 58

Chapter 6 Bibliography.............................................................................................................. 59

List of Tables
Table 1 Symbol Notation for Case Example 1 ........................................................................................... 39 Table 2 Employee Cost expense................................................................................................................. 39 Table 3 Impact of Net Expenses on ARR................................................................................................... 40

List of Figures
Figure 1 Electricity industry supply structure ............................................................................................ 14 Figure 2 Reliability Pricing Model............................................................................................................. 21 Figure 3 Australia spot market structure .................................................................................................... 23 Figure 4 Methodology ................................................................................................................................ 31 Figure 5 Expenses computed by the Commission (Rs. Crores) ................................................................. 34 Figure 6 Segregation of wire and supply businesses by the Distribution Licencees.................................. 35 Figure 7 Comparison of segregation models with MSEDCL (ARR FY-11) ............................................. 38 Figure 8 Case Example 1............................................................................................................................ 39 Figure 9 Comparison of contribution of the cost centers to the opening GFA........................................... 53

Chapter 1 Introduction

1.1 Background of Retail business Open access is the mechanism crafted to usher in competition and choice, and in turn facilitate investments and protect the interests of the consumers. The Electricity Act, 2003 provides for retail competition through open access or multiple licencees supplying through their own distribution networks. While the provision of multiple licencees in the same area is perceived by many as cherry picking by new entrants, others have criticized the requirement of multiple networks as wasteful and suggested the complete separation of the supply function from wires business, on the lines of the restructured electricity industry in many Countries. Legal and Policy Issues The concept of multiple distribution licencees in the same area existed even in the Indian Electricity Act, 1910, which provided that the grant of a distribution licence shall not in any way hinder or restrict the grant of a licence to another person. The State Government was however required to consult the SEB before granting a licence. SEBs had the statutory right to undertake distribution in the entire State. The EA, 2003 took a more liberal approach and required the regulators to not to refuse a distribution licence only on the grounds that there already existed one licencee in that area, if the applicant fulfilled the statutory requirements relating to financial capability and past business track record in respect of compliance with other laws. One other condition is that the Central Government should have no objection if the area includes defense installation or airport, etc. Such second and subsequent licencee, however, is required to undertake distribution through its own network. The intent of the Parliament to minimize possible entry barriers was noticeable in an amendment to the Act in 2003-04, which circumscribed the conditionalities that could be laid down for compliance by the applicant. Every distribution licencee has the duty to fulfill universal supply obligation and, to develop and maintain an efficient, coordinated and, economical distribution system. Tariff for retail supply is to be determined by the SERC/JERC, which also has the discretion to just specify a ceiling for tariff in case there is more than one licencee in the same area. The Act does not require a licence for composite scheme of generation and distribution in rural areas.
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The Parliamentary Committee that examined the Bill was flooded with apprehensions of cherry picking by new entrants endangering the viability of the incumbent licencee and leading to a tariff shock to its consumers. After considering this aspect, the Committee recommended that the new entrant should be given a mix of urban and rural areas or a mix of remunerative and unremunerative clusters. The NEP also stipulates that if a licence is to be given for part of an area of an existing licence, the minimum area for such a new licence should be at least a municipal council, municipal corporation or a revenue district. Full conscious of the likely problems of cherry picking, the Policy also asks the regulators to keep watch on initial connection charges levied by the new licencee so that these are not so high as to intentionally avoid low-end customers. The stipulation regarding minimum area, if the licence is given for a part of the existing licencees area, has also been included in the statutory rule concerning conditionalities of financial capability and code of conduct. The rule was notified in March 2005. The Tariff Policy gives flexibility to a licencee to charge lower than the regulated tariff in a competitive situation, but without claiming additional revenue from the regulator. It also gives discretion to the incumbent licencee to file a separate revenue petition for part of his area, if there is new competition licencee in such part area. 1.2 Challenges in distribution system of electricity. Section 1 (17) of Electricity Act, 2003 reads as distribution licencee means a licencee to operate and maintain a distribution system for supplying electricity to the consumers in his area of supply; Section 14 Proviso 6 reads as Provided also that the Appropriate Commission may grant a licence to two or more persons for distribution for electricity through their own distribution system within the same area, subject to the conditions that the applicant for grant of licence within the same area shall, without prejudice to the other conditions or requirements under this Act, comply with the additional requirements
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[relating to the capital adequacy,

creditworthiness, or code of conduct] as may be prescribed by the Central Government, and no such applicant, who complies with all the requirements for grant of licence, shall be refused grant of licence on the ground that there already exists a licencee in the same area for the same purpose:
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Suffix 1 in the above provision denotes The Distribution of Electricity Licence (Additional Requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005 Section 42 (1) reads as It shall be the duty of a distribution licencee to develop and maintain an efficient co-ordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained this Act. (Emphasis added) MERC has used the following criteria to determine the petitioners eligibility to for grant of distribution licence: i. ii. iii. iv. v. Minimum area of supply requirement (E1) Capital Adequacy requirement (E2) Creditworthiness requirement (E3) Code of Conduct requirement (E4) Requirement of own network rollout plan (E5)

Following the rules and regulations and the opinion dated May 14, 2011 rendered by Shri Gopal Subramanium, the Learned Former Solicitor General of India, to the Forum of Regulators, the Commission evaluated petitions in Cases 5,6,7,8 of 2011 on the grounds that a distribution licencee must develop, operate and maintain its own distribution network in that area.

A committee was constituted under Chairman, CEA for examination and recommendation on the proposed amendments in the Electricity Act, 2003. The Committee deliberated on the proposed amendment in section 14 of the Act to enable a second/subsequent licencee to become a retails supply licencee and supply electricity through the distribution network/system of incumbent licencee without having the requirement to own distribution network and suggested that the distribution system may be separated from supply of electricity with two separate licences to two separate legal entities.

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1.3 Benefits and challenges for sustainability of retail competition in India. In the meeting headed by Chairman, CEA for introducing competition in retail electricity supply in India dated 27th June13 the discussions came out with the suggestion to propose amendment in the section 14 of EA, 2003 highlighting benefits by separating carriage and content.

a) b)

It will avoid conflict of interest and bring neutrality in the network business. It would enable the two functions focus their efforts on reduction of commercial losses

and efficiency enhancement. c) d) It would bring transparency in the cost and revenue streams of the distribution business. In separating wire business it would promise assured return and encourage investment in

expanding distribution networks. e) f) It would improve access of distribution network in rural areas. The existing distribution network can remain a natural monopoly possibly with

Government ownership with a regulated return. g) Separate supply business would ensure reduction of commercial losses and efficiency

enhancement. h) It is predicted that the focus of distribution licencees on geographical area will increase,

which the Commission had suggested to TPC-D in Case No. 165 of 2011 to form clusters in the geographical area assigned for computation of sales and ARR while reporting and filing petition before the Commission in order to avoid cherry picking of consumers.

Challenges for sustainability of retail competition in India:

a)

In reference to Section 1 (7), Section 14 Proviso 6, Section 42(1) of EA03, former

Solicitor Generals opinion and eligibility criteria of MERC for granting Distribution Licence under Network Rollout Plan norm; it can be inferred that the possibility of parallel Distribution Licencees using their own distribution network for retail supply is mandatory. Obviously, duplication of network would lead to increase capitalization and wheeling costs to be borne by both the subsidizing as well as the subsidized customers.

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b)

To be able to operate in such a dynamic market where consumers switch suppliers

frequently, the distribution licencees should have flexibility on the power procurement side which accounts for 80-85% of the total cost of a bundled distribution (wires + supply) entity. However, this can be ensured only in a balanced or supply surplus system without excessive reliance on long-term contracts.

c)

A merchant market has not yet evolved to the extent seen in international markets marked

by retail competition. With the kind of deficit witnessed in the State of Maharashtra and in the country, the opening of retail distribution to competition without a vibrant wholesale market/merchant market, will pose a number of issues.

d)

Power Procurement from long term Power Purchase Agreements (PPA) is of the order of

85% for TPC-D, 46% for RInfra-D and 96 % for BEST. The power purchase cost is considered as a completely pass-through element for Distribution Licencees. As the power purchase costs including fixed costs are pass-through, the consumers staying with the incumbent distribution licencee are likely to face a significant tariff impact.

e)

International markets such as Australia and UK have introduced full retail competition

only after fully competitive bulk markets came into operation. In the petitions filed by three distribution licencees under study; none have considered impact of open access consumers in Business Plan.

1.4 Segregation of distribution business A distribution utility in India normally conducts two distinct types of activities distribution or network business and retail supply business. In some of the countries like UK, Nord Countries, Australia etc, the distribution network and retail supply are handled by separate companies. In these countries, the distribution network is regulated business and retail supply is fully or partially competitive. The distribution network company levies distribution charge/wheeling charge on the retail supply companies according to their respective contracts and the retail supply company levies a supply charge on its retail customers. In case of Indian utilities,
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network and retail supply business are managed by a single entity. For designing an incentive scheme, it is necessary to treat the two businesses separately since cost and revenue drivers for each of the businesses are different.

1.4.1

Functions

of

retail

supply

and

wire

network

businesses

Figure 1 Electricity industry supply structure

(PricewaterhouseCoopers India Private Limited, 2010)

The distribution infrastructure up to the consumers meter is part of the wires business, and the distribution infrastructure from meter to consumer premises is part of the supply business.

Distribution Network function involves transporting of electricity from transmission systems (transmission ends at 66kV) to customers. Traditionally described as customer end part of wires business (transmission is the generator end) with more radial operations rather than networked. This involves in setting up of network consisting of the poles, wires, transformers etc. to reach the electricity physically to the consumer. Main activities are: (a) Setting up of physical network poles, wires, transformers etc to reach electricity to consumers

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(b) Obtaining the right-of-way in order to set up the network poles, distribution wires company should approach the local authorities for obtaining permission (c) New connections extension or erection of network, so that new area loads are added to the systems either a pull or push growth phenomenon (d) Maintenance of network ensuring that the network is in good condition, available to dispatch electricity at any time and is adequate (doesnt cause electrical instability) (e) Quality of supply maintaining proper conductor, transformer loading, transformer maintenance such that the consumer is assured of quality power assured voltage, assured ampere and frequency.

Retail supply function is also called as merchant function (not physical function). Retailing is sale of electricity to the final consumers and till recently thought of as part of distribution business. The main activities involved are: (a) Procurement of electricity from wholesaler or bulk supplier (as mentioned earlier, the electricity generated, flows directly to consumer through wires at various voltages). (b) Pricing of electricity. (c) Selling of electricity including the following commercial functions (i) Connection of consumer to the network on payment of certain charges and signing up to consume energy equivalent of x kW of load categorization depending on the type of service (LT Domestic, commercial, industry of certain voltage and HT Colonies, industries, Railways etc) (ii) Metering of energy used by consumers setting up meter in consumer premises, their maintenance, reading the meters at regular intervals and ensuring that energy accounting tallies up (iii) Commercial losses meaning that energy has been consumed but not billed, either because the consumer is not accounted or because the meters are not read properly or not working or simply theft of energy by consumers. (iv) Billing of electricity supplied usually on variety of factors such as connected load, load factor, energy demand, energy supplied, consumer service etc. and approved by regulator at periodic intervals.

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(v) Collection of bills setting up infrastructure of collecting the dues from consumers such as section offices, kiosks, mobile vans, internet, cheque drop boxes, auto-debit to accounts etc. (vi) Disconnection of service as per the contract with the consumer, the supplier is allowed to discontinue services to the consumer. Reconnection is possible with clearing of dues and payment of reconnection charges. In most of the countries where the Power sector is advance and stable the Distribution and Retail Supply are handled by separate companies. In these Countries, the Distribution is regulated entity and Retail Supply is fully or partially competitive. The distribution company levies distribution charge on the retail supply companies according to their respective contracts and the retail supply company levies a supply charge on its retail customers. In the case of India there exist no distinct entities for wheeling and retail supply business. Hence, it is a bit complex to segregate the cost between the two businesses and arrive at a distribution and a supply charge.

Today, the problem is arising because the wire business and supply business are operating in an integrated manner, with the same entity having the distribution and supply licence. The EA, 2003 provides for issue of integrated distribution and supply licence. However, for effective competition to be introduced, the Wire Business, both at the transmission and distribution level, should be segregated and regulated, whereas the Supply Business could be largely de-regulated in terms of pricing. Eventually, in order to have full scale retail competition, the Wires Business will have to be separated from the Supply Business, and it is essential to de-link the operation of the Wire Business from the operation of the Supply Business. Once this is done, one can have multiple supply licencees, who can procure the required quantum of power and supply to consumers using the common wire network. Such kind of competition will enable the tariffs to go down, as well as enable further improvement in the quality of service and supply, since the supply licencees will have to create differentiation and brand identity by ensuring quality supply.

The international experience in introducing competition in retail supply also shows that instead of parallel networks, multiple suppliers are allowed to supply through a common network, as it is not economically viable to duplicate the distribution network, considering the sunk-cost associated with the existing network and the scale of economies derived from network operation. Also, only transmission and distribution segments are regulated under price cap mechanism,
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since they are natural monopolies, while the generation and supply business are freely competitive businesses. In this context, it becomes imperative to separate the supply from wire business to make retail supply competitive.

1.4.2 Regulatory structure Proviso 1 in Regulation 71 of Maharashtra Electricity Regulatory Commission (Multi Year Tariff) Regulations, 2011 requires every distribution licencee to maintain separate records for the Distribution Wires Business and Retail Supply Business and to prepare an Allocation Statement to enable the Commission to determine the tariff, pursuant to each such application made by the Distribution Licencee. Following this regulation, The Tata Power Company Limited Distribution (TPC-D) and Reliance Infrastructures Limited Distribution business (RInfra-D) submitted their petitions; Case No. 165 of 2011 and Case No. 124 of 2011 respectively segregating their accounting heads into Wire and Supply businesses. The segregation model adopted is as per the business gain and the auditing done by Commission is not as per any guidelines. Regulation 78.4.1 of MYT 2011 provides for the recovery of Operation & Maintenance expenses relating to the Distribution Wires business on normative terms. The report aims to recommend the methodology for segregating accounting heads in wire and supply businesses while computing the Aggregate Revenue Requirement (ARR) for the Commission to audit the petitions coming before it. 1.5 Distribution models adopted in India and other countries. 1.5.1 (Maharashtra) India The Preamble to Electricity Act, 2003 talks of promoting competition in electricity sector and the Act gives direction to the Central Commission (Section 79) and State Electricity Regulatory Commission (Section 86, 42, 63) to take necessary steps to promote competition in electricity sector.

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In the Mumbai region of the Maharashtra State, four Distribution Licencees hold the licence to distribute electricity within the areas specified in their respective licences and within the ambit of the relevant orders of the Maharashtra Electricity Regulatory Commission (the Commission or MERC) and various judgments of the legal bodies. The licencees are: a) Brihan Mumbai Electricity Supply and Transport Undertaking (BEST) Case No. 124 of 2011, b) Reliance Infrastructure Ltd. (Distribution business), (RInfraD) Case No. 158 of 2011, c) The Tata Power Company Ltd. (Distribution business) (TPC-D) Case No. 165 of 2011, and d) Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL). Case No. 19 of 2012. While M/s. BEST, RInfra-D, and MSEDCL operate within specific distribution licence areas allocated to them, distinct from each other, TPC-D, on account of its historical background and the Supreme Court Judgment dated 8th July, 2008, is licensed to distribute power in the entire Mumbai region excluding the Mira-Bhayander area served by RInfra-D and excluding all the areas served by MSEDCL. Thus, there are multiple Distribution Licencees in each area. Each licencee has an obligation to supply electricity to all consumers, who demand electricity supply from them (Universal Service Obligation, as mentioned in Section 43 of EA, 2003). The operationalisation of parallel distribution licence is one of the ways to promote competition in electricity sector. In exercise of powers conferred under Sections 61 and 62 of the EA 2003 and Regulations 2(1)(Proviso 3)& 2(3) of the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2011, the Commission notified distribution licencees to submit application for determination of tariff under Section 64 of the Act or application for annual performance review under Regulation 2(1)(Proviso 3)& 2(3) of the Tariff Regulations as per guidelines given in MERC (Uniform Recording, Maintenance and Reporting of Information Regulations) (URIMS), 2009.

As mentioned before in the background of the report, Proviso 1 in Regulation 71 Maharashtra Electricity Regulatory Commission (Multi Year Tariff) Regulations, 2011 requires every Distribution Licencee to maintain separate records for the Distribution Wires Business and Retail Supply Business and to prepare an Allocation Statement to enable the Commission to determine the tariff, pursuant to each such application made by the Distribution Licencee.
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Following this regulations, The Tata Power Company Limited Distribution (TPC-D) and Reliance Infrastructures Limited Distribution (RInfra-D) submitted their petitions; Case No. 165 of 2011 and Case No. 124 of 2011 respectively segregating their accounting heads into Wire Business and Supply business. The segregation model adopted is as per the business gain and the auditing done by Commission is not as per any guidelines. Regulation 78.4.1 of MYT 2011 provides for the recovery of Operation & Maintenance expenses only relating to the Distribution Wires business on normative terms.

1.5.2 PJM PJM Interconnection operates the worlds largest wholesale electricity market as the regional transmission organization for the area that encompasses all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJMs competitive wholesale electricity market began operating in 1997. Based on its success, PJM since then has led a dynamic process that has expanded the number and kinds of markets available to its more than 800 members. The Energy Market consists of Day-Ahead and Real-Time markets. The Day-Ahead Market is a forward market in which hourly prices are calculated for the next operating day based on generation offers, demand bids and scheduled bilateral transactions. The Real-Time Market is a spot market in which current locational marginal prices are calculated at five-minute intervals based on actual grid operating conditions and are published on the PJM website. PJM settles transactions hourly and issues invoices to market participants monthly. PJM also operates a Day-Ahead Scheduling Reserve Market. It obtains supplemental, 30minutes reserves that may be needed to deal with unanticipated system conditions during the actual operating day. To ensure the future availability of the generating capacity and other resources that will be needed to keep the regional power grid operating reliably for consumers, PJM developed a new method of pricing capacity called the Reliability Pricing Model. It was implemented in 2007. The RPM system includes incentives that are designed to stimulate investment both in maintaining existing generation and in encouraging the development of new sources of capacity not just generating plants, but demand response and energy efficiency
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programs as well. It works in conjunction with PJMs regional planning process to ensure the future reliability of the system.

Evolution from LMP model to RPM LMP = System energy Price + Transmission Congestion Cost + Cost of Marginal Losses System Energy Price Represents optimal dispatch ignoring congestion and losses Same price for every bus in PJM Calculated both in day ahead and real time

Congestion Price Represents price of congestion for binding constraints Calculated using cost of marginal units controlling constraints and sensitivity factors on each bus Will be zero if no constraints Will vary by location if system is constrained Calculated both in day ahead and real time

Loss Price Represents price of marginal losses Calculated using penalty factors Will vary by location Calculated both in day-ahead and real-time

Reliability Pricing Model (RPM) Resource commitments to meet system peak loads three years in the future Three year forward pricing which is aligned with reliability requirements and which adequately values all capacity resources Provide transparent information to all participants far enough in advance for actionable response. An Installed Reserve Margin (IRM) = 15.4% satisfies the reliability criterion for the 2015/16 Delivery Year. Resource Adequacy ICAP Requirement = Forecast Peak Load * (1+ IRM)
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Figure 2 Reliability Pricing Model

(PJM)

1.5.3 Australia The Australian Energy Market Operator (AEMO) was established to manage the NEM and gas markets from 1 July 2009. With respect to the electricity market AEMO has two core roles: Power System Operator Market Operator

Since the commencement of the NEM, electricity consumers have progressively gained the right to choose their own supplier. This has meant that AEMOs responsibilities have extended from managing the wholesale market to providing the systems and processes to support competition and choice for all end-users in the retail electricity market. Delivering full retail competition (FRC), or contestability, has required new information technology systems to process transfers of
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customers between registered retailers in the NEM. The systems that facilitate this function contain one of the largest metering databases in the World. They accept data from a variety of electricity meter types and have the capacity to process information from up to 10 million meters. AEMOs systems are set up to provide key meter installation details to support a simple and rapid information transfer process. Different metering processes are required for different types of meters used in the NEM, to support consumer transfer and core settlement procedures and to calculate load profiles. The cost of electricity consumed is then calculated according to a user profile that approximates the pattern of use in a typical situation. By June 2009, approximately 6.3 million customer transfers from one retailer to another had taken place. As a result of the introduction of full retail competition, electricity retailers are increasingly competing, and creating new and unique products as a means to increase their customer bases.

In the spot market dispatch price is determined every five minutes, and six dispatch prices are averaged every half-hour to determine the spot price for each trading interval for each of the regions of the NEM. AEMO uses the spot price as the basis for the settlement of financial transactions for all energy traded in the NEM. National Electricity Law and Rules set a maximum spot price, also known as a Market Price Cap, of $12,500 per megawatt hour (MWh). This is the maximum price at which generators can bid into the market and is the price automatically triggered when AEMO directs network service providers to interrupt customer supply in order to keep supply and demand in the system in balance.

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Figure 3 Australia spot market structure

(AEMO, 2010)

AEMO is required to operate the power system efficiently and ensure agreed standards of security and reliability are maintained. Operating the NEM involves conducting a sequence of activities to facilitate trade between the producers and wholesale consumers of electricity. These activities include establishing demand levels, receiving offers to supply from generators, scheduling generators, dispatching generators into production, calculating the spot price, measuring electricity use and financially settling the market. Ancillary services are those services used by AEMO to manage the power system safely, securely and reliably. Ancillary services maintain key technical characteristics of the system, including standards for frequency, voltage, network loading and system re-start processes.

1.5.4 New Zealand The five major generation companies produce more than 90 percent of New Zealands electricity. New sources of generation can be developed in New Zealand without securing any
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specific approval from the Commission. The main Regulatory requirements are that a new plant conforms to the relevant technical codes and has the necessary resource consents. Generators that are bigger than 30 MW or which are grid-connected compete in the electricity spot market by submitting offers to the System Operator for the right to generate electricity to satisfy demand, subject to transmission capacity. In addition to retailers, a small number of customers, typically large industrial users, also buy electricity directly from the spot market. These parties will typically also enter into financial contracts (often called hedges), which smooth out some or all of the volatility in spot prices. In addition to managing the existing transmission system, Transpower plans and builds new grid investments. These grid investments are first reviewed and approved by the Electricity Commission. Transpower is responsible for all transmission development processes; for example, resource consents, access rights and construction. The national grid transports electricity from over 50 power stations, and connects with distribution networks or major industrial users at around 200 grid exit points (GXPs) around New Zealand. The Electricity Commission is responsible for overseeing New Zealands wholesale and retail electricity markets, operating the electricity system, promoting the efficient use of electricity and regulating some aspects of electricity transmission. In addition to its role as competition watchdog, Commission administers the price control regime for transmission and distribution businesses, and enforces the legislation that requires a level of ownership separation between network activities and generation/retailing. The distribution business has been segregated into two segments, i.e., the lines business and the supply business. The Electricity Act, 1992 introduced contestability in the retail segment by removing the exclusive retailing rights and the obligation to supply. At that time, the separation of the lines business and the supply business within the distribution business had not been carried out. As a result, the network operators who owned the lines business continued to operate in the retail supply segment. Several measures, including public disclosure of information relating to line charge, and financial separation of the competitive activities (generation and retailing) from the monopolistic activities (lines business) to promote competition, were implemented. However, there was a concern that the electricity companies, being vertically integrated natural monopolies, would use their market power in distribution to exclude competition at the retail
24

level. To address this concern, the Electricity Industry Reform Act was introduced to reform the electricity industry to better ensure that costs and prices in the electricity industry were subject to sustained downward pressure and the benefits of efficient electricity pricing flowed through to all classes of consumers by 1) Effectively separating electricity distribution from generation and retail; and 2) Promoting effective competition in electricity generation and retail. Common ownership of electricity distribution businesses and of either an electricity retailing or electricity generation businesses (other than minor cross-ownerships) is prohibited. Presently, around 29 lines companies own the local distribution networks throughout New Zealand and operate as monopolies. The line companies are connected to the national grid at the GXPs. Generally, the line companies sell their distribution or line services to retailers who manage the electricity supply agreements with the end consumers. The network operators are subject to a targeted price control regime which was introduced in 2004. Under the regime, the line businesses are only potentially subject to control if they cross either of the two thresholds of performance. The regime is referred to as targeted control because only those businesses that cross the thresholds, trigger the Commission to identify lines businesses whose performance may warrant further examination, and if necessary, control of prices, revenues and/or quality. The two thresholds adopted by the Commission for all electricity lines businesses (with the exception of Transpower), are: compliance with a specified price path based on the CPI minus X price methodology, and compliance with specified reliability and consumer engagement criteria. The operation of the electricity retail market is overseen by the Commission in order to promote strong retail competition and fairness to consumers. Its role includes providing arrangements for the protection of consumers, as well as administering retail market rules such as metering arrangements, customer switching and reconciliation the process by which the quantity of electricity purchased by each retailer is calculated. The key features are that customers can switch between retailers, and any party can be an electricity retailer provided they meet the minimum requirements. While the extent of retail competition varies across the country, customers have a choice of retailers. The retail tariffs are not subject to price control. In some parts of New Zealand, there are five or more competing retailers. All of the main generation companies in New Zealand are also electricity retailers. In addition, there are a number of smaller independent electricity retail companies. Furthermore, the switching process has become
25

easier over time, and can now be executed over the phone with the new electricity retailer. Free web-based tools are also available to help residential users to shop around.

1.5.5 United Kingdom The United Kingdom (UK) electricity industry was one of the first to experience reforms, which became a model for the remaining countries. In the pre-reform era, the Central Electricity Generating Board was responsible for the generation and transmission of electricity, while 12 area electricity boards (AEB) were responsible for distribution and supply to consumers. On 31 March 1990, as part of the privatisation of the electricity system in England and Wales, the area electricity boards were changed into independent regional electricity companies (RECs) and the CEGB was split into four companies -- three generation companies and the National Grid Company, operator of the National Grid. The National Grid Company was placed under the ownership of the RECs. On 11th December 1990, the RECs were privatised. In 2000, as part of further restructuring of the market under the Utilities Act 2000, the public electricity suppliers were required to have separate licences for their supply business and distribution networks, which were renamed as distribution network operators (DNOs). Presently, there are five types of electricity licences: a. Generation - Allows the licencee to generate electricity for the purpose of giving supply to any premise or enabling a supply to be given. b. Transmission - Allows the licencee to participate in the transmission of electricity for the purpose of enabling a supply to be given. c. Inter-connector - Allows the licencee to participate in the operation of an electricity interconnector. Participating in the operation as an electricity inter-connector is defined as: cocoordinating and directing the flow of electricity into or through an electricity inter-connector, or making such an interconnector available for use of conveyance of electricity. d. Distribution - Allows the licencee to distribute electricity for the purpose of enabling a supply to be given. Electricity is distributed from the National Grid Network through a low voltage network of wires to customers. e. Supply Allows the licencee to supply electricity to different premises. The regulator Office of Gas and Electricity Markets (OFGEM) has a market monitoring role -- it publishes periodic reports on developments in the domestic retail market and conducts
26

investigations and consultations on the performance of the domestic and the non-domestic markets, when necessary. Most of UKs electricity is generated by gas, coal and nuclear stations. Thirty large (>1GW) power stations meet the majority of the electricity demand. The generation industry is a competitive market. There are four transmission systems in the UK - one in England and Wales, two in Scotland, and one in Northern Ireland. Each is separately operated and owned. The largest, in terms of line length and share of total transmission, is the National Grid Company (NGC) system, covering England and Wales. NGC also operates electricity interconnectors overhead lines connecting the transmission networks in England and Wales to Scotland, and an undersea link that connects France and England. Transmission operators also have a role in balancing generation and demand at all times, to ensure the security of the network.

The distribution lines business is considered a natural monopoly and is a licenced activity in UK. There are fourteen licenced areas, based on the former Area Electricity Board boundaries, where the Distribution Network Operators (DNOs) distribute electricity from the transmission grid to consumers. In 1990, the Area Boards were replaced by regional electricity companies (RECs), which were then privatized. The DNOs are the successors of the distribution arms of the RECs. Under the Utilities Act 2000, they are prevented from supplying electricity; this is done by a separate company chosen by the consumer who makes use of the distribution network. DNOs hold regional licences for the provision of distribution network services and are regulated by the OFGEM. DNOs are under a statutory duty to connect any customer requiring electricity within a defined area, and to maintain that connection. Various charges related to DNO operations are as follows: _ Use of system charges: To pay for network reinforcement, maintenance and renewal, paid by generators and suppliers, broadly in proportion to their use of the network. Charges are highest for generators in remote regions, far from demand. _ Connection charges: To cover costs of infrastructure required for new connections, paid by generators and customers wishing to connect. _ Balancing charges: To meet costs of matching supply with demand, and providing reserve generation, paid by large generators and suppliers. The DNOs are regulated through five-year price control periods, which include curbs on expenditure as well as incentives to be efficient and to innovate technically. The price controls
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set the maximum amount of revenue which energy network owners can take through charges they levy on users of their networks to cover their costs and earn them a return in line with agreed expectations. Ultimately, charges are passed to electricity consumers. Transmission and distribution costs make up around 4% and 17% of the average domestic bill, respectively. The retail electricity market in UK was opened up in three phases for large users (> 1 MW) in 1990, for medium users (> 100 kW) in 1994, and for residential consumers in 1999. Full competition was introduced in Great Britain from 1999. Extant regulation prohibits the distribution network operators from holding supply licencees. Allowing customers to choose the supplier of their choice has kept up the pressure on costs and promotes greater choice of tariffs and services for customers, such as the fixed price and capped price offers now available to domestic customers. Competition in metering services also helps suppliers to deliver more innovative products to customers. This competitive market in retail supply has developed well.

1.5.6 Argentina CAMMESA administers the market non-profit corporation equally owned by the wholesale market. It is a federal Government and four associations representing generators, transmitters, distributors, and major users. It is in charge of scheduling and dispatching generators in accordance with the power demand, on the basis of using marginal costs and availability offered by generators, employing those generators offering the lowest marginal costs first. The law also established a Federal Energy Council to advise the Secretary of Energy and the Congress and administer the National Fund of Electricity, which is used for regional subsidies. Power generation companies are not allowed to own majority shares in Argentina's three transmission companies. The transmission & distribution companies have to provide open access to their systems for the power generators on a regulated basis. Distribution companies are organized as regional monopolies and permitted to buy electricity from the MEM or through contracts with power generation companies. The energy market was liberalized for customers with demands greater than 5 MW; this has been successively reduced to 30 kW. These customers are free to contract directly with generators and can participate directly in the generation market.

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 Tariff for Regulated customers (below 30 kW) is calculated by a formula that takes into account the wholesale prices, seasonality, capacity and local charges, if any.

1.6 Learning from international experience Post introduction of wholesale competition, supply of electricity is often separated from the operation and ownership of the distribution wires and a number of suppliers or retailers compete to sell electricity to customers, or rather customers choose their suppliers, i.e., retail competition is allowed.

Choice of supply for large customers is often introduced at the same stage as wholesale competition, and then extended to smaller consumers at a later stage. Suppliers buy their electricity from the wholesale market and then pay the transmission and distribution companies a regulated price to transport their electricity to customers. Customers may also elect to purchase their electricity directly from generators. The UK, New Zealand, Australia and many other countries have moved to retail competition -- first allowing large customers choose and then eventually extending competition to all electricity customers.

In full retail competition, the regulator generally regulates only the natural monopoly (wires) part of distribution and competitive retail, or selling services are deregulated. However, as a measure to protect consumer interest, in countries such as Australia, there is a default service provider, whose tariff serves as a ceiling. The consumer receives regulated delivery services from the local utility and can shop for a supplier of competitive services. Customers who do not or cannot find a competitive supplier are offered default service (typically) by their local utility.

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Chapter 2 Methodology

2.1 Research Objective As discussed in section subtitle 1.4.3 of the report, the petitions filed by the distribution utilities for the approval of MYT Business Plans do not provide with the justified methodology to apportion the expenses in segregating wire and supply businesses. MERC (MYT) Regulations, 2011 and MERC (URIMS) Regulation, 2009 provide for the regulations for computation of the petitions by the Commission and the format of submission of the petitions. The regulation provides with the apportionment of O&M expenses as computed case to case. For other accounting heads, there is no justifiable expense apportionment methodology. The report aims to find the methodology for apportionment of expenses from Regulatory perspective. The initial endeavor would be to compare the petitions of the licencees on ARR determined as per their business plans and Commissions response to the same. The Commission answers the prayers arbitrarily in the interest of the consumers as well as the utilities and hence proceeds in its approach vividly case to case basis. The next endeavor would be to compare the logical thinking behind the apportionment of the expenses into wire business and supply business. The expenses in some of the accounting heads like O&M expense and PPE expense is a function of many other dependent variables which determine other accounting heads too. Generalized formulation, if could be found out would provide with the best results. Learning from international experience would aid in delivering results. The segregation done in the business models of all the licencees would be analyzed with each other and with the business model so other States, if feasible. The accounting heads are to be analyzed individually to arrive at the generalized equations or uniform methodology to be adopted. The target would be complete the assigned task well before time so that there is enough time at the end to correct at the perusal of the alterations suggested by the mentors at MERC and the faculty at the institution.

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Figure 4 Methodology

2.2 Problem Statement The segregation of businesses into wire and supply businesses is checked and computed by the Commission for the petitions filed by the distribution licencees for MERC (MYT) determination. Apportionments of the expenses need justifiable approach by which Commission can check and the licencees can follow the same.

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2.3 Limitations The data in the worksheet for business plans of the petitions filed by the Distribution Licencee lack linking at some places, which implies that there are chances of data manipulation. The methodology adopted by the licencees and operators in other countries is also not explained in their respective websites/public domain.

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Chapter 3 Data Collection

3.1 Comparison of expenses computed by the Commission for MYT Business Plans of BEST, TPC-D and RInfra-D

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Figure 5 Expenses computed by the Commission (Rs. Crores)

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3.2 Comparison of segregation of wire and supply businesses by the licencees in approved Multi Year Tariff Business Plans

Figure 6 Segregation of wire and supply businesses by the Distribution Licencees

Some of the salient features are: BEST a) BEST does not have any Open Access consumers and thus, sales from Supply Business and Wheeled energy have been considered at the same level.

35

TPC-D b) TPC-D adopted conservative approach to project growth in switchover customers due to

issues like: Challenges for cable lying in South Mumbai Area: i. Permission from various Authorities such as MCGM/PWD/MMRDA and Traffic Police

needs to be obtained. This process of obtaining permission for cable laying ranges from 1 month to 3 months. ii. Permission is granted only during fair season, which is practically 6 months (October to

March). iii. iv. Permission is denied for excavation of roads under 1 year guarantee. In case of South Mumbai Area, full carriage is concretised as compared to paver blocks

in road shoulders in Mumbai Suburbs area. Permission is denied for breaking concrete based roads.

c)

Commission accepts the fact that distribution losses of TPC-D would increase

considering the increasing network and LT consumer base

d)

Power is to be procured from the following three routes namely: 1. Case I bidding, as directed by MoP to consider the impact on long term PPAs due to Open Access 12.5% 2. Bilateral sources 2.2% 3. Imbalance Pool 0% 4. Own generation 85%

e)

TPC-D submitted that it is too early to predict the impact of Open Access on the Business

Plan but the Commission is of the view that TPC-D should continue to procure power through Case I bidding and reduce its dependence on bilateral purchases in the interest of the consumers.

f)

Total Transmission System Cost or (TTSC) is to be shared by the various Distribution

Licencees in proportion to the co-incident peak (however, average of Coincident Peak Demand
36

and Non-Coincident Peak Demand should be considered as per MERC (MYT) Regulations, 2011 of these Distribution Licencees.

g)

Standby charges depend on percentage of sharing in coincident and non-coincident

peaking period. SLDC charges are proposed to be raised due to high involvement as they will be the nodal center in implementation of retail competition.

h)

Receivables to be considered for provisioning of Bad and doubtful debts are sundry

debtors outstanding for a period more than the regular collection period of the Utility, whereas the receivables considered for the computation of Working Capital Requirement are the bills outstanding and shall be collected before the next billing cycle.

i)

Rent component added in computation of Non Tariff income only in Wire business.

j)

Commission is of the view that clusters can be identified geographically in BEST and

RInfra area and thus the capital expenditure can be segregated.

RInfra-D k) RInfra-D further submitted that 40% of the changeover consumers have opted for RInfra-

Ds meters, which form part of the Retail Supply business assets and not the Wire business. RInfra-D contended that the wheeling charges payable by changeover consumers do not include such expenses.

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3.3 Analysis of Expenses

Figure 7 Comparison of segregation models with MSEDCL (ARR FY-11)

3.4 Analysis of O&M expense Case example 1 Consider a 500 kVA distribution transformer in a locality feeding electricity to poles with 3 core 95 sq. mm cross section wire 500 households with the average consumption of 5kW each are to be supplied power. Considering 3 core 50 sq. mm. 200 m wire feeding every 10 households, the cost of laying wire associated for the wire business is Rs. 3.32 crore and that of retail supply business is Rs. 2.36 crore.

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3 core 50 sq.mm 200 m wire

50 no.

10 m. 20m.

50m.

Figure 8 Case Example 1

Table 1 Symbol Notation for Case Example 1

S. No. 1 2 3 4 5 6

Symbol

Notation Distribution Transformer (500kVA) 3 core 50 sq.mm wire Pole 3 core 16 sq.mm wire 3 core 95 sq.mm wire AMR

Approx cost (in Rs) 10000 200x50x300=3000000 20000x150=30000000 450x50x160=3600000 500x525=262500 5000x4000=20000000

Table 2 Employee Cost expense Employee Expense 40 lakh 30 lakh 40 lakh 30 lakh 3.3 lakh 4.75 lakh Cost per km

S. No. Employee grade 1 2 3 4 GET/Asst Managers Manager/Sr. Manager GET/Asst Managers GET Manager/Sr. Manager/QC

Numbers 10 2 10 2

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3.5 Impact of Net Expenses on ARR Table 3 Impact of Net Expenses on ARR

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Chapter 4 Analysis & Findings

4.1 Power Purchase Expenses including transmission Charges A distribution licencee contracts the sufficient power for 24X7 supplies to the consumers in the State. In MSEDCL some consumers have opted for open access. To compensate the loss of consumers and stranded capacity of around 700 MW, MSEDCL has allocated 5% of the fixed/capacity charges of power purchase in wires business and balance 95% of fixed/capacity charges and entire variable cost of power purchase allocated to the retail supply business since procurement of electricity from wholesaler or bulk supplier for sale to end consumer is the main activity of retail supply business. Further, entire transmission charges paid to Transmission Licencee is allocated to the retail supply business.

The TPC-D and RInfra-D have submitted the breakup of the power procured from all the sources to calculate the power purchase expenses considering distribution and transmission losses. Allocation to wire and supply businesses is not ascertained. It can be concluded that since the power procured is the major task of Supply business, hence the apportionment suggested could be 100% for Supply business.

4.2 Total Capitalization The major components that form retail supply asset are meters and billing equipments (computer etc). Similarly, majority of the plant and Machinery and lines and cables form Distribution Assets. Other fixed assets include buildings, office equipments, furniture and fixtures, vehicles etc.

BEST has allocated capital expenditure on Meters in supply business and other assets (Land, Building, DEA, MV, Tools & Equipments, Furniture and office equipments, cable street and lighting lamps to wire business. Hence, the Apportionment has to be done on actual basis of investment in the respective businesses.

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4.3 Operation & Maintenance Expenses This accounting head comprise of Employee expenses, Administration & General expenses and Renovation & Modernization expenses. To segregate the employee cost MSEDCL has used the basis of employee requirement to undertake the Retail Supply and Wire business. 75% employees engaged in Wire business and 25% in Supply business. RInfa-D has used the basis of allocation as 30% to the number of employees/no. of substations and 70% weightage to the number of employees per 1000 customers. The TPC-D used the formula as .

Increasing the Employee Expenses apportionment to 80% in wire business causes 2% increase in the Wire ARR and decreasing the apportionment to 70% causes decrease by 2%. The curve plotted in Figure yields the equation as a) Power equation for the trendline as and R2 = 0.838

b) Logarithmic equation for the trendline as y = 649.6 ln(x) + 2901 and R2 = 0.802

The variation in the ARR values by comparing with the values in the other business model came to be 452 (8.7% decrease in ARR) for the Power equation and 459 (9.6% decrease in ARR) for the logarithmic equation. The variance computed by increasing the wire business by 1% causes increase in ARR by 1.33%. Hence the equation yields no good result. The conclusion can be drawn that the expenses be allocated on the basis of number of employees engaged per 1000 number of consumers for the respective businesses as suggested by the Commission.

MSEDCL apportioned the A&G expenses as 75% to wire business and 25% to supply business. RInfra-D apportioned 50% of expense on the basis of expenses/(1000xNo. of consumers) and 50% on the basis of expenses/employee. The TPC-D has computed the incremental factor in supply business due to changeover consumers and hence the more employees engaged.
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If the A&G expenses are apportioned 74% to wire business, the ARR is affected by 0.08%. Comparing it with the other States, the ARR reduces by 1.33%. The curve plotted in Figure yields the equation as a) Power equation for the trendline as and R2 = 0.810

b) Logarithmic equation for the trendline as y = 156.2 ln(x) + 5026 and R2 = 0.802

The variation in the ARR values by comparing with the values in the other business model came to be 133 (2.3% increase in ARR) for the Power equation and 135 (2.4% increase in ARR) for the logarithmic equation. Hence the equation yields no good result.

The conclusion can be drawn that the expenses be allocated on the basis of expenses accrued or incurred for the respective businesses. Say for example, the rent paid for the accommodation of the staff or office premises can be segregated for the employees engaged in the respective businesses, wherever feasible. If segregation to that extent is not possible, then the general method of evaluation can be expenses/(1000xNo. of consumers)

MSEDCL apportioned the R&M expenses as 95% to wire business and 5% to supply business. RInfra-D computed on the basis of opening GFA. The TPC-D has computed the incremental factor in wire business due to increase in expense on machinery and hydraulic works. If the R&M expenses are apportioned 100% to wire business, the ARR is affected by 0.3%. Comparing it with the other States, the ARR reduces by 1.05% for every 1% decrease in wire expenses. The curve plotted in Figure yields the equation as a) Power equation for the trendline as and R2 = 0.808

b) Logarithmic equation for the trendline as y = 125.5* ln(x) + 5276 and R2 = 0.802

The variation in the ARR values by comparing with the values in the other business model came to be 133 (3% increase in ARR) for the Power equation and 135 (3% increase in ARR) for the logarithmic equation.
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Hence the equation yields no good result. The staff assigned to wire and supply businesses projecting growth in the distribution and risk of changeover consumers can be suitably categorized by forming groups. These groups in each business would comprise of junior, middle and senior employees. For Wire business, the number of employees would increase if switchover consumers increase. For Retail supply business, in case of increase in the changeover consumers the staff which was earlier employed in meter installation would shift to the monitoring/auditing staff of the meters installed by that of new licencee. This would require more skilled employees and more middle management staff. Hence, training needs need to be catered to meet the competent levels with quality certifications. Renovation & Modernization expenses depend on opening GFA of the financial year. The expenses are projected to increase due growth in the supply business. Installation of AMI and DSM equipments to meet out the losses arising due to distribution would increase the capital expenditure required. As discussed earlier, the distribution network up to consumer meter is part of the wires business and the infrastructure beyond meter is part of the Retail Supply business. Therefore, majority of R&M is required for the portion up to consumer meter and infrastructure beyond consumer meter or other supply related equipments dont require that much R&M. Considering this fact, R&M expenses could be allocated as 95% to Wires Business and 5% to Supply Business. The O&M expense as in Case Example 1 is 58% wire and 42% supply business. The capital expenditure involved is also in the same ratio. This cannot be the ideal case due to many assumptions involved here. Moreover, it is not in situ with the data in the orders (ref. Table 1 & Table 2).

4.4 Depreciation Depreciation expenses are allocated on the proposed ratio of fixed assets between wires and retail supply business. i.e., 90% to the Wires Business and 10% to the Supply Business by MSEDCL. RInfra-D adopted voltage wise segregation (33kV & above, 11kV & above, below 11kV) and the TPC-D also allocated on the basis of GFA which depend on capitalization plan

44

done considering physical progress of the activity carried out during previous financial years and the time period for capitalization of new assets Annexure 1 referred to in Regulation 31.2(b) of MERC (MYT) Regulations, 2011 doesnt give details of the time period on which the depreciation value of the assets is to be computed. Allocation of expenses as 95% causes 0.74%increase in wire ARR. The conclusion can be drawn that given the time period for computation of the depreciation value of the assets and segregating the assets as per the usage in respective businesses. Where this is not possible, general method of segregating the assets voltage wise would be useful. The increase by 1% in wire expenses in BEST Business Model yields similar result as in MSEDCL Business Model. Hence, the general method of segregation holds good where required. 4.5 Interest on long term loans Majority of the long term loans are taken for capital works. Interest expenses on long term loans by MSEDCL, RInfa-D, and The TPC-D are allocated on the proposed ratio of fixed assets between wires and retail supply business. i.e. 90-93% to Wires Business and 10-7% to Supply Business. The interest expenses are passed on to the consumers. A way to reduce the impact can be to reduce the interest rate of loans granted by the financial institutions. This is possible if long term loans are applied by few financial institutions. To mitigate the risk the utilities enhance their portfolio and prefer applying for loans to more than a few institutions. In reference to the criteria for awarding licence to the distribution company, the Electricity Rules, 2005 focuses on the Capital Adequacy, Creditworthiness and Code of Conduct of the utilities. The Commission, when convinced of the strong financial position of the licencees proceeds in awarding the licence. At the point of time while assessing the financial health of the utilities, the business plan of those applicants who plan to procure loans from many financial institutions and short term loans can be checked with more prudence.

45

4.6 Interest on Working Capital

TPC-D apportioned 100% book value of stores, materials and supplies to wire business. MSEDCL apportioned 90% and RInfa-D apportioned 10% to wire business. This depicts that the apportionment is done as per the business gain of the company. The method of apportionment can be suggested here to be on the basis of application/usage of the assets in the respective businesses and like the other accounting heads, on the basis of the GFA of the book value of the assets. For eg. if the book value of stores, materials and supplies is apportioned on the basis on which depreciation of assets is evaluated in MSEDCL Business plan model, the increase in wire ARR is 0.5%.

4.7 Interest on Consumer Security Deposit Consumer security deposit is considered to be for retail supply business only. The risk associated with the investment accrued on the wire business requires apportioning at least 5% to the wire business. The impact as studied in the MSEDCL Business model is increase of wire ARR by 0.22%

4.8 Provision for bad debts Reward policy of BEST include parameters of high collection efficiency and low distribution loss which result in higher and faster revenue realization, high liquidity and reduction in quantum of power purchase (which contributes to 75% to 80% of the total expenditure) to sell the same quantity of power. The Ten Point program chalked out by MSEDCL at the time of segregation includes improvement in collection efficiency through measures like: Reduction of live arrears Reduction of P.D. arrears Zero tolerance for non-payment of bills 100% billing on the basis of actual meter reading and elimination of average billing Use of spot billing and other special billing and collection techniques.
46

The approach to the collection center is the prerequisite. With the collection efficiency achieved over 99% by TPC-D in the past encouraged it to take up benchmarking of distribution network reliability indices with Kinetrics, Canada. The concept of Distribution Collection loss (DCL) was introduced by Hon'ble MERC in the Order dated August 3, 2005 in the matter of Principles and protocols of load shedding The {Clause No. 21 (L-ii)}, of the order dated August 3, 2005: The Commission also agrees that all other Consumers and areas should share in load shedding, in such a manner that the more efficient regions in terms of lower distribution losses and higher collection efficiency should be subjected to lower load shedding . This is based on premise that , in times of scarcity, the available energy should be rationed amongst the consumers such that the more efficient usage is encouraged, since there is no merit in dumping electricity in areas which do not efficiently utilize a scarce resource. The Clause No. 25 (b) of the order dated August 3, 2005 It is necessary to distinguish between areas with better performance, and to undertake lesser load shedding in areas with lower distribution losses and higher collection efficiency, all else being equal. This would be in keeping with the principle that at the time of scarcity, areas where energy is not being efficiently utilize or paid for should rank lower in the rationing order. The Honble Commission has followed the principle of T & D Losses and collection efficiency as the basic parameters to determine the different groups / areas and has accordingly prescribed higher load shedding in areas having higher T & D losses & lower collection efficiency. In the process the Honble Commission has given 70% weightage to distribution loss & 30% weightage to collection efficiency. The losses criteria was considered as prime objective of managing the load, and this was reflected in weightage in the ratio of 70:30 for the Distribution loss and collect ion inefficiency, respectively. Some of the reliability indices are:

4.8.1 System Average Interruption Frequency Index (SAIFI)

This index is designed to give information about the average frequency of interruptions per customer over a pre-defined area, which could be the entire distribution licence area or over smaller portions of the system, such as an operating area or individual feeder.

47

SAIFI = Sum of all customer interruptions/Total number of customers served SAIFI = ( Ni) / NT SAIFI is measured in units of interruptions per customer over a fixed duration, usually a month or a year.

4.8.2 System Average Interruption Duration Index (SAIDI) This index is commonly referred to as customer minutes of interruption and is designed to provide information about the average time the customers are interrupted. SAIDI = Sum of all Customer interruption durations/Total number of customers served SAIDI = ( ri x Ni) / NT SAIDI is measured in units of time, often minutes or hours expressed as interruption duration per customer, over a fixed duration, usually a month or a year.

4.8.3. Customer Average Interruption Duration Index (CAIDI) CAIDI gives the average outage duration that any given customer would experience. CAIDI can also be viewed as the average restoration time.

CAIDI = Sum of all Customer interruption durations/Total number of customer interruptions CAIDI = ( ri x Ni) / ( Ni) = SAIDI / SAIFI CAIDI is measured in units of time, often minutes or hours, over a fixed duration, usually a month or a year. Where, i An interruption event ri Restoration time for each interruption event T Total Ni Number of interrupted customers for each interruption event during reporting period NT Total number of customers served for the area being indexed

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The Central Electricity Authority (CEA) publishes monthly reliability indices for selected towns using following formulae for calculating monthly Consumer and 11kV reliability indices:

1. Consumer Reliability Indices = ((No of consumers x 24 x No of days in that month x 60)-(Outage duration in minutes)) x 100 ----------------------------------------------------------------------------------------------------------------(No of consumers x 24 x No of days in that Month x 60)

2. 11 kV feeder Reliability = ((No of feeders x 24 x No of days in that month x 60)-(Outage duration in minutes)) x 100 ----------------------------------------------------------------------------------------------------------------(No of feeders x 24 x No of days in that Month x 60)

The formulae indicated above are variants of System Average Interruption Duration Index (SAIDI). The accuracy of above mentioned formulae depends on outage duration estimation. However, it is difficult to verify the same, unless consumer indexing and tripping details are maintained properly.

Proposed Mechanism for measuring Network Availability Network Availability is an indicator of how much time the distribution network is available to the supplier for supplying electricity. Hence, it is proposed to adopt a variant of the CEA formulae to indicate Network Availability.

It is important that Utilities maintain data on: o Planned Maintenance Outage details o Load shedding o Force Majeure outages o Trippings

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While calculating the values of SAIDI, the interruptions due to Load Shedding, Interruptions caused by events outside the control of the Network Business and Interruptions due to natural calamities need to be excluded. Proposed Formula is:

Wires Network Availability = (1- (SAIDI / 8760)) x 100 Where, SAIDI = Sum of all Customer interruption durations/Total number of customers served

Wires Network Availability is proposed to be measured over the course of a month and year and will be expressed in percentage terms. As mandated under the Tariff Policy, the Commission has to increasingly focus on regulation of the supply quality and service standards, rather than the regulation of costs. The Standards of Performance stipulated by the various State Electricity Regulatory Commissions (SERCs) for their respective State needs to be adhered to by Utilities strictly. Any variation in this regard has to be considered as a controllable factor, and sharing of gains/losses has to be undertaken. In this context, the FOR Report on MYT framework and Distribution Margin recommends as under:

5.4.2 A Composite Index of Supply Availability and Network Availability should be specified. The SERCs should give appropriate weightage to these two factors. Supply availability should be measured on the basis of power contracted by distribution licencees on a long-term basis for the power procurement plan submitted by the utility. Network availability should be measured on the basis of reliability indices such as SAIDI, CAIDI and SAIFI. Feeder Reliability Indices at 11 KV voltage level as specified by CEA would be appropriate till 100% consumer indexing is achieved in the licencees area as the exact number of effected consumers by any interruption will be known only thereafter. The target achievement for Composite Index of Supply Availability and Network Availability may be specified as 95% for urban areas and 85% for rural areas. However, the SERC may initially fix a lower norm for network availability for rural areas keeping in view the present levels of service with trajectory for time bound improvement. For every 1% under-achievement in composite availability for urban or rural areas, ROE shall be reduced by 0.1% of equity.

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The SERC shall specify the mechanism of computing Composite Index of Supply Availability and Network Availability.(emphasis added) Since, under the proposed framework, the Wires Business and Supply Business are being segregated, the performance indices of both Businesses may be kept separate, rather than determining a Composite Index.

Supply Availability FOR has recommended that SERCs should specify Supply Availability. It is proposed that Supply availability may be measured on the basis of power contracted by distribution licencees on a long-term basis for the power procurement plan submitted by the Utility and may be represented in two sub-heads as under: 1. Base load Supply Availability: This parameter may be used to represent ability of Supply Business to meet its base load requirement. Proposed formula for calculation of this parameter is Base load Supply Availability = (Actual Contracted Base Load Supply in MW) x (No of OffPeak hours)/((Base load in MW) x (No of off Peak hours))

2. Peak load Supply Availability: This parameter may be used to represent the ability of the Supply Business to meet its peak load requirement. Proposed formula for calculation of this parameter is Peak load Supply Availability: (Actual Contracted Peak Load Supply in MW) x (No of Peak hours)/((Peak load in MW) x (No of Peak hours))

Since the peak hours and off-peak hours could vary from one season to another, the above computations may be done in such a manner that the sum of off-peak hours and peak hours is 8760 hours, i.e., the total number of hours in a year. It is proposed that SERCs may specify Index for Supply Availability based on Base load Supply Availability and Peak load Supply Availability, with the weightage for Base load Supply Availability and Peak load Supply Availability being considered as, say, 75% and 25%, i.e., greater emphasis may be placed on meeting base load requirements. It is felt that the Supply Availability for base load should be 100% and concession, if any, may be given in the peak load supply availability, since as per the distribution licence conditions, the licencee is supposed to ensure supply on 24 x 7 basis, and there is no specific reference to load shedding under the EA 2003. It is envisaged that SERCs
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will specify Supply Availability trajectory based on past performance of Supply Business, however, it should not be lower than 90%, and should be progressively increased in a maximum of three years to 95% or 98%. In case the actual contracted supply is higher than the normative level, then the Supplier will be entitled to an incentive, and conversely, if the actual contracted supply is lower than the normative level, then the Supplier will be subjected to a disincentive. Annual Performance Review and Mid terms performance of the licencee forms the basis of computation of many other factors by which the Commission get convinced and award

incentives. This will pave a road for distribution margin discussed about.

4.9 Contribution to Contingency Reserves In accordance with Regulation 36.1 of the MERC MYT Regulations, 2011; the contribution to contingency reserves should be 0.25% to 0.5% of the opening GFA for the financial year. The TPC-D has apportioned 97% expenses to Wire Business and 3% to Supply Business. MSEDCL and RInfa-D apportioned 90% expenses to Wire Business and 10% to Supply Business. The contribution to the GFA as given in Business Plans is as follows:

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Figure 9 Comparison of contribution of the cost centers to the opening GFA

The major contribution is of Plant and Machinery and Cables & Mains i.e., Supply Business and Wire business. In case of Rinfra-D, the contribution of Plant & Machinery is 63% and in case of MSEDCL it is 34% and in case of TPC-D it is 100%. Thus, the generalization would be on the basis of usage of assets, which is computed by the Commission.

4.10. Other Expenses including Incentive and Discounts The other expenses of comprise of the expenditure on DSM, load factor incentive, power factor incentive, interest to suppliers/contractors, rebate to consumers, compensation for injuries to staff and outsiders.
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The apportionment of expenses cannot be justified to be allocated to only retail supply business as the employees contribution, engaged in the wire business is not considered. The distribution margin, in future will depend on the performance/ contribution of the employees in respective businesses to reduce power failures and other innovative methods employed. Hence, the apportionment need be based on wire availability and supply availability factors as discussed earlier. 4.11. Return on Equity The Commission has computed RoE at the rate of 15.5% per annum of the equity for the distribution Wires Business and at the rate of 17.5% per annum on the equity of the Supply Business, respectively, in accordance with the MERC MYT Regulations, on the opening equity of the year and on 50% of the approved levels of asset capitalisation during each year of the Control Period and considering the normative debt: equity ratio as 70:30. The excerpt from FOR report: .However, another objective that is presently not being achieved or targeted in the distribution sector is the linkage of returns with the Availability of the Network and Supply Business. FOR has also recommended that certain Availability norms should be specified for Network Availability and Supply Availability, and the incentive/disincentive should be given in terms of addition/reduction in ROE. Hence, the Distribution Margin approach has been proposed with the objective of improving the hitherto neglected aspect of Availability of the Distribution Business. the incentive/disincentive will be in terms of addition/reduction in percentage of ARR that can be earned/reduced for over-/under- achievement vis--vis the target availability. To start with, the additional ARR may be considered as +0.2% of ARR for every percentage point increase/decrease in Availability vis--vis the normative levels, for Wires Business and Supply Business, separately..

The rational behinds 15.5% for wire business and 17.5% for supply business is also given in the same report which reads as If the Availability goes to 100%, then the maximum Distribution Margin, amounting to +2% of additional return will be available to the Distribution licenceeIf the Availability goes to as low as 80%, then the reduction in ARR will be commensurate with a reduction of maximum 2%
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returnThus, if the RoE for Generation and Transmission Business is considered as 15.5%, and RoE for Distribution Business is considered as 17.5%, then the return for the Distribution Business, after accounting for the Distribution Margin, can vary between 15.5% and 19.5%....

The concept of incentivizing the distribution licencee lies in its performance. The reliability indices of which are given by the Wire Availability and Supply Availability. Thus it can be proposed that the segregation should be based on the consolidated contribution of the wire and supply availability. For example, if we compute RoE at the rate of 15.5% x Wire Availability x (Regulatory Equity in the beginning of the year + Equity portion of Assets Capitalization) for wire business, the Wire ARR reduces by 4.04%. On similar lines computing Supply ARR at the rate of 17.5% would increase Supply ARR by 8.2%. Overall there is reduction in ARR by 2.8%.

4.12. Non tariff income Rate of interest for the investment should be on the basis of CAGR computed by the Commission for the growth in the projection of demand and sales. Rent component, as added only in the wire business by The TPC-G is to be checked. The rent would certainly increase if the retail supply business will prosper in a locality to accommodate the designated staff. The rent component can also be pondered over to be reduced as many inhabitants/flats which are purchased on lease basis by the licencee could actually be purchased, though it solely depends on the capital expenditure business plans of the firms. The other major components include interest on delayed payment and contribution to contingency reserves. The segregation should be based on the expenses accrued in respective businesses

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Chapter 5 Conclusions and Recommendations

5.1

Power Purchase Expenses The apportionment suggested shall be 100% for Supply business.

5.2

Total Capitalization The Apportionment shall be done on actual basis of investment in the respective businesses.

5.3

O&M Expenses The expenses shall be allocated on the basis of number of employees engaged per 1000 number of consumers for the respective businesses as suggested by the Commission.

5.4

A&G Expenses

The expenses shall be allocated on the basis of expenses accrued or incurred for the respective businesses. Say for example, the rent paid for the accommodation of the staff or office premises can be segregated for the employees engaged in the respective businesses, wherever feasible. If segregation to that extent is not possible, then the general method of evaluation can be expenses/(1000xNo. of consumers)

5.5

R&M Expenses R&M expenses shall be allocated as 95% to Wires Business and 5% to Supply Business.

5.6

Depreciation Given the time period for computation of the depreciation value of the assets the segregation of the assets shall be as per the usage in respective businesses. Where this is not possible, general method of segregating the assets voltage wise would be useful.

5.7

Interest on long term loans

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At the point of time while assessing the financial health of the utilities, the business plan of those applicants who plan to procure loans from many financial institutions and short term loans can be checked with more prudence.

5.8

Interest on working capital The method of apportionment shall be suggested to be on the basis of application/usage of the assets in the respective businesses and like the other accounting heads, on the basis of the GFA of the book value of the assets.

5.9

Interest on Consumer security deposit Expenses shall be allocated as 95% to Supply Business and 5% to Wire Business.

5.10

Provision for bad debts. Prudence check required to assess the financial health of the company as well as the expenses be based on the performance of the company.

5.11

Contribution to Contingency Reserves The generalization would be on the basis of usage of assets, which is computed by the Commission. Interest on Contingency reserve can be identified for Wires and Supply Business separately based on GFA.

5.12

Other incentives including Incentives & Discounts The generalization would be on the basis of usage of assets, which is computed by the Commission.

5.13

Return on Equity Segregation shall be based on the consolidated contribution of the wire and supply availability considering the Wire Availability and Supply Availability.

5.14

Non tariff income The segregation shall be based on the expenses accrued in respective businesses.
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5.15

Segregation of accounts for SEZ Ministry of Commerce & Industry (Department of Commerce), Government of India has issued a notification dated 3 March 2010 granting deemed Distribution Licensee status to the SEZ developer.

It shall be recommended to propose the segregation of the wire business and the supply business for the SEZ developer in its tariff petitions.

5.2 Scope for further study The generalized equations formed on the basis of analysis done on the trendlines can be modified with introduction to the partial differentiation of the dependent variables. The independent variable is the function of other dependent variables. The other independent variables, like in case of Power Purchase Expenses and Operation & Maintenance Expenses are functions of many same independent variables. Mathematics provide with the solution by forming partial differential equations for such cases. The access to the methodology adopted by other countries would provide with more insight to the reasoning which would be highly recommended for the model to be adopted in India.

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Chapter 6 Bibliography
(n.d.). Retrieved july 5, 2013, from http://www.mercindia.org.in/# (n.d.). Retrieved july 22, 2013, from www.mahadiscom.in: http://www.mahadiscom.in/MYT-BusinessPlan_01-8april.shtm (n.d.). Retrieved july 10, 2013, http://www.bestundertaking.com/Regulatory_matter.asp from www.bestundertaking.com:

ABPS Infrastructure Advisory Private Limited. (2011). Study on evolving an appropriate model for dsitribution margin. ABPS Infrastructure Advisory Private Limited. AEMO. (2010). Introduction to Australia's National Electricity Market. Australia: Australia Energy market Operator. BERC. (2013). BERC Case No. TP41 of 2012 for ARR for 2013-14. Patna: BERC. Chatterjee, A. K. (2012). Electricity Sector in India. New Delhi: Oxford University Press. CRISIL Infrastructure Advisory. (2010). Discussion paper on operationalizing Parallel Distribution Licencees in the State of Maharashtra. CRISIL Infrastructure Advisory. GERC. (2013). Tariff Order for UGVCL case no. 1283 of 2013. Ahmedabad: GERC. http://www.mercindia.org.in/Orders_2012.htm. (n.d.). www.mercindia.org.in: http://www.mercindia.org.in/# Retrieved july 5, 2013, from

MERC. (2011). Maharashtra Electricity Regulatory Commission (Multi Year Tariff) Regulations 2011. Mumbai: MERC. MERC. (2009). MERC (Uniform Recording, Maintenance and Reporting of Information Regulations) (URIMS), 2009. Mumbai: MERC. PJM. (n.d.). http://www.pjm.com/training/training-material.aspx. Retrieved july 18, 2013, from www.pjm.com: http://www.pjm.com/markets-and-operations/rpm.aspx Pricewaterhousecoopers India Private Limited. (2013). FOR reoprt Feasibility of retail competition in India. Pricewaterhousecoopers India Private Limited. PricewaterhouseCoopers India Private Limited. (2010). Study to evolve an appropriate model of incentive-disincentive mechanism for distribution utilities. PricewaterhouseCoopers India Private Limited. The Electricity Act, 2003. (2013). New Delhi: Universal.

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