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No. MERC/Legal/120/927
May 14, 2004
Shri Jayant Kawale, IAS,
Secretary (Energy),
Industries, Energy & Labour Department,
Mantralaya,
Mumbai 400 032.
Subject: Commission’s
advice on restructuring of MSEB.
I
am directed to refer to your letter No. ECA-1004/CR-8729/NRG-5
dated April 13, 2004 seeking advice on the restructuring of MSEB,
and to the provisions of Section 86(2)(iii) of the Electricity
Act, 2003. The views and advice of the Commission are summarised below.
1.
The Commission
has reviewed the proposed structuring of distribution companies
based on the information available to it.
It appears from the State Government’s letter and the presentation
made to the Commission on April 7, 2004 that the State Government
is in favour of forming two urban and four rural distribution
companies (Option III). The Commission appreciates the need to
focus better on efficiency improvements and enable competitive
response through price reductions to prevent flight to captive
generation or alternate suppliers under open access, as envisaged
in Option III. However,
the Commission advises that all aspects should be reviewed in
a comprehensive manner to ensure that the proposed structure does
not result in any future inflexibility.
2.
There
are several complexities in the restructuring of the sector and
formation of distribution companies.
However, the Commission is keen that the requirement of
the Electricity Act, 2003 on restructuring of MSEB by June 9,
2004 is met. If necessary,
the restructuring can be undertaken in a phased manner, with the
basic requirements for compliance with the statutory provisions
being adhered to initially. Subsequent
restructuring measures can be undertaken to usher a more permanent
sector structure. Section
131 (4) of the Electricity Act, 2003 permits further restructuring
of the successor entities by the State Government.
3.
The State
Government should ensure that the dissimilarities in consumer
mix and operating parameters do not result in a situation that
makes the operations of any particular company unviable.
The State Government reference also mentions the possible
allocation of Power Purchase Agreements (PPA) based on “capacity
to pay” of the distribution companies. While an optimal cost allocation based on “capacity
to pay” may be necessary, certain risk factors would need consideration
(e.g. reliance on specific stations, hydrology risks, risks arising
out of consumer mix changes, etc).
The term of any PPA implemented for the stations of MSEB
and allocated to the successor companies should be restricted
to 3-5 years initially to preserve flexibility for future reallocation.
4.
The State
Government should formulate specific mechanisms as a part of the
restructuring process to ensure that the objectives of end use
tariff uniformity across the State for particular tariff categories
(if any) are not vitiated. For
achieving these objectives, and for ensuring that scheduling and
dispatch is conducted in a manner that does not impose undue transition
costs, it may be beneficial to establish a trading company.
The trading company could be vested with management of
peaking power (including hydro), and for undertaking trading on
behalf of the distribution companies. The State Government may look into this option
in further detail.
5.
Redistribution
of liabilities between entities in order to bridge differences
in financials and performance may be acceptable, but only to a
reasonable extent. In general, the debt allocated should not be
disproportionate to the assets of the distribution company.
6.
The Commission
recognises the need to consider the starting performance level
on aspects like system loss and collection efficiency (which will
vary between the distribution companies) and also different improvement
trajectories. The Commission would be introducing suitable incentive frameworks
under a comprehensive Multi-Year Tariff (MYT) to encourage the
poorly performing areas to improve their efficiency.
However, it should be noted that MYT frameworks typically
do not specify the end use rates, but a transparent mechanism
for revenue requirement and/or rate determination, and for incentivising
superior performance.
7.
The State
Government should consider innovative arrangements for rural distribution
management through franchising arrangements to reduce the high
level of losses in the rural areas.
The Commission notes with concern that certain rural circles
have Aggregate Technical and Commercial Losses (AT&C) losses
in excess of 80%.
8.
The Commission
is in agreement with the approach of requiring the State Transmission
Utility (STU) to operate the State Load Despatch Centre (SLDC)
for the present subject to maintenance of separate accounts. However, while restructuring MSEB, the State
Government should consider appropriate organisation structures
for these functions. The
State Government should also establish a representative body from
the industry to oversee the operations of the SLDC.
9.
On the
matter of the license area of the second and subsequent distribution
licensees, the Commission will be guided by the provisions of
the Electricity Act, 2003 and the policies formulated under it. The intent of the Act is to promote competition and the Commission
is averse to recommending any structural measures that could be
perceived to be negation of this intent in any manner.
10.
The Commission
is formulating regulations on open access for notification by
June 9, 2004. The regulations
may envisage suitable studies over a period of time for introducing
open access in a phased manner, and also the principles of computation
of the surcharge for cross-subsidy.
Insofar as rationalisation of tariffs is concerned, the
philosophy of the Commission is well articulated in all its tariff
Orders. It has undertaken several measures and progressively rationalised
tariff structures and charges. The Commission remains committed to the implementation
of cost based tariffs and progressive reduction and elimination
of cross-subsidies.
11.
Timely
payment of subsidy will be critical to the financial health of
the successor entities. Given that cross-subsidy is to be phased
out within a reasonable timeframe, targeted subsidy would be the
primary mechanism for the entities to recover the costs of supply
to particular consumer categories. Upfront commitment on subsidies would also
provide the distribution companies the necessary comfort on operations
and investments. The State
Government should also adequately consider the investments required
by the distribution companies to reduce losses, improve quality
of supply and implement open access.
12.
Section
131 (2) of the Electricity Act, 2003 permits valuation of assets
based on revenue potential. However,
determination of the revenue potential should be scientific and
not result in ad-hoc asset valuation.
Care should be taken that there is no tariff shock on this
account. Discrepancies between the financial values of assets and physical
assets transferred should be prevented.
13.
It is
undesirable to carry forward the high level of MSEB receivables
to the successor entities. Suitable provisioning of overdue receivables
should be made to ensure that the distribution companies are not
unduly burdened with the legacy of the past.
The State Government must also ensure that dues of MSEB
from State agencies are suitably adjusted in the restructuring
process.
14.
The Commission
is of the opinion that the restructured entities should not be
burdened with contingent liabilities. This has been the practice
in several States that have restructured in the past.
The investments/liabilities due to the Dabhol Power Company
should be kept out of the restructuring exercise.
This is consistent with the approach adopted by the Commission
in its tariff Orders.
15.
The Commission
is concerned that, unless adequate rules, systems and processes
are implemented by MSEB’s successor entities, the procurement
costs could balloon on account of inefficient dispatch, thus affecting
the consumer. The Commission is of the view that the Availability
Based Tariffs (ABT) arrangements would need to be extended to
the in-State generators and loads for handling imbalances vis-à-vis
schedules and settlement thereof.
The ABT mechanism would also serve as a trading platform
and would thus promote efficiency and market development. Installation
of meters of necessary accuracy class and adequate features for
telemetry would also be essential, both for energy accounting
and for load management.
16.
The State
Government must ensure that the MSEB and its successor entities
are adequately aware of their responsibilities consequent to restructuring
and are equipped to deal with the complexities. Significant capacity
development will be necessary in the successor entities. This
poses a great challenge, and the Commission is concerned about
whether the MSEB, given its past operational history, will be
equal to the task. The
State Government should formulate an overall reform implementation
plan to ensure that the benefits of reform and restructuring reach
the end consumer.
17.
The views
of the Commission on the specific issues referred by the State
Government are further elaborated in Annexure I to this letter. The detailed views and advice of the Commission are set out at Annexure
II. This letter must,
therefore be read in conjunction with the contents of these Annexures.
With
regards,
Yours faithfully,
Sd/-
(A.M. Khan)
Secretary, MERC
Encl:
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