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No. MERC/Legal/120/927                                                                               May 14, 2004

 

Shri Jayant Kawale, IAS,

Secretary (Energy),

Industries, Energy & Labour Department,

Government of Maharashtra,

Mantralaya,

Mumbai 400 032.

 

Subject:        Commission’s advice on restructuring of MSEB.

 

Sir,

 

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-ŕ-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: 

Annexure – I - (html version) Annexure – I - (pdf version) Annexure – I - (zip version)

Annexure –II - (html version)

Annexure –II - (pdf version)

Annexure –II - (zip version)


Commission's advice on restructuring of MSEB.
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