Wednesday, July 07, 2010

MERC’s Public Hearing in the matter of Govt of Maharashtra’s Memorandum Case No. 13 of 2010

• The Present Situation
• CriticalIssues – Process of Law
– Competition – Power Purchase – Cross Subsidy
•• Summary 02


The Present Situation (1/4)
• The present situation in Mumbai is a unique one – For the first time in the country, consumers have a REAL CHOICE of electricity supplier
– Implemented only after Supreme Court restated & reiterated TPC’s status as a retail supply licensee
• About1.5% of RINFRA’s customers in the Mumbai suburbs have shifted to TPC
– To take advantage of lower rates
– Since the advantage is greater for higher consumption users, most of these 40,000 users are understandably in the higher usage bracket

The Present Situation (2/4)
• As a result, RINFRA’s consumer mix has changed
– Those paying higher tariffs (and consequently ‘subsidizing’ the lower-end users) have moved away apparently leaving RINFRA with a ‘revenue gap’
• TPC has informed RINFRA that it would no longer supply it with power

RINFRA does not have a LT-PPA with TPC and would need to buy Short Term power at (obviously) higher rates. RINFRA may also have trouble actually securing the power – leading to power cuts ‘load shedding’. RINFRA is ‘threatening’ to increase the rates for its 28 Lakh consumers

The Present Situation (3/4)
• RINFRA’s ‘threats’ prompts (!) GOM to wake up – Though the GOM did nothing to increase generation for years, the GOM DOES care for its vote bank!
• GOM forms a special ‘committee’ which concludes that MERC must ‘protect consumer interest’

Issues a formal ‘Memorandum’ (legal status?) to MERC Memorandum issued is not under any specific section of the EA 2003 Unlike the earlier ‘direction’ issued u/s 108 to MERC asking it to investigate RINFRA’s functioning w.r.t. efficient functioning, capital expenditure, power purchase, etc.

The Present Situation (4/4)
• MERC calls for a Public Hearing, with the following ‘Objectives’:
– The role of the Hon’ble Commission to take measures in regard to the broad principles indicated in the ‘Memorandum’ dated 7th May 2010 along with the report of the Committee;
– The statutory provisions under which the Hon’ble Commission can take measures, if any;
– The measures that the Hon’ble Commission can take which would be suitable in public interest.

The Issue:

Process of Law (1/3)
• Central Government promulgated the EA 2003 on 10th June, 2003
• This sector that has been abused by the State Govts, just to get themselves elected, term after term, by giving free electricity to their vote-banks.
• It is precisely with this intent that the EA 2003 has sought to limit, as far as possible, the powers of the State Government with respect to running this sector

Process of Law (2/3)
There is enough of Legislation that empowers MERC
– To ensure that Competition is introduced and promoted – To ensure that consumer interest is protected
There is also enough to ensure that generation companies stay free of Regulatory control Section11 and Section60 have been chewed and masticated enough and I will not dwell on them
– Other than simply stating that the GOM cannot invoke Section 11 in this present case
– Unless WAR breaks out or there is a National calamity!

Process of Law (3/3)
After the EA 2003 came in to existence, MERChad passed an Order preventing TPC from retail supply
– Which was proven to be grossly incorrect by the Supreme Court
– I don’t recall GOM running around asking MERC to invoke Section 60 (abuse of market dominance) on REL/RINFRA! For over FIVE years, MERC’s wrong decision prevented Mumbai’s consumers from the legitimate choice that they had WHO WILL PAY FOR THIS???

The Issue:

Competition (1/3)
The EA 2003 encourages competition
– Has empowered the ERCs with enough Sections to go ahead and implement this Competition MUST be introduced and promoted, in order to protect consumer interest
– Also mentioned in the preamble of the EA 2003 We have enough proof that this is something we HAVE to do!
– Time & again, various legislations and Court rulings have enough references to Open Access, Parallel Licensing, Wheeling Charges, Distribution Franchising (rural areas)

Competition (2/3)
• What do we mean by ‘Competition’ ? – Simply put, it is the presence of more than one supplier – Through parallel licensing, open access, etc.
• Competition is the availability of CHOICE to the consumer

Currently, this choice is limited to SUPPLIER In future it could also be choice of ‘tariff plan’ (as in mobile phones, airline tickets, etc.)
Reliability charges (higher payment for continuous supply) is a step in that direction – but its implementation by MERC is flawed (if supply is discontinued even for a few seconds, the user still pays!!)

Competition (3/3)
Does Competition lower the tariff for Consumers?
Does Competition prevent development of the electricity industry?
Do we have encouraging results from what limited Competition has happened up to now?
Should MERC encourage MORE Competition?
Should the GOM be doing anything that prevents increased Competition?
Do I need to bother answering these questions?

The Issue:

Power Purchase (1/7)
A major issue of the present situation is the availability of power
– There is a nationwide shortage – Discoms need to enter into LTPPAs to secure their needs and protect their consumers – Garnering as much of (relatively) cheap power is critical ERCs should ensure that discoms have signed PPAs with suppliers. GOM should create an investment -friendly atmosphere to encourage generation plants.

Power Purchase (2/7)
• Incidentally, when the GOM ordered MERC u/s 108, to “investigate” RINFRA (on 25th June 2009), power procurement costs of RINFRA was a major point.

“...whether M/s. Reliance Infrastructure Ltd. has discharged its duties as envisaged in the Act in the most economical and efficient manner so as to result in unnecessary avoidable burden on the consumers of that area and taken such further action as may be considered necessary.”

Power Purchase (3/7)
Also, when MERC actually ordered the investigation of RINFRA (on 8th Sep 2009), it stated:
– “Commission is therefore satisfied of the necessity to investigate into the procedure adopted by R-Infra-D and the reasons for procurement or non-procurement of power through long term power purchase agreements and related transactions as reflected in the books of accounts maintained by RInfra-D to ensure the optimal impact on cost of supply and tariff charged by RInfra-D.”
So it is a well- established and well- accepted fact (by the GOM and MERC) that RINFRA’s power procurement has not been judicious

Power Purchase (4/7)
I am not going to go in to the sequence of events of the (non-starter) PPA between TPC & REL/RINFRA
– Both entities have spent enough of money trying to prove their own side right The fact remains that there is NO legal and binding agreement between them
– Which is primarily the most important responsibility of a Distribution company Therefore,despiteeverythingthe‘blame’falls directly on REL/RINFRA

Power Purchase (5/7)
• MERC’sownOrderdated6-Nov-2007inCaseNo.87 of 2006, Case No. 88 of 2006 & Case No. 30 of 2007,

“REL’s recalcitrant attitude in seeking approval of the terms and conditions of its power procurement, deserves to be deprecated and the Commission administers a warning on REL.”
“ is for REL to file the power purchase agreements for purchase of power from generating companies early...for approval of the Commission as prescribed by the provisions of The Electricity Act 2003 and in terms of the Regulations framed by the Commission. The Commission may take stern action in the event of such failure on the part of REL, in future.”

Power Purchase (6/7)
• We were happy at one point when REL started setting up so many power plants across the country
– We consumers thought that finally REL’s consumers would not be dependant on TPC
• Alas, REL’s management had different plans!!! – They ‘hived off’ the new business into a different company, REL POWER, and got it listed with great fanfare
– This built up huge wealth for the ADAG promoter group, and deprived REL’s shareholders
• The immediate market crash was like Divine justice!

Power Purchase (7/7)
Prayas mentioned that 28,000 MW of generation capacity is being built by REL POWER
– If this were still with RINFRA, maybe its Mumbai’s consumers would not have so much to worry!
– Interestingly, hadn’t REL built up their finances ONLY from the Mumbai electricity consumers??
Another aspect, which has not been highlighted is the need of RINFRA’s Mumbai Metro One project
– It is a known fact that this will be operational within the next 12 months
May be RINFRA needs cheap power for Metro One and is using the excuse of Mumbai consumers

The Issue:

Cross Subsidy (1/5)
• Whatiscross-subsidy?
– Same category: A higher consumption consumer will pay tariff at a higher rate – which allows the discom to sell power at a lower-than-average-cost rate to lower end consumers
– Different category: A higher ‘category’ consumer like a ‘Commercial’ consumer will be paying at a higher rate and again, this will help the discom to sell at lower rates to some other categories
• Therefore,amountofsubsidylargelydependsupon power purchase cost and the “mix” of consumers (within categories and of different categories)

Cross Subsidy (2/5)
The consumer- mix for all four suppliers(TPC,BEST, RINFRA, MSEDCL) is very different!
– Trying to draw parallels between these will not help us arrive at any constructive conclusion
The content ion is that if higher-end consumers move away, then RINFRA will not get higher revenue to subsidise (fund) its lower end consumers
– Since, in the present competitive situation, RINFRA’s ‘higher end’ consumers are migrating over to TPC

Cross Subsidy (3/5)
• In order to‘ compensate’ for this loss, RINFRA is proposing the levy of a cross-subsidy surcharge!
– Now, if this were done, it would put an additional ‘price’ on migrating away
– Effectively reducing the competitive environment !!
• MERC has permitted levy of ‘Wheeling Charges’ on consumers who switchover

By Law, this only when the load is 1 MVa and above, but here switchover consumers are paying for it even if their consumption is ONE single unit!!
Which is why there is a threshold & its NOT economical for lower end consumers to switch!!

Cross Subsidy (4/5)
Since it is uneconomical for lower end consumers to switch, they CHOOSE to continue with RINFRA
– We MUST not take away the CHOICE of lower end consumers!
Incidentally, when the higher end consumers migrated away (switched to TPC), didn’t the LOAD also go down for RINFRA??
– Since it was buying extra power at higher rate from external sources, with the load going down now, wouldn’t they need LESS of this expensive power?
These details need to be made public by RINFRA and certified by MERC

Cross Subsidy (5/5)
• If we go begin the unhealthy practice of Cross- subsidy surcharge, there is NO end to it!
– It already exists between consumers in one category and between categories
– Then we will extend it to between TPC & RINFRA ... and later between TPC & BEST, then TPC & MSEDCL (?)
– How about between MUMBAI & Rest of Maharashtra?
– Is the GOM not worried about the State where consumers are facing 12-14 hours of power cut??
– Where do we draw the line??
• Such a surcharge is not only illegal, but also unwarranted!


Summary (1/3)
New classifications of consumers have come up
– RINFRA consumer, TPC consumer, BEST consumer, Switchover consumer, Subsidised/Subsidising consumer
The old “Divide-and-rule” policy is being played out on consumers through media campaigns
– 28 Lakh RINFRA consumers are being incited against 40,000 switchover consumers
Just like the GOM is pitting a few thousand ICSE/CBSE students against Lakhs of SSC students
– The net result is the SAME: ALL students are suffering And here ALL consumers are suffering!

Summary (2/3)
GOM must not be allowed to set/mandate any kind of tariff or blanket subsidy
– There should also be NO Uniform Tariff, as this will KILL consumer choice
In Uniform Tariff via subsidy the GOM will need to pay the discom directly and will eventually collect this via taxes from us!
– The amount of taxes could be much higher and there would be no way to correlate this with subsidy given
– Inefficient, recalcitrant and derelict utilities will continue to benefit!

Summary (3/3)
MERC should ensure that RINFRA ties up its power procurement needs from ‘outside sources’ in a time bound manner
– Stiff financial penalties for failure to comply Penalty in the form of disallowing any tariff hike and asking RINFRA to ‘bear the losses’ Dual benefits:
– Consumers will be ensured of power – They will also not suffer on account of higher tariff. Thus, achieving the objective of protecting consumer interest

Tamasoma jyotir gamaya
(From darkness unto light)

Sandeep N. Ohri
Authorised Consumer Representative for this Case

credits to JNMM

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