Effects of Multiple Distribution Licensee

EFFECTS OF MULTIPLE DISTRIBUTION EFFECTS OF MULTIPLE DISTRIBUTION EFFECTS OF MULTIPLE DISTRIBUTION EFFECTS OF MULTIPLE DISTRIBUTION

LICENSES IN ONE GEOGRAPHILICENSES IN ONE GEOGRAPHILICENSES IN ONE GEOGRAPHILICENSES IN ONE GEOGRAPHICAL CAL CAL CAL

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World Trade Institute

Post Graduate Diploma in Electricity Regulation

Effects of Multiple Distribution Licenses in One Geographical Area in Major Cities

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Acknowledgement

We would like to express our gratitude to those precious without whose kind cooperation; this project

would not have been possible.

We would like to express our gratitude to Shri. Vijay Sonavane (Member, MERC), Shri. Rajendra

Ambekar (Director-Tariff, MERC) and Shri. Prafulla Varhade (Director-Electrical Engineering,

MERC) for their kind cooperation and providing us with valuable information throughout the entire

course of PGDER at WTC, Mumbai. We have been highly inspired by the consultative process on

implementation of Electricity Act, 2003 in true during the lectures in PGDER program by Shri. V. P.

Raja (Chairman, MERC).

We would also like to express our sincere gratitude towards Shri. Bose Nair & Mr. Bhupendra Vadhe

for rendering us that kind cooperation, excellent course arrangement and guidance during the period of

our course conducted at WTI, Mumbai.

We are also thankful to our batch mates and all those who have helped us knowingly and unknowingly

to script and compile this project report.


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List of Team Members

Sr. No. Name of Members Organisation

1. Mr. T.Muraleedharan The Tata Power Company Limited

2. Mr. Abhinav Sharma The Tata Power Company Limited

3. Mr. Amit Kadam Maharashtra Electricity Regulatory Commission

4. Mr. Ranjeet Singh World Institute of Sustainable Energy

5. Mr. Pradeep Kumar Darashaw & Co Pvt.Ltd.


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Chapter I : Why the need of Multiple Licensee has evolved 5

Chapter II : Provisions of the Electricity Act 2003 & Regulations on multiple license 6

Chapter III : Concept of Geographical Area 7

Chapter IV : Different models of multiple Licensee which are existing in India 8-18

Chapter V : Looking Abroad 19-22

Chapter VI : Effects of Multiple Licensees in a Geographical Area 23 -28

Chapter VII : How to counter the challenges 28-31

Conclusion Key messages 32

Bibliography 33

TABLE OF CONTENTS


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Chapter I: Why the need of multiple licence has evolved

Reliable supply of electricity is one of the basic assumptions in terms of economic

progress of any Country. The level of the economic development of a Country determines

the level of electricity consumption. To avoid becoming a holdout for economy, the

development of power industry should go ahead of the economic development, so that the

industry would be ready to meet the development needs of the Country, its States and

their Cities. This task is especially difficult for a huge and the developing Country like-

India, which lead to inevitable dependence on energy imports wherein parallel

licensing is one of the options. Thus, implementing the concept of Parallel Licensing

major cities needs to be considered.


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Chapter II: Provisions of the Electricty Act 2003 &

Regulations on multiple licenses

In case of parallel distribution licensees, the relevant provision of the Act is:

“ ..14…..

…..Provided also that the Appropriate Commission may grant a licence to two or more

persons for distribution of electricity through their own distribution system within the

same area, subject to the conditions that the applicant for grant of license within the

same area shall, without prejudice to the other conditions or requirements under this Act,

comply with the additional requirements (including the capital adequacy, credit-

worthiness, 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 license, shall be

refused grant of license on the ground that there already exists a licensee in the same

area for the same purpose:…”

With respect to parallel distribution licensees, during 2003, various players filed

applications for grant of distribution licenses, using their own distribution network, for

various areas under the provisions of the Electricity Act, 2003. However, due to various

reasons including non-submission of network rollout plan and availability of information

from the incumbent licensee, the process has not resulted in the issuance of any new

parallel distribution license. However, the recent Supreme Court judgement and the

commercial arrangement between RInfra-D and TPC-D have helped operationalization

of parallel distribution in a unique way, i.e., without duplicating the network.

MERC has already framed open access regulations which allow open access to

consumers with contract demand of not less than 1 MVA. However, if required, MERC

can allow open access at consumer below such contract demand also in order to give

consumers choice or to introduce further competition in the distribution sector.


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Chapter III : Concept of geographical area:

As the topic of project suggest, we need to study the effects of multiple licensees in a

geographical area. For this purpose we need to ponder upon the concept of geographical

area.

The geographical area that can be considered may be:

• A city.

• Some parts of city.

• Some revenue divisions in a state.

• A whole state.

In the present context we are considering the Major cities which have seen the reforms or

are in the process of reforms. In further sections we will look into different models of

multiple licensees in the types of geographical areas discussed above.


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Chapter IV : Different models of multiple licensees which

are existing in India:

� A tale of 5 Cities:

1. Delhi

2. Jamshedpur

3. Bhiwandi

4. Kanpur

5. Mumbai

1. Delhi:

The Delhi Vidyut Board (DVB) was a State Electricity Board set up in 1997 under the

Electricity (Supply) Act, 1948, succeeding the Delhi Electricity Supply Undertaking

(DESU), which had existed since 1957 as a wing of the Municipal Corporation of Delhi;

it was an integrated utility with generation, transmission and distribution functions

serving all of Delhi except the New Delhi Municipal Corporation (NDMC) and MES

(Cantonment) areas, to which it supplied power in bulk.

One of the first major steps taken by the new Government of the National Capital

Territory of Delhi was to bring out a Strategy Paper on Power Sector Reforms in

February 1999. There followed a unique, innovative yet fast track reform process that

ultimately resulted in the unbundling of DVB and privatisation of distribution with effect

from 1st July 2002. The Delhi power sector reforms are now being widely acclaimed as

marking a breakthrough.

Today in effect there are 4 licensees in Delhi geographical region i.e BSES Yamuna

Power Ltd. (BYPL), BSES Rajdhani Power Ltd. (BRPL), North Delhi Power Ltd.


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(NDPL). & New Delhi Municipal Corporation (NDMC) (for lutynes Delhi). The Delhi

model is illustrated in the pictures below;

The model in Delhi is basically an example of privitasation. Though there exist

multiple licensees in a single geographical area i.e. National Capital Territory of

Delhi, but their operating areas are mutually exclusive & non-overlapping. Hence

there is no element of competition between the utilities.

The Delhi Model


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2. Jamshedpur:

In the city of Jamshedpur in Jharkhand a second distribution license was granted to

JUSCO a subsidiary of Tata Steel for supply of electricity in for the revenue district of

Saraikela-Kharsawan.

Jamshedpur Utilities and Services Company Limited (JUSCO) is a company incorporated

in August 2003 under the provisions of The Companies Act, 1956 and is a wholly owned

subsidiary of Tata Steel Limited. The Seraikela-Kharsawan district of Jharkhand is

contiguous to JUSCO’s service area of Jamshedpur.

JUSCO was incorporated primarily to cater the infrastructure and utility services to the

city of Jamshedpur. The Company's services encompass Water and Waste Water

Management, Power Services, Public Health & Horticulture Services, and Planning

Engineering & Construction. JUSCO conforms to the standards of ISO-140001

(Environmental Management System) and ISO-9001 (Quality Management System).

Power Service Division of JUSCO is engaged in distribution of electricity for the city of

Jamshedpur – as a Power Distribution Franchisee of Tata Steel Limited (Licensee of

Jamshedpur) as well as for the revenue district of Saraikela – Kharasawan, in the capacity

of Power Distribution Licensee.

Under the provisions of Electricity Act, 2003, JUSCO applied for Power Distribution

License to Jharkhand State Electricity Regulatory Commission (hereinafter referred as

Hon’ble Commission) for the revenue district of Saraikela–Kharasawan of Jharkhand

State. This area is geographically contiguous to the Jamshedpur City. The Hon’ble

Commission, in its landmark decision has granted JUSCO, a Second License for the area

(JSEB being the first Licensee) in December, 2006.

In the Jamshedpur model due to the historic background, Tata Steel was supplying

power to the township of Jamshedpur and the surrounding area and the licensee in


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the state i.e. Jharkhand State Electricity Board was not involved in the distribution

activities in that area. The JUSCO Ltd was appointed as a second licensee in the

area for supplying electricity to the areas excluding township. So we infer that the

operation two licensees were mutually exclusive of each other in-spite of an overlap,

hence this example also doesn’t involve any competition.

The Jamshedpur Model


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3. Bhiwandi:

Bhiwandi is a major textile hub of western India having one third of the country’s power

looms. The estimated demand in the circle is 750 MVA with an annual power input of

around 2600 million units. About 55% of the total sales are to the power loom sector, and

government of Maharashtra provides significant subsidy to these consumers. The town

has a reputation as a chronic defaulter of power bills for more than 10 years and has a

record of very high level of Aggregate technical and commercial (AT&C) losses (around

60% in the year 2006-07).

The input based franchisee model was hoped to bring in certain amount of fixed revenue

from circle. MSEDCL signed Distribution franchisee Agreement (DFA) with Torrent in

December 2006 and TPL took over operation of Bhiwandi circle from 26th

January 2007.

For its entire term, i.e. 10 years in this case, franchisee is responsible for all the functions

of the distribution licensee within that area. The consumers in the franchisee area are

charged same tariff as applicable to consumers of rest of licensee area. The DFA gives

complete autonomy to the franchisee in planning and execution of capital expenditure

without requiring any regulatory approval. At the end of the term, the licensee will

reimburse the franchisee at depreciated cost of the assets.

Franchisee makes payments to licensee on weekly basis. The revenue earned by licensee

is indexed to ‘input rate’ as agreed between the two parties and tariff indexing ratio. The

tariff indexing ratio is calculated as ratio of average billing rate (ABR) of the given

month or year to the average billing rate of base year (FY 05-06). ABR is calculated as

sum total of product of category wise, slab wise sales and their respective tariff, divided

by total sales to the franchisee area. It covers all aspects of tariff such as fuel adjustment

charges, additional supply charge, reliability charge, etc. The DFA has provisions for

various independent audits (by one of the big four audit firms) such as annual ABR audit,


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quarterly audit of subsidy claims, inventory status audit, audit of the franchisee’s billing

system and database, etc.

The city of Bhiwandi has seen a drastic change in the aggregate technical &

commercial losses and the quality of supply. But the change was due to a different

kind of competition i.e. the franchisee was appointed by a process of competitive

bidding with defined loss reduction targets. So the case of Bhiwandi, though the

licensee was MSEDCL the operations in the area were taken up by the franchisee.

Thus in the above case the there was not a direct competition between the licensee &

the franchisee because the area of operation was different.

The Bhiwandi Franchisee Model


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4. Kanpur

Kanpur Electricity Supply Company Limited is a company incorporated under the

Companies Act, 1956 which is entrusted with the business of supply of electrical energy

and authorized to maintain a distribution system for supplying electricity to the

consumers in its area of supply.

Consequent to Uttar Pradesh Electricity Reforms Transfer Scheme 2000, the erstwhile

UPSEB was reorganized into three corporations; Uttar Pradesh Power Corporation

Limited (UPPCL), to carry out the business of transmission, distribution and retail

supply, Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited (UPRVUNL), to carry out

thermal generation, and Uttar Pradesh Jal Vidyut Nigam Limited (UPJVNL), to carry out

hydro generation in the State.


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In addition, the Government of Uttar Pradesh transferred Tanda Thermal Power Station

to the National Thermal Power Corporation (NTPC) and the Kanpur Electricity Supply

Area was separated as a subsidiary company of UPPCL and christened The Kanpur

Electricity Supply Company Limited (KESCO) vide Uttar Pradesh Transfer of Kesa Zone

Electricity Distribution Undertaking Scheme, 2000 notification No. 186/XXIV – 1‐ 2000

dated January 15th, 2000.

In this case KESCO came into existence due to the restructuring of UP State

Electricity Board and existed as a separate licensee with the other licensee UPPCL

in the state of UP. In this case also though the licensees existed in the same

geographical area i.e. the State of UP, but KESCO has a distinct area of operation

than UPPCL hence not amounting to any type of competition.

The Kanpur Model


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And finally…..The Curious Case of Island city & Suburbs of Mumbai….

In Mumbai the capital city of Maharashtra there are four Distribution Licensees viz;

a) Brihan Mumbai Electricity Supply and Transport Undertaking (“BEST”),

b) Reliance Infrastructure Ltd. (Distribution business), (“RInfra–D”),

c) The Tata Power Company Ltd. (Distribution business) (“TPC-D”), and

d) Maharashtra State Electricity Distribution Co. Ltd. (“MSEDCL”).

These licensees hold the Distribution License to distribute electricity within the area

specified in their respective license allotted to them by the Maharashtra Electricity

Regulatory Commission (MERC) and other legal bodies. The three major licensees in

Mumbai cover the whole Mumbai differentiating their area license depending upon the

geographical differences such as RInfra-D covering the Mumbai Suburbs, BEST having

Island City of Mumbai under their Licensee and TPC-D 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. These happen to be covering an area of

about 384 sq.km., 70 sq.km., and 454 sq.km., respectively.

The Supreme Court of India, in its judgement dated 8th July 2008, held that TPC-D is

entitled to supply electrical energy in retail, directly to all consumers within its area of

supply, as stipulated in its licenses, thereby confirming TPC-D as a distribution licensee

for the entire city of Mumbai. Subsequently, on 20th, August, 2008, the Commission

notified the MERC (Specific Conditions of Distribution License applicable to The Tata

Power Company Limited) Regulations, 2008, effectively confirming TPC-D as a

distribution licensee for the entire city of Mumbai, covering the license areas of both

BEST and RInfra-D. TPC-D’s distribution license is valid up to 15th August, 2014. Thus,

neither RInfra-D nor BEST have a monopoly distribution license in their respective

licence areas. Subsequent to Supreme Court order, TPC- D and R Infra-D entered into


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discussion to effect supply to changeover consumers. The discussions culminated in TPC

filing a petition before MERC (Case 50 of 2009) The “Interim Order” of MERC in the

said case facilitated the development of parallel distribution, utilizing other licensees’

network.

Since there are four different Distribution Licensees holder for supplying electricity

confining to Mumbai area there are multiple Distribution Licensee in each area. With an

obligation to supply electricity to all consumers who demand electricity supply it has

turned mandatory to explore the possibilities of utilizing the distribution network of

existing Distribution Licensee or to develop their own infrastructure/ network to execute

the supply obligation.

The model that has come up in the city of Mumbai is an ideal example of

competition among different players in a geographical area having overlapping

regions of operation. This not only gives consumers choice and quickly introduces

retail competition, but does so without replicating network infrastructure.

The Experience so far with the scenario in Mumbai:

This section summarizes the different issues which were faced by the licensees in the

period so far after the changeover order came:

• Metering & billing: After the process of changeover started there were many

glitches in the process of metering & billing. There were delays in raising of bills

to the consumers. Due to this the wheeling charge could not be recovered by the

WDL in time & was forced to carry the cost of inefficiency of the SDL and also

affects the WDL during the energy settlement in the IMSM imbalance pool. In the

metering part the problems arose with the incompatibility of meters to the billing

system of SDL. The meters of both licensees did not have similar physical &

electrical dimensions hence added to further cost & problems.


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• Energy Accounting: SDL had problems in sharing the appropriate Data for meter

readings of energy sales to changeover customers with WDL & SLDC.

• Wheeling Charges: Changeover order clarifies the reading of meter will be

considered for raising the invoice. Accordingly SDL raised invoice on changeover

consumers on reading taken by them. There was no mechanism for WDL to raise

invoice for wheeling charges based on actual meter readings.

• Customer service & Interface: The problems relating to network as well as

supply are routed through the SDL. But this system has proven to be problematic

to both the licensees as well as consumers. There was a compromise in the

standards of performance practiced by the Mumbai Utilities due to the above issue.

The issues like those explained above are a part & parcel of any new reform

happening in the power distribution industry. These issues will get resolved as

the processes evolve with time.

Mumbai will certainly prove to be an ideal example for the competition in the

distribution industry & the interests of consumer & utilities will be upheld.

The Mumbai Model


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Chapter V: Looking Abroad

I. Model in United Kingdom:

The United Kingdom (“UK”) electricity industry was one of the first to experience

reforms, which became a model for the remaining countries. restructuring of the market

under the Utilities Act 2000, the public electricity suppliers were required to have

separate licenses for their supply business and distribution networks, which were

renamed as distribution network operators (DNOs). Presently, there are two types of

electricity licenses in Electricity retail business:

a. Distribution - Allows the licensee 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.

b. Supply – Allows the licensee 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 investigations and consultations on the performance of the domestic and the

non-domestic markets, when necessary.

The distribution lines business is considered a natural monopoly and is a licensed activity

in UK. There are fourteen licensed 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 licenses for the provision


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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 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

licenses. 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.


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Competition in metering services also helps suppliers to deliver more innovative products

to customers. This competitive market in retail supply has developed well.

The United Kingdom Model

II. Model in Australia.

A two-tier system has been established for electricity distribution and supply in each

state.

‘First tier’ retailers: These are attached to a distribution business with a monopoly

geographical franchise in that state. First-tier retailers can sell electricity to customers

throughout the state, whether or not the customers are located within the accompanying

distribution franchise. The retail business is “ring-fenced” from the distribution business

(i.e., established as a separate accounting entity within one holding company). The first-

tier retailer is akin to the widely known concept of “Utility of last resort.”


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‘Second-tier’ retailers: These are stand-alone businesses not attached to a distribution

business in the relevant state. Second-tier retailers can also sell electricity to customers

throughout the state. A second tier retailer in one state may be a first-tier retailer in

another state.

The major Australian wholesale electricity market, the National Electricity Market

(NEM), comprises the sale of bulk electricity by generators to electricity retailers and

large end-use customers in southern and eastern Australia. The NEM operates in the

states of New South Wales, Victoria, Queensland, South Australia and Tasmania and in

the Australian Capital Territory.

The retail electricity market comprises the sale of electricity by retailers to end-use

customers. Within the area covered by the NEM, the retail market is partly competitive

and partly operates on a franchise basis. In the competitive retail market, electricity

retailers compete to supply to the vast majority of large customers who choose not to

purchase directly from the wholesale market, and to smaller customers who opt out of

purchasing electricity from their first-tier retailer. In most jurisdictions in which the NEM

operates, retailers can sell electricity to all end-use customers down to the household

level, i.e., all customers are contestable. Where this is the case, customers may continue

purchasing electricity from their local first-tier retailer; the tariffs they pay are controlled

by the electricity industry regulator. Alternatively, customers can choose to purchase

electricity under a competitive retail contract from a first or second-tier retailer in their

state. There is no controls on prices under such competitive retail contracts

Under this structure, for the retail electricity market, retailers actually shield retail

customers from the price volatility in the NEM wholesale spot market. In effect, retailers

provide price risk insurance for retail customers with the retail price being paid by the

customer, including an insurance premium component.


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Chapter VI: Effects of Multiple licensees in a geographical

area:

A. Positive effects:

1. Choice of supplier. Multiple licenses in one geographical area bring a great

opportunity for the customers .He will be paying less than the present and good

regulatory mechanism shall ensure it to continue the trend.

2. Promoting Competition. As per the electricity act, encouraging the competition in

terms of efficiency of utilities operations and thereby the end user is most

benefitted. While competition in electricity distribution is likely to bring in lesser

tariffs, better services to consumers, more innovativeness among players,

appropriate technology to lower prices & improve services. It will lead to greater

efficiency in procurement thus optimizing a major component of final tariff.

3. Phasing out of Monopoly. In a deregulated retail supply market consumers are no

longer bound to a particular supplier. They select their supplier and make their

purchase decisions based on the retail prices and terms of service they are offered.

4. Different/Improved Tariffs. Having long term power purchase plan by the

utilities is very important to have an improved tariff .In India at least for few years

the power shortages are likely to exist, hence improved tariffs can be ensured by

maintaining the power purchase cost for a few years to come.This is based on the

fact that 80% of the retail tariff component consist of cost of fuel used for

generation of electricity.

5. Expanded geographical reach.The multiple licenses will help to expand the area

of operation and shall bring more stability for the operations of the utility.


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B. Challenges involved:

1. Scattered customers : Since the consumers of different licensees operating area are

scattered it may cause difficulties in the following aspects:

• Complaint handling: The handling of consumer complaints of scattered consumer

base poses a very difficult situation in front of licensees who also have to follow

the standards of performance.

• Billing & metering : The billing & metering of the scattered consumer is another

challenge which could lead to discomfort among the consumers.

• Implementation of technology : Technologies like Geographical Information

System are very difficult to implement for a scattered consumer base.

2. Lack of clear guidelines & processes: The regulator gives a broad guidelines

which are not sufficient for smooth change over .The utility which loses the

customers shall be hostile to the incumbent .This is a challenge in implementation of

the change over.

3. Awareness of people. This is the biggest challenge in the whole process of change

over. If the consumers are not aware of the actual cost of supply & the practical

issues relating to supply, they may have misconceptions and a sense of discomfort

with utilities leading to resistance to the multiple licensee model.

4. Lack of Coordination & data sharing: If there is a lack of coordination & trust

between the competing utilities it may lead to failure of the multiple licensee model.

5. Readiness of utilities for change in customer base: The incumbent utility shall be

ready with a right organization structure in place for retails supply.Otherwise, lot of

customers will get disappointed due to the euphoria created in terms of services in

the initial period.


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6. Utility forecasts: The veracity of data used for forecasting the plans is very

important .This data if not projected properly /overestimated ,may cause a tariff

shock to the consumers.

7. Customer grievances: This is very important specially when the present utility is

having high performance customer services except the tariff. A retail customer will

be ignorant on the technicalities of the power business and his/her grievances may

not be heard properly in the initial phase of change over.

8. Local factors: There are many local factors like diversity of load, Historical factors

in the supply business, & the paying capacity of consumers, which vary in different

areas, & may cause failure of a model if it is directly applied without taking into

account these factors.

9. Power purchase planning. In Indian conditions the future long term plans for

power purchase , fuel sourcing of generating companies etc are very necessary and

that will be the differentiator while determining the tariff.

10. Standards of Performance: SoP to take into account regional variations, licensee

performance & public expectations. When determining the SoP s regulator, shall see

the present performance levels of the utilities. This is very necessary to raise the

levels of the incumbent licensee. SoPs shall be relevant to the geographical

conditions and always attempt to raise the bar of performance of the utility thereby

customer is benefitted the most.

11. Issue of Cross subsidy: In the situation of multiple distribution licensees, when the

consumers are given a choice, it is normally observed that the commercial and

industrial consumers are the first ones to change over from their existing electricity

supplier (Existing Distribution Licensee) to alternative electricity supplier (Supply

Distribution Licensee), taking into account the tariffs and their financial implications


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on their business. These categories of consumers are commercially-savvy with their

focus on their own internal budgets and savings accruing due to the changeover.

These consumers have resources, bargaining power and incentives. However, the

domestic category consumers are relatively slow to change over and take time

despite apparent savings accruing due to the changeover. This has been witnessed in

markets such as UK and US wherein upon the introduction of choice of supplier,

domestic consumers showed some inertia and remained with the existing retail

electricity supplier for some period of time.

12. Energy Accounting: In the context of parallel distribution licensees, some of the

consumers of a licensee are likely to be connected through the network of other

distribution licensees; thereby drawls of parallel supply distribution licensee will get

embedded within the drawl of the wheeling distribution licensee. Since utility-wise

sharing is required under the Interim Balancing and Settlement Mechanism (IBSM)

/FBSM, in the absence of data at the interface meters, it is not possible to ascertain

the drawls of each distribution licensee separately.

13. Universal service obligation: despite multiple distribution licensees in the same

area, all are bound by the terms of the distribution licenses, which include provisions

related to Universal Service Obligation. Such an obligation is in accordance with the

duty to supply on request under Section 43 of the Act. In fact, in the case of multiple

distribution licensees in an area, the National Electricity Policy, 2006 clearly states

that the second and subsequent licensee for distribution in the same area shall have

the obligation to supply to all consumers in accordance with the provisions of

Section 43 of the Act. Further, it also suggests regulating connection charges to

avoid cherry-picking by incumbent or subsequent distribution licensees.

In view of this, each distribution licensee in an area with parallel distribution

licensees shall be clearly responsible for the supply of electricity. Since all


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distribution licensees are expected to supply to all consumers in their area of supply,

there is no need for default service providers or providers of last resort as envisaged

in some other countries.

14. Recovery of regulatory assets & past revenue gap: In case of existing licensee,

there have been regulatory assets and past revenue gaps which need to be recovered

subsequently. This issue is only applicable to licensees operating in cost plus regime.

In a regulatory regime wherein consumers switch over from one licensee to another,

the recovery through tariff of a particular licensee can only be possible through the

balance consumer of that particularly licensee. However, these costs actually pertain

to the period wherein there were other consumers also who were connected with the

network but subsequently switched-over to other / parallel distribution licensee.

Recovery of these charges from the balance consumers may not be appropriate and

there is need to devise a mechanism of recovery of these charges from the relevant

consumers. One of the options to short out such an issue is to identify consumers

who were incumbent’s consumers during the period when these regulatory assets /

revenue gaps were created and entrust responsibility on parallel / other licensee to

recover and pass on these charges to the incumbent licensee.

15. Retail Supply Margin: The retail supply margin is distinct from the distribution

margin concept indicated in the national tariff policy. The national tariff policy talks

about the regulation on the basis of Return on Equity vis-à-vis return through

providing distribution margins. The distribution margin-based approach is concept

related to the determination of tariff in the cost-plus situation irrespective of single

or multiple distribution licensees. The Retail Supply Margin refers to the

compensating mechanism for a distribution licensee, who is effecting its supply,

utilizing the network of the incumbent licensee. In the case of retail supply

distribution, the question of a separate retail supply margin does not arise as it is

similar to single distribution licensees. The concept is discussed in the context of


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switch over consumers / distribution of electricity using incumbent licensee’s

network.

Chapter VII : How to counter these challenges?

• MYT tariff regime: MYT is a framework for regulating licensees over a period of

time wherein the principles of regulating the returns/profits of licensees & the

trajectory of individual costs & revenue elements of the utilities are determined in

advance . The basic premise is the tariff would not fluctuate beyond a certain band

unless there are extraordinary circumstances. Network development of the

distribution utilities. This type of tariff regime shall force utilities to come out with

long term plan for power purchase, which is a major contributor in cost of

electricity.

• Regulations to factor all possible scenarios. Depending upon the region , the

regulator will have to issue the relevant regulations applicable to that specific

region.

• Metering & billing issues. Based on the Mumbai experience, most of the issues

faced in Mumbai can be addressed by having a common IT system for utilities.

The parallel licensing cannot survive with utilities with IT systems which are not

compatible .

• Complaint handling system .The incumbent utility will have a tough time in

resolving the complaints in the absence of a common IT platform .The duplication

of records are being generated and tendency for the Wheeling distribution licensee

( WDL) to operate within the SoP norms.If the WDL is already maintaining a

standard better than SoPs issued by the Regulator, there is always a chance for

manipulation in records.


PGDER-WTI Page : 29

• Implementation of new tech. The competition in terms of tariff shall drive the

utilities for innovative ways of serving the customer in a most economical ways.

Standardisation of network layout, new substations , switch gears and

communication systems are a must for utilities to survive in the market.

• Segregating of accounts & reporting requirements: The segregated cost should

help in accurately identifying and carrying out a meaningful analysis of cost to

serve both the wire and retail supply separately. Distribution Licensees needs to

maintain separate wire and retail supply-related costs. The segregated accounts

shall include financial statements (Profit & Loss Statement, Balance Sheet and

Cash flow statement).

The segregation needs to be done in such a way that it can be presented under all the cost

components of ARR. All identifiable expenses, revenues, etc. shall be assigned to their

particular activities; non-identifiable expenses to the extent not possible to be separated,

should be allocated on the basis of some rationale. All the regulatory submissions shall

detail out the methodology and the basis of allocation of such expenses.

The methodology for the allocation and related workings may be reviewed and may

suitable modifications to the same can be made. The network costs need to be further

segregated in terms of voltage level (33 kV, 22 kV/ 11 kV, and LT).

Further, in the assets register, voltage-wise assets need to be maintained. The same

should be clearly identifiable and submitted separately in the regulatory submissions.

• Code of conduct .Moving from a monopolistic to a competitive business, it is very

difficult for the utilities to be very magnanimous in case of change over

procedures. The working level staff of the utilities may face many difficulties and

it is suggested to form a third party audit in a quarterly basis.This will help in

smooth changeover process till a matured process is in place. It is suggested that


PGDER-WTI Page : 30

regulator is monitoring the progress of these audits and suggest possible remedial

measures in case needed.

• Dynamic business strategy: A right organization structure shall be in place before

going ahead with multiple licensee issuance. The utilities shall be ready for the

transformation to take care of the customers needs and expectations. This includes

the plan for the customer complaint mechanisms, attending technical complaints

and maintaining the SoPs as per the regulator.

• Current regulations to envisage current scenarios. At present any complaints

(technical) from customer is reported to SDL and SDL lodge a complaint with

WDL .WDL after attending the complaint update the system .Duplication of the

complaint management system leads to inefficient way of working.

• Standards of Performance: SoP to be amended accordingly to meet the

challenges. SoPs shall be formulated based on the present performance of the

utilities as well as taking into account the expectations of consumers in the area of

supply.

• Local factors Any future model for the multiple licensees in an area should

incorporate the local factors existing in the area, like the nature of load like

agricultural ,Industrial ,commercial etc., paying capacity of the consumers in that

area, the historical factors in the electricity supply business.

• Power Purchase Planning: Every utility should ensure an efficient power

purchase planning which should have Power purchase agreements which can be

long term, medium term & short term, according to dynamic market conditions in a

competitive market. These plans should also be disclosed to the regulator as well

as in public domain, which would bring in transparency in the system. This would


PGDER-WTI Page : 31

help in ensuring power reliability & a better price discovery for the benefit of

consumers.

• Increasing awareness: Spreading awareness to the consumers about the actual

cost of supply of electricity, and other practical problem related to electricity

supply to the consumers, by coordinated action which is common to all utilities by

a joint action committee comprising of all the utilities & consumer groups. This

would ensure an amicable atmosphere is created for a healthy competition in the

interest of consumers.

• Efficient Corporate Governance by the Utilities: Since electricity supply

industry has historically remained a regulated business. The business houses

involved in this business need to adopt an efficient corporate governance standards

& business ethics with appropriate social responsibility. This would help in a long

way for strengthening the multiple licensee models in different areas which in turn

will create a healthy competition among the utilities.


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Conclusion / Key Messages

The multiple licensee approach for distribution of electricity in different areas is a

very unique feature in electricity reforms. Though this concept is in a nascent stage in

India, it has a very promising future ahead.

Through this project we have analyzed the different models existing in India as well as

abroad, along with the challenges involved in its effective implementation. We have

also suggested the probable solutions to these challenges. In the end we would like to

say that to an ideal model for multiple licensees in India can be arrived at by taking

into account these challenges peculiar to Indian scenario, learning from the

experiences so far. This would certainly go a long way in promoting competition in

the distribution business & also the Interest of the esteemed consumers.


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Bibliography

- MERC, Order No. 50 of 2009 Petition filed Petition filed by Tata Power Company

Ltd - Distribution (TPC-D) seeking approval of operating procedures for

supplying power to consumers in the common area of license of Reliance

Infrastructure Ltd. – Distribution (RInfra-D), using each other’s existing

distribution network dated October 15,2009

- Newspaper Article

- www.mercindia.org.in

- Report on Parallel Licensee by CRISIL

Effects of Multiple Distribution Licensee

Documents

Transcript of Effects of Multiple Distribution Licensee