Tuesday, June 25, 2013

Part 2 of 2 - Suggested amendments in National Tariff Policy

This is sequel to "Part 1 of 2: Suggested amendments in National Tariff Policy". 

True privatization would entail giving more
“choices to customers” and improvement in service quality.

Tata Power proposed model for segregation of Wire and Retail business is good and could enhance competition & investments into the sector. However with very poor recovery, high retail side AT&C losses, and political entanglement, the “Retail Supplier” business will continue to be challenging. That role is similar to Collection based Franchisee and it has seen its failure earlier.  With end recovery part of the model not working well, will put pressure on upstream Wire Business owners and Bulk Traders, bringing the whole system to square one.

         i.Input based Power Distribution Franchisee (IBDF) model has good building blocks to transition into the proposed segregate wire-retail business eventually. To begin with Distribution Franchisee = DNOMA + Retail Supplier, while Distribution Licensee continue to act as DNO.

Some further proposed improvements in the IBDF model:
·    Pre RFP Third party audit, authentic asset register creation, ring fencing of DF area, input meter calibration, and devoted point of contact to support transition & all legacy data sharing.
·    Strengthening of QR for DF operator selection and its standardization pan India. Joint consortium bidding should be allowed with partners spanning across all key functional work areas for Distribution Mgmt. success:
o    Finance (deep pockets to sustain initial losses)
o    Network (core competence in Distribution Network products, EPC, O&M, services)
o    Metering and Energy Auditing (solutions and service providers)
o    Customer Mgmt. (revenue mgmt, CRM, IT solution, CSAT etc.)
·    Streamlining existing planned investments (like RGGVY, R-APDRP, NEF etc.) on priority in DF areas and integrating with DF capex requirements
·   Design incorporation of Bankers/investors views in RfP and DFA documents (specially deals with SPV structuring, Charge on Collateral or Hypothecation, Escrow mechanism, and Exit)
·   Standardisation of some critical calculations for better viability of both DL and DF:
o    minimum input benchmarking prices
o    ABR based indexation and revenue sharing
·    DL to disclose its real avg. power purchase cost and allow DF to bring optimization through different/outside power sourcing, if any.
o    The incremental benefit (DL’s avg. power purchase cost – DF’s avg. power purchase cost ) from such power sourcing to be accrued and shared in equal proportion with DL, DF and end-customers.
·    Making provision in Tariff calculation for rewarding DF area customers based upon DF’s performance. This is to encourage faster cooperation from end-customers to DF operator.
·    The Electricity Duty and TOSE could be collected as deferred payment for 3 months from DF. This can act as good perk and allow DF optimize its working capital mgmt.
·    DF operator and DL should jointly be brought under Regulators purview for regular performance reporting
·    All other suggestions in this note including specific defined SLAs, independent CSAT, transparent reporting etc.

        ii.Few another and more affordable ways to drive competition differently would be through:
·    Healthy bidding of Franchisee model (one option suggested below)
·    Keeping 2nd bidder as backup if first bidder default on SLA terms. This shall also ensure strict adherence to SLA and also add another private eye on first bidder/operator performance

Open Access though a good mechanism to drive healthy competition, and offer more choices to customers is not rightly priced and enforced for fast penetration and improved industrial viability.

         i.The cross subsidy surcharge is high and prohibitive
        ii. Walking in and walking out from state grid creates burden on Discom through UI penalities. There is no rigid mechanism for Intra State UI distribution.
      iii.  The Temporary Tariff charged for OA customers to use grid is quite high.
·    Pricing structure of various power flow mechanisms including wheeling, Open Access, Power Trading should be rightly defined and enforced. This could be first step towards creating market led dynamics in broader wire and retail segregation proposal. The basic building blocks are already present. Healthy competition via Open Access should bring better optimal equilibrium and efficiencies.
·    The Open Access surcharge should be cancelled (post correcting broader Tariff regime). Only right cost heads should be added with improved regulation.
·    Standard load commitment and scheduling protocol should be adopted for effective integration of Open Access with economic grid functioning.
o    Defined min. time slot for customer to avail and remain in OA.
o    Pre-defined min. notification period to enter into OA
o    OA customer to pay for it impacted UI charges through well defined Intra state UI protocol.
o    Well definition for temporary charges for OA customers to avail grid power
·    Broader grid sharing protocol between Discom and captive Generator should be defined.
o    The case in mind is Generation-tied-Distribution model for group sub-urban or rural customers. How can a Generator be allowed to supply to a set of customers, and keeping Discom power as backup power?

Current uniform electricity tariff structure throughout a State is hampering modulation of end-customer behavior and attitude towards electricity, including theft.

         i. High cross subsidy overloading on Industrial category is affecting our industrial economy.
        ii. The good areas/customers continue to pay penalty for bad areas/customers.
      iii.  Various studies have highlighted the true cost of power paid by agri users, which because of unreliable grid power is much higher than normal tariff rates because of inefficient DG power. Its high time that subsidies are removed and more market led dynamics govern the equilibrium.
·    A Base ARR should be filed for tariff revisions at State level. (continue as-is)
·    It should be best attempted to not have cross subsidization across customer categories.
o    Cross Subsidization should not be on basis of customer categories (Industrial vs. Domestic). Rate slabs could be on basis of consumption quantum, usage timings, and other load characteristics which influences load mgmt. and power sourcing and hence economics.
·    Variable incentives provision should be made in Tariff structure to reward good customer behaviors – timely payment, off-peak consumption, self metering, Electricity conservation etc.
o    Direct ‘rebates’ should be given to end-customers on their supporting energy conservation initiatives.
·    Following 2 options, one based on Tariff and other based on supply hours could be formalized to incentivize/penalize group customers to improve power theft:
o    Tariff based incentives: To incentivize best customer behavior in terms of LT side AT&C losses, a capped portion of lets say ± 15% should be added/subtracted from Base Tariff depending upon DTR rating of a particular customer. (DTR should be establish as smallest resolution for Energy auditing and accounting. This shall also enforce transparency in DTR energy accounting monthly results.)
o    Supply Hours based incentives: Tieing load shedding hours of group customers (feeder/DTR wise) with their AT&C losses. It will be further useful to be able to record and communicate these supply based deviation in the bills.
·    Licensee’s performance as measured by Multi Year Tariff projected AT&C loss levels should be strictly enforced and tied to all employees salary. (In addition employees rotation/transfers could also be tied to their individual performances)

Posted by: Kunjan Bagdia @ pManifold

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