2012

IDPPP End Term Assignment

Divanshu Dubey

[ANALYSIS OF A RULING- APPELLATE TRIBUNAL FOR ELECTRICITY]

End term individual assignment cum take home Exam.

Abstract: Indian power sector has traditionally been associated with inefficiencies, poor distribution, failures and shortages. If we look at the supply side of the business, it was dominated by the public sector in the pre-reform era. Power sector reforms were initiated in the 1990s which progressively resulted in the enactment of The Electricity Act, 2003. This act gave rise to the Appellate Tribunal for Electricity, which was constituted to act as a forum for grievance redressal of stakeholders. Over time the Tribunal has set the ground rules for this sector and is said to have had a harmonising effect on various power sector issues (Bajaj and Sharma, 2007)1. The result has been that many of the uncertainties faced by the new players, both private and reconstituted bodies of the state electricity boards, have been have been mitigated. From the regulation point of view the matter is further complicated by the fact that this sector is the concurrent responsibility of the central and state governments. In addition there is an array of public sector utilities involved, majority of which are under the state government and a few under the central government. While the policy makers did realise the importance of the Power Sector as an ingredient for economic growth, the actions taken so far have not proved to be adequate to match the growing requirements of the country from this sector. We now look at the developments in this sector in recent history and try to get a sense of the problems being faced post reforms and recourse thereto.

On an average the sector has accounted for 16% of the total annual capital outlay from the year 1950 to the year 20001. In absolute terms one can say that substantial development has taken place in this sector, however, the sector has been facing a number of issues over the past few decades. Inefficiencies and losses in transmission, energy and peaking shortfalls, endemic theft at the consumer end, poor services by SEBs and huge commercial losses were some of the problems in the pre-reform era. The Post-Reform Era: Even after 15 years of reforms the electricity sector was

still plagued by uncertainty on account of regulation and policy (Morris 2006)2. According to Morris the Electricity Act 2003 attempts to bring in open access and competition in the market with generation, with trading as a distinct business, and reduction in cross subsidies. Yet actual open access had not taken place on the ground and electricity distribution showed large losses. To put things in perspective we now look at the developments before the Electricity Act 2003. Many states such as Delhi, Andhra Pradesh and Madhya Pradesh have moved towards reforms, although reforms mean a cash outflow in a short time horizon. The pressure has been higher on the states that buy a significant part of their electricity from outside. These states have gone on to show that there is value in pursuing reforms. Draft Tariff Policy: According to the India Infrastructure Report 2004, Draft

Tariff Policy (DTP) goes some way to provide the much needed clarity in

regulation (Overview, page 15)3. The framework laid for transmission pricing through a three part tariff is a step towards making open access a reality. Its insistence on long term contracts has however been an issue of contention. It does not talk of the time of the day pricing and falls short of defining a mechanism for spot pricing. Also missing are the much needed risk mitigants such as caps on taxes, which should have been included in the DTP or even the Electricity Act 2003. Having said that, these (The Electricity Act 2003 and the Draft Tariff Policy) are definitely steps in the right direction. Competition: We now look at the status of competition in the sector. According to Singh (2008)4 the necessary groundwork for wholesale competition has been initiated by the Central Electricity Regulatory Commission (CERC), albeit it has moved slowly at the state level. Singh in his article goes on to conclude that the provisions of the act are necessary but not sufficient condition for reforms. While we must accept that the market structure, ownership patterns, subsidies and other compulsions will continue to impact the competitive nature of the power market, some movement in the direction of open access and competition on the generation and distribution sides has taken place. Retail competition will improve the quality of service but may not improve the prices for consumers (subsidised categories). A number of issues still remain to be tackled for the development of wholesale power markets and introduction of retail competition in the country.4 The Act is woven around the cardinal principle of competition with regulatory oversight and the Appellate Tribunal for Electricity has brought about technical

expertise in deciding appeals against the orders of state and central commissions has become a fast track mechanism for disposal of cases thereby enabling redressal of grievances.1 Role of Appellate Tribunal The Electricity Act, 2003 Section 110 mandates establishment of the Appellate Tribunal for Electricity for hearing appeal against the orders of Regulatory Commissions and adjudicating officers. The Tribunal has been in place since July, 2005. The Appellate Tribunal for Electricity has the role of providing technical expertise in decision making. It also has the same powers as vested in a civil court. It is a specialized Tribunal that exclusively deals with cases of the Electricity and energy sectors and it acts as an enabler towards the speedy disposal of cases. Not only does the Tribunal hear appeals, it also has the mandate to ensure that the Regulatory Commissions satisfactorily discharge their statutory functions. The Tribunal is at the level of the High Court, in that the appeals against its judgments lie before the Supreme Court. The Appellate Tribunal for Electricity came into existence in July, 2005. Since then it has disposed a number of appeals filed before it originating from a variety of parties who are participants in the power sector, such as generators, transmission and distribution licensees, traders and consumers. Their website has One Thousand One Hundred and Fifty Four judgements uploaded in it which have been passes from 14 September 2005 through 21 November 2012.4

The Appellate Tribunal for Electricity has a rather unique role to play in the rapidly transforming power sector. Not only does it ensure expeditious disposal of appeals against the decisions of Regulators, it also performs the important function of harmonizing the orders of the various Central and State Regulators. This results in a feeling of regulatory certainty and it goes a long way in enhancing investors confidence. This gives way to the lowering of the risk perception of investors resulting in their increased participation in the sector. Although the sector is devoid of direct participation by foreign majors in a big way (100% FDI permitted), the domestic private investors have responded very positively. The result has been that over time a considerable part of the capacity generation planned through private participation has been realised. As per Bajaj and Sharma (2007)1 a large number of IPPs had applied for coal linkage totalling to nearly 1,87,000 MW and were actively pursuing with the States for acquiring land, water and other inputs for setting up these projects. India will need huge investments to attempt filling the yawning gap between the demand and availability of power in the country. With this context we now look at the rulings of the Appellate Tribunal which have implications for competition in the sector. The case or appeal chosen is because of its importance or relevance to not just the big players wanting to enter the market and compete in a big way, but to relatively smaller players and industrialists or companies who find it more cost effective or derive operational synergies from having their own captive plants, thereby also reducing the need for availability of

power from the grid. Not only this, such endeavours also tend to utilise renewable sources of energy. Hence a judgement affecting captive power generating units is of great significance to all stakeholders. Appeal No116 of 2009 and IA No. 218 and 219 of 20095 Chhattisgrh State Power Distribution Co. Ltd. Daganiya, Raipur. .Appellant(s) V/s. 1. Hira Ferro Alloys Ltd. 567B/568/553B Industrial Area Urla, Raipur- 492001 2. Chhattisgarh State Electricity Regulatory Commission Civil Lines, G.E. Road Urla Raipur-492001 . Respondents Subject: Declaration by the State Commission as Captive Power Generating Plant and grant of Captive Consumer Status. Brief Facts of the Case: M/s HFAL Ltd. (first respondent)had filed a Petition

before the State Commission seeking permission to act as a supplier of power through open access to certain other units. These six units, it claimed, were sister concerns holding 9.04% equity between them and were captive consumers of for its 20 MW plant. The commission rejected the petition on the grounds that atleast 26% holding was required under Rule 3 of the Electricity Rules, 2005. Notwithstanding the ruling, HFAL continued to supply to two of the units- HCL and RRIL. Following this suo motu proceedings were initiated by the Commission.

It imposed a penalty of Rs. One Lakh and ordered the first Respondent to cease supply to the other companies, at the same time allowing a months time to find an alternate source of power. Following this HFAL filed a petition before the commission seeking: (i) a declaration of its power plant as a captive generating plant, (ii) to hold that HCL, RRIL and HIL were captive users of the captive power plant together with the first Respondent and (iii) to direct the CSEB to give permission for wheeling of power to HIL and Jagdalpur. By an ex-parte order dated 10.03.2008 the Commission allowed HFAL to continue to supply power to RRIL and HCL till the disposal of the Petition.5 139 MU (net) was expected to be generated at the plant, out of which 92 MU (66.2%) was proposed to be consumed by HFAL itself. The balance of 47 MU (33.8%) was proposed to be consumed as shown in the table below:
Sl.No. Company Share in Ist Respdt. % 3.32 10.06 20.11 33.49 Consumption (of 139 MU Net available) % 45.80 How conveyed for consumption

MU 1
2. 3. Total

HCL RRIL HIL

32.94

1.2
47.00

0.86 33.8

Dedicated feeder of Ist Respondent Dedicated feeder of Ist Respondent Wheeling through licensee

As per the State Commission the shareholders of the company were entitled to be treated as captive consumers. There was no requirement of consumption in

proportion to the shareholding. The State Commission held the plant to be a captive power plant and the three sister companies to be captive users and granted temporary permission for use of electricity in the captive mode. The State Power Distribution Company (appellant) challenged the order on the following grounds5: (i) The State Commission has no jurisdiction to entertain the petition of the Respondent No. 1 or otherwise declare whether or not the proposed consumer was a captive consumer with reference to Rule 3 of the Rules. (ii) The State Commission cannot declare a power plant and the consumer to be captive consumer as the requirements of Rule 3 have to be fulfilled on a continuous basis and not at any one point of time. (iii) The Respondent No. 1 being the owner of the power plant and itself consuming electricity from the power plant, the shareholders of the Respondent No. 1 cannot also claim to be the captive users of electricity. The shareholders of the Company do not own the assets of the company and as such cannot claim captive status for use of electricity from the power plant. (iv) Even assuming that the shareholders in the Respondent No. 1 can claim captive status, the State Commission has not applied the proportionality criteria to be followed for captive use of electricity by such shareholders.

Now we look at the judgement pronounced by the tribunal. On the issue of declaring the plant captive and the three sister companies captive users, the Tribunal agreed with the decision of the State Commission. On the issue of proportional consumption also it found the decision of the state commission to be correct. This was on the grounds that the principle of proportional consumption should be applied in the context of a Special Purpose Vehicle and not in the context of an Operating Company acting as a captive generator. This judgement should be seen in the light of the fact that it supports competition in the generation side, simplifying the rules to qualify as a captive consumer and does away with the requirement of proportional consumption in such cases. This judgement is not only important for competition in the generation side but also has implications in the retail side. At the same time it highlights the fact that the rules for qualifying as a captive consumer have further scope for simplification and straight forward definition. Given the power shortage in the country, it would be unfair to deny such status to entitled entities. Further analysis of the issue takes us to the point that if an industrial unit finds it cost effective to produce its own power in any way, whether acting as a captive generator or though an SPV, it would be in the interest of the competitive forces to not have restrictions of proportional use at all. The only restrictions that the state must impose must be towards conformance of environmental norms, and to avoid any other negative externalities. The state power distribution company or a private player operating in the region should not be allowed to act as a monopoly,

but must be forced to make competitive offerings in terms of product and services in order to prevent consumers from finding alternate means of procuring power. Such entities should not be allowed to use regulatory crutches to monopolise the electricity market and unfairly curb competition. Providing greener and efficient captive power solutions has potential to grow as a sector and many firms are specialising in offering such tailor-made solutions to company. The policy-makers should see this as an important tool in conjunction with green energy rules must look at the model being followed in some other countries, where the captive power generators not only have the option to supply to the companies around them but also can sell the power back to the grid. Working with easing the regulatory hurdles or even better, providing incentives for such projects can act as a steroid injection to help us quickly race towards meeting the energy needs of the nation. This will be particularly pertinent in the light of achieving the goal of full connectivity over the national grid with minimal transmission losses. The new captive units being set-up today to spur industrial growth in areas with short or irregular power supply can tomorrow be leveraged to fulfil the shortages especially at peak loads by participating in the spot markets. One can conclude on the basis of the above that the judgement that in the light of the general discussion in the environment and the discussions in class during this course, we can gain insights into the current situation in the power sector and the

attitude of the various stakeholders involved. We are also pointed in some of the directions where there is scope for further reform to take place and though a move in the positive direction. Through this study we get a sense of how the rulings by the Tribunal acts as a reality check towards how much more needs to be done on the policy front in the Power/ Electricity Sector.

References: 1. Article: The Indian Power Sector Role of Appellate Tribunal by Harbans L. Bajaj, and Deepak Sharma. 2. Infrastructure- Sebastian Morris, entry in the Oxford Companion to Economics in India, 2006. 3. Chapter 1 Overview by Sebastian Morris in the India Infrastructure Report 2004. 4. Appellate Tribunal for Electricity website: http://aptel.gov.in/judgementnew.html. 5. Appellate Tribunal for Electricity website (copy of judgement): http://aptel.gov.in/judgements/116%20of%202009%2028.05.2010.pdf