Competition in ElectricityAddis Ababa

March 27 2006

Prof S L Rao

Chairman, Institute for Social and Economic Change, Bangalore;

first Chairman Central Electricity Regulatory Commission, India

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Common Characteristics of Electricity in developing Countries-I

• Many poor and weak groups in society

• Governments use dual pricing• No enterprise or efficiency mindset

in much of sector• Political interference in supplies• No automatic islanding of sub-

stations & consequent poor frequency & voltage

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Common characteristics-II

• Free or very cheap supplies to slums, farmers and other large vote banks

• Thefts by influential people & industries not checked

• Collusion by staff in thefts

• Poor Quality: frequency; voltage; black outs; lack of safety

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Common characteristics-III

• Government dominates investment• Little investment in maintenance, renovation

and modernization, new generation capacity, transmission & distribution, SCADA and other I.T. enablers, capacitors, etc.

• Distribution runs at increasing loss• Private suppliers of services not sure of being

paid• Dominance of State in power sector

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Preconditions for COMPETITION

• Many suppliers: • Consumer Choice:• Freedom of entry and Exit;• Freely available Information on

Supplies, Prices, Quality ;• Open Access to T & D Wires

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Competition Conditions Not Met

• State Monopoly in transmission & distribution and most of generation

• Consumer has no choice and no voice• State is monopoly distributor;• No one can buy from or sell to any other party

except the state enterprise and buyer • Little information; little warning on blackouts;

prices fixed by government without consultation; quality is poor and erratic.

• Access to state owned wires difficult and arbitrarily priced

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What must be Effects of Competition in Electricity

• Improved Availability of Supply• Greater Efficiency/productivity at all points• Improved Quality• Lower Costs• Lower Prices• Different market segments have access &

availability at affordable prices• Alternative suppliers/services/products

available to substitute

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Issues & Possible Answers-I

What to do about the poor and marginalized? In a competitive situation, who pays for them? POSSIBLE:

• make the better-off pay; • Don’t disturb prices but charge a special tax

on better-off customers; • Make provision in government budgets; • Educate consumers; • Improve economic conditions so that people

can afford to pay!

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Issues & Possible Answers-II

• Compulsory separation of fuel sources & generation from transmission? A. Desirable.

• If there are cross-subsidies who decides prices? A: Must be an independent regulator who can hear all parties, and come to fair decisions

* Protection to state owned enterprises:at stake, government investment and jobs. A. SOE’s need the discipline of competition to develop enterprise attitudes; alternative is to privatize them.

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Issues & Answers-III

• Vertically Integrated monopolies:“well-head to wall-socket”; how to prevent exploitation. A. Independent Regulator should ask for accounts separately for each SBU

• Ensuring Quality. A. Independent Regulator must monitor, enforce, penalize.

• Tariffs: Regulated Tariffs OR long term contracts OR spot markets OR forward markets OR mix of all. A. Independent Regulator can decide

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Issues and Answers-IV

• Improving Efficiency and Productivity; A. Regulator fixes targets for T & D losses and scrutinizes all costs. But poor base data makes for non-achievement. Regulator needs to monitor closely and run base line surveys to set T & D targets. Or look at Aggregate transmission and Collection since these are definite figures.

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Issues & Answers-V

• Who is to ensure fairness? A. Regulator• Environmental issues and Renewable energy.

A. Government must lay down %age renewables use & Regulator must enforce

• Need for strong technical expertise to identify project cost padding. A. As in India, government needs an electricity technical advisor.

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Experiences in Simulating Competition-I (Generation)

• At outset: Regulated Tariffs for generators and transmission monopolies;guaranteed returns to equity, all costs as pass through; fixed charge and variable charge; take or pay condition, guaranteeing customer’s quota; capital costs recovered through fixed charges; Regulator can compare costs between operators: Data problems

• Introducing competition in generation: On basis of competitive project cost;on tariff bidding for a project; Merit Order Dispatch so that most expensive plant is not dispatched

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Simulating Competition-II (Wires)

• ‘Natural Monopolies’ in T & D Wires: At outset: Fixed returns, cost pass throughs with incentives for improved performance on availability, technical losses, etc

• In transmission: Open Access for suppliers to users ensures no misuse of monopoly on wires;

• Parallel Lines as threat on monopoly; • Buying and reselling transmission capacity

can optimize use of capacity

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Simulating Competition-III (Distribution)

• Separate wires from supply• Supply=metering, billing, collection;

conceptually, each can be separate• Parallel wires can be allowed as threat to

monopoly • Once supply is separated from wires, different

generators can supply at different rates on same wires; customers can choose between suppliers

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Simulating Competition-!V (Quality)

• Frequency variation: resolved through ABT-daily forecasts, penal charges for variations affecting frequency; Effect was to stabilize frequency

• Subject to misuse as generators and distributors squeeze customers to make extra money on penal rates for supplying frequency violators

• Low Voltage & fluctuations: Imposing penal reactive power charge to ensure capacitor installation

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Simulating Competition-Y (Other Measures)

• Recognize and permit Trading to help match supply to demand pre-determined Regulator’s prices. Even in shortage and despite transmission constraints, some trading is possible

• In India trading now recognized, trading margins are cappedto prevent profiteering,but most purchases are on long term contracts and there is no spot trading

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Issues in State Ownership

• State ownership, usually of monopolies• Long intimacies between SOEs & bureaucracy• Lack of enterprise and commercial cultures• Tolerant of inefficiencies• Overstaffing & lack of Discipline• Inadequate investment in levels of Renovation

and Maintenance • Low Modernization • Populist tariffs, many times uncapped &

charged to SOE• No scrutiny of decisions • More conscious of social obligations

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Functions of Independent Regulator

Assures investors of certainty, predictability & fairness; & consumer is heard for fair decision; transparency & reasoned decisions

1) Simulates effects of Competition2) Adjudicates on Disputes3) Policymaking concurrent with Regulation4) Enforcement of Orders and Ensuring compliance 5) Advocacy of Regulatory functions and reform

Vision6) Neutral between all parties: government, state

owned enterprises, other users

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Regulation:Illustrative decisions-who to decide, Regulator OR Government

• Economic efficiency & social considerations & costs not compatible; Regulator has to get clear guidelines on limits to each from government.

• Who and How to bear social costs must be decided & announced by Government

• TWO REGULATORY METHODS FOR TARIFFS: a) Based on rulesb) Based on Contracts that regulator enforces• Should Regulator decide Rate of return? Yes• Should it be on Equity or Equity +Debt?

Regulator

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Regulation:Policy Decisions (3)

• Quantify Social considerations: USO, Lower tariffs to special groups(rural, especially farmers, & poor) Government

• Government must decide extent of compromise on efficiency over social considerations (Examples: environment-e.g. Using ‘green’ energy; economic development of special zones or products; resource preferences (e.g. domestic coal vs. imported gas)

• Who pays for social considerations and how soon? Government

• Methods: Reimbursements, Cross-subsidies, cess by operator, tax Government

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Regulation: Policy decisions

• Rule Based– Rules announced after

wide consultation– Regulator can change rules

with similar procedure– Procedural safeguards

built into rules re Decision Time; Freedom of Information, etc.

– There must be clarity and predictability for investor to cover all circumstances

– There will be Short-term uncertainty till rule is in vogue and interpreted

– Safeguards against changes due Political instability

• Contract Based– Written in contract, so No

unilateral changes– Contractual safeguards

against misbehaviour by any party

– Pressure is on both parties to anticipate eventualities correctly from start

– Political stability:Contracts less likely to be revoked than Rules which can be changed

– Can provide for multi year tariffs to ensure certainty for financial closure

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Enforcement Powers with Regulator

• Can impose Only Civil penalties• Decides Standards-e.g. operating norms,

quality of service• Can Order performance-quality of

service, accounting, etc.• Can Escrow (earmark future) funds• Can allow/disallow Rate adjustments • Can Adjust productivity indices and

incentives• Give Public censure and embarrassment

to obstreperous party

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Enforcement Powers (2)

• Revoke or suspend license• Authority to impose standards (e.g.

quality of service, accounting)• Give Specific order to perform• Order Consumer refunds• Disallow capital cost/claimed current

costs• Criminal sanctions

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Institutional Issues

• Single national or multiple local Regulators• Multi sector or single sector jurisdiction• Multi-member Commission or single Member • Appellate process (superior courts or government

or arbitration or special appellate authority )• Applicability of foreign laws or courts• Consumer protection (e.g. price, safety, service

quality, fraudulent practices)• Clarity on jurisdiction with CCI• MOU with Other Regulatory bodies• Fulfillment of social objectives

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Privatization Alternatives (Role for Competition Commission)

• Essential to have transparent unalterable methods laid out in advance

• Sell Private equity shares in SOEs with or w/o ‘golden share’

• Sell to single buyer who can exercise management control

• Or to many small holders; management & control by independent Board and managers

• And with or without sunset clause for government holding

• Involve independent Regulator in Planning and implementation

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Privatization-Some Conditions

• Transition period to full privatization might see decline of SOE-Need to ensure no neglect in management or investment

• Essential to ensure USO, fairness and equity between stakeholders

• Government must underwrite social obligations

• Obviously job of Independent Regulator

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CONCLUSION

• Competition and Market development in Infrastructure related to effective and Independent Regulation

• An articulated statement of what is competition, what are markets, what are the stages to get there in each Sector is essential

• Clarity on Roles, Authorities, Accountability, Relationships, Responsibilities of Regulator and Government essential

• Regulator must state his approach to issues• Expectations must be quantified

THANK YOU