Parallel License in the Indian Power Sector

Introduction

Power utilities have historically been government-owned monopolies because of the essential nature of services they provide and the massive capital investment they require. With the evolution of markets, nations around the world are recognizing the role played by regulated, well functioning markets in providing user choice and good quality service through provider competition. 

For increased innovation, productivity, and economic growth, increased market competition is essential. Market competition is founded on the idea that the companies who produce the most efficiently and provide the most value to their customers should and will win. When businesses compete, consumers benefit from the best prices, quantity, and quality of goods and services.

Since independence, state and centrally owned vertically integrated utilities have dominated the Indian power sector, with the primary goal of making “electricity available to all.” The opening up of the Indian economy in the early 1990s, as well as large-scale liberalisation, urbanisation, and industrialization, resulted in a surge in electricity demand. The amount of investment required expanded at an exponential rate, and the government could no longer make adequate investments in the sector on its own. As a result, in 1991, power generating was de-licensed and allowed private participation to help the sector grow.

The focus turned to unbundling of State Electricity Boards (SEBs) beginning in 1996, with the overarching goals of improving function-specific efficiencies and providing higher returns to generating and transmission enterprises. Soon after, in 1998, the Electricity Regulatory Commission Act was enacted, which established provisions for the establishment of independent regulatory commissions to regulate electricity rates at the state and central levels. This market structure was once thought to be a stand-in for competition in monopoly markets, with an independent regulatory body protecting consumers’ and other stakeholders’ interests.

However, such a market structure is only transitional till the establishment of a full scale competitive market. The Electricity Act of 2003 was passed with the goal of increasing competition, protecting consumer interests, and ensuring that everyone has access to electricity. Electricity Act, 2003 has drawn up a pathway for utilities to transition from vertically integrated monopolised unbundled autonomous entities to enhance competition.

One of the pillars of the Electricity Act of 2003 is to promote competition in the electricity business. Various reform measures, such as open access for customers, parallel licenses, have been implemented by the Central and State Governments in the goal of increasing competition. Following the enactment of the Electricity Act 2003, power generation was de-licensed and a number of fiscal and financial incentives were offered under various schemes. This attracted significant investments from the private sector to leverage the demand-supply gap in the sector.

The initial move resulted in power generation, transmission, and distribution being competitive. The distribution licensee provides power and maintains the distribution system in the distribution sector. Electricity consumers have the option of choosing their energy supplier and purchasing electricity depending on pricing or the source of power delivered to their house or business in the framework of retail competition. Retail supply competition is intra-type, meaning that distribution utilities compete against one another for consumer business.

Through provisions for parallel licensees, the Electricity Act of 2003 created the groundwork for bringing competition at the consumer level. The situation of a parallel licensee is contemplated under the 6th proviso of Section 14 of the Electricity Act, 2003. As per this proviso, the Appropriate Commission may grant a license to two or more persons for distribution of electricity through their own distribution system within the same area subject to the conditions. The parallel licensee regime, on the other hand, has the potential to reduce tariffs by requiring distribution licensees in a given area to distribute power “via their own distribution infrastructure inside the same territory.”

Each distribution licensee investing in its own network is replication of network and, economically unviable as capital investment is a pass-through expense. It would also push up costs/tariffs for the end consumers. Mumbai is India’s sole power distribution location where two power distribution companies compete for customers, and Mumbai residents can choose between changing over to the common distribution network or switching to the parallel distribution network. According to the experts, Mumbai experience demonstrates the need of avoiding a parallel distribution network.

In this Article we will discuss the positive and negative aspects of the parallel licensing in the Indian Power sector to establish whether the contention of various experts with regards to avoidance of parallel licensing is correct. This article will also reflect on the legal and regulatory challenges faced by the city of Mumbai.

Pragmatic Aspects of Parallel License:

1. Competition in the transmission and distribution (T&D) segments, which will benefit consumers. it gives a choice to consumers and leads to competitive tariffs. Thus, The key positives from an expectation perspective are consumer empowerment, competitive tariffs and open access.
2. In the Transmission and Distribution segments, increased operational efficiency will boost performance and profitability.
3. Consumption efficiency and increased availability of distributable power It will mark the start of the energy industry’s (generation, transmission, distribution, and supply) healthy development, as envisioned by legislators in the preamble to the Electricity Act of 2003. The distribution segment’s health determines the health of the power sector to a considerable extent.
4. The real cost of distributable supplies and electricity can be discovered gradually through market competition.
5. Losses from Transmission and Distribution can be effectively reduced through parallel licensing.

Impediments of the Parallel Licensing in the power industry

1. The provision of parallel licensing was introduced in the Electricity Act, 2003 to promote competition in the power distribution segment and give more options to customers. However, it did not see much success due to various inherent design issues. Consumer awareness will be required to enable them to make a choice also it requires Bold decisions to be taken for tariff applicability.
2. Disputes among licensees can lead to delays in consumer dispute redressal.The government has to come out with a clear-cut policy for parallel licensing to prevent harassment of consumers by licensees.
3. The requirement of having one’s own distribution system is a key roadblock to growth. Laying a parallel distribution system in congested lanes/bylanes of a city already penetrated by an incumbent utility, combined with regulatory inertia in terms of granting parallel distribution licences and the capex investments for the entire area, can be a lengthy process involving right-of-way and return-on-investment considerations.
4. Higher asset redundancy may result from the development of parallel networks. In terms of total system costs and long-term competition, inefficient asset utilisation is undesirable.
5. Parallel licencing, if left unchecked, could lead to cherry-picking of specific types of customers, defeating the objective of the system.
6. Consumer migration adds to the operational challenges. As a result, it is vital to tighten processes and manage migration.
7. Parallel licencing can be accomplished by creating independent distribution networks or getting access to the network of an incumbent distribution licensee. While establishing a new network in a congested city is usually impossible, sharing networks could result in a conflict of interest with incumbent discoms. As a result, regulatory agencies are wary about allowing network sharing.
8. Furthermore, due to discoms’ current organisational structure and work processes, it is impossible to separate their wires and supply functions accounts. This makes determining the exact amount of wheeling and other costs difficult. When both the incumbent licensee and the parallel licensee start sharing each other’s distribution network, such concerns will become much more complicated.

Issues that might be faced by private investors while obtaining Parallel License

1. The Electricity Act of 2003 is unclear, while Sections 62(1)(a) and 14 allude to several licensees in the same area, there are no guidelines for proper infrastructure or a defined legal framework.
2. State electricity regulatory commissions (SERCs) will be required to drought regulations in this area in a transparent manner, in conjunction with discoms and customers. Further, Many SERCs have been unable to separate themselves from the sway of state discoms or the state governments that own them. Several parallel licence applications have been rejected in the past for a variety of reasons. Even if licences are granted, issues of conflict of interest with incumbent licensees, such as accurate computation of voltage-wise wheeling costs and cross-subsidy charges, must be handled.
3. Regulations requiring supply to a minimum region of a revenue district are the most significant hurdle in acquiring parallel licences. This revenue district covers a broad area, necessitating significant investments in an ineffective network, preventing private players from entering. As per the regulations, the minimum area eligible for a parallel distribution licensee is a revenue district. This entails huge infrastructure investments in a parallel network, which is also one of the reasons for parallel licensing not taking off.
4. The incumbent licensee will be obliged to build a parallel distribution network under the current Electricity Act since the distribution licensee is responsible for the distribution and supply of electricity. This is not just a capital-intensive proposition, but also an inefficient one, because in a regulated system, network duplication will put upward pressure on tariffs. Furthermore, it may face regulatory obstacles in terms of approval.

Parallel Licensing Regime in Mumbai

Reliance Infrastructure Ltd.(Distribution) (RInfra-D) filed a case in 2002, alleging that Tata Power Company (Distribution) (TPC) had encroached on its supply region. TPC’s direct delivery of electricity to retail consumers with maximum demand below 1000 kVA within RInfra- D’s area of service, according to RInfra-D’s petition, was in violation of TPC’s licence terms as well as the stipulations of numerous electrical laws.

The Maharashtra Electricity Regulatory Commission (MERC) heard the matter and held that TPC can offer power to any consumer. TPC, on the other hand, was barred from supplying new connections below 1000 kVA in the licenced region shared by RInfra-D and TPC, citing a lack of a level playing field between TPC and RInfra-D.

Both licensees filed separate appeals to the Appellate Tribunal for Electricity against this order (APTEL). The Appellate Tribunal dismissed both appeals, ruling that the TPC was only allowed to offer energy in bulk, not retail, to users, regardless of their demand, under the terms of its licence.

Finally, in a historic Supreme Court decision dated 6 May 2009, the apex court backed Tata Power’s position that it was a universal provider in Mumbai and may distribute power to any retail consumer in the city in addition to its authority to supply power in bulk to other licensees.

On the issue of supply of power by TPC through the common network of RInfra-D, the Supreme Court held that introduction of the very concept of wheeling is against the contention that not having a distribution line in place disentitles TPC to supply electricity in retail directly to consumers. Further, the Court observed that the concept of wheeling was introduced in the Electricity Act, 2003 to enable distribution licensees who are yet to install their distribution line to supply electricity directly to retail consumers, subject to payment of surcharge in addition to wheeling charges as determined by the State Commission.

In response to the Supreme Court’s order, the MERC issued an interim Order establishing a mechanism for facilitating consumer switchovers from one Distribution Licensee to another using RInfra- D’s distribution network, with the long-term goal of introducing competition and, as a result, providing cheaper electricity to consumers in the TPC and RInfra-D service area.

Again in 2012, RInfra-D filed a petition with MERC requesting relief from several concerns hurting RInfra-D and its financial viability, including large-scale customer movement of high-end consumers. The MERC ordered that henceforth, consumer migration would be allowed from RInfra-D to TPC only for the residential category of consumers and that too only for consumers who consume electricity up to 300 units a month.

Universal Service Obligation in Mumbai 

Each distribution licensee in Mumbai holds the licence to distribute electricity within a specified area and in line with the respective tariff schedule issued for that licensee by the MERC. Hence, there is more than one distribution licensee in several areas and each licensee has an obligation to supply electricity to any consumer who may demand electricity supply from that licensee under the Universal Service Obligation.

Learning from the Parallel Licensing regime in Mumbai 

Mumbai has been in the forefront of giving Indian consumers more options when it comes to retail electricity. However, as with any other bold action, there have been a number of regulatory and legal hurdles to overcome.

The legal disputes in Mumbai between RInfra-D and TPC-D highlight the importance of keeping the distribution wire and retail supply businesses separate to avoid a network operator’s conflict of interest. Reduction and gradual elimination of cross subsidy is essential for bringing about retail competition since the incumbent distribution licensee, who is saddled with a traditional tariff structure laden with cross subsidies, would naturally resent the loss of high-paying (and cross subsidising) consumers to competitive retail suppliers.

Simultaneously, the Mumbai example has raised some concerns about the parallel licensee regime. TPC-D was using RInfra-D’s wires network, which resembles open access more than a parallel licensee regime, as the APTEL noted in its December 2012 verdict. However, because a parallel licencing regime requires each licensee to build in its own network, infrastructure repetition occurs in countries like India, increasing the financial burden on end users.

Therefore, against this backdrop, segregation of distribution (wire) and supply businesses and then introducing competition in the retail segment appears to be a good way of bringing about retail choice.

Conclusion

Mr. Shrirang Karandikar, Managing Director of Indian Power Corporation was of the opinion that Parallel licencing was proposed in the Electricity Act of 2003 as a significant driver of retail competitiveness in the power distribution market. On the plus side, it gives consumers a choice and results in competitive tariffs. A good example is Mumbai’s effective adoption of the parallel licence system, which has resulted in healthy competition that has benefited both consumers and operators. However, The requirement of “own distribution system” is a major impediment to growth. The laying of a parallel distribution system in congested lanes/bylanes of a city already penetrated by an incumbent utility, along with regulatory inertia in terms of granting parallel distribution licences and the capex investments for the entire area, can be a long-drawn process considering right-of-way and return-on-investment issues.