Policy Aspects in Infrastructure Development

Session 1 2 Click to edit Master subtitle style

8/24/2010

Agenda
1. 2. 3.

Theoretical Overview Issues & Developments in Infrastructure Electricity

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Why are Policy Interventions are Required ?

Even with a market framework, markets can fail or may not deliver the right outcome To make markets work To influence market more effectively outcomes Setting the market Addressing framework externalities for Protecting competition example, pollution, Ensuring consumer congestion choice and quality Using markets to Lessen information deliver public services asymmetry Adjusting the Government interventions to outcomes for different influence outcomes can have an groups. impact on market effectiveness
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Intervention Instruments
Traditional Providing public services Direct provisions Market-based Competitive tendering User choice Trading schemes Self-regulation

Influencing private Regulation markets Tax and subsidy

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Need for Intervention

Features of infrastructure sectors

Long life of assets Investment irreversibility High share of fixed costs Natural monopoly

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Policy & Regulatory Objectives

Sustainability: adequate return on capital; attraction of capital to the industry Allocative

Efficiency Efficiency

prices ~ cost

Productive

cost minimization

Fairness Universal access and affordability

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Institutions & Organizations

Institutions areare Organizations the

rules implementing of the game agencies in an institutional Formal (policy, laws, regulations) framework
Informal

(generally accepted norms and codes)

Douglas North (Nobel Laureate)

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Understanding Policy Incremental Change

Lindbloms Theory Multiple institutions Insufficient Information Policy Outcome Bounded Rationality Separation of powers Formal checks & Checks and balances

balances

Regular Policy Amendments

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Understanding Policy Radical Change

Other Theories Private group dynamics Interest benefits Policy Outcome Punctuated equilibrium Dramatic shifts Multiple streams Social Issues; Policy

Entrepreneur; Politics framework

Development of new policies

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Understanding Regulation - Concepts

Regulatory Intervention

Market Driven Approach Non Market Driven Approach

Regulatory Governance

Substantive Model Proceduralist Model

Pricing Models

Regulatory Economics & Policy n Market power n Interest group & Opportunism n Competition n Information Asymmetry n Principal Agent Theory Other Concepts n Averch-Johnson Effect n Regulatory Capture & 8/24/2010 Revolving Door

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Agenda
1. 2. 3.

Theoretical Overview Issues & Developments in Infrastructure Electricity

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Electricity
Low

Capacity Addition

Environmental

& Forest Clearances Fuel Availability

Deteriorating
Low

viability of distribution utilities

tariff & high losses

Discussions
Perform,

around opening up of coal sector National Mission for Enhanced Energy Efficiency
achieve, and trade (PAT) scheme Energy Efficiency Services Ltd. (EESL)
Renewable
National

Energy

Solar Mission (NSM) Renewable Energy Certificates (RECs)

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Oil & Gas

Focus

on intensifying exploration

Including

coal bed methane and shale gas Open Acreage Licensing System (OALP) from NELP National Data Repository (NDR)
Refining

and Processing
of refinery capacity

expansion Pipelines Green

Transportation Distribution

and Storage

and Storage Expansion

and Marketing

fuel, RGGLVY

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Telecom
Second

largest wireless network after China Issues in allotment of UAS and 2G spectrum 3G and BWA license Mobile Number Portability (MNP) Telecom Policy 2012
Delinking

spectrum and license Roaming and MNP Convergence

Draft

National Broadband Plan

Broadband Network

National

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Water
State

water policies Independent water commissions JNNURM and 74th Constitutional Amendment

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Roads
National

shortfall Slow progress of National Highway Development Programme (NHDP) PPP envisaged under DBFO model Plans for Expressway Authority of India Increasing liability in (BOT)-toll or the BOT annuity projects

Highway Authority of India (NHAI) plan

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Ports
Low

efficiency levels Maritime Policy not finalized development of state policies Proposed maritime agenda 2020
Landlord

ports & corporatization Multimodal connectivity Maritime finance corporation TAMP to Major Port Regulatory Authority (MPRA)
Prevention

of creating private monopolies

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Rail
Declining
Low

financial position

freight growth iron ore issues and competition from roads Sixth pay commission
Railways
Cost

Infrastructure for Industry Initiative (R3i)

sharing-freight rebate model Full contribution-apportioned earning model Special purpose vehicle (SPV) model Private line model
Accounting
(i)

Reforms to be implemented

fixed infrastructure, (ii) passenger operations, (iii) freight operations, (iv) suburban operation systems, and (v) other non-core activities
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Civil Aviation
Slow

progress on airports Civil Aviation Economic Advisory Council (CAEAC)

Overlaps

with Airports Economic Regulatory Authority

(AERA)
Absence

of comprehensive civil aviation policy

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Regulatory Organizations in India

Electricity
CERC/ APTEL

SERCs Regulators

Telecom
TRAI

(notified Broadcasting) TDSAT

Ports Tariff Authority for Major Ports Airports

AERA

Natural Gas
PNGRB APTEL

(additional Bench)
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2020

Posts/ Coal - on the cards

Petroleum & Natural Gas

Legislation enacted in 2006 PNGRB notified in 2008 PNGRB toll regulate

Refining Processing Storage Transportation Distribution and Marketing of petroleum products

DG Hydrocarbons licenses and regulated exploration and optimal exploitation of hydrocarbons Controversy over city gas distribution networks

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Airport Economic Regulatory Authority

AERA is economic regulator of airports AAI is operator of airports (other than PPP airports) DGCA regulates safety and technical aspects Tariff for aeronautical services taking into consideration Capex and timely investment Quality of Service provided Cost of improving efficiency Economic and viable operation of major airports Concession agreement Development Fees for major airports Passenger service fees Monitor performance standards Tariffs for five years at a time

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TRAI
Regulate

telecom and internet service operators Tariff setting and interconnection for cable operators

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TAMP

Tariff Authority for Major Ports Has sole function of tariff setting Investors and users have no recourse to an independent regulator on other matters such as

Dispute resolution Performance standards Consumer protection and competition

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No regulator as yet for:

Roads
NHAI

acts as the regulator as well as operator act as operator and regulator exists

Railways
Railways

Posts
Proposal

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Infrastructure Utilities are Diversifying

India, JUSCO United Kingdom, United Utilities: North West Water, Norweb France, Suez Lyonnaise des Eaux: Lyonnaise des Eaux, Tractebel Germany, E.ON: E.ON Energie, Gelsenwasser Chile, Enersis: Chilektra, Agua Potable de Lo Castillo

Many utilities cover 2 sectors Only a few - Vivendi and Suez Lyonnaise des Eaux cover 4 sectors
India, Reliance ADAG Brazil, Companhia Forca e Luz CataguazesLeopoldina: Energipe, Teleserv, Telecabo

Australia, TXU Australia Holdings: Eastern Energy, Westar-Kinetik Energy Argentina, SEMPRA Energy: Empresa Distribuidora de Energia Atlantica, Camuzzi Gas Pampeana, Camuzzi Gas del Sur
Source: 2626 World Bank company: Legend: Country, Parent Subsidiaries

India, Reliance ADAG. BSES, BSES TeleCom: Orissa Brazil, Eletropaulo Metropolitana Eletricidade de Sao Paulo: Eletropaulo Telecomunicacoes Estonia, Eesti Energia: Eesti Energia Televirk Spain, Endesa: AUNA Republic of Korea, Korea Electric Power Company:Powercom Malaysia, Tenaga Nasional Berhad: Fibrecomm

Agenda
1. 2. 3.

Theoretical Overview Issues & Developments in Infrastructure Electricity

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The Energy Landscape

Total: 524 MTOE

Total: 12,002 MTOE

Energy mix in India is expected to be dominated by 2828 8/24/2010 Coal, Oil & Gas.

Power Sectors Role in Economic Growth

Elasticity of Electricity w.r.t. GDP

12 10 8 6 4 2 0 Plans
Source : Annual Report 2011-12, Planning Commission

0.8
2929 21st November

Energy Regulation in India

Power
1.

Electricity Act 2003

Regulatory commissions at Centre and States with Extensive powers. Regulation of refining, processing, storage, transportation, distribution and marketing of petroleum products. Director General of Hydrocarbons licenses and regulates the exploration of hydrocarbons. No regulatory authority. Control by ministry and through nationalised corporations.

Oil & Gas

Petroleum and Natural Gas Regulatory Board Act 2006. 2.Petroleum Act 1934 3.Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962
1.

Coal

Coal Mines Nationalisation Act 1973 2.Coal Mines Conservation and Development Act 1974
1.

Fragmented Regulatory Philosophies and Move Towards Integrated Energy Policies

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Policy Failure in California - 2000

Low Rainfall Growing Demand Form Competitive Markets Fear of self dealing Limited Capacity Costly Emission Permits Divestiture of Generation CPUC No long term contracts AB 1890: Price Control Rising wholesale prices Non Payment Inadequate Supply Generators Offline Elimination of direct access Utilities not credit worthy State long term contracts State Revenue Bonds Regulatory Failure

High Risk System

High usage

Financial Crisis for Utilities

SCE Near Bankruptcy PG&E Bankruptcy

State Short Term Purchases

Consumer Protection

CPUC keeps low retail prices during shortage

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Industry Evolution: Policy Aspects

Reforms 2003 Act Competition Access

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The Electricity Act 2003 has transformed the Key Features of Electricity Market functioning of the Electricity Act, 2003

Unbundled vertically integrated State Utilities

Established independent Electricity Regulatory Commission

Generation

No license required for establishing non-hydal plants Distributed generation and renewables encouraged

Transmission

Immediate non-discriminatory open access to transmission Independent power transmission companies allowed

Trading

Introduction of power trading as a separate line of business Unbundling of transmission and trading

Distribution

Allows open access to a bulk consumer drawing more than 1 MW of electricity by January 2009, hence choice to customers Multiple Licensees in distribution allowed Rationalization of tariff Progressive reduction of cross subsidies Metered supply of electricity and strong anti-theft provisions

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Policy evolution and key thrust areas

Policy/Guidelines issued till date

Thrust Areas for Reforms

National Electricity Policy, 2005 notified by Ministry of Power for overall development of power sector National Tariff Policy, 2006 notified by Ministry of Power for ensuring financial viability of the sector Rural Electrification Policy Competitive Bidding Guidelines for Procurement of Power by Distribution Licensees National Electricity Plan rolling 5 year plan developed by Central Electricity Authority

Focus of reforms more on T& D rather than generation Fundamentals have improved significantly with recent regulatory changes and infrastructure development complementing structural reforms through unbundling & privatization Strong reforms with legislation like Electricity Act 2003 & APDRP etc. Transmission & distribution open access allowed Reduce T & D losses

Improve HT / LT ratio Improve billing to realization ratio 100 % metering Restrict on subsidies

Better control & Accountability Benchmarks set for Utilities to imbibe reforms & become financially viable

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Industry Evolution: Structural Aspects

Pre -1990s
State owned monopolies Power generation Transmission Distribution Retail

Post -1990s

Vertical industry disaggregation Power generation

Transmission & System Operation

Distribution & Retail

Power Trading

Growth of captive generation

Selective open access

Weak Market Operators

Franchisee

Retail Companies
Retail

Power

EE

Power generation

Transmission

Now & Going Ahead

Distributio n

Trading

Growth of captive generation

Independent System Operator

Full Open access

Strong Market Operators

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Industry Maturity Where is India ?

UK Canada Poland China Franc e Indonesi Russia a Turke y

US

Australia Germa ny

Industry Maturity

Brazil

OPENING

DEVELOPIN G Market Stage

MATURE

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Industry Maturity
UK Canada Poland China Franc e Indonesi Russia a Turke y India (2012) India (2003) Brazil India (1991)

US

Australia Germa ny

Industry Maturity

OPENING

DEVELOPIN G Market Stage

MATURE

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Future Plans
Demand Estimates (000 MW)
200

12th Plan (2012-17) + 100,000 MW Rs. 14 Lakh Crores

Generation Transmission Distribution Renewable (Solar, wind) Coal Mine Development

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Railway Infrastructure
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Exercise: Dealing with Many Stakeholders

Central
Policy Planning Appeal Regulations System Operations Financing HR Development Generation Transmission Distribution Trading
Inter-state Trading Licensee Ministry of Power Central Electricity Authority Appellate Tribunal Central Electricity Regulatory Commission (CERC) National/Regional Load Dispatch REC / PFC NPTI, UPES Central Generating Stations Central Transmission Utility State Electricity Regulatory Commission (SERC) State Load Dispatch Centre Internal / State Finances Internal State Generating Stations State Transmission Utility Distribution Licensee Intra-state Trading Licensee System Control / ALDC Internal Internal Internal / IPPs Internal / Transmission Companies Licensee/ Franchisees Inter/Intra-state Trading Licensee Power exchanges

State
State Government

Private/ Joint

Internal

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Sub-segments of the Electricity Sector

Generation Size Total Installed Capacity: 202 GW Transmission Inter-regional Transmission Capacity: 20750 MW Distribution Total no. of consumers served: > 188 mn Trading Trading Volumes: ~ 3%

Domestic -Government

NTPC, NHPC, DVC, BBMB, State Gencos

PGCIL, State Transmission Utilities

State Distribution Licenses

PTC, NVVNL

Domestic Private Players

Tata Power, Reliance Power, Essar Power, Adani Power

Reliance Energy Transmission Ltd., Tala Delhi Transmission Co (51% Tata Power & 49% PGCIL) Nil

Reliance Energy, North Delhi Power Ltd., Torrent Power, CESC

Lanco, Tata Trading, Reliance Trading

Foreign Private Players

China Light & Power (Gujarat), AES (Orissa)

AES Orissa (license cancelled by Regulator in 2007)

Nil

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Generation: Organization & Ownership

Example Centre NTPC, NHPC

State

WBPDCL

Joint Cooperative/ Group Captive Private

Maithon Power (Tata & DVC) APGPCL, GIPCL CESC, DPSC

Captive

Vedanta Aluminum (1215 MW) Jindal Power, Raigarh

Merchant

Source: CEA (April 2012)

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Transmission: Organization & Ownership

Overview
l More than one transmission licensee permitted in a State and

Non-discriminatory open access

l Private investments can be only through Independent Power
NR

Transmission Company (IPTC) or Joint Venture Company (JVC)

NER

WR

ER

Example Centre Powergrid (CTU)

SR

State

WBSETCL (STU)

Joint

Tala Delhi Transmission Co (51% TPC,49% PGCIL) Reliance Energy Transmission Ltd

Private

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Transmission: Organization & Ownership

Transmission Lines in Ckt. Km.
12 10 8 6 4 2 0 Source: CEA (April 2012)

Interregional Transmission Capacity in MW NER-NR NER-ER ER-NR ER-WR ER - SR NR-WR WR-SR ALL INDIA 0 1260 7930 2990 3630 4220 1720 21750

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Distribution: Organization & Ownership

Example
State Odisha Haryana Rajasthan Uttar Pradesh Uttarakhand Andhra Pradesh Delhi Madhya Pradesh Karnataka Assam Gujarat Maharashtra West Bengal Chhattisgarh Tamil Nadu Punjab Himachal Pradesh Structure G+T+4D G+T+2D G+T+3D G+T+6D G+T+D G+T+4D G+T+3D G+T+ 3D+TR G+T+5D G+T+2D (H+TR)+G+T+4D G+T+D+H G+T+D G+T+D+H+TR T+(G+D) T+(G+D) T+(G+D) Timeline 1995/1998 1998/1999 2000 2000/2003 2001/2004 1999/2000 2002 2002 2001/2002 2003 2005 2005 2007 2008 2010 2010 2010

SEB

Bihar, Jharkhand, Kerala

Departments

Goa etc.

State Owned DISCOM State Owned Generation Distribution Co. Private

WBSEDCL

Punjab and Tamil Nadu CESC, TPCL, RIL, BSES, NPCL, NDPL Torrent Power Bhiwandi Limited, Agra, Nagpur etc.

Private Distribution Franchisee

G-Generation company, T-Transmission Company, D-Distribution Company, HHolding Company, TR-Trading Company, (G+D)-Generation & Distribution combined

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Exercise: Dealing with Many Stakeholders

IMPORTANCE

VERY HIGH

Keep Satisfied Minimal effort

HIGH

Key Players Keep Informed

VERY HIGH

HIGH

INTEREST
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Issues in Regulations

Combination of powers of judiciary, executive and legislative Absence of inter institutional bargaining Accountability of independent regulations Multi layered and multi agency regulations & state-centre issues Scarcity of regulatory expertise Sectoral regulatory compartments Need for multi sector regulations Overlaps in competition law and regulations

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Recent Trends

Separation of carriage and content business

Carriage is mostly natural monopoly open access requirements Content is amenable to competition

Emergence of uniform concession frameworks Shift from Command and Control and focus on regulatory reform and governance

Transparency of institutions to support independence and autonomy Setting performance based transfer prices & Differential Pricing Emergence of long term pricing regime Shift towards participatory regulatory process

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Regulatory Framework Design Options

Cost plus regulation
Prudent costs Limited but assured returns Cost variations eligible for true-up Limited or no incentive

Targeted incentive
Overlays incentives on cost plus Identifies cost pass through and risk mitigation elements

Performance Based Regulation

Regulates outcome and not cost Initial rate setting based on cost of service Two options - price cap and revenue cap

Hybrid options
Uses the basic PBR concepts Risk mitigation mechanisms Incentives critical parameters

Incentive for Efficiency

Targeted incentive mechanism Moderate to High Moderate to High Moderate to High Shared Moderate Performance Based Regulation Moderate to High Low High To Utilities High

Annual CoS Regulation Risk Mitigation Regulatory Involvement Incentive Benefit sharing Information Requirement High High Low To Consumers Moderate

Modified PBR Moderate to High Moderate Moderate to High Shared Moderate

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Thank You
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