Competitive bidding guidelines for power procurement MUM-RLP007-20040427-(MR)(rd) Competitive bidding guidelines for power procurement Presentation to Hon’ble Central Electricity Regulatory Commission and Distinguished Invitees May 7, 2004

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

CONTEXT FOR TODAY’S DISCUSSION MUM-RLP007-20040427-(MR)(rd) CONTEXT FOR TODAY’S DISCUSSION Electricity Act, 2003 aspires to create a liberal framework for the development of the power sector – “An Act to consolidate the laws…for taking measures conducive to development of electricity industry, promoting competition therein, protecting interests of consumers and supply of electricity to all areas…” Current situation End goal Gradual transition path Largely cost plus tariff systems with limited incentives for improving efficiencies A well functioning power market leading to free competition – rewards more efficient generators and reduce power procurement cost The power sector needs to introduce competition into the power procurement process as it gradually migrates to competitive markets across electricity value chain

INDIAN ELECTRICITY REGULATIONS ENVISAGE A COMPETITIVE MARKET MUM-RLP007-20040427-(MR)(rd) INDIAN ELECTRICITY REGULATIONS ENVISAGE A COMPETITIVE MARKET “Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such tariff has been determined through transparent process of bidding in accordance with the guidelines issued by the Central Government” “Under the competitive bidding route, the Commission perceives its function of regulating tariffs to primarily be the scrutiny and approval of the process adopted for competitive bidding, with a view to ensure that competitive conditions do prevail” “A significant portion (which could be up to 50% of the new capacity) should be committed to trading or other forms of competitive power markets. This could be attained over a period of time, keeping in view the transition requirements.” “As far as possible, power procurement should be through a transparent competitive bidding mechanism.” Section 63 Electricity Act 2003 CERC order dated 9th March 2000 on a petition filed by Power Trading Corporation Ltd. Task force report on power sector 2004 , page # 275 Tariff Policy, Appendix 1 of the Task force report 2004 , page # 275

MUM-RLP007-20040427-(MR)(rd) THE TASK FORCE REPORT ALSO SEEKS TO ENHANCE COMPETITION IN THE SECTOR USING COMPETITIVE BIDDING The task force report of 2004 specifies five preferred mechanisms for procurement of electricity through competitive bidding* Tariff based bid for entire project capacity Tariff based bids for blocks of capacity Competitive tariff based bidding, without being related to any particular generation source Tariff based bidding for peaking requirements Bidding on capital cost of specific project (with overall two part tariff structure) Linked to particular generation capacity * Page 289 – Report of the Task force on Power Sector Investment and Reforms (Feb 2004 Volume I)

OBJECTIVES OF TODAY’S DISCUSSIONS MUM-RLP007-20040427-(MR)(rd) OBJECTIVES OF TODAY’S DISCUSSIONS Share our views on competitive procurement of generation and transmission capacity To achieve consensus on how to formulate and implement guidelines for competitive bidding process, so that it embodies the spirit of the Electricity Act 2003 To discuss and arrive at a consensus on the extent of standardization required in the bidding process and documents in order to expedite the process

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL COST OF SUPPLY MUM-RLP007-20040427-(MR)(rd) POWER PROCUREMENT COST IS A LARGE PORTION OF THE TOTAL COST OF SUPPLY Paise/Kwh, 2001-02 469 365 357 349 Other cost Power procurement cost Maharashtra Delhi Gujarat All India Power procurement cost as percentage of total cost of power (Per cent) 62 77 73 66 Source: Planning commission report on SEB performance (2001-02)

MUM-RLP007-20040427-(MR)(rd) POWER PROCUREMENT IS COMPLEX DUE TO DIFFERENT BASELOAD AND PEAK LOAD REQUIREMENTS Delhi’s ‘unrestricted’ load duration curve (MW) Peak Intermediate Baseload Hours of the year Source: Delhi operations of REL

TODAY, SIGNIFICANT COST DIFFERENCES EXIST AMONG GENERATORS MUM-RLP007-20040427-(MR)(rd) TODAY, SIGNIFICANT COST DIFFERENCES EXIST AMONG GENERATORS Tariffs of various plants supplying to Delhi Power plant Type MUs bought Rs/Kwh Salal Baira Siul Tanakpur Singrauli Chamera Rihand Anta Auraiya Unchachar-I Uri Dadri (Gas) Unchachar-II Dadri (Thermal) Badarpur BTPS RPH IP Station GT Pragati PPCL RAPP(B)-III NJPC RAPP (B)-IV Hydro Thermal Thermal (GT) Gas Nuclear 358 86 58 1,370 132 850 375 600 190 286 640 400 5,065 4,600 740 490 1,060 1,706 28 160 276 0.59 0.63 1.04 1.09 1.32 1.47 1.61 1.62 1.88 2.08 2.24 2.26 2.27 2.37 2.50 2.71 2.98 3.02 3.25 While some of these differences can be explained by differences in fuel type, technology, location and vintage, some differences are attributable to differing generation efficiencies Current cost plus system does not adequately encourage generators to improve operational efficiencies Source: Delhi Electricity Regulatory Commission order on Delhi Transco ARR for 2002-03 and 2003-04

POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE MUM-RLP007-20040427-(MR)(rd) POWER MARKET IS REQUIRED TO EVOLVE TO A NEW STRUCTURE Today’s wholesale power procurement model Desired market structure for power procurement (in the end-state) Single buyer model - SEB/transco pools distribution utility requirements to procure power Multiple buyer model (e.g., each distribution company procuring for its own requirements) Primarily long duration contracts Suitable mix of long, medium and short term contracts Cost plus tariff setting CPSUs and SEBs: cost plus tariffs based on CERC/SERC orders IPPs: mix of cost plus and tariff based bidding Tariff setting driven by market forces Limited incentives to improve efficiency Market rewards players with lower costs and higher efficiencies

MUM-RLP007-20040427-(MR)(rd) TO REACH THE REQUIRED STRUCTURE, IT IS IMPERATIVE TO ACHIEVE COMPETITION IN GENERATION What needs to be achieved as the market transitions to full competition? Reduce inefficiencies in generation plants to enable low cost power production Encourage private investment in generation to keep pace with growing demand Develop a fast, efficient and transparent bidding process that expedites procurement Building a framework for the end state of the power procurement in the envisaged free market pricing system Competitive bidding based power procurement is crucial for the healthy development of this sector

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

GUIDING PRINCIPLES FOR COMPETITIVE BIDDING MUM-RLP007-20040427-(MR)(rd) GUIDING PRINCIPLES FOR COMPETITIVE BIDDING Competitive bidding process should ensure Free fair and effective competition Transparency Simplicity and cost effectiveness of process Minimal burden on regulator and other stakeholders Flexibility to adapt to varying needs of power procurement according to the structure of the sector The new guidelines should adequately build on CERC and GOI guidelines issued earlier by incorporating new inputs from EA 2003 and the Task Force report

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

GUIDELINES SHOULD COVER PROCUREMENT BY VARIOUS ENTITIES MUM-RLP007-20040427-(MR)(rd) GUIDELINES SHOULD COVER PROCUREMENT BY VARIOUS ENTITIES Sellers Buyers Existing generating stations Distribution Licensee Procurement transaction New generating stations Trading licensee Trading licensee Nominated Buyer (?) Distribution Licensee (?)

GUIDELINES SHOULD COVER BOTH GENERATION AND NEW TRANSMISSION CAPACITY MUM-RLP007-20040427-(MR)(rd) GUIDELINES SHOULD COVER BOTH GENERATION AND NEW TRANSMISSION CAPACITY Should guidelines cover it? Procurement category Rationale Generation Capacity May be baseload/Peak or off peak Yes This would form the bulk of the power procurement bids; hence it is imperative that the guidelines cover these Energy Transmission capacity Existing Not required Rules for open access on transmission lines already well defined (e.g., transmission service charge bidding) Firm May be entire day/part day Non-firm Setting up new capacity Yes New capacity addition not based on competitive bidding so far, but lends itself to the process quite naturally Ancillary services Spinning reserves Reactive Power Harmonics etc. Not initially The concept of ancillary services not well developed yet In future as market matures guidelines may be expanded to include these as well

Excessive burden on regulator MUM-RLP007-20040427-(MR)(rd) TODAY, DISCOMS/TRANSCOS PROCURE POWER MAINLY THROUGH LONG TERM BILATERAL CONTRACTS Description/Details Long term Generally 15-25 year contracts. New capacity may be added if needed Capacity added in three ways - Self generation (SEB owned generators); capacity cleared by SERC as required Allocation from central generating stations ; CERC determines tariffs Independent power producers; Bid/MOU route for projects; CERC/SERC vets the tariff Medium term No clear process currently for bridging medium term requirements (i.e. more than one year and less than 15 year duration) Short term Upto one year duration contracts; (form small part of total power procured) SEBs propose power purchase from third parties in their ARRs, prior to actual contract Some SERCs have taken a hands off view on these bids as long as the total annual power purchase cost remains within budget Real time/day to day No day ahead market Real time power requirement (in excess or deficit of scheduled drawls) drawn directly from grid without any prior permission from regulator SEB pays/receives UI charges under ABT regime at the end of accounting cycle Excessive burden on regulator

PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE MUM-RLP007-20040427-(MR)(rd) PROPOSED GUIDELINES WOULD COVER POWER PROCUREMENT PHASE Discom forecasts its power requirements for Long term Medium term Short term Covered by competitive bidding guidelines Regulator approves forecasted power need Discom procures power Pricing mechanism Traders Competitive bidding Competitive bidding Generators Discom power procurement Pricing mechanism With generator Cost plus pricing MOU based bilateral contracts Cost plus pricing With traders (e.g., PTC) Competitive bidding by Trader

MUM-RLP007-20040427-(MR)(rd) IN TERMS OF DURATION, GUIDELINES WOULD COVER ALL PROCUREMENT CONTRACTS OUTSIDE THE DAY AHEAD AND REAL-TIME MARKET Proposed scope of guidelines Description of type of contracts Long term All contracts greater than 10 year duration The lead time (advance notice before start of contract) needs to be decided for each term (long/ medium/ short) to ensure effective competition Medium term Contracts that span 1-10 years duration Short term Power requirement for several months duration (upto 1 year) Day(s) ahead market / Emergency procurement Typically a day to a week ahead demand Requirement typically driven by forecasting error/ weather changes/unforeseen conditions Real time Unscheduled spikes/drops in demand that have to be managed Can continue with current UI/ABT system until the establishment of a fully functioning wholesale and spot market

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

MUM-RLP007-20040427-(MR)(rd) BIDDING PROCESS WOULD START WITH THE REGULATOR APPROVING THE DEMAND FORECAST FOR THE DISTRIBUTION COMPANIES Path 1 Using standard bid documents Demand forecast for short / medium / long term by discom Regulatory approval of forecast Procurement process Path 2 Using non-standard bid documents Guidelines specify process to be followed in each case Standard documents supplied for following path 1 Regulator approves documents if path 2 is followed

MUM-RLP007-20040427-(MR)(rd) PROPOSED POWER PROCUREMENT BIDDING PROCESS IF STANDARD DOCUMENTS ARE USED Requirement definition Shortlist bidders Evaluation of bids Award of bid(s) Initiate RFQ RFP Bidding Post bid negotiations Key activities/Salient points Specification of Quantum Timing Duration of contract Publish notice Issue RFQ Evaluate responses to RFQs Shortlist bidders For short term contracts bidders may be pre- qualified Issue RFP to selected bidders Conduct pre-bid conference Short listed bidders invited to submit bids Technical compliance must for any bid to be considered Determination of winner on bases of price bids Use of independent observer if necessary RFQ/RFP process may be combined into single step, especially for short term contracts At each stage we may specify minimum number of bids to proceed to next stage Regulator kept informed at all stages of the process

MUM-RLP007-20040427-(MR)(rd) PROPOSED POWER PROCUREMENT BIDDING PROCESS IN CASE OF DEVIATIONS FROM STANDARD BIDDING DOCUMENTS Regulatory clearance of forecast Prepare bidding documents Requirement definition Shortlist bidders Initiate RFQ A Iterations on development of bid documents Seek regulatory approval Regulator’s comments on process and go ahead A Evaluation of bids Awards of bid RFP Bidding Regulatory approval if required Even though active regulatory approval needed in only certain stages, but the regulator is always kept informed of all developments Post bid negotiations Any modifications suggested by bidders, or due to any other reasons to be approved by regulator – possibly over several rounds of iterations

MUM-RLP007-20040427-(MR)(rd) IN THE RFQ STAGE, BIDDERS SHOULD BE SCREENED ON THE BASIS OF AN ARRAY OF METRICS Technical metrics Past record Financial metrics To prevent frivolous/mischievous bidders To ensure supply contracts, in case of default To minimise risk of delay/shortfall For generators For new plants Past infrastructure project execution Resource raising For existing plants Reliability Performance in the past Tie ups with transmission companies preferred Should be an organization of repute No default on previous contracts To ensure supply contracts, in case of default Net worth Credit worthiness Bank/other financial guarantees For traders For long term contracts trader should show the capability/history to source 70-80% of contract amount Tie ups with generators and transmission companies are preferred Source of power has to be specified Trader of repute No default on past contracts Past litigation record No conflict of interest between other obligations and contract being bid Net worth Credit worthiness Bank/other financial guarantees To be suitably relaxed in initial stages for traders, as they would have no history of trading operations Limits to vary by duration of contract and amount of load contracted

MUM-RLP007-20040427-(MR)(rd) FOR MEDIUM/LONG TERM CONTRACTS, AT RFP STAGE, BIDS SHOULD BE SCREENED BASED ON NON PRICE EVALUATION PRIOR TO PRICE COMPARISONS Element for evaluation Details Supplier’s guarantee Financial guarantee covering supply default All these aspects need to be sufficiently detailed in the standard bid documents and processes, to enable bids to be efficiently and transparently evaluated/ rejected on technical merits Delivery point Different bidders could be capable of delivering power at different points in grid Most reliable/least bottlenecked point most preferable Delivery dates/period Relevant for time of day contracts, or for parts of long term contract Best fit to demand should get preference Buyer’s guarantee Bidder asking for least financial guarantee from buyer would be preferred Force majeure /risk sharing Risk sharing mechanism in case of forced outages/unforeseen circumstances

BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL MUM-RLP007-20040427-(MR)(rd) BUYER SHOULD SPECIFY THE BID STRUCTURE IN DETAIL Discussed further Element Illustrative examples What is being bid for? Energy Capacity Percentage of load (varying) Elements of a bid Whether part bidding is allowed? No part bidding Part bidding allowed Part bidding allowed in multiples of some pre-specified minimum bid unit (preferred option) What is the tariff structure used? Single part tariff Two part tariff with suitable indexation (preferred)

BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF MUM-RLP007-20040427-(MR)(rd) BID PRICING STRUCTURE WOULD USUALLY EMPLOY A TWO PART TARIFF Aspect Details Price setting mechanism Two part tariff structured as follows Tariff bid = Fixed component (X) + Variable component (Y) X = X1 + X2 X1: Inflation linked (e.g., O&M) X2: Non-Inflation linked (e.g., debt servicing) Y = Y1 + Y2 Y1: Variable component not linked to any index Y2: Linked to suitable energy index* Both X and Y could vary by time frame Buyer should compare the competing bids based on annualised/NPV type calculations Bidder should not be disqualified for submitting different price bids in different contracts * Index might be a reference fuel price, or price of a basket of fuels, or some other index Note: Medium term contracts could follow a pricing mechanism similar to long term contracts with simplified indices

MUM-RLP007-20040427-(MR)(rd) FOR SHORT TERM CONTRACTS, THREE ASPECTS SHOULD BE MODIFIED TO SPEED UP THE PROCESS Discussed further Aspect Details Bid pricing Single part tariff No escalation/inflation No fuel variation Bids compete purely on single price (i.e., all bids that fulfill all technical criteria beforehand) Empanelment of bidders Bidders empanelled once Panel kept updated on regular basis For each short term requirement, panel members asked to bid – eliminates the need for bidder qualification step in procurement process Short lead times Bid process may be started (public notification stage) upto a few weeks before the actual requirement of the contract Thus mostly traders and existing generators would likely bid for these

EMPANELMENT OF BIDDERS - DETAILS MUM-RLP007-20040427-(MR)(rd) EMPANELMENT OF BIDDERS - DETAILS Rationale Short term bids need to be executed rapidly since time is of the essence Need to avoid unnecessary repetition/ duplication of records For short term bid, buyer should skip bidder qualification Buyer should ask the existing panel of bidders to bid Buyer should regularly update the list of empanelled bidders Process/details of empanelment Updation of bidders panel Buyer should update the list of empanelled bidders to reflect changes over time. These would include – New entrants – should be allowed to submit details at 3-4 occasions in an year. Once a bidder is empanelled, he stays on the panel until he withdraws, or is disqualified Regular checks - Empanelled bidders should submit details of credit worthiness and make other financial/ legal disclosures annually. Any discrepancy / shortfall could lead to revoking of pre-qualified status Disqualification from panel - Bidders will attract disqualification if They default (or dishonor) on any contract They have not participated in the last 3-4 bids up for competition

MUM-RLP007-20040427-(MR)(rd) INTERNATIONAL PRECEDENTS OFFER SEVERAL USEFUL TIPS FOR FORMULATING THE COMPETITIVE GUIDELINES Reference document Issue date/number Aspect International examples Bidding for part of the contract RFP for Central Maine Power Company allows bidders to bid in multiples of 20% of total contract amount November 18, 2003; issued by Maine PUC Bidding for partial duration EPSA guidelines mention use of annuity based calculations while comparing bids for unequal (part) duration and choosing a lower overall bid portfolio EPSA guidebook for design implementation and monitoring of competitive power supply solicitations Use of Independent observer Independent observer was used for overseeing the process of RFP’s for Portland General Electric Company January 20, 2004; Interim report of independent observer Bidding for percentage of load Rather than a fixed load (in MW/ MWh) the bid may be asked for the percentage of the utility’s load, so as to offload some risk to the suppliers EPSA guidebook for design implementation and monitoring of competitive power supply solicitations Use of discounting/ NPV calculations for evaluation Public service commission of Maryland approved use of single discounted average term price (DATP) for evaluation of bids in the phase II settlement proceedings Order no. 78710 Case no. 8908; Phase II September 2003 Pre-qualification of bidders to form a panel Rules of the Florida Public Service Commission on general purchasing procedures allow the prequalification of bidders to form a panel Ch.25-25 Sup no.194 Financial guarantees from bidders RFP for Central Maine Power Company required bidders to provide financial guarantees upto US$ 1.21 million/month and 1.50 million/month while bidding for service to 2 classes of consumers November 18, 2003; issued by Maine PUC

INTERNATIONAL BIDDING PROCESS - EXAMPLE MUM-RLP007-20040427-(MR)(rd) INTERNATIONAL BIDDING PROCESS - EXAMPLE US long term PPA bid process Process start Receiving EOIs Regulatory Validation Bidder selection Receiving proposals Round 1 Revision/Round 2 Contract start Steps Timeline 3½ months 15 days 15 days 15 days 2 months 9 months Posting of information publicly Request for Expressions of Interest (EoI) FERC and PJM qualification Credit application and financial information received Pre-bid conference Eligible bidders qualified and issued certification Request for detailed proposals from eligible bidders Price proposals received Bids evaluated Award of bids More rounds if previous rounds fail to meet objectives Iteration continues till satisfactory solution reached Retail prices published 6 months before start of contract Details Source: Allegheny power RFPs and RFQs

AGENDA Context and objectives MUM-RLP007-20040427-(MR)(rd) AGENDA Context and objectives Need and importance of competitive bidding for power procurement Guiding principles Our suggestions Scope of guidelines Bidding process and evaluation of bids Enablers for speed, transparency, and fairness

SYSTEMS REQUIRED TO ENSURE SPEED, TRANSPARENCY AND FAIRNESS MUM-RLP007-20040427-(MR)(rd) SYSTEMS REQUIRED TO ENSURE SPEED, TRANSPARENCY AND FAIRNESS Discussed further Standardization of contracts Standard contract documents to cover as many scenarios as possible All deviations counted as material deviations – requiring regulatory approval Speed All details of bid process and method given to all bidders All factors that will be considered and their relative weights notified in advance Transparency Information dissemination Communications All communications to be made in written form All records retained for a certain duration after the end of bidding Optional separate rounds for RFP and RFQs Fairness Independent observer Not required in usual biddings – as long as standard processes are being followed Needed if an affiliate of the buyer is also bidding for the contract This would be more of an oversight role without any involvement in decision making

STANDARDIZED BIDDING DOCUMENTS NEEDED FOR EXPIDITING PROCESS MUM-RLP007-20040427-(MR)(rd) STANDARDIZED BIDDING DOCUMENTS NEEDED FOR EXPIDITING PROCESS Providing standard documents as templates is important to Expedite process Prevent the whole process from getting bogged down in litigation Reduce burden on regulator and all shareholders Standardization is easy for short term contracts. It gets increasingly complex as the duration of contracts increases For new plants standard documents need to capture all possible aspects of Finance structuring Risk sharing Need to provide flexibility for future requirements Need for detailed documents as standard templates; but with sufficient flexibility to ensure responsiveness to new needs

IMPORTANT ISSUES FOR DEBATE – NOT EXHAUSTIVE MUM-RLP007-20040427-(MR)(rd) IMPORTANT ISSUES FOR DEBATE – NOT EXHAUSTIVE Can any buyer aggregate power requirements Across distribution companies? Across states? Across regions? Even though the Electricity act itself does not prohibit such aggregation, would this lead to a dispute between state and central bodies ? How do these guidelines change with the development of a power pool? Should there be a common energy index to link the variable costs of plants? If yes, how should it be developed/monitored/updated? Should the buyer inform rejected bidders about reasons for rejection? Should the buyer seek power at one specific delivery point per bid and compare costs accordingly? For long-term procurement requiring set up of new capacities, should the buyer specify location, fuel, technology (e.g., for BOT basis)? Evaluation of non-price factors What is the process for dispute resolution? Is the duration definition (long-term > 10 years, medium-term between 2 and 10 years, and short-term less than 2 years) rigid or evolving over time? Should these guidelines cover competitive bidding by a trader as well? In order to avail benefits of scale (e.g., flattened load curve, economic size of the plant) and reduce transaction costs

MUM-RLP007-20040427-(MR)(rd) Thank you