1. CII – PTC Conference on The Power Market Post Electricity Act 2003: Entities, Business Models and Implications by Karthikeya Pisupati Deloitte Touche Tohmatsu India Pvt Limited October 15, 2003 SESSION II : EMERGING SHAPE OF DOWNSTREAM LINK - TRANSMISSION & DISTRIBUTION

2. Context More than 10 years of Reforms in the power sector Some states have developed their own “reform Acts” –Unbundled their SEBs into G, T & D’s –Setting up of Electricity Regulatory Commissions –Privatisation of distribution (Orissa, Delhi) Others yet to unbundle their integrated utility Need to give thrust to reforms (in order to realise efficiencies) –Introducing markets, open access, contestability of customers etc This presentation looks at the business models of T & D in the light of new Electricity Act, 2003

3. India Is Following Established Path Of Industry Evolution MonopolyTransitionalCompetitive Italy Canada New Zealand Australia Mexico South Africa India (2003) Russia/CIS Asset ManagementCustomer Management Customer Contestability Brazil Pakistan U.K. Scandinavia Argentina, Chile United States Germany France

4. States position – Circa 2003 – Still Monopolies Efficiency Levels Low High IntegratedUnbundled“D” Privatised Orissa Delhi KarnatakaHaryana Rajasthan UP AP Uttaranchal MP Gujarat TN HP Maharastra Punjab Assam Nagaland Bihar Tripura Sikkim Ar.Pradesh Mapping based on the Report on Rating of SEBs, ICRA & CRISIL

5. Engineering Finance/Marketing AssetsCustomers Monopoly ModelCompetitive Model Key Competencies Management Focus Transmission/ Distribution Generation/ Retail Applicable Segments PhysicalPortfolioCustomerPortfolio Value Lever Value Drivers - By Segment

6. What’s the new Business Model for T & D? Txn Wires SO Bulk Supply TRANSCO Retail Supply Dist Wires Large Consumers Other Consumers Franchise Consumers DISCOM Open Access Unbundling Functions Trading Non-exclusivity Txn Wires SO Wholesale Supply Retail Supply Dist Wires Large Consumers Other Consumers Franchise Consumers TRANSCODISCOM(S) TRADECO (S) Contestable Consumers GRID CO (S)

7. Implication of new business model Functionally, under T & D segment of the business, Trading System Operation Transmission wires Distribution wires Retailing – Non contestable consumers, Tariffs Covered in the subsequent slides

8. Trading Creation of Multi- buyers & Multi sellers Define Trading models Scheduling & Dispatch Imbalances Pricing of energy Bilateral Spot Treatment of subsidies/ cross- subsidies in a transparent way Move to pricing signals – SRMC/ LRMC Balancing & Settlement modalities Shortage of capacity Pricing of ancillary services Non-exclusivity of area of supply Grid available to move power over different regions Pricing for HT/ LT PhysicalPricingIssues/ Concerns Act specifies “Non-Discriminatory” access to users Multiple Licenses CERC/ SERC to fix surcharge for open access with Special treatment for captive

9. System Operation Scheduling & Dispatch – Merit Order Treatment of Imbalances Spot Ancillary services Balancing & Settlement – need to know the physical contracts for settlement Pricing of Imbalances Pricing of Ancillary services Settlement Contract Balance Sophisticated system (within state) Demand management Treatment of shortages minimum hrs of supply for Agriculture/ rural Dispatch of Non- conventional PhysicalPricingIssues/ Concerns Act specifies Balancing & Settlement functions with LDCs

10. Transmission wires – Inter & Intra state Accurate Measurement of energy & capacity handled Congestion Management Availability of system Unbundling the “Average charges” Contract Path MW mile Postage stamp/ Incremental Postage Stamp Congestion pricing Adequate pricing signal for maintenance of system Determination of contract path pricing within the state New capital expenditure Incentive to build? PhysicalPricingIssues/ Concerns Act specifies only transmission wires for CTU/ STU along with system operator function

11. Distribution Wires Accurate Measurement of energy & capacity handled Loss reduction investments HT/LT ratio Transformer loading Availability of system Unbundling the “Average charges” cost to serve various loads Defining “wires” cost for multiple licensees Pricing signal for new investment (adequate for good load development) Right to connect (for all categories immediately?) Duplication of wires? PhysicalPricingIssues/ Concerns Act specifies only metered supply after two years Allows “inset” franchising Special Policy for Rural distribution

12. Retailing – Franchise consumers Accurate measurement of LT system Metering Billing efficiency Reduction of “theft” & other commercial losses Pricing to consumers Cost to serve Retain customers Customer service Managing demand of Agriculture Allocation rules – position in case of multi buyers system Need to retain the creamy layer from competition Tariff rebalancing PhysicalPricingIssues/ Concerns Act allows for special Policy for treatment of rural electrification National tariff Policy?

13. General System Issues Long term PPA signed with IPP’s & other generators Pricing pressure on adverse hydro/ thermal mix of generation Limited number of trading players initially? (from capital adequacy, capacity to bear loss positions) Major cash flow problems – need to still depend on large subsidy from state government Affect private participation in the existing distribution businesses of state Tariff principles (cross-sub elimination, agriculture tariffs, multi-year tariffs) Competitive bid tariff route (binding)– How to define it for Trading, Wires?

14. What are the pre-requisites for Competitive Market? Tariff reforms Transparent/ clear understanding of Value chain and associated costs Elimination of supply shortage Multi-buyer and Multi seller Price responsive Demand and Supply Position for generators to participate in spot market Access to Transmission and Distribution wires Interconnectivity to trade power across states/ regions

15. Enablers in Electricity Act 03 Allows Electricity Boards to unbundle/ transfer to new corporate entities Unbundling of wires & Trading business Fixed time frame for enunciating policy and action plan –Provision of open access –Tariff policy –Rural electrification The Act is in the right direction Modalities to be worked out - by States & Centre jointly……..