The State Capacity Initiative at the Centre for Policy Research (CPR)’s talk series titled: ‘Know Your Regulator’ is held in collaboration with the National Council of Applied Economic Research (NCAER), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA). In this talk series, we are talking to chairpersons and members of India’s regulatory agencies about regulation of Indian markets and the economy.
Our guest for the fourth event in the series was Mr P.K. Pujari, Chairperson, Central Electricity Regulatory Commission (CERC).
He was in conversation with Ms Arkaja Singh, Fellow, CPR, Dr Abha Yadav, Associate Professor, IICA and Director, FOIR Centre at IICA, and Dr Ashwini K Swain, Fellow, Initiative on Climate, Energy and Environment, Centre for Policy Research.
Dr Mekhala Krishnamurthy, Senior Fellow, CPR and Ms Amrita Pillai, Consultant, IEPF Chair Unit on Regulation, NCAER made welcome remarks.
The event was held on 20 December 2021, and a full video recording is available above.
Here is a summary of the conversation:
Background, role and purpose of CERC
CERC was setup with a purpose to distance the government of the day from getting into running the power sector. From 1991, power generation was opened to accommodate private participants and dealing with these private players on commercial issues was not within the government’s expertise. This led to the creation of a regulator. Subsequently, in 2003, the government distanced itself from tariff setting and other commercial aspects of the power sector. The mandate of the regulator is very clear: CERC is an independent regulatory body, but it must work within the framework of the Electricity Act.
CERC frames its own regulations, and the objective is to strike a balance between the suppliers and the consumers. In the process, CERC’s role is to ensure that the cost of electricity is recovered in an affordable manner and that competition and efficiency are brought into the system.
Dealing with the transition to renewables
The power sector all over the world is undergoing a tremendous change because of the introduction of renewables. The regulator needs to keep itself abreast with these developments and create a legal framework that enables and facilitates the changes that the sector is experiencing. In India, the government has announced setting up of large-scale renewables with a capacity of 480 GW. The biggest challenge that the CERC faces at this time is to integrate this into the Indian grid. Battery and hydrogen alternatives are also showing a promising potential.
This has regulatory, commercial and operational aspects. The regulator needs to keep itself abreast of these developments and develop a legal framework to facilitate these changes. The regulator also needs to be able to anticipate what changes are going to happen, and create the necessary background so that they can be assimilated into the system.
CERC might frame regulations facilitating integration of renewables into the system but how does it play out in practice? CERC needs to address technological operations that involve forecasting and scheduling issues as well. The grid operator must upgrade itself but how can CERC facilitate this transition? These functions are not visible to the public. The public only know the generation and distribution part of the sector, but operating the grid is not something people see. It takes a lot of effort to manage the grid. EVs are coming up and those challenges needs to be addressed too. CERC must be prepared to facilitate these developments; it must also prepare the grid to absorb the changes without disruption. When we discuss market turbulence, market monitoring and new emerging trends are where the issues begin. CERC must be very quick to develop capacity in those areas. Either we recruit people, or we have in-house capabilities, and CERC usually takes a call on how to upskill its employees. But the nature of the requirements keeps changing and this is another challenge.
CERC is mandated to promote competition and increase the efficiency. The body also advises government on the removal of institutional barriers to bridge the demand and supply gap, and therefore to foster and develop the interest of the consumers. Has the CERC been able to fulfil this mandate for its consumers?
As far as bulk power generation is concerned, there are two ways in which we determine the cost. The Electricity Act provides for either the cost-plus approach, which means that, for example, for an NTPC plant, you determine the capital cost and tariff. Or you can have a competitive bid through which price is discovered. This is more appropriate when there are private sector generators. But it is not as if only the second approach is competitive. In the first one too, it is the job of the regulator to determine efficiency parameters and mimic the market in fixing tariff. So it is not that the cost-plus approach is based on actual expenses. Over the years, the regulator has had to analyse and find the most efficient norms. In either of these ways, what the regulator does is to discover the tariff that is competitive.
Electricity is a concurrent subject and the state regulators set the distribution tariff that is paid by the consumer. State regulators determine the tariff of distribution of power within the state. They take the price set by the central regulator (both through costless and competitive bid), add the transmission charges (determined by the central regulator) and once the cost is fixed, they fix the tariff for the utilities and this final cost is passed to the consumers. So, the benefit of efficiency that finally reaches the consumer is through both the central and state regulatory levels. The CERC is a central regulator and does not directly deal with consumer tariff. But CERC’s generation cost becomes a bigger input in consumer tariff, and the regulator is fully responsible for discovering tariff that is competitive. The approach that CERC takes is to fix the tariff within competitive and tight normative parameters, discover tariff through competitive bidding and make sure that the transmission system is planned in an efficient manner so that there are no strained assets, and lastly, ensure that the efficiency is passed on to the consumer. The bidding guidelines, based on which the competitive bidding takes place, are framed as per the Electricity Act. Over the years, solar prices have been reducing sharply after competitive bidding, and regulators have to see the benefits of these falling tariffs are also passed down to the consumer. This is the broad framework under which CERC makes sure that the efficiency, economies of scale and competitiveness of those tariff gets passed on to the consumer.
CERC’s legislative, executive and adjudicatory powers
CERC has powers that are quite similar to legislative powers; the regulator frames regulations and places it in the Parliament. The regulations made by CERC are adjudicated based on the Electricity Act and the regulator also adjudicates on its own regulations and in that, it functions like a civil court. The CERC also does operations functions. It is a whole system operator and thinks about how systems function and does transmission planning, which is almost like an executive function. The CERC as an organisation has all the three elements of legislative, judiciary and executive functions. The need of the organisation is not specialization in one part; for electricity is the sector where there is techno-commercial economics. Every technology has its own commercial use. Finance, technology, and legal components are important in decision making. So, there is a need to ensure that CERC has enough expertise in these areas. This is a challenge since it is difficult to get competent people in all the three areas. Being in the electricity sector, people with technical backgrounds understand finance and law easily. CERC also has in-house people who acquire capacity and contribute to the government’s decision making. The regulator has autonomy to the extent that it does not report to the ministries but there are general financial guidelines under which the body requires governmental approvals. The CERC does not depend on the government budget and there is financial independence since we have charges and fees. The Act also defines the nature of our independence. If the Act is followed in true spirit, there is enough independence. The government can give directions to the central regulator, but the regulator is not bound by their advice. They also cannot issue guidelines specific to commercial or tariff issues. There is also a provision where CERC can advise the government on competition and market regulation; these are not binding on the state governments. We are independent but we are guided by the national policies; the jurisprudence is very clear on what is meant by guided and what is mandated.
The Kerala High Court described the domain of regulation as “unfathomable ocean of technical gobbledegook”. One of the key features of a regulatory authority is to be able to respond to complex technical demands in a rapid timeframe. The that is not all, CERC also has considerable legislative, executive and adjudicatory power. In what ways is the exercise of power by a regulator distinct from what you would do in the ministry, and can you explicate what the term regulate means in the context of CERC?
The role of the ministry is to make broad policy framework; the Electricity Act provides tariff policy, national electricity policy etc. The ministry gives policy guidance for the sector and the regulator is guided by that policy framework. The regulator works on the nitty gritty functions of the Act. For example, if we say that there is 450 GW of renewables, that is a policy statement. To do that, the ministry may take a document and ask us to setup a solar generation project, but the regulator needs to think about how this gets integrated within the larger framework, commercial issues involved in the contract, etc. CERC’s regulations comes into the detailing of all these activities. Its regulations promote implementation of policy.
The judgement you refer to of the Kerala High court is about a simple order relating to transmission. There is a transmission network in the country, but you can’t identify the exact line that goes to a specific consumer. How do we account the cost for this and how do we regulate? We found out that X amount of money needs to be recovered from the consumer. It flows from the policy that money needs to be recovered but how do we apportion the cost? Should it be based on usage? Should it be based on distance from the generating system? This is what CERC determines. We frame regulations to figure out the percentage cost for reliability and security; we also determine the x% that is a national component, the x% that is a regional component and how we estimate components becomes complex. The nitty gritty of translating policy and making it workable is CERC’s job. A lot of detailing takes place and CERC’s underlying policy is to do it in an equitable, affordable, fair, and efficient manner.
How is CERC’s adjudicatory powers different from what the judiciary does?
CERC’s adjudicatory powers are derived from the Electricity Act. The Supreme Court recently pronounced that composite schemes fall under the domain of the CERC. A private or government generating station supplying to more than one state comes under the CERC. Transmission is a monopoly, and it comes under the CERC as well. Intra-state generation and intra-state transmission is investigated by the CERC. Any contractual issues are adjudicated by CERC, and the regulator has its own procedure, it has the powers of the civil court and follows the process of the civil courts. We adjudicate disputes and we also investigate tariff setting issues in the same manner we resolve disputes. Adjudication comes in when there are issues of power supply agreement or when there is a force majeure issue, we adjudicate for the provision in the contract based on the law prevailing and whether the parties can claim for compensation or additional costs for recovery etc. We follow the basic principles of adjudication; we issue orders, and our orders are self-speaking. In the earlier days, all entities were government entities and there were very few disputes. Today, there are many private entities, and these issues are very important since huge amounts of commercial stakes are involved. Our intention is to adjudicate these issues in a fair and quick manner. We also investigate how many of our orders are appealed and how many of our orders the courts have set aside etc. Usually, our orders are very good. Parties do look up to us since we provide a quicker way of resolving issues, and both the distribution utilities and generating utilities accept our judgements.
How does CERC integrate the market at a national level and how does it help consumers in tariff and supply reliability?
One can have a power plant purely as a merchant power plant. One can go anywhere else in the market for power exchange. This is delicensing. Transmission is a natural monopoly; we will not have competition in this space. Earlier all the transmission lines were built by power grids belonging a common entity but now these lines are bidded out and then private players who build these lines, operate, and maintain them for 35 years. We license them so that they can run and manage those lines. In the last 2-3 years, close to 50% of transmission assets have been bidded out. In the distribution part, utility will not have competition, but the point is who manages the distribution. The issue is about bringing in efficiency in the delivery of these services.
One issue we thought about was the carriage and content separation. In distribution, we take the lines part and make it a separate company. For example, the Central Transmission Utility is the monopoly in transmission, and we allow entities to supply in that line. The lines remain as monopolies. Recently there was a talk about delicensing distribution utilities but again switching over form one supplier to another is difficult because of the way in which the Act stands and hence, there is limited competition on this side.
There are other developments which need to be looked at: traditionally we have long term Power Purchase Agreements (25 years) but now because of the dynamics within the power sector there are not many takers for long term PPAs. In the long term, if you look at the distribution utilities, even the good utilities in the states of Gujarat, Maharashtra and Tamil Nadu can lock in 40-50% in long term PPAs, 30% in medium term PPAs (3-5 years) and for the rest 10-20% they can look to the short-term market. The whole load curve is changing and if you lock into long term PPAs you don’t have that flexibility. This is happening now. The demand for the market will grow and because of necessity, we will go to the market and buy.
CERC’s job is to facilitate market operations. We have different types of products; our term end market was limited to 11 days but now we are going for products with longer periods, and we will have contracts of 3 or 6 months. Everyone is looking at flexibility and managing their portfolios in an efficient manner, rather than locking into a contract for the long term and paying unnecessarily. Second, the scheduling that takes place on a PPA basis sometimes doesn’t optimise the power sector. For example, if I don’t schedule cheaper power the gain to the system is minimised. Market based economic dispatch (MBED) says that instead of every individual player scheduling power based on their contract, we can pull everything together and put it in the market to schedule it. The schedule is done from cheaper to higher cost and cheaper power is dispatched 100% so that there is efficiency gain in the system. This is the basic concept behind MBED.
The challenge is implementation. Not technology implementation, but that the Discoms are the larger buyers and have to agree to go out of the PPAs and go to the market. There is a financial issue, because once you go to the market you have to pay upfront, so they have to have the resources. A lot of effort is being made by the ministry and by us so that we proceed in that direction. It is a slow process, we have floated a paper, a lot of comments have come, we have been discussing with stakeholders. My understanding is that it will happen. Security Constrained Economic Dispatch has been happening for the last 1.5 years, that is a precursor to MBED.
This is very important because 80% of the tariff we pay as consumers is the bulk power cost, and this will bring down that cost. However, the challenges are also political. The way electricity has developed, we treat states as islands of electricity grid, and there is a state-level sense of energy security. But moving to integrated market is a necessity for the future.
The Draft National Electricity Policy discusses the need to shift to light touch regulations. There is a transition happening in the sector. Supply and demand were predictable but now with renewables and various behind the meter interventions, demand is going to be variable. We are also moving away from a control to a market-based economy. Given all these changes, what does light regulation mean? Will there be a reduced role for regulators, or a more substantive role?
In the value chain of electricity, generation is the first point. The main cost is the generation cost. If you go through the process of competitive bidding, it is much easier. You go through a guideline, bid document, follow a process, and discover tariff. You ensure that the process is fair and transparent. The difficulty comes in the cost-plus tariff setting, since you must discover the tariff based on ‘n’ number of factors which is time consuming. Initially, we thought that we will do away with the cost-plus efforts and move into competitive bidding, but we realised that we cannot do away with one option. Today, instead of a deterministic approach, we are thinking to build normative parameters and then determine some benchmarks to set the tariff. For example, there are ‘n’ number of NTPC plants with various sizes and types and if we can determine O&M expenses based on size and capacity as a formula, it will be easier to add weightage. Can we also have an average normative number for capital cost? Everything is much more predictable in these situations when the norms are fixed. But we cannot make a norm for 10 years and go to sleep, this needs to be updated. For this, the regulator needs to be much more sensitive to what is happening in the market.
Another point is that today we have multi-year tariffs. We notify norms applicable to whichever power plants come in and are operating during a 5-year period. There is some regulatory certainty. We notify it before the tariff period kicks in, so everyone knows about it and this makes everything simpler. We cannot do away with regulations, but we can make them more normative, predictable, and this will certainly reduce the burden on the regulators and uncertainty for the other entities. This is our effort, but we have a long way to go because fixing up normative numbers is a difficult task.
What is CERC’s role in making sure there is universal access to electricity? How does CERC do advocacy and engage with the public?
The Act itself provides for various advocacy roles for the state regulators, and state regulators deal with the retail consumers and their awareness campaigns. The PSU generators like NTPC also do their own awareness campaigns as part of their CSR activities.
Our role in awareness generation is limited because we are not dealing with retail consumers. However, at our level, public engagement in regulation-making is something that we promote and encourage. For any regulations we make, we do engage with the expert bodies. Secondly, we take out a staff paper and ask for public comments. Thereafter, we consider those public comments. Then we make a draft regulation, and we ask for comments on the draft regulations and do a public hearing, and then we finalise it. The whole process is transparent, and we value the comments we receive.
In cases where larger public interest is involved, we allow certain non-governmental bodies to participate in the hearing. They bring the other side of the picture, or the counter point. We have recognised some NGOs and they are expert bodies. We also have interactions with various associations and societies who are active in the field of power sector.
But if you look at the level of engagement in regulation-making it is quite surprising and effective. We recently made a special provision for waste-to-energy plants – there are only 5-6 plants in the country, but we want to encourage them, so we made a special provision. We received comments from people who had read very clearly and made comments.
Access all events as part of the Know Your Regulator series:
