August 2, 2022
8th July 2022
Mr Preman Dinaraj, Chairperson, Kerala State Electricity Regulatory Commission
Dr Ashwini K Swain, Fellow, CPR
Ms Arkaja Singh, Fellow, State Capacity Initiative, CPR
Dr Abha Yadav, Associate Professor, IICA and Director, FOIR
Read the background note here.
Chairperson’s engagement with the electricity sector
The term ‘regulator’ often conveys a negative connotation. It gives the impression that an organization will regulate everything and make things difficult (in a market). The audit department (my parent department) as well as the income tax department are viewed as necessary evils. I was lucky that I spent around 20-22 years outside the department and with the Government of India. I have also worked with the UN High Commission for Refugees, looking after the Great Lakes operation in East Africa, also with the Republic of Mauritius for 5 years, and the Government of New Zealand for 2 years. This probably pulled me out of the (traditional) regulatory framework. Typically, the KSERC is considered a very friendly regulator by the regulated entities (distribution licensees, power producers, even average consumers who come with complaints).
The KSERC has three Consumer Grievance Redressal Forums in different parts of the state. The state electricity ombudsman is also within our ambit. Generally speaking, in Kerala, the manner in which grievances are addressed has been satisfactory to a large extent.
I ventured into the power sector by accident. At one stage I was the Director (subsidy) of the Ministry of Food, looking after the Food Corporation of India. Obtaining a lateral shift within Delhi was a difficult (task). The Department of Atomic Energy at the time was looking for someone who could work on contracts, so I moved into this department as a Director. They initially gave me a choice between continuing as a Director in the Ministry (which is based in Mumbai, Maharashtra) or as General Manager (contracts) in the Nuclear Power Corporation. The latter seemed more attractive because at the time, the Director of a department (this was a department which was also a ministry) did not get a car whereas the General Manager (contracts) did.
Choosing this role turned out to be a wise decision because the intricacies of contract, the contracting law, disputes, redressal forums, and generally, the type of cases one comes across in (the field of) contract are unique.
After two years in this role, I was promoted. At the time, the negotiations for the Kudankulam-I and II contracts were in progress. These were intergovernmental agreements between the Government of India and the Government of Russia. I was the principal negotiator on behalf of the Government of India. At this point, I moved into the Board as Director, Personnel and Industrial relations, however, I had to carry on the job of continuing negotiations. There was a great deal of satisfaction that I was able to see the first concrete-pour as part of this project. At present, this project is generating 2000MW of electricity. It is a cheap source of electricity, at around Rs. 4.12 per unit. It is a baseload station, which means power is available 24×7. It is also a reliable, green power that does not damage the environment.
Mandate of the SERC
The establishment of the SERC flows from Section 86 of the Electricity Act 2003 which clearly and elaborately delineates the role of the SERCs. (These commissions) are essentially entrusted with central generating stations and central transmission units. They do not get into the distribution sector.
The problems in the electricity sector are (in fact) being faced by persons concerned with distribution. This is where the average consumer comes into the picture. Electricity is a very sensitive topic; governments are formed and sometimes even fall on the basis of electricity pricing. Free electricity has also been offered at the time of elections. Without getting into the political context of electricity distribution, the manner in which electricity regulators work in the states is akin to trapeze artists. There is certainly a safety net because regulators cannot be removed from their jobs. However, the pressures, demands, and expectations faced by state regulators are tremendous. The interests of the public which pays for services have to be balanced with the interests of a group of consumers who get subsidized services (for example, extra high-tension consumers). Apart from this, the policy direction of the state government has to be taken into account.
Subsidy is often easier said than availed. Subsidies are promised but there is always a shortage at the time of giving money. One also has to maintain financial viability as far as the distribution licensees are concerned. In Kerala, which is a small state, there are 10 distribution licensees, and two “deemed distributors” i.e. the railways and the military engineering service. Conflicting interests exist, and the regulator has to carry out this balancing to ensure that nobody, including the regulator collapses (under such weight). The regulator has a highly politicized sensitive role and it is quite easy for things to go wrong.
Structure of KSERC
SERCs as per the Electricity Act have a Chairman and two Members. Interestingly, the legislation does not say that only persons from the power sector or those with technical expertise are eligible. As per the Act, persons from engineering, management, law, etc. are also considered eligible. This is a very wide net and in essence, serves to bring in people with experience. Since these are practically end-of-life postings, it is very important at this stage to put in people who have the requisite experience, apart from qualification, and further, someone who can manage this (specific kind of) work. The biggest challenge as far as the state (regulatory) commission is concerned is the reactionary part – challenges are quite a common feature but not very easy to overcome.
Each (state) regulatory commission has their own organizational structure. At the Forum of Regulators, we are now trying to envisage a standardized model structure which we could use for at least the bigger regulatory commissions. As far as the north-eastern states are concerned, there is a resource constraint, and maybe even the number of cases and the quantity of work is relatively low. For the bigger regulators, however, like Kerala, which has 10 distribution licensees, there is a big work-load.
KSERC has two Directors and a Director (legal). There are three verticals now. The legal vertical is headed by the Member (legal) – we call him a consultant because he is a retired Additional Special Secretary from the government with about 38 years of experience in framing of laws and regulations, and interpreting them. Three persons work under the Director (legal). The technical vertical is headed by the Director (technical), who is a Deputy Chief Engineer from one of the utilities – in this case from Kerala State Electricity Board. Here, there is (scope for) a conflict of interest. Therefore, one of the first things we do is to orient the joinee specifically to ensure that once they have left an organization, past approaches can be unlearned and the regulatory approach is learnt. Without this orientation, the role of the regulator will get constrained. Under the Director (technical), we have a Joint Director, two consultants, and electrical engineers.
We are currently trying to venture into making market-appointments. In a recent commission meeting, we took a decision to not take persons on deputation since we need to have in-house talent which is oriented, nurtured and developed. Otherwise, there is going to be a fallback as far as the system is concerned. The job market is fairly difficult. Going from the post of a Director into a Member in the commission is fairly difficult. There is a logical reason for this – a person who has solely been in the regulatory framework, unfortunately, does not have any direct exposure. It is advantageous to be involved with electrical and mechanical systems. If persons constrain themselves within the regulator, they will only be exposed to cases and regulations which come up before them.
The initial appointments that are made are for consultants, who are electrical engineers with a B. Tech. degree and have 3-4 years of experience. The commission pays about Rs.35,000 – Rs.40,000 with a 10% raise every year. If in our evaluation system, someone is found to be not delivering, in spite of all the hand holding, the person will run into difficulty and be asked to leave. However, there have been very few instances of such kind. In fact, people have gone on to join the National Thermal Power Corporation Ltd. and other power companies. Some of them have mentioned that working at KSERC has been advantageous.
Key functions and considerations for KSERC
Beginning with tariffs, we have a Multi Year Tariff (MYT) framework. Such a framework provides some sort of stability (for a period of 5 years) in order to encourage investment and give people some element of certainty. Kerala has recently announced the MYT for 2022-23 till 2026-27, but interestingly we have only brought out the tariff for one year. This is because what normally happens is that if you give the regulated entity a tariff for five years, the management of the entity thanks you and that is about it. Compliance with the regulatory framework does not happen because the entity has given whatever it had to for five years.
Secondly, in Kerala particularly, we place a lot of importance on efficiency. If the system is able to function in a way that betters the norms, then the extra gain is shared between the distribution licensees and the general public in a 2:1 ratio. However, if the entity is inefficient, we ensure that the inefficiency is not passed on to the consumers. If the entity exceeds the normative values we check into why that has happened, and if it is not found to be reasonable we ensure that this is not passed on to the consumer. This is one of the principles of tariff setting to ensure that optimum efficiency is achieved.
It is also important to ensure that quality power is delivered because entities can always save on cost. This occurs when entities do not undertake regular maintenance or do not replace equipment when necessary. This is why we ensure that repair and maintenance is not compromised. If we find that there is a significant fall as far as repair and maintenance expenditure is concerned, we immediately ask for reasons, and if we find that it is not satisfactory we give a direction saying this should be set right within a given time frame.
The second part of our job involves framing regulations or subordinate legislations, from which the tariffs flow. The original legislation is the Act. Thereafter, the KSERC has the powers to make rules, regulations or orders whereby the role expected of a regulator can be fulfilled in a free, fair, and independent manner.
The regulation-making process (followed by the KSERC) is as follows:
The Electricity Act gives the KSERC both civil and criminal jurisdiction. Further, the Chairperson in Kerala has been given the rank, status and benefits of a judge. Hence, the order so issued is termed a quasi-judicial order. (In my opinion), there is nothing quasi about it – it is a judicial order. Any challenge to it lies before the appellate tribunal. The only ground on which a regulation can be challenged is that due process was not followed in framing it. If it has been followed, there is no way that the court would intervene – we have witnessed this in multiple cases.
The third aspect of the regulator’s job is consumer grievances. We already have the Consumers Grievance Redressal Forum (CGRF) and the electricity ombudsman. If somebody does not carry out an order, beyond these two there is remedy under Section 142, which is basically non-compliance. Once someone files a petition claiming non-compliance, the commission looks into it.
Balancing market development and consumer protection roles
Kerala has achieved 100% electrification. Even the most far-flung hamlet has been electrified and to a large extent we have ensured there is supply. Electrification and supply are two different aspects. There is no point in saying that a little bulb worked for two hours and then there was no power for the next one week. This is where the quality of supply regulations come into the picture. There are specific norms for how long it should take for electricity to be restored, fines to be imposed, etc. People are very active (in the state) – they file petitions and even represent themselves.
The second aspect is the disconnect between the interests of consumers and those of distribution licensees. The use of electricity in farming – which in Kerala is mainly cash crops – is less than 2%, so it is quite minor. Domestic consumers dominate the total number of consumers in the state which stands at more than 1 crore consumers. Non-domestic consumers (low tension, high tension, and extra-high tension) account for only around 28-29 lakhs, out of the total. Actual consumption of electricity is up to 150 units on an average, for domestic consumers. The first 40 units are free for Below Poverty Line (BPL) families and certain other identified groups like the tribal population. The next 50 units are charged at Rs.1.50 per unit. Thereafter, there is a telescopic weighted slab system. So practically about 200 units per month for 85 lakh domestic consumers are highly subsidised. The actual realisation is about Rs.5.73 while the average cost of supply is in the range of Rs.6.80+. This revenue gap is made up from subsidizing consumers, but in Kerala there is not much of industrialization; so if you start taxing industries very heavily in terms of energy costs then they would run out. Hence, we ensure that by-and-large they remain within the +/- 20% range. Currently, they are 103% in the present tariff.
It is also our endeavour to see that the average cost of power supply comes down. We try to control this by ensuring that wasteful expenditure, unnecessary manpower and power purchase costs are reduced. The good news is that the KSEB has made, what we call, a regulatory operating profit. To be sure, their balance sheet does reflect a loss of Rs. 600-650 crores, although this is much less compared to the loss burden of Rs. 3000-3500 crores that they had 5 years back. Regulatory operating profit means that compared to the norms when the KSEB is regulated, they made a profit of 70 crores this year.
The mandate from the state government is to ensure quality, reliable power with 24×7 supply, and ensure that it reaches everywhere. The KSEB has been very efficiently fulfilling this task, as have the other suppliers. The other nine suppliers cater to specific groups, for example, Info Park caters to computer-based industries. There is a special economic zone, and the two municipalities supplying power – Munnar where Tata Tea has become the main consumer, and Thrissur municipality. Subsidy, in this context, is cross-subsidization. For example, the ‘subsidy’ for the 12,000 BPL families does not come from the state government, it is cross-subsidized. At the same time, the commission has to ensure the financial viability of the distribution licensees because without them there is no supply. Hence, the cross-subsidisation has to be reliable, reasonable and affordable. In Kerala, the cross-subsidizing groups are heavy industries. While commercial entities are taxed slightly more, the norms are relaxed – there has been no noise around the tariffs we came out with two weeks back.
The average increase has been in the range of Rs. 35-40 p per consumer. This comes to about Rs.45 a month for 80 lakh consumers, and 150 units per consumer. Now if you look at the Consumer Price Index (CPI) – Wholesale Price Index (WPI), where we do a weighted average of 70:30 between CPI and WPI respectively, the average inflation in the last three years (the last tariff revision given to KSEB was in July 2019) is 19.8% whereas the average increase we have permitted in the latest tariff revision is 6.7%. But even with 6.7%, by distributing this tariff increase across the board except the free consumers, we have ensured that KSEB is getting approximately Rs. 1000 crores more. Their balance sheet has a loss of Rs. 600-700 crores vis-à-vis contribution. This is going to be the first step in turning the KSEB into an operational profit entity from a loss-making one. Its accumulated loss is about Rs. 9000 crores, so the next task is to wipe this out.
Consumer participation in the regulatory process
Let me give you a concrete example. When we were floating an amendment to the Renewable Energy (RE) Regulations, the KSEB had a proposal to use gross billing rather than net billing. Usually, consumers are eligible for net billing for up to 1 megawatt. Wherever there is a facility for banking, if 50 units are produced and 40 units are consumed, then the consumer can bank the remaining 10 units. At the end of the year, the billing adjustment can be done.
For an overall net export there is an average power purchase cost and for a net import you pay for it. When the proposal came up, the KSERC was initially inclined towards it but there was public opposition. The main opposition was simple and logical – the Government of India (Ministry of Power and Ministry of New and Renewable Energy) was encouraging the setting up of rooftop solar, under a subsidy scheme called Surya, wherein for up to 3 kilowatts there is a 40% upfront subsidy deductible from the price paid to the installer, and between 3 and 10 kilowatts, there is a 20% subsidy. So, on the one hand the central government is trying to subsidize and incentivize the scheme. and on the other hand, the KSEB wants gross billing. Someone had even done the calculation and pointed out that an average consumer, due to his net import, gets between Rs.100-150. It was not worthwhile for distribution licensees to dip into the pockets of 2,00,000 consumers just to take out Rs.150 each. This was an important contribution from the public.
Similarly, when we brought out the RE regulations, multiple issues were aired, such as not fixing a time-frame for when the grid will be connected and metered after the system is energized. When we held public hearings, people came and said the time-frame in this instance should not be more than 7 days. This was debated and now we have restricted it to 6 working days. Additionally, there is a sentimental aspect to democratic decentralization such that the average person gets to air their grievances in public forums.
Unbundling of the electricity sector
At the time when the Electricity Act was being passed, the Kerala government said that they do not want a trifurcation of power companies. However, from a regulatory standpoint, the (then) chairperson of the commission had insisted that there should be three separate vertically unintegrated units. Thus, even though the KSEB has both generation and distribution functions, they have separate accounts as far as the regulator is concerned, though they may integrate for balance sheet purposes. The KSEB calls them Standalone Basic Units (SBUs) – so there is a separate SBU for generation, SBU for transmission, and for distribution. As such, we get our accounts in three separate audited accounts.
I do not know if an integrated model is the best but one advantage it has is that talent flows across. If somebody is in the transmission business their entire life, they do not get exposure beyond that sector. However, in KSEB, there is cross-transferability as far as the officers and staff are concerned. Due to different verticals, everyone gets a chance to work everywhere and there is knowledge dissipation.
Federal aspect of regulation – mechanisms for coordination and cooperation
I will talk about two dimensions – (i) the regulated-regulator interaction, and (ii) the regulator-policy maker interaction, where the policy maker is the government of the day. The legislature gives us the policy, whereas the regulator engages in formulating subordinate legislation.
There is a need for the commissions to cooperate and talk to each other. This is where the Forum of Indian Regulators (FOR) comes in. FOIR meetings are quite heated – there is a lot of discussion and difference of opinions but these discussions are very elaborate. Every decision of the FOIR is thus thoroughly considered.
The relationship between the regulator and state government is tricky at times. Section 107 and 108 empower the union and state governments respectively to give directions to the commission. For instance, they will direct us to reduce the tariff by 50%. They have invoked this power twice in my tenure. The first approach here is to tell the minister that they cannot do this since tariff-setting is not their job. Depending on the person (and their advisors), the minister may or may not listen. If the minister does not listen, it is a personal call to defy. The chairperson’s job is not (typically) at stake. Further, there are at least two or three decisions of the appellate tribunals and Supreme Court which hold that directions under Section 108 are in the nature of recommendations – if the commission feels that the direction does not fulfil the requirements considered essential by it, it can reject the direction. We have done this in a polite fashion, after explaining our stance, and said that before issuing directions they should consult us since there is no need for confrontation. The state government in our case has been very cooperative. (At present), we have one of the best electricity ministers who understands things and does not interfere. This helps a lot, depending on the personality of the people involved. There is no day-to-day relationship or coordination between the central government and state regulators, however, there are meetings where the regulators are up-front in stating their points of view.
On the point of certain resources like coal being owned by the central government and reliance of states on these resources leading to tensions, every power purchase is governed by a contract between the generating company. So, strictly speaking, there is no scope for the central government to interfere in the day-to-day functions of the company. Secondly, the supply of electricity to a distribution licensee like the KSEB is again governed by a contract. In my experience at least, the central government cannot interfere with the supply of power since it is governed by the power purchase agreement. Thirdly, there has been (some) conflict but fortunately Kerala did not have any thermal power plants, or else there would have been some difficulty because coal import, coal allocation, and prioritisation would have come in. In Kerala, we consume approximately 24,000-25,000 million units annually, of which 30-35% is produced in-house and most of it is hydel, with a very small contribution from solar (rooftop solar and a few solar plants) and a not very significant contribution from wind power. While we did not come into conflict, there is scope for it in the broader framework, and my suggestion is to talk to the concerned persons. When a distribution company talks to the generator, the former is in a relative position of weakness since the generator can cut the former off. Here, the support of the regulator might be useful.
Views on a nationally integrated market for electricity
While the concept of one nation one price is excellent, one has to talk in terms of uniform electricity pricing at the level of the generator. Many of the new plants are more expensive and sell at rates higher than older, depreciated plants. If you mill these together there will be a net reduction especially for the large generators. So before thinking about single pricing for electricity we need to think about a single generational pricing.
Secondly, the conflict between the Ministry of Power and SERCs is pertinent and has come up for discussion before the FOIR. This is especially because an order of the Ministry of Power, even if under Section 179 of the Electricity Act, is an executive order and not subordinate legislation. As such, it does not have to go through the pre-publication process. Even if it did, it cannot count as subordinate legislation, since it is clearly defined who can make subordinate legislation. On the other hand, every regulation, rule and order of the commission is subordinate legislation, done for and on behalf of the concerned legislature (here, the Parliament). This conflict is being discussed (in) the FOIR. In the last one year, the stand has been that if you cannot implement something, do not implement but avoid a confrontation. If and when the matter becomes an issue, the courts can decide whether an executive order or a subordinate legislation takes precedence. I think this issue will play out in the long run and probably be settled by the courts.
Role of the regulator in the energy transition
Kerala does not have any thermal plants, so to that extent we are relatively far from the fossilization effect and its impact on climate change. 30% of power sources in Kerala are hydro and all the new plants are either wind or solar based. We will not have the problem of retiring older thermal plants – we had two of them, one was a BSES plant that retired in 2012 and a NTPC plant in Kayamkulam where they have put up 82 MW of floating solar power (over 200 acres of backwaters) – 40MW is already being produced. The commission-determined rate is Rs.3.16.
Regarding the role of the regulator, there is a proposed amendment to the Electricity Act to de-license distribution. I anticipate that the major private players will concentrate on urban areas, which will place the SEB under a lot of stress since it does not distinguish between consumers based on the urban/rural criterion. De-licensing will disable the regulator from stepping in and ensuring a level playing field. If there is no requirement for the licensing of distribution companies and if as a matter of right they can utilize open access then that is going to be a very big challenge. It will lead to many disputes which will affect the sustainability of every SEB. This is a big challenge.
Kerala is yet to comply with the Renewable Purchase Obligation (RPO). After much deliberation, the KSERC had given a RPO target lower than the MNRE target but that was also not fulfilled. However, in the last three years, this situation has turned around. Kerala is now expecting about 1000MW of rooftop solar. They have contracted for 800MW of wind, solar and other renewable sources, and they are thinking of setting up another four generators in Idukki to generate another 850MW. Complying with RPO may not be a problem for Kerala in the near future. Even Tamil Nadu is in excess of its RPO because they have got a huge element of wind, and Karnataka too in terms of solar and hydro power. Similarly, Telangana and Andhra Pradesh will not have a RPO problem. The issue is going to be the effect on the transmission system especially with reference to maintaining the frequency. This has been discussed at the FOIR. The technical committee has been addressing it, suggesting various solutions like having a spinning reserve to ensure that frequency is maintained at all points of time. The challenge is that no one wants to offer their plant as a spinning reserve, especially the hydro ones, since they can come on stream at the shortest possible time. Secondly, everyone wants the benefit but does not want to offer their backyard. Hence, some solution needs to be hammered out between the states regarding where spinning reserves can be set up and how costs are to be borne.
Demand Side Management (DSM) is a function for the concerned utility. Kerala has been doing this to some extent. The actual challenge of DSM comes in during the peak hours, which in Kerala is from 6 pm – 10 pm. We have not agreed to the demand of increasing it to 5 pm – 11 pm. We have excluded domestic consumers, and for others we have already installed TOD meters.
Now, with the introduction of the smart meters, we would expect that the high-paying consumers at least install them. There was a proposal to install smart meters throughout the state on an operational expenditure model and the company had said that the cost would be about Rs. 140 to 142 per consumer per month. This is a big difference compared with Rs. 7 which is currently being paid by the consumer. So, while we welcome smart meters, it has to be implemented phase-wise. It has to begin with the higher paying consumers. In fact most of the higher paying consumers, especially the high-tension industries, who are on TOD, have been demanding that the electricity pricing should be on the basis of voltage. They should be willing to spend money on smart meters now. According to them, their TOD meters will need some software change to address this issue. We are however hoping to slowly move into smart meters and that DSM will be managed by the distribution company. There will be several incentives and disincentives in terms of DSM to ensure that there is not too much peak load.
Interface between the KSERC and projects like Smart City
I am really confused about the concept, purpose or mission of smart cities. There is no exchange of information between the commission and the electricity board because the essence of any distribution licensee is the licensing area – whatever we are now trying to do is well within these smart cities. For instance, in the case of KSEB, any capital expenditure over Rs. 10 crores requires the approval of the commission. So, if any of these smart city projects exceeds the Rs. 10 crores investment – which I estimate it will – there will be some interaction with us. For instance, in Thiruvananthapuram, the smart city project has started trenching. The city has cables (telephone, ethernet) all over the place and nobody has a map, so you do not know where to begin and where to dig. They are trying to trench and this is a facility for everyone, so there will be a user charge which will either get charged by the corporation or the smart city project. This is going to cost more than Rs. 10 crores. KSEB has filed a position saying we are doing this under the smart city project. As far as funding is concerned, I believe some funds are flowing from the smart city project, some from either state government’s or KSEB’s funds. Wherever in the pricing of tariff, if anything comes free either by way of a grant or of a consumer contribution, it is not allowed as part of the tariff. For other smart city projects, they have unfortunately not been doing well and are running at a huge loss, as is the electricity business. They have not got what they anticipated, perhaps because of Covid etc, but things are not looking good.