Ring Fencing of System Operation and independent functioning of Load Despatch Centres

1. Ring Fencing of System Operation and independent functioning of Load Despatch Centres by K.Ramakrishna, AGM, POWERGRID 6th Septemebr 2011

2. Outline • Unbundling………rationale • Ring fencing of System Operation • Milestones & Achievements • The ultimate mantra to functional autonomy

3. Unbundling…………rationale Source: Sally Hunt: Making Competition Work in Electricity

4. Unbundling…………rationale Source: Sally Hunt: Making Competition Work in Electricity

5. Unbundling…………rationale Source: Sally Hunt: Making Competition Work in Electricity

6. Unbundling…………rationale Source: Sally Hunt: Making Competition Work in Electricity

7. Ring fencing of system operation & transmission (1) • The major locus of conflict of interest in the short term is the system operator. As we have stated before, the system operator has to have complete control over the short-term operations of the generating plant and interface with the transmission system. He has a hundred subtle ways of influencing access to transmission, which are hard to police, because the system operator’s judgment is relied on at very short notice to resolve problems on the transmission system by telling generators what to do. If he is employed by a company that also owns generation, he is not independent, he is a competitor: no one will trust him. In a competitive world, the system operator needs to be independent of all generators, and indeed all traders, buyers, and sellers. Everyone agrees on this and independence of the system operator is always a central objective of restructuring. Source: Sally Hunt: Making Competition Work in Electricity

8. Ring fencing of system operation & transmission (2) • A second source of conflict is the responsibility for expanding the transmission system—the short-term problem of transmission access translated into the long term. If a competing generating company or utility owns the transmission system and has responsibility for maintaining and expanding it, there are many subtle ways in which it can thwart competitors by being dilatory about construction and maintenance of the transmission assets. This is not so immediately apparent, since any bad results are longer term, not day by day, as with the system operator. Competitive generators also complain about delays and costs involved in connection of their generators to a transmission system that is under the control of a competitive company. Source: Sally Hunt: Making Competition Work in Electricity

9. Other areas necessitating functional autonomy • Non-discriminatory open access • Outage planning • Backing down or re-scheduling • Switching instructions • Availability certification • Real time data availability at LDCs • Metering and settlement system • Incident investigation and analysis • Proper feedback to planners and regulators

10. Milestones and achievements Pre 1994: RLDCs were operated by CEA with budgetary support from Govt. of India. 1994-1996: RLDCs transferred in a progressive manner to POWERGRID. Budgetary support from GOI stops. July 1998: CEA finalizes an adhoc arrangement for reimbursement of RLDC expenses.(Rs. 12 Crores for 1996-97)

11. Milestones and achievements…..contd/- 8th May 2003: CERC approves RLDC fees and charges from 2000-2001 ( Rs. 21.52 Crs. in the starting year) 2005 onwards: ULDC scheme charges merged with RLDC fees & charges and approved by CERC 5th Nov 2007: Interactive session convened by Ministry of Power with Forum of Regulators and State Government. Pradhan Committee on Ring fencing of LDCs constituted in Feb 2008 after this meeting. 4th July 2008: Ministry of Power directed POWERGRID for formation of POSOCO

12. Milestones and achievements…..contd/- 11th August 2008: Gireesh B. Pradhan Committee Report on”“ Manpower, Certification and Incentives for System Operation and Ring fencing Load Despatch Centres” submitted. Report accepted and a meeting called on 7th Oct 2008 by Secretary Power. 15th Nov 2008: Forum of Regulators (FOR) approves formation of ‘Forum of Load Despatchers (FOLD) and approves FOLD charter in Jan 2009 20th March 2009: Power System Operation Corporation Ltd. incorporated as a 100% subsidiary of POWERGRID with authorized share capital of Rs.200 crores.

13. Milestones and achievements…..contd/- March 2009: Satnam Singh Task force report on on “Capital Expenditure and Issues Related to Emoluments for Personnel in Load Despatch Centres “ submitted. June 2009: Rakesh Nath Committee Report on “Manpower Selection, Recruitment Procedure and Tenures for Personnel in SLDCs” 18th Sept’ 2009: CERC notifies Regulation on Fees and Charges of Regional Load Despatch Centres for the control period 2009-2014.

14. Milestones and achievements…..contd/- 19th March 2010: Dhiman Committee Report on “Training and Certification of System Operators” submitted. March 2010: All RLDCs and NLDC file petitions with CERC for the Fees & Charges for the control period 2009-2014 23rd March 2010: Certificate of commencement of Business obtained for POSOCO. 1st June 2010: Transfer of manpower from POWERGRID to POSOCO on secondment basis.

15. Milestones and achievements…..contd/- 9th June 2010: Ministry of Power designated National Power Training Institute (NPTI) as the Certification Authority for executives of SLDCs , RLDCs and NLDC for an initial period of 3 yrs i.e up to 31st March 2013 26th Sept 2010: Gazette notification by Central Govt. of India that the POSOCO a wholly owned subsidiary of POWERGRID shall operate RLDCs/NLDC wef 1st Oct 2010. Feb/March 2011: CERC notifies the fees and charges for NLDC and all five RLDCs

16. Ultimate mantra for ensuring functional autonomy • Technical and managerial excellence • Comprehensive set of regulations by the ERCs covering system operation • Minimizing discretion • Ensuring high level of transparency in Operations • Any exercise of judgment by operator in few cases……..beyond question or reproach • Devote more time to participation in rule making rather than disputes after notification of rules • International benchmarking with other system operators

17. Thank you Discussion………

18. MoP Communication to POWERGRID • MoP has directed POWERGRID vide letter dated 4th July 2008 the following : 1.To set up a wholly owned subsidiary company of PGCIL responsible for independent system operation with separated accounting and Board structure. 2.This company will gradually made independent from PGCIL over a period of 5 yrs.

19. MoP Communication to POWERGRID –Structure and Functions STRUCTURE • The wholly owned subsidiary of the PGCIL will be called Power System Operation Corporation (POSOCO) • CMD of POWERGRID will be non-executive Chairman of the new Corporation. • There will be three functional Directors ie MD, Dir(Per &Engg), Dir(Comml & Fin) • Five part time directors one each from each region nominated by respective RPC. • One independent Director from PGCIL • Chief Executive of the five RLDCs will be special permanent invitee on the Board

20. Structure and Functions..Cont. • FUNCTIONS 1. To supervise and control all aspect concerning operations and manpower requirement of RLDCs and NLDC. 2. To act as apex organization for HR requirement of NLDC and RLDCs. 3. To ensure planning and implementation of infrastructure required for smooth operation and development of NLDC. 4. To advise assist SLDCs including specialized training etc. 5. To perform any other function entrusted by MoP

21. Recommendation 1 The Committee recommends that the LDCs should be ring-fenced suitably to ensure their functional autonomy by taking the following steps: • The Appropriate Government should take suitable steps to facilitate independent functioning of the Load Despatch Centres in line with the Electricity Act 2003 and National Electricity Policy. To begin with, the State Governments are urged to create a separate representative board structure for governance of LDCs on the lines of wholly owned subsidiary being created for the independent System Operation of RLDCs and NLDC. • The financial accounts should be separated for all LDCs by 31st March 2009 with the appropriate Electricity Regulatory Commissions (ERC) specifying the fees and charges payable.

22. Recommendation 1 (contd/-) • Capital Expenditure (CAPEX) plans for modernization of all LDCs during 2009-12 should be submitted and the approval of the respective Electricity Regulatory Commission (ERC) should be obtained by 31st March 2009. The Central Transmission Utility (CTU) and Regional Load Despatch Centres (RLDCs) should extend the necessary assistance to SLDCs in this area. • In the next stage, rolling 5-year CAPEX plans should be prepared by each LDC and got approved by the respective ERCs to take care of the system expansion, associated real-time data requirements as well as technological innovations and obsolescence of control centre equipment. ERCs may examine CAPEX proposal considering a shorter life cycle of 7-10 years for such equipment.

23. Recommendation 2 For making LDCs financially self-reliant, the Electricity Regulatory Commissions (ERCs) should recognize the three distinct revenue streams: • Fees and charges for system operation • Tariff for decision support system and IT infrastructure (currently only ULDC tariff) • Operating charges for scheduling, metering and settlement for market players. • All Generating Companies and licensees using the services of the LDCs would make all the above payments. In addition the LDCs could provide value added services (studies, manpower development, reports, access to data archives etc), on chargeable basis.

24. Recommendation 3 The Committee recommends • Introduction of a system of certification of System Operators by an independent Central body, similar to the system followed in case of Air Traffic Controllers. • Establishment of a Central Institute for training of System Operators. Initially the National Power Training Institute (NPTI) may be entrusted with the responsibility of training and certification. • Within the next one year, all the course material, systems and procedures required for administering a “basic level” of training and certification should be developed.

25. Recommendation 3 (contd/-) The Committee recommends • All LDCs must ensure that all the personnel of LDCs undergo this ‘basic level’ training and certification and only certified personnel staff the LDCs within two years from the release of this report. The appropriate Electricity Regulatory Commissions would be furnished with an Annual Compliance Report of this requirement. Subsequently advanced level training and certification programme must be introduced. • Fresh recruitment at regular intervals for lowering the average age of the work force in the LDCs. • Introduction of suitably designed courses in the Indian Institutes of Technology and National Institutes of Technology for ensuring availability of skilled manpower. • Active collaboration of LDCs with educational institutes for research and development related to Indian power system and electricity market operation.

26. Recommendation 4 The highly specialized and technical nature of LDC function necessitates a suitable compensation structure to attract and retain talent. The Committee recommends • The compensation structure for LDC personnel should be substantially higher than comparable companies in the power sector both in the public as well as private. • Apart from the compensation structure, innovative incentive schemes, such as sabbaticals for higher learning and opportunities for Professional Engagement (PE) in the form of attending seminars/workshops and conferences both in India and abroad must be provided. • Once the certification system is introduced, monetary incentives similar to Air Traffic Controllers can be provided to the System Operators based on their ratings.

27. Recommendation 5 For standardizing and harmonizing the LDCs work, the committee recommends • The NLDC in consultation with CEA, would lay down the “Standard Operating Procedures” (SOPs) which would be adopted by the SLDCs. Suitable Quality Standards and an Integrated Management System (IMS) may also be implemented. • A ‘Forum of Load Despatch Centres’ with the secretariat provided by National Load Despatch Centre must be established. This Forum could take up issues of common interest and also formulate a Code of Ethics for the LDC personnel. • At a future date, if all the State Governments agree, an umbrella structure of SLDCs integrated with RLDCs and NLDC may be considered.

28. Task Force: Terms of Reference • To look into the • Financial aspects for augmentation and upgradation of State Load Despatch Centres • Issues related to emoluments (compensation structure, incentives etc.) for the personnel in System Operations

29. About the Task Force • Members • CMD, Power Finance Corporation: Chairman • Director (Finance), POWERGRID: Member • Secretary (Power), Haryana Govt.: Member • Managing Director, GETCO: Member • Secretary, CERC: Member Secretary • Meetings • 17th December, 2008 : New Delhi • 27th February, 2009 : New Delhi • Report • Submitted on 5th May 2009

30. Structure of the Report • Part-I • Financial Aspects for augmentation and up-gradation of Load Despatch Centres • Functional Autonomy of Load Despatch Centres • Identification & transfer of assets/liabilities to • NLDC/RLDCs from CTU • SLDCs from CTU/STU • Financing the above transfer of assets/liabilities • Capital Expenditure (CAPEX) plans and its financing • Part-II • Emoluments for personnel • Study of existing Compensation structure • Proposed structure for compensation and incentives for personnel

31. Part-IFinancial Aspectsfor augmentation and Upgradation

32. Past Investments

33. Past Investment in ULDC project by POWERGRID (2002-2006) As on 31st December 2008 Figures rounded off ULDC: Unified Load Despatch and Communication

34. Segregation of Assets and Outstanding liabilities in respect of past investments Annex-III Page 57-71 • Region-wise and State-wise segregation • Carried out by the Task Force • Details as Annex-III of the Report • Total Outstanding apportioned into ‘outstanding equity’ and ‘outstanding loan’ for • Remote Terminal Units • Communication System • Control Centre Equipment

35. Transfer of POWERGRID’s existing assets and liabilities under ULDC project: Recommendations Para 4.1, Page 11 Para 4.8, Page 16 Field equipment: Remote Terminal Unit and associated infrastructure • Central Sector Assets • Control Centre equipment installed at NLDC/RLDCs to be transferred to the wholly owned subsidiary of POWERGRID • Building/parts of building where NLDC/RLDCs are operational along with associated facilities like staff quarters to be transferred to NLDC/RLDCs • Field equipment and communication infrastructure to remain with POWERGRID • Condemned items to be written off • State Specific Assets (under ULDC) • Control Centre equipment to be transferred to SLDC • Field equipment and communication infrastructure to be transferred to STU • Transfer to be completed by 30th June 2009

36. Financing the transfer of existing assetsRecommendations Para 4.3, Page 13 Para 4.4, Page 13 • Central Sector • Transfer of assets and liabilities pertaining to NLDC/RLDCs from POWERGRID to the books of accounts of the wholly owned subsidiary • State Specific • Three alternatives for financing suggested by Task Force

37. Financing transfer of State specific assets from CTU to respective STUs/SEBs and SLDCs Preference to alternative-1 Other alternatives to be explored in case of difficulties Para 4.8, Page 16 Para 4.4, Page 13 Para 4.8, Page 16 • Alternative-1 • Equity liquidated by concerned STU/SLDC • Loan transferred to STU/SLDC • Agreement by lenders required • Capital Recovery Charge specified by SERCs • Alternative-2 • Equity liquidated by concerned STU/SLDC • Existing loan swapped with fresh loan taken by concerned STU/SLDC • Capital Recovery Charge specified by SERCs • Alternative-3 • Assets continue to be treated as given on lease • POWERGRID continue to collect tariff as lease rental • STU/SLDC make provisions in Annual Revenue Requirement • Assets transferred to STU/SLDC after full recovery

38. Past investment in SLDCs by STUs/SEBs Table-2, Page 7

39. Transfer of existing assets and liabilities of STUs/SEBs under ULDC project Para 4.1, Page 11 Para 4.5, Page 14 Para 4.8, Page 16 Recommendations • Investment by STUs/SEBs • Infrastructure with SLDCs to be transferred from STUs/SEBs to SLDCs • Field equipment and communication infrastructure to remain with STUs/SEBs • Assets, liabilities of STUs and SLDCs to be segregated and transferred to the subsidiary or the successor company created in State as the case may be • To be completed by June 2009

40. Future Investments

41. Capital Expenditure plans to cover Para 5.1, Page 18 Para 5.2 to 5.4 Page 18-20 • Augmentation of Communication System for data transfer from field units to Control Centre • Augmentation of Control Centre • Civil Infrastructure • Computer System and peripherals • Specialized Software • Smart Grid • Auxiliary power • Cyber Security and Infrastructure security • Back up Control Centre • Others

42. Execution of CAPEX plans Para 5.5, Page 21 • Centralized mechanism adopted in the past as in ULDC no longer suitable due to • Large diversity in local requirements • Need for capacity building in State Sector • Need for vendor development to reduce monopoly • Implementation and financing is challenging • Fast evolving changes in power system operational needs • Recommended approach for Control Centre augmentation • Decentralized at each LDC level • Integrated for seamless data flow • Flexible to address changing requirements • Open systems for interoperability • Load Despatch Centres may harmonize technical specifications through Forum of Load Despatchers

43. Financing CAPEX and O &M Para 6, Page 21 Para 8 (iv), Page 26 • Plans to be examined by respective ERCs • Fund requirement of moderate range • Typically Rs. 75 crore per LDC staggered over 5 years (Annex-IV) • Financial Institutions would be willing to lend if recovery is through ‘Fees and Charges’ approved by respective ERCs • Regulations are necessary to give comfort to the lenders • Revenue from Open Access to add to reserves and surplus of LDCs (Margin money for CAPEX)

44. Methodology for recovery Para 8 (a), (b), (c), Page 25 • Fees and Charges • Charges for servicing of CAPEX • Return on Equity, Interest on Loan, Depreciation • Charges for Human Resource • Salary, perquisites, incentives, Training, Certification • Charges for O&M and General Expenses • Repair, Communication, Travel, Statutory duties, Taxes • Interest on Working Capital

45. Revenue streams and sharing of charges Para 9, Page 27 Para 11, Page 28 • Services from LDCs • System Operation • Market Operation • System Logistics • Charges to be shared by beneficiaries of LDC service • Modus Operandi to be specified by respective ERCs

46. Part-IIEmoluments of Personnel

47. Major Issues Para 13, Page 32 Annex-V, Page 75-94 Para 12, Page 30 Para 14, Page 33 • Problems being experienced in attracting and retaining talent • Wide variation in emoluments among SLDCs-RLDCs/NLDC as per organizations managing LDCs • SLDCs managed by respective STU/SEBs • 5 RLDCs and 1 NLDC managed by POWERGRID • Existing emoluments incommensurate with the job responsibilities and associated physiological and mental stress • Urgent need for • Broad Harmonization and scaling up of emoluments to facilitate movement of personnel across different LDCs • Suitable incentives for personnel

48. Recommended Compensation Structure Para 15, Page 36 Basic pay and perquisites Performance Related Pay (PRP) Incentive-linked to certification Contingency duty allowance Special awards

49. Performance Related Pay: Recommendations Para 15.2, Page 37 Illustration in Annex-VI, Page 95 Annex-VIII, Page 101 • Linked to performance of • Load Despatch Centre • Individual concerned • Performance Indicators for LDCs • System Operation (20 %) • Market Operation (20 %) • System Logistics (20 %) • Documentation (10 %) • Learning and growth perspective (20 %) • Financial (10 %)

50. Performance Related Pay: Recommendationscontd… Annex-IX, Page 105 • Performance Indicators for Individuals • Management defined Key Result Areas • Individual informed in the beginning of assessment period • 70 % weightage • General competencies, skills and personal traits • 30 % weightage • 360 degree feedback for assessment of LDC-Head • Forum of Load Despatchers (FOLD) • To carry out further work • To harmonize Performance Management System