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J Sagar Associates (JSA)
J Sagar Associates (JSA)

The Viewpoint – Market Structure and Competitive Bidding

Bar & Bench

By Amit Kapur & Vishnu Sudarsan

The ContextThe gold standard for market structure is long believed to be competitive conditions.  Competitive bidding is one of the primary mechanism for procurement and the premise for electricity sector reforms in India.  The Electricity Act, 2003 ushered in a transition from a vertically integrated public monopoly to the introduction of competition in different segments of the industry (with introduction of a multi-buyer multi-seller model, trading and open access).  The law in June 2003 had provided for it as an option and went on to try and enshrine it as a ‘must’ in the provision of public goods and services.

The Framework:  The Electricity Act provides for two alternative routes to the distribution licensee for procurement of power. They are:-

(a) Negotiated Route:  The bilateral/negotiated PPAs is subject to prudence check and regulatory approval of (i) tariff[1] and (ii) power procurement[2].

(b) Bidding Route: Transparent process of competitive bidding conducted as per statutory Bidding Guidelines notified by the Central Government. The Appropriate Commission is obliged to adopt the tariff so discovered.

The Challenge:  Markets, of course, are not perfect and if left unregulated, players with market power are likely to attempt to distort the competitive framework. This ground reality puts a significant spin on the implementation of competitive bidding for procurement and poses a policy challenge. At the current stage of the evolving Indian power sector (with market power of State owned enterprises), recent rounds of procurement by State owned Discoms, some such issues arising from “public interest” came to the fore. The Appellate Tribunal for Electricity in a recent judgment of December 16, 2011 has clarified the position re. competitive procurement of power.

Brief Facts:  Fundamental features of the present case were:-

(a) In its pursuit of low rates, the Discom (Noida Power) was seeking to evolve its own procurement process, at variance with the statutory MoU route and Competitive Bidding route, as envisaged by the Electricity Act, 2003

(b) After conclusion of the bidding process, a generator (not a participant in the bidding process) offered to supply power at a price around 10% lower than the price discovered through competitive bidding.

(c) March 25, 2009:  Noida Power filed a petition seeking approval of Uttar Pradesh State Commission of the bidding documents including the Request for Proposal (RFP) for procurement of 500 MW power through competitive bidding process in accordance with the guidelines issued by the Central Government.

(d) October 08, 2009:  Uttar Pradesh State Commission approved the bidding process along with bidding documents proposed.

(e) October 11, 2010:  Noida Power initiated the process of procurement 200 MW (± 20%) of power under the competitive bidding route on long term basis under tariff based on Case-1 competitive bidding process as per the Government of India guidelines and issued the standard RFP duly approved by the Uttar Pradesh State Commission.

(f) Successful BidderEssar Power was one of the 6 bidders. It emerged as the lowest bidder offering levelized tariff of Rs. 4.0868 (Rupees four and Paise zero eight six eight) per unit for 240 MW of power. The Evaluation Committee set up by Noida Power approved the bid of Essar Power as the successful bidder and the tariff as “market reflective”.

(g) April 07, 2011:  Noida Power filed a petition before the Uttar Pradesh State Commission (as required in case of competitive bidding) for adoption of the tariff quoted by Essar Power enclosing Essar’s PPA.

(h) April 27, 2011:  Noida Power filed an interim application stating that subsequent to the filing of the petition it received a letter from another company proposing to supply power to Noida Power on long term basis at a levelised tariff of Rs. 3.667 (Rupees three and paise six hundred sixty seven) per unit which is less than the tariff quoted by the Essar Power. Noida Power prayed for appropriate orders.

(i) May 30, 2011: Uttar Pradesh State Commission passed an order permitting the Noida Power to take any steps considered fit.

(j) Aggrieved by the order dated May 30, 2011 passed by the Uttar Pradesh State Commission, Essar Power preferred an appeal before the Appellate Tribunal for Electricity.

(k) June 09, 2011:  Noida Power sent a letter to Essar Power and other bidders calling upon them to submit the revised financial bid to match or offer the lower tariff than the levelised tariff of Rs. 3.667 (Rupees three and paise six hundred sixty seven) per unit quoted by the 3rd party.

Key Issues:  Amongst others, the following key issues were considered by the Appellate Tribunal for Electricity –

(a) What is the scope of power to be exercised and the method of procedure to be followed by the State Commission in relation to competitive bidding?

(b) Can a third party, not being a participant to the bidding process, subsequently offer to supply at a price lower than the price discovered through competitive bidding?

(c) Is competitive bidding based on selecting the lowest financial bidder or should other parameters be given due consideration?

The Verdict:  The Appellate Tribunal for Electricity set aside the order passed by the State Commission and remanded back to the State Commission to dispose of the main petition filed by Noida Power by giving due consideration to the observations made in the judgment, including:-

(a) The State Commission could either reject the petition for tariff adoption if it finds that the bidding was not as per the statutory framework, or adopt the tariff discovered by a transparent process conducted as per the Central Government guidelines.  It cannot substitute with its own process in relation to power procurement.

(b) Competitive bidding must be consistent with the Central Government guidelines. This process must discover competitive tariff in accordance with market conditions from the successful bidder.

(c) Any deviation from the standard Request for Proposal (RFP) and model PPA notified by the Central Government must be approved by the State Commission.

(d) If Noida Power (Discom) was allowed to hold negotiations with the third party after price bids are discovered, it would nullify the sanctity of the competitive bidding process.

e) The principles set out in Electricity Act, 2003 (re. Sec 61) require all the Regulatory Commissions to adopt a balanced approach for fixation of tariff. These principles are – (i) the generation, transmission, distribution and supply of electricity are conducted on commercial principles; (ii) the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments; and (iii) safeguarding of consumers’ interest and at the same time, recovery of the cost of electricity in a reasonable manner. The abovementioned principles are to be complied with even in case of competitive bidding in order to safeguard consumer interest as well as to encourage competition, efficiency, and economical use of the resources.

Key Take-aways: Evidently, the contracting process in competitive bidding is dynamic and requires the government and the regulator to play an important role in market structuring. This judgment lends predictability and certainty to the competitive bidding process and sends a strong signal to the investor and developer community as their efforts to secure future pipeline of power projects cannot be undermined by the market by scuttling the competitive bid process. For future transactions, it is clear that:-

(a) The competitive bidding is not to only discover the tariff but also to discover the supplier who would be able to supply the required quantum of power in a timely manner whilst balancing the interest of diverse stakeholders i.e. the distribution licensee, the bidder and the consumer.

(b) The competitive bidding process should strike a balance between transparency, fairness, consumer interest and viability.

(c) Competitive bidding process in Electricity Act, 2003 is distinct from non-statutory regimes (i.e. sale of property by official liquidator for bank loans or PWD procurement) and is not  driven solely by highest revenue realization or lowest cost incurred – but by the guiding principles of Section 61.

Amit Kapur (pictured left) & Vishnu Sudarsan (pictured right) are Partners with JSA. Views of the authors are personal.

[1] Under Section 62 of the Act, the State Commission is required to collect various relevant data and carryout prudence check on the data furnished by the licensee/generating company for fixing tariff. Hence, determination of tariff under Section 62 is very different from determination of tariff through competitive bidding process under Section 63.

[2] Section 86(1)(b) requires SERCs to regulate purchase including process and price.