Caught up in controversy

Indian power retailers, mostly controlled by provincial administrations, are burdened by heavy losses and together have nearly 1.4 trillion rupees (USD 17.7 billion) in unpaid bills as well as subsidies from their governments for providing cheaper power to some consumers. In July, Prime Minister Narendra Modi urged the state governments to clear their bills and dues to power distribution firms to help ensure stability in the energy sector to meet consumer demands.

The total generation capacity of electricity in India, as on June 30, 2022, was 4,03,760 MW — of which central, state and private sectors contributed 24.5 per cent, 26 per cent, and 49.5 per cent respectively. About 58.6 per cent of electricity in India is generated using fossil fuel (coal & lignite 52.3 per cent, gas 6.2 per cent, diesel 0.1 per cent). The rest 41.4 per cent is generated by non-fossil fuel (large hydro and renewables 39.7 per cent and nuclear 1.7 per cent). In 2021-22, the average plant load factor (PLF) of India's power plants was 58.87 per cent. During the same period, the PLF of the central, state and private sectors were 69.71 per cent, 54.50 per cent, and 53.62 per cent respectively. Last decade's PLF data, as provided by the Central Electricity Authority, suggests that among the three sectors the performance of the private generators was the poorest.

It is reported that despite the last 20 years of power sector reforms, the electricity distribution companies (discoms) are unable to pay the generation and transmission companies as well as banks / financial institutions due to poor financial health. By the end of May 2021, the overdue amount of discoms to generation companies was Rs 79,257 crores. Of this, Rs 24,828 crore was due to Central Public Sector Enterprises, Rs 42,913 crore to Independent Power Producers, and Rs 11,526 crore to Renewable Energy Producers.

Against this background, we shall briefly discuss the pros and cons of power sector reforms that have been initiated through the enactment of the Electricity Act of 2003 and the Electricity (Amendment) Bill of 2020.

Electricity Act 2003

The electricity sector can be classified into three segments: generation, transmission, and distribution. Generation is the process of producing power using different sources of energy. High-voltage power is carried from the generation plants to the distribution substations through a transmission grid. Electricity is finally transferred from sub-stations to individual consumers through a distribution network. The Electricity Act, 2003, is the central law regulating the electricity sector. It was enacted and came into force on June 15, 2003. It is a comprehensive legislation replacing Electricity Act 1910, Electricity Supply Act 1948, and Electricity Regulatory Commission Act 1998. The Electricity Act, 2003 was amended on two occasions through the Electricity (Amendment) Act, 2003, and the Electricity (Amendment) Act, 2007.

The stated aim of the 2003 Act is to push the sector onto a trajectory of sound commercial growth and to enable the states and the centre to move in harmony and coordination through the introduction of competition, protect consumer's interests and provide power for all. The Act provides for national electricity policy, rural electrification, open access in transmission, phased open access in distribution, mandatory State Electricity Regulatory Commissions (SERCs), license-free generation and distribution, power trading, mandatory metering, and stringent penalties for theft of electricity.

Key features of the 2003 Act

• Policies: The Electricity Act, 2003, envisages that policies need to be framed regarding various aspects, and it should be done by the central government in consultation with the state governments and electricity commissions as the subject is in the concurrent list of Schedule VII of the Constitution of India. National Electricity Policy, National Tariff Policy, National Electricity Plan, National policy permitting stand-alone systems for rural areas and National policy on rural electrification and local distribution in rural areas are the policies to be notified by the central government in consultation with the state governments and electricity commissions.

• De-licensing in the generation of electricity: The 2003 Act provides for de-licensing in the generation of electricity, except in the cases of hydroelectric generation and nuclear power generation. As per the Act, 10 per cent of the power supplied by suppliers and distributors to the consumers has to be generated using renewable and non-conventional sources of energy.

• License-free generation and distribution in the rural areas: The 2003 Act de-licenses distribution in rural areas and brings in a licensing regime for distribution in urban areas. It says,

(i) Any generating company may establish, operate and maintain a generating station without obtaining a license under this Act if it complies with the technical standards relating to connectivity with the grid.

(ii) The central government shall also formulate a national policy, in consultation with the state governments and the state commissions, for rural electrification and for bulk purchase of power and management of local distribution in rural areas through Panchayat Institutions, users' associations, co-operative societies, non-governmental organizations or franchisees.

(iii) The central government shall, after consultation with the state governments, prepare and notify a national policy, permitting stand-alone systems (including those based on renewable sources of energy and other non-conventional sources of energy) for rural areas.

• Open access in the distribution of electricity: It is claimed that open access had shown significant improvement in the United Kingdom and the prices of electricity fell down by 30 per cent. Even in India, the government is aiming for the same and the experts opine that the prices of electricity may rise temporarily for a few years, but in the long run, the prices will definitely go down. This will also lead to efficiency in the National Electricity Market.

• Competition at micro-level: As the distribution is liberalized and parallel distribution networks are allowed along with the introduction of open access, the consumers will have the choice of electricity supplier. As there will be competition at the micro-level, the consumers will get better service at a reasonable price.

• Specialized Tribunal: The Electricity Act, 2003, provides for a specialized body — Electricity Appellate Tribunal — dedicated to solving issues and disputes in the electricity sector.

• The state governments are required to unbundle State Electricity Boards. However, they may continue with them as distribution licensees and state transmission utilities.

• Setting up of the State Electricity Regulatory Commission (SERC) has been made mandatory.

• An appellate tribunal to hear appeals against the decision of the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC) is provided for.

• Metering of electricity supplied is made mandatory.

• Provisions related to thefts of electricity made more stringent.

• Trading as a distinct activity is recognized with the safeguard of Regulatory commissions being authorized to fix the ceiling on trading margins.

• Central government to prepare National Electricity Policy and Tariff Policy.

• Central Electricity Authority (CEA) to prepare National Electricity Plan.

The salient features of the 2003 Act indicate that though the power sector falls under the concurrent list, the Union government, through the enactment of the Act, has begun to encroach into the provincial governments' domain. Moreover, the present crisis in the power sector, as highlighted by the Prime Minister, indicates that the Electricity Act 2003 has failed to achieve its objectives.

Electricity Amendment Bill 2020

It is argued that one of the key concerns in the power sector has been the financial health of the distribution companies (discoms), which are mostly state-owned. Discoms have had a high level of debt and have been running losses for the past several years. The Ujjwal Discom Assurance Yojana (UDAY) was launched in 2015 to bring financial and operational turnaround to discoms. Under UDAY, 15 states took over the debt of their discoms worth Rs 2.1 lakh crore. However, the losses of distribution utilities have increased by 69 per cent between 2017-18 (Rs 29,452 crore) and 2018-19 (Rs 49,623 crore). Under-pricing of tariffs, and high technical and commercial losses (including theft and billing issues) are some of the major reasons for financial issues of the discoms

In 2014, a Bill to amend the 2003 Act was introduced in the lower house of the Parliament but lapsed with the dissolution of the 16th Lok Sabha. The 2014 Bill sought to (i) increase competition in the sector by segregating the distribution segment into distribution and supply, (ii) rationalize tariff determination, and (iii) promote renewable energy. The Bill was examined by the Standing Committee on Energy. In 2018, based on the Committee's recommendations and other stakeholder consultations, the Ministry proposed draft amendments to the 2003 Act. The Draft Amendments sought to: (i) introduce a direct benefit transfer mechanism for the transfer of subsidy to consumers, and (ii) define renewable generation and purchase obligations, among others. Again, in April 2020, the Ministry of Power released the Draft Electricity (Amendment) Bill, 2020 proposing amendments to the 2003 Act. As per the Ministry, the Draft Bill seeks to address critical issues which have weakened commercial and investment activities in the electricity sector.

Key Features of the Electricity (Amendment) Bill 2020

• Electricity Contract Enforcement Authority: The Draft Bill proposes to set up the Electricity Contract Enforcement Authority (ECEA). ECEA will consist of: (i) a chairperson, (ii) two or more judicial members, and (iii) three or more technical members. ECEA may have multiple benches, and every bench must have at least one judicial member and one technical member. ECEA will adjudicate on matters involving the performance of contracts regarding the purchase, sale, or transmission of electricity between a generation company and other licensees. It will not adjudicate any matter related to regulation or determination of tariff, or any dispute involving tariff. Such matters will continue to be adjudicated by concerned SERCs and CERC.

• Common selection committee to recommend appointments: The 2003 Act provides for a selection committee in each state to recommend appointments to the respective SERC, and separate committees to recommend appointments to CERC and the Appellate Tribunal for Electricity (APTEL). The Draft Bill proposes a common selection committee to recommend appointments to all SERCs, CERC, APTEL, and ECEA.

• Currently, the SERC selection committee has the Chief Secretary of the respective state as a member. The proposed common selection committee includes chief secretaries of two states as members, by annual rotation (alphabetically). This implies that a concerned state may not have a representative in the selection committee when selecting members of the state's regulator. The question is whether this undermines a state's powers to appoint its regulator.

• Cost-reflective tariff: The 2003 Act provides that the tariff for the retail sale of electricity should progressively reflect the cost of supply. The Draft Bill amends this to require that tariffs must reflect the cost of supply.

• Government subsidy: The 2003 Act provides that the state governments may provide subsidies to consumers. The Draft Bill requires that tariffs for the retail sale of electricity must be determined without accounting for the government subsidy. The 2003 Act provides that state governments must pay the subsidy in advance to the distribution licensee or any other person concerned to implement the subsidy. The Draft Bill removes this provision and requires that subsidies must be provided directly to consumers. It introduces a Direct Benefit Transfer (DBT) system under which state governments will pay the subsidy directly to the consumers.

• Regulation of cross-subsidy: The 2003 Act requires the cross-subsidy in tariffs to be reduced progressively. The Act empowers the regulatory commissions to make regulations regarding the manner of reduction of cross-subsidy. The Draft Bill 2020 removes the powers of the regulatory commissions to make these regulations. It requires that cross-subsidy should be reduced in the manner provided in the National Electricity Tariff Policy prescribed by the central government.

• Sub-contracting of power distribution activities: The 2003 Act empowers a distribution licensee to authorize a Franchisee to distribute electricity on its behalf. The Draft Bill adds that a Franchisee will be appointed with the information given to the SERC. The Draft Bill also introduces another entity named Distribution Sub-Licensee which can be authorized by a distribution licensee to distribute electricity on its behalf. Prior permission from SERC will be required for authorizing a Sub-Licensee. No separate license will be required for operating as either a Franchisee or a Distribution Sub-licensee.

• Functions of National Load Despatch Centre (NLDC): The 2003 Act provides for load despatch centres at the state, regional, and national levels. The load dispatch centres are responsible for optimum scheduling and despatch of electricity in their respective jurisdiction. Under the 2003 Act, the central government is empowered to prescribe the functions of NLDC. The Draft Bill 2020 adds that functions of the NLDC will include: (i) monitoring of grid operations, (ii) exercising supervision and control over inter-regional and interstate transmission networks, and (iii) carrying out real-time operations of the national grid. The Bill also empowers NLDC to issue directions for ensuring the stability of grid operations and the safety and security of the national grid. Such directions will be binding on various entities involved in the operation of power systems including generators, and regional and state load dispatch centers.

• National Renewable Energy Policy: The Draft Bill empowers the central government to formulate a National Renewable Energy Policy in consultation with state governments. The policy will be aimed at promoting renewable sources of energy. The central government may prescribe a minimum percentage of purchase of electricity from renewable and hydro sources of energy.

• Renewable Purchase Obligation: The 2003 Act empowers the SERCs to mandate a percentage of electricity purchased from renewable sources known as Renewable Purchase Obligation (RPO). The Draft Bill adds that SERCs will specify RPO as may be prescribed by the central government.

Concerns

As expected, many provincial governments have objected to the Bill. Protesting the Centre's move to place the "anti-people" Electricity (Amendment) Bill, 2020, in the Parliament, West Bengal Chief Minister Mamata Banerjee in August 2021 shot a second letter to Prime Minister Narendra Modi, urging him to refrain from proceeding with the legislation. Expressing outrage over the draft Electricity (Amendment) Bill 2020 which, she said, was an attempt by the centre to "destroy" the country's federal structure. She claimed that the bill aims to make the entire state electricity grid an appendage of the National Grid.

The People's Commission on Public Sector and Services, a group of eminent academics, jurists, erstwhile administrators, trade unionists and social activists, has issued a statement urging the Union government not to pass the Electricity (Amendment) Bill, in its current form, saying that it is an assault on India's federal structure and will undermine states' authority.

In a strongly worded statement, the Assam and Meghalaya branches of the National Coordination Committee of Electricity Employees and Engineers (NCCOEEE) said, the Bill pursued by the Ministry of Power was framed without taking the 27 lakh electricity engineers and employees in India into confidence. The committee threatened to resort to nationwide strike if the Bill is tabled in Parliament and passed. The NCCOEEE alleged that the objective of the Bill was to let private corporations supply electricity through the existing network of government distribution companies on which crores of rupees are spent every month. The committee termed Power Minister RK Singh's statement that consumers would be given a choice through the Electricity (Amendment) Bill, as "misleading and cheating the public".

"Naturally, the private companies will give electricity only to the profitable industrial and commercial consumers, and government distribution companies will go into further losses by providing subsidized electricity to farmers and common consumers. Thus, the government distribution companies will by default become loss-making companies," it said. This will pave the way for the privatization of the entire power distribution system, the NCCOEEE added. It cited the example of Mumbai where the "privatization experiment" through Adani Power and Tata Power has resulted in domestic consumers shelling out Rs 12-14 per unit, the highest in the country.

The proposal that the subsidy must be provided directly to consumers is also a major area of concern. It proposes to introduce a Direct Benefit Transfer (DBT) system under which state governments will pay the subsidy directly to the consumers. The systematic phasing out of LPG subsidy through the DBT system is a case in point.

Views expressed are personal