Loaded with incoherence

On August 8, 2022, the government introduced the Electricity Amendment Bill 2022 in the Lok Sabha. Amid vehement opposition, it was immediately referred to the Parliamentary Standing Committee on Energy. The Indian power stocks were on the rise on that day. At 12:47 pm, the S&P BSE Power index climbed 1.48 per cent to 4765.2 on the Bombay Stock Exchange. The major gainers were Adani Green, ABB India, NTPC, and Torrent Power.

After a gap of over four months, the bill was referred to the panel for discussion only on December 21. BJP MP Jagadambika Pal heads the panel. Newspaper reports suggest that the government plans to present the bill during the upcoming monsoon parliament session in July 2023.

The electricity sector has four major segments: supply of energy sources for power generation (coal; natural gas; uranium; renewable sources), 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 the sub-stations to individual consumers through a network of distribution companies (Discoms).

‘Electricity’ falls under the concurrent list of India’s Constitution. While the central government holds responsibility for overall development, the individual states are accountable for the provision of electricity to their respective residents. Thus, Discoms come under the jurisdiction of the state governments.

In 2022, losses in distribution stood at over Rs 900 billion, and total outstanding loans to distribution companies (Discoms) were close to Rs 6 trillion (Rs 6 lakh crore). In 2021, the aggregate Technical and Commercial losses in India stood at 23 per cent. In contrast, they are at 6 per cent in the USA, 5 per cent in China, and 4 per cent in Japan.

Power sector reforms

The first major reform in the Indian power sector was introduced by the Atal Bihari Bajpayee government in 2003. The Electricity Act, 2003, which came into force on June 15, 2003, is the central law that regulates the electricity sector in India. It is a comprehensive legislation passed by replacing the Electricity Act of 1910, the Electricity Supply Act of 1948, and the Electricity Regulatory Commission Act of 1998. The Electricity Act of 2003 has been 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, protection of consumer interests, and provisioning of 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.

The 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.

* 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

* License-free 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

* Open access to the distribution of electricity.

* Specialised tribunal: The Electricity Act, 2003, provides for a specialised 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.

* Central government to prepare National Electricity Policy and Tariff Policy

* Central Electricity Authority (CEA) to prepare the 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.

Electricity Amendment Bill 2022

Since 2014, the government of India has been trying to introduce a few deep-seated reforms, especially in the power distribution sector. The August 2022 Amendment Bill is the newest initiative in the reform process. The proposed bill has gone through a long process of dialogue between various stakeholders.

In 2014, a Bill to amend the 2003 Act was introduced in Lok Sabha 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) rationalise 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 of Power of the newly elected Modi government proposed draft amendments to the 2003 Act. The Draft Amendments sought to: (i) introduce a direct benefit transfer (DBT) mechanism for the transfer of subsidy directly to consumers, and (ii) define renewable generation and purchase obligations, among others. Again, the proposed amendments could not be legislated. The 17th Lok Sabha was dissolved in 2019. The re-elected Modi government initiated the process 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, like huge outstanding payment to Discoms by the state governments, which have weakened commercial and investment activities in the electricity sector.

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

Key contentious issues of the Electricity (Amendment) Bill 2020:

* Electricity Contract Enforcement Authority: The Draft Bill proposed to set up the Electricity Contract Enforcement Authority (ECEA). ECEA would adjudicate on matters involving the performance of contracts regarding the purchase, sale, or transmission of electricity between a generation company and other licensees.

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

* 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.

* 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 provided that the state governments might 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 removed this provision and required that subsidies must be provided directly to consumers. It introduced a Direct Benefit Transfer (DBT) system under which state governments would 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 removed 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 authorise a Franchisee to distribute electricity on its behalf. The Draft Bill added that a Franchisee would be appointed with the information given to the SERC. The Draft Bill also introduced another entity named Distribution Sub-Licensee which could be authorised by a distribution licensee to distribute electricity on its behalf. Prior permission from SERC would be required for authorising a Sub-Licensee. But no separate license would 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. Under the 2003 Act, the central government is empowered to prescribe the functions of NLDC. The Draft Bill 2020 added that functions of the NLDC would 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 draft Bill also empowered NLDC to issue directions for ensuring the stability of grid operations and the safety and security of the national grid. Such directions would be binding on various entities involved in the operation of power systems including generators, and regional and state load dispatch centres.

* National Renewable Energy Policy: The Draft Bill empowered the Union government to formulate a National Renewable Energy Policy in consultation with state governments. The central government might 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 added that SERCs would specify RPO as might be prescribed by the central government.

As expected, the Electricity (Amendment) Bill, 2020 faced severe criticism from provincial governments, academicians, administrators, farmers, power engineers et al. for being ‘anti-people’, corporate-leaning, and contrary to India’s federal structure. The opposition also accused the Union government of not undertaking proper consultations with state governments on the matter, despite electricity being on the concurrent list. West Bengal chief minister Mamata Banerjee had written to Prime Minister Narendra Modi on June 12, 2020, expressing outrage over the draft Bill, which, she said, was an attempt by the Centre to “destroy” the country’s federal structure.

The Union government failed to introduce the Bill in the Parliament because, according to an agreement with Samyukta Kisan Morcha (SKM) — one of the key farmer unions that protested against the now repealed farm laws in 2021 — the government decided to discuss the Electricity (Amendment) Bill 2021 with farmers before it was tabled in the Parliament.

Towards the end of 2021, the Union government dropped at least four major clauses from the draft Electricity (Amendment) Bill, after receiving objections from various stakeholders, including the farmers. The removed clauses were: the provision of direct benefit transfer (DBT) on power subsidies, the provision of creating a new Electricity Contract Enforcement Authority, the idea of distribution sub-licensee, and the provision dealing with the Single-Selection Committee for appointment of the Chairman and the Members of SERCs and CERCs.

However, the Union Ministry maintained its position to pass the remaining reforms to the Electricity Act, 2003, stating that reforms including licensing distribution and strengthening the dispute resolution mechanism would increase the sector’s financial viability. Thus, a revised bill of 2020 was introduced to the Lok Sabha on August 8 last year as Electricity Amendment Bill 2022 which may be presented for discussion during the Monsoon session of 2023. Here again, the contentious issues of the Bill remain as under:

* The Electricity Act, of 2003 permits more than one distribution licensee (Discom) to operate in the same area. They are required to supply electricity through their own network. The Bill removes this requirement.

* A network-owning Discom will be required to provide open and non-discriminatory access to its network to other Discoms. This creates a conflict of interest in sharing the network, as the network-owning Discom will compete for the supply business. This may also have adverse implications for investments in the network.

* The power and associated costs from existing power purchase agreements (PPAs) will be shared among all Discoms in an area. Power procurement forms 70 per cent to 80 per cent of the total cost and, in many states, most of the existing demand is tied to long-term PPAs. Hence, as per the new proposal, the scope for cost-efficiency gains and competition may be limited, initially.

Conclusion

The proposed Electricity Amendment Bill is a blow to the federal structure of the Indian Constitution. Moreover, if enacted, a few private Discoms may end up controlling most of the power distribution utilities of the country. It may be recalled that in 2022 when Petroleum and Natural Gas Regulatory Board (PNGRB) declared results for 52 geographical areas (GAs) for which GAs were offered for bidding in the 11th city gas distribution (CGD) licensing round, Adani Total bagged 14 GAs. Hyderabad-based Megha Engineering and Infrastructure Ltd (MEIL) won 13 GAs, while state-owned Indian Oil Corporation (IOC) was declared the winner in 8 GAs. The Gas Authority of India Ltd (GAIL) owned only one GA. Same trend was observed while awarding tenders for the modernisation and operation of airports and ports.

Views expressed are personal