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Home News Power Sector News Amendments to EA 2003-Prescription for symptoms; not cure for malady

Amendments to EA 2003-Prescription for symptoms; not cure for malady

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Amendments to Electricity act 2003The amendments proposed in the Electricity Act 2003 by Ministry of Power is mainly in the areas of tariff fixation by regulatory commissions, role of state governments and further restructuring of distribution sector.

10 years of implementation of the Electricity Act, 2003 has evidently aggravated the maladies afflicting the sector. The symptoms are there for every one to see. The losses of distribution utilities has reached gigantic proportions threatening to derail even the financial sector of the country. This has forced the central government to announce debt relief package (more in the form of blood transfusion to keep the ailing patient alive) to avert collapse of entire power sector. The AT&C losses is still remaining abnormally high. Subsidy burden of state governments has increased manifold. Power shortages has increased and is threatening even the orderly functioning of the grid, as witnessed during the NEW grid failure in 2012.

All this has resulted in clarion calls for redrafting the Electricity Act, 2003. The amendments proposed by Ministry of Power has to be seen in this background. But unfortunately the proposal seeks to prescribe treatment to the symptoms and not the malady.

Comments of KSEBOA on amendments to electricity Act 2003- Letter dtd 13-11-2013 seeking intervention of Kerala Government

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2013-11-13

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Comments of KSEBOA on amendments to electricity Act 2003- Letter dtd 13-11-2013 seeking intervention of Kerala Government

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The proposal now is to curtail the powers of state governments who are more closely linked to and directly answerable to the people in respective states. The state governments in the past had unsuccessfully tried to soften the ill effects of reforms unleashed by the Act through loop holes available. The directions issued by state governments under sections 11 and 108 of the Act were examples. They included directions to curtail sale of power outside the state by private generators utilising state resources when the state is reeling under severe power shortages. This is seen as a great sin against the forces of market (the new god of neoliberalism). There were also directions by the states to retain tariffs at affordable levels, like the one issued by Kerala in 2006.

As per the proposal, the power of state governments under section 11 are curtailed. The functioning of state regulators will be more vigorously scrutinised by the center ostensibly to ensure that the commission do not fall in line with the policy of the state government. If found necessary, the appointment rights of the regulators will be taken over by the central government. The regulators will become puppets who merely follow the prescriptions issued by central government through executive orders and policy statements.

However, before attempting to robe the state governments and reign in the state regulators one has to examine whether there were any compelling reasons for the state governments in issuing such directions. Or what held back the regulators from issuing tariff orders at levels necessary to recover costs. Is it mere populistic compulsions or has something more to it.

If one closely examines the developments in the last two decades in the power sector the real malady afflicting the sector will become evident. The amendment in Electricity (Supply) Act, 1948 during 1991 to allow private investment in power generation which lead to the Enron episode and the liquid fuel (Naphtha/Diesel/LSHS) policy that followed (aimed at reducing entry barriers for private capital) has bankrupted many of the electricity boards in the first decade due to abnormal increase in power purchase cost (which obviously could not be directly passed on to consumers). The second decade saw the market reforms through implementation of Electricty Act, 2003. The flawed market model introduced by the Act ensured that the power purchase cost of distribution utilities ballooned to the benefit of captive and merchant power plants set up mostly by beneficiaries of coal gate. Analysis of data thrown up by high level panel chaired by Sri V.K. Shunglu will reveal that the losses sustained by distribution utilities is almost same as the undue benefit gained by power market players.

The state governments and the state regulators who has to directly face the popular resistance were undoubtedly in no mood to pass on the huge increase in power purchase cost. This has lead to a financial crisis in the entire value chain and has now affected the market sentiments also.

Thus any sincere effort in curing the malady shall start from reigning in the market rather than prescribing to pass on the burden created by market players to ordinary people either through electricity tariff or through taxes. Unfortunately the amendments seeks to achieve the later than the former.

It even seeks to achieve much more! It wants to enlarge the scope for market players without burdening them with commensurate responsibility. So it seeks to remove the entry as well as exit barriers for private capital in the distribution sector.

Supply licensee – the ironic Fifth wheel

The Act invented the fourth wheel (trading) in power sector in addition to the three traditional sectors comprising generation, transmission and distribution. The fourth wheel was invented for the smooth ride of market reforms in the sector. Now the proposed amendment has invented the fifth wheel in the form of sale of electricity which is to be unbunbled from distribution of electricity. The ride ought to be rather bumpy.

The aim of the proposal is rather simple. Allow new private players entry into electricity distribution sector without the burden of setting up and maintaining the distribution infrastructure. Cherry picking of high value consumers by the new entrants is explicitly allowed through the amendments. This is achieved through amendments in the express provisions in the existing Act, which inhibited such cherry picking. Thus the existing distribution utilities which will continue to be the deemed sales licensee for a short period and the successor sales utilities in the public sector will be burdened with the low value consumer segment which is huge in number and the new entrants can flurt with the few high value consumers.

The game plan is simple and evident. Let the high value consumers who are already paying at par with or higher than the cost of electricity (due to inbuilt cross subsidy in tariff) be served through new entrants in the electricity sales business, which could be a win-win situation for both the new entrant and the high value consumers. This segment is expected to breed the thirst for profit of the operators in the power market. Yes, the traders could/must act as sales licensee also to penetrate among high value consumers and achieve direct sales from the mushrooming power market. At the same time let the successor sales licensees of the incumbent distribution licensees be burdened with low value consumers and the high prices derived in the bulk power market. Of course, the reformists will get a new whipping boy; instead of the present distribution utilities, the newly unbundled sales licensees in the public sector.

And if something goes wrong ? The new entrants can wash their hands and leave the sector since virtually no investment has been made by them. This is the magic of leoliberalism. The slogan is 'remove entry and exit barriers' for private capital so that the markets can flourish.

And what is in store for ordinary electricity consumers ? To get a new electricity connection he has to first approach the distribution licensee and pay the charges for availing connection. After getting connected to the network he can approach the sales licensee; new or old. If the new sales licensee does not see flesh in the deal the consumer can approach the old licensee (sales licensee unbundled from the traditional distribution utility) as a last resort and ensure supply. After availing supply he has to regularly pay charges to both the distribution licensee and the sales licensee. Default in paying charges of any licensee could lead to stoppage of supply. For enhancing load etc, the same proceedure might be required.

The inseparable 'wire and current' are artificially segregated creating new coordination issues. Even though one may point out experience of separation of wires business and sales business in some advanced countries the scenario there is entirely different due to the pre-existence of a well developed network due to the so called over capitalisation that happened during the prolonged golden years of cost plus tariff regime in such countries. The scenario is also different due to the reverse cross subsidy in the prevailing tariff structure. In most of the developed economies the tariff for domestic sector is significantly higher than the cost of supply and the tariff for big industrial consumers is lower than the cost of supply. In India, which is presently going through a different phase of the development cycle, the cross subsidy structure is just the reverse due to significant socio economic reasons.

Thus in India, due to the large scale cherry picking of high value consumers (few in numbers but large in volumes) by new entrants the incumbent sales licensee will be perennially lose making which could reflect as low level of service, low level of supply availability or unaffordable tariff for ordinary consumers.

That is the problem with fake doctors. They aggravate the malady rather than cure it.

Corporate greed vs Aam Admi: On whose side is our law makers ?

When the executive is proposing exotic legislation that appeals to the taste buds of greedy corporates, in which direction the law makers will look. In the contemporary Indian situation where the corporate interests are well represented, both directly and indirectly, in both the houses of parliament the answer is evident. But what will the Aam Admi do.

The latest census data shows that 400 million Indians could not so far avail electricity. The Ministry of Power admits that even today more than 30,000 villages does not have access to electricity. Those fortunate ones who managed to avail electricity are getting electricity at highly subsidised rates. Roughly more than 70% of the domestic consumers fall in this category. With inflation going sky high the family budgets of rural and urban poor are upset already. About 30% of electricity sold in the country is availed by our farmers at heavily subsidised rates. The subsidy burden of various state governments to provide relief to households and farmers even at this subsidised rates is running to thousands of crores of rupees.

Who will serve these consumers and sectors of economy in future ? Currently the distribution utilities could serve these sections since part of the burden is shared by the wealthy households and profitable business ventures in the service sector. Once these consumers who are already paying at rates much above the rates discovered in the market are picked up by the new sales licensees, who is left to share the bill. These creamy sections of the consumers were expected to foot the bill even in cases were they choose another licensee, in the form of cross subsidy surcharge, as per the existing provisions of law. But the dilution of these provisions in the proposed amendment ensure that the sharing of burden will come down sharply.

The amendments open interesting options to wealthy sections of the society to avail power at lower rates and may be better services also. The markets will be happy that the creamy layer of consumers having better paying capacity who could potentially lift the market rates (currently witnessing consistent lower rates due to lower demand from bankrupt distribution companies who are not in a position to pay the market) are freed from the shackles of the existing distribution licensee and becomes potential direct beneficiaries through the new sales licensees. The new sales licensees will be happy that they can cherry pick the wealthier sections and meet their demand from the market since the heavy baggage of poor and the needy will continue to remain with the public sector incumbent licensee.

And what will happen to this heavy baggage of low value consumers ? Most probably the existing cross subsidy structure in tariff will disappear even without a legislative mandate and the poor will start paying through their nose at rates similar to their wealthier counterparts. Eventually most of those lucky Aam Admi who could avail an electric connection in the first place will be forced to surrender it being a luxuary item affordable only to the rich and the famous. And the perennial problem confronting the sector will be resolved much to the likings of the ruling class with the eventual de-elctrification of millions and shrinking of that historical baggage.

But no one can be sure about the turns history will take. Even though electricity alone might not be a powerful cause to create new history, it has the potential to become the proverbial last straw among a series of burdens passed on to the shoulders of the poor through the sequential neoliberal reforms.

 

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