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Home News Power Sector News Electricity Act - 2003 - Questionable Wisdom

Electricity Act - 2003 - Questionable Wisdom

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Indian Electricity Act-2003 would be disastrousWhen the bill which was in due course enacted as the Electricity Act, 2003 was under consideration of the standing committee of parliament, a number of issues which deserved closer examination had been highlighted. Several of these issues remain unattended. The Act, which is a halfway house, also raises a number of new issues which are likely to pose serious problems in the coming years.

The Electricity Act, 2003 (hereafter referred to as the Act) which has come into force (except for section 121) on June 10, 2003 is stated to be the ‘distilled wisdom’ of a series of commissioned international and national consultancy studies and seminars and conferences held at the all-India level during the last three years. It is acclaimed to be the roadmap for the electricity industry which will help hasten the pace of economic reforms in the country. When the bill on this subject was under consideration of the standing committee of parliament, I had highlighted a number of issues which deserved closer examination.1 Several of these remain unattended. The Act, which is a halfway house, raises a number of new issues which are likely to pose serious problems in the coming years.

First Page

It will be best to begin the discussion with a brief overview of the power sector.2 The report of the Planning Commission on the working of the state electricity boards (SEBs) for the year 2001-02 brings out several areas of concern. It is seen that power sector reforms so far have been half-hearted and halting. The driving force for the reforms is not a conviction among the states that the reforms are imperative. Rather it is the allurement of large financial assistance from the World Bank, Asian Development Bank and the bilateral donors which is goading the states to reluctantly show just enough progress to qualify for the release of the next instalment of aid from external sources! If this was not so, the financial performance of SEBs would not have deteriorated so sharply during the reference period 1996-97 to 2001-02. The percentage recovery of cost of supply through average tariff has gone down from 76.7 per cent (82.2 per cent in 1992-93) to 68.6 per cent. Average agricultural tariff in the reference years was just 21.2 paise and 41.54 paise respectively. Commercial losses (with subsidy) have increased nearly six times from Rs 4,674.31 crore to Rs 24,837.2 crore. These losses (without subsidy) have tripled from Rs 11,305 crore to Rs 33,177 crore. Net internal resources of SEBs which were (-) Rs 2,090.7 crore deteriorated sharply to (-) Rs 19,103.90 crore. Subsidy for domestic consumers increased from Rs 4,386.01 crore to Rs 12,238.51 crore. Subsidy for agricultural consumers increased from Rs 15,585.20 crore to Rs 30,462 crore. Gross subsidy (subsidy for domestic and agricultural consumers and inter-state sales) went up steeply from Rs 20,210.75 crore to Rs 43,060.10 crore. Gross subsidy per unit of sale increased from 75.4 paise/Kwh to 126.6 paise/Kwh. Revenue arrears in 1999-2000 were Rs 24,773.1 crore and accounted for 40.4 per cent of the total revenue for the year. The rate of return (ROR), which statutorily should have been at least 3 per cent of assets in service (excluding interest and depreciation), is in a bottomless pit and has deteriorated unbelievably from (-) 12.7 per cent in 1992-93 to (-) 19.6 per cent in 1996-97, (-) 43.1 per cent in 1999-2000 to (-) 44.1 per cent in 2001-02.

Attention should also be invited to the fact that the level of cross-subsidisation has been declining steeply over the years. Cross-subsidy from commercial and industrial sectors (as a percentage of effective subsidy to domestic and agricultural consumers) which was as much as 41.7 per cent in 1992-93 sharply declined to 16.7 per cent by 2000-01 (RE) and is expected to further decline to 14.3 per cent in 2001-02. Surplus generated by cross-subsidisation for the year 2001-02 was only Rs 5,759 crore. This is due to the fact that the share in the total energy sales of domestic and agricultural consumers, who get power supply at subsidised rates, has been progressively increasing over the years and stood at 50.1 per cent in 2001-02 against 49 per cent in 1996-97, while the share of industrial sector consumption has declined from 34.7 per cent in 1993-94 to 33 per cent in 1996-97 and further to 29 per cent in 2001-02. A reference may also be invited to the average tariff (paise/Kwh) charged by SEBs to their various customers in 2001-02. It ranges from 41.6 paise, at the lowest end, charged to agricultural consumers to 194.4 paise for inter-state sales, 195.6 paise for domestic consumers, 378.7 paise for industry, 426.3 paise for commercial use and 449.2 paise for traction. This data has considerable bearing on the further discussion on viability of SEBs in the coming years due to the liberal definition of captive generation in the Act leading to so-called ‘cherry-picking’.

Changing Ownership Profile

Yet another striking feature of the power sector is the rapidly changing ownership profile of assets. It is often forgotten that initially there was considerable opposition to the central government making investments in power generation. Several states considered it an unnecessary encroachment in their field. On this background, it is interesting to see that as on March 31, 2002, central sector generation accounted for a little over 30 per cent of the total installed generation capacity (1,04,917.5 MW) in the country. Over the coming decade, this share is expected to go up further. Purchase of power by SEBs from central sector generating stations, as a percentage of availability, has increased from 33.08 in 1996-97 to 36.77 in 2001-02. The investment in inter-state transmission lines is mostly by central public sector undertakings (PSUs). The financial assistance from the centre and its PSUs to SEBs has also increased substantially.

Another noteworthy feature of the power sector is the sharp decline in the Plan outlays for the sector both at the all India and the state level. At the all India level, the Plan outlay for power sector, as a percentage of the total Plan outlay, has come down from 19.04 per cent in the Seventh Plan (1985-90) to 14.49 per cent in the Ninth Plan (1997-2002). In the annual Plan for 2001-02, it was as little as 12.19 per cent (excluding Jharkhand). At the state level, the power sector outlay, as a percentage of the total Plan outlay, has come down from 31.55 per cent in 1990-91 and about 26-27 per cent for each of the three years thereafter to just 15.25 per cent in 2001-02. As a result, capacity addition in the Ninth Plan was only 47.2 per cent or 19,015 MW against the Plan target of 40,245 MW. This is particularly disconcerting as the per capita electricity consumption of 355 Kwh during 1999-2000 in India compares very unfavourably with that of 719 in China in 1997. It is also important to note that the elasticity of electricity consumption to GDP for 1980-81 to 1998-99 was 1.41. Thus, any shortfall in power availability will inevitably lead to slower rate of growth of the economy. If the severe constraint of financial resources is to be addressed, steps will need to be taken to increase the internal resources of SEBs. If it had been possible to adopt a tariff of 50 paise per Kwh for agricultural sales, SEBs would have been able to mobilise additional resources of Rs 1,984 crore in 2001-02. Their resources could improve to over Rs 33,176.8 crore even with a 0 per cent ROR and over Rs 35,432.5 crore at 3 per cent ROR, rather than the shocking ROR of (-) 44 per cent recorded in that year. Given the political will, this should not be difficult as, on an average, at all India level, SEBs would have to raise tariff by about 117 paise/Kwh for achieving 0 per cent ROR and by about 117 paise/Kwh for achieving 3 per cent ROR in that year. Not only are the state governments not permitting the SEBs to charge cost-based tariff but are not even coming forward to take over the burden of subsidy fully. Thus, subvention received by SEBs from the state governments was only Rs 8,339.62 crore while the uncovered subsidy burden was as much as Rs 28,976.92 crore in 2001-02. The provisions of the Act need to be examined against this background.

Second Page

At the outset it must be mentioned that the whole scheme of the Act gives an impression that the subject of electricity, instead of being in the Concurrent List, is in the Central List. There is far too much centralisation and standardisation. Policies on all matters, namely, the national electricity policy and plan, and even the national policy on stand alone systems for rural areas and non-conventional systems, and the national policy on electrification and local distribution in rural areas are to be formulated by the central government (section 3). As in the case of enactment of this Act, the formality of consultations with the state governments will be observed but, in the light of experience so far, whether this process will be meaningful is difficult to say. It also needs to be noted that national consensus and agreements arrived at, year after year, in the national development council and conferences of chief ministers and power ministers have mostly remained on paper. The Act lays down that SERCs are to be guided, inter alia, by the principles and methodologies specified by the central commission for determination of the tariff applicable to generating companies and transmission licensees (section 61(a)). There is to be an unduly large central electricity authority (CEA) consisting of not more than 14 members of which 8 are to be full time members (section 70(3)). Its independence is, however, highly doubtful as the members shall hold office during the pleasure of the central government (section 70(6)). The critical importance of independence of CEA became clear during the approval process of the highly controversial Enron power project. The three-member selection committee to select members of SERCs is to include the chairperson of the CEA or the chairperson of the CERC (section 85 (1)(c)). The chairperson of the appellate tribunal is to exercise general power of superintendence and control over the appropriate commission (section 121). Mercifully, this section has not been notified and given effect to so far. The chairperson of the central commission is to be the chairperson of the forum of regulators (section 166 (3)). The continuance of SEB as the state transmission utility or a licensee for a further period beyond one year has to be mutually decided by the central government and the state government (section 172).

Unbundling SEBs

The reform strategy on which the Act is based raises several questions and may, in fact, seriously undermine the intended reforms themselves. It is necessary to bear in mind that there is a strong opposition to privatisation of power sector in India. Like the words ‘family planning’, which came into disrepute after the Emergency and had been replaced by the words ‘family welfare’, the word privatisation too has negative connotation in political and social parlance in India and has been replaced by words such as divestment and disinvestment. It is necessary to underline that, with all their limitations3 , the transparent, participative and open working of the state and central electricity regulatory commissions has created public awareness of the serious problems facing the SEBs and a climate in favour of reforms in the sector. Unfortunately, several provisions of the Act discussed hereafter are likely to be counter-productive in these endeavours and may lead to increasing the resistance to reforms in general and much larger involvement of private sector in particular without adequate, effective and transparent safeguards. Entry of large industrial houses such as Reliance in the sector has strengthened these misgivings.

Third Page

The act is largely based on the reform strategy advocated by the World Bank. The World Bank often claims that its lending strategy is owner-driven rather than being donor-driven. But this is hardly borne out in practice. For example, the training and visit (T and V) strategy adopted by the World Bank for lending to agriculture for a number of years was thrust on India, in spite of serious reservations in the country. The advocacy by the Bank to reduce government support to higher education and for its marketisation has led to serious social tensions. Insistence on eliminating agricultural power subsidies in India, in spite of large agricultural subsidies being given in US and a number of other developed countries, is increasingly difficult to comprehend. The flat rate tariff for agriculture propagated by the World Bank in the mid-1970s was similarly misconceived and India is paying the heavy price for it for over three decades. Same is true of the several strands of the new power policy advocated by the World Bank for (what it itself describes as) its ‘client countries’. Unfortunately, the precept of accountability which the Bank preaches so assiduously to its client countries is hardly ever considered relevant in its own work.

The most important element of the reform strategy contained in the Act is of unbundling of SEBs. A great deal can be said in favour of selective approach to unbundling rather than this being advocated as a mantra, as the Act seems to do. The experience, world over, is not uniform in this regard. In USA itself, reportedly there are about 200 vertically integrated privately owned power utilities. There are also countries in which vertically integrated PSUs are functioning successfully. Further, the Act itself says that distribution licensees would be free to undertake generation and generating companies would be free to take up distribution business. As a result, Reliance, for example, have already announced their plans to integrate their operations from gas fields to common consumer of electricity. Tatas too have announced plans to expand their generation capacity as also to take up new distribution responsibilities. How can there be separate dispensations for the private sector and SEBs? This is nothing but denying a level playing field to SEBs with a vengeance.

At this critical stage of reforms, it would be counter-productive to create a public perception that the sector is to be left at the mercy of the private sector. But this is precisely what is going to happen with the recent advocacy by the World Bank of ‘regulation by contract’ to promote larger private sector investment in electricity distribution.4 In brief, the discussion paper of the World Bank asserts that the key lesson of the last 10 years is that regulatory independence, by itself, creates neither regulatory commitment nor balanced decision-making. Regulatory independence must be combined with a clearly specified regulatory contract that must be negotiated by political authorities. Such a regulatory contract would substantially limit the regulator’s discretion. The idea is to limit the discretion of the regulator in areas that are known to deter investment. The key component of the regulatory contract is a performance-based, multi-year tariff-setting system. It is argued that the concept of independence does not logically require that a regulatory commission design the tariff system that it implements. The paper suggests that, insofar as India is concerned, it would be better to, inter alia, (i) transfer tariff-setting authority back to the government on a one-time basis for the initial post-privatisation period, (ii) incorporate the tariff-setting formula directly into the privatisation agreement, and (iii) establish fairly detailed tariff principles and processes that would apply to subsequent multi-year tariff (MYT) periods. According to the perceptions of the paper, without such changes, any privatisation will take place under a cloud of legal uncertainty. It is further suggested that, in this process, risks should be shared between the private party, consumers and the state government. The paper asserts that a multi-year tariff system can be put into operation even in the absence of high quality data. The paper has a touching faith that “data quality will improve through privatisation”. This is an amazing assessment in the light of shocking corporate scandals such as of Enron and a host of others due to falsification of accounts and records and collusion by accountants.

The fact that this advocacy is not just a straw in the wind is further underlined by its serious consideration by the government of Karnataka as a part of the strategy for privatisation of distribution in that state. The distribution margin (DM) approach accepted by the state government has two components: base revenue and incentive charge. It is important to note that the base revenue is the amount of revenue that the distribution company is allowed to retain to meet its cost of operating the distribution business. The strategy is based on the acknowledgement that “because the system currently has a large cash deficit and the required information is unavailable, the current regulatory arrangements need to be modified before investors can take business and regulatory risks.”5 The government of Karnataka has under active consideration amendment of the state regulatory commission Act for introduction of multi-year tariff. The consultants appointed by the state government have, inter alia, recommended that of the several risks facing the investor in privatisation, only the collection risk in respect of metered consumers, theft risk limited to the starting levels of theft, risk in respect of inaccurate meters, operational management risk and capital expenditure management risk should be borne by the investor. All other risks should be borne by the state government. In its comments, the Karnataka Electricity Regulatory Commission (KERC) has observed that “these amendments seem to operationalise the concept of a regulatory holiday for a period of ten years”. KERC has advised against undertaking such amendments and has further stated that if this view does not find favour, “it [the commission] be kept in a suspended animation during this period of 10 years to avoid the completely unnecessary expenditure of around Rs 2 crore per annum on its maintenance and upkeep”.

Fourth Page

Regulatory Contracts

The above regulatory contract approach is fraught with serious consequences and should not be accepted as blindly and mindlessly as similar other prescriptions in the past. What may be acceptable in and suited to Latin American or East European countries may not either be acceptable or relevant in India. Each country must look at its own ethos, past experience, institutional and legal framework and other relevant parameters before following the advice of international aid agencies. This is the least that we can do, at least now, with the comfortable foreign exchange reserves position. But, this will call for an altogether new mindset than in the past. At the outset it must be noted that the regulatory contract will have all the characteristics of the series of highly controversial power purchase agreements (PPAs), such as in respect of Enron, entered into by the state governments for generation projects, by adoption of MOU route, after the onset of reforms in this sector. These had totally undermined the credibility of the government both at the centre and the states. It was on this background that there was wide reception of the idea of approval of all investments in the sector by regulatory commissions in an open, transparent and participatory manner. Going back on this progressive step will be grossly inadvisable. Second, it needs to be noted that approval of a contract at the political level is more prone to risks of it being disowned, cancelled or abrogated than if a contract has been approved by a statutory authority such as CERC/SERC in an open and transparent manner with a ‘speaking order’. Third, the Act provides for arbitration (section 158). Appeal over the decisions of the CERC/SERC lies to the national appellate tribunal presided over by a judge of the Supreme Court. There is also a further appeal provided to the Supreme Court. By any international and other well recognised standards, these are enough safeguards against any regulatory excesses. Fourth, the words ‘regulatory risk’ connote a contradiction in terms. In fact, there is more risk of arbitrary and unpredictable decisions on contractual matters at the political level than by statutory bodies such as regulatory commissions. Why should private investors not be prepared to face such so-called risks when they are assured of fair and open hearing and judicial process? Fifth, in all matters involving pricing of power, decisions inevitably get politicised and lead to controversies. Acceptance of such decisions becomes less painful and simpler if the consumer representatives have an opportunity to look at all relevant data and place their point of view before the regulator. They must also be convinced that strict standards will be laid down for monitoring the performance of the utility and that its inefficiencies will not be passed on to them automatically by way of increase in tariff. This is all the more important in a situation such as in India where the existing tariffs for certain politically sensitive groups are low and will need to be stepped up in practically each of the years in the near future. Sixth, the concept of automatic pass-through of certain costs such as power purchases can be open to serious question. This will be particularly true in the case of vertically integrated utilities or where there are cross-holdings in relevant companies. Seventh, MYT-setting should be an important objective but it cannot be put into practice immediately. The present data base in SEBs is so weak and unreliable that any projections based on it are bound to be way-off the mark. This is brought out in the reports of SERCs year after year. It is necessary to underline that even with much more reliable data, the projections, for a five-year period, made quinquennially by state governments and the centre for submission to the central finance commission in respect of their revenues and expenditures are found to be far from realistic. The same is true also of the projections made by the finance commissions themselves on which their recommendations for vertical and horizontal devolution of central resources to the states are based. On this background and experience, there are bound to be severe limitations to MYT-setting. With the present state of highly unreliable data, such MYT-setting may give rise to and incentivise manipulation of data and creative accounting by utilities. Eighth, currently the consumer representatives are ill-equipped to go into the complex facets of MYT-setting. As far as one can see, the approach suggested by the World Bank does not envisage consumer bodies participating in this exercise at all. But, even if they were to be given such a right, it is doubtful how far they will be able to do justice to it. It will therefore be necessary to strengthen the NGOs by training their personnel, enabling them to have their own panel of independent experts etc. before MYT-setting is taken up seriously. Ninth, much is being made of the risks which have to be faced by the private sector in taking up power distribution business. Private utilities cannot be permitted to blame others if they fail to do their homework before taking investment decisions. It is for them to take steps to satisfy themselves about the validity and authenticity of the data put out by government in the tender notices. They must also make a realistic assessment of their own capabilities in setting and achieving targets such as for reduction in aggregate technical and commercial losses, testing of meters, energy audit, recovery of arrears, etc. Assured rate of return on capital, coverage of foreign exchange and other risks by the state government and government transmission utility, and providing for distribution margin as a first charge on revenue make a mockery of the very justification underlying privatisation. Tenth, the whole purpose of privatisation is to bring in the risk capital, management expertise and business acumen. The regulatory contract approach seems to be based on the assumption that private sector lacks these attributes. If this is to be so, it can hardly be trusted to create conditions for and confidence among investors for infusion of fresh capital in the business, thereby defeating yet another objective of privatisation Eleventh, one other justification for privatisation is to reduce the burden of subsidies on the state exchequer in an open and transparent manner. This purpose too is likely to be frustrated by the regulatory contract approach as risks which are to be borne by the state government will not explicitly come up for public scrutiny, either initially or during the transition period. It may also not be clear as to how long such subsidisation by the state government may have to be continued as there will be a tendency on the part of utilities to pressurise the state government to continue the regime of sharing of risks. This is all the more so since such decisions are to be made by political authorities. Finally, a question may be asked whether such a regulatory contract can be entered into under the provisions of the new Act as it would water down the authority of the SERC substantially and may even make it superfluous. A reference may be made in this context to the provisions of Article 254 (2) of the Constitution of India. It states that, “Where a law made by the legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by parliament or an existing law with respect to that matter, then the law so made by the legislature of such state shall, if it has been reserved for the consideration of the president and has received his assent, prevail in the state.” Thus, all that would be required is for the government of Karnataka to obtain prior approval of the president before undertaking such a legislation. Looking to the leverage of the World Bank, it would be surprising if the centre refuses such a request. In fact, it would not be surprising if this new approach isincorporated in the central Act.

Fifth Page

The Act is a half-way house on the road to reforms in more ways than one. It professes that its basic premise is that SEBs should not be continued in their present form. The transitional provision in section 172 (a) states that a SEB constituted under the repealed laws shall be deemed to be the state transmission utility and a licensee under the provisions of the Act for a period of one year from the appointed date or such earlier date as the state government may notify and function accordingly. However, importantly, its proviso states that the state government may, by notification, authorise the SEB to continue to function as the state transmission utility or a licensee for such further period beyond the said period of one year as may be mutually decided by the central government and the state government. The same position emerges from section 131 dealing with vesting of property of SEB in state government. It, inter alia, states that, “with effect from the date on which a transfer scheme, prepared by the state government to give effect to the objects and purposes of this Act, is published or such further date as may be stipulated by the state government …” This shows that no final date has been set for the abolition of SEBs and this decision has been left to the state governments. Looking to the likely compulsions of centre-state relations in the medium term, it is unlikely that the centre will ever be able to turn down proposals for the continuance of SEBs as the licensees under the Act.6 In such a scenario, though the SEBs will cease to exist, their place will be taken up by separate and several government companies formed for generation, transmission and distribution. This insistence of the Act on unbundling at any cost is difficult to understand as it is unlikely that private sector will have the capacity to take over the whole electricity business from SEBs even during the next two decades. As the recent experience of most reforming states has shown, creation of government companies alone does not lead to any noticeable improvement in their performance and, in fact, leads to increase in the tariff for the consumer by adding to overhead costs at each stage.

Implications for Government Finances

Once it is accepted that the state governments may not find it possible or be in a hurry to privatise the SEBs wholly, it is imperative to examine as to what implications the Act will have on the finances of the state governments. If the states show unwillingness or are unable to privatise distribution, the paying customers of SEBs, namely, industrial, commercial as also domestic consumers whose consumption is more than, say, 300 units a month and therefore are in the highest slab of tariff for the domestic consumers are likely to desert the SEBs. The ministry of railways has already announced plans to take supply of electricity directly from the central PSUs. This process is expected to be completed in the next five years. It is necessary to note in this context that the Act defines captive generating plant as one “set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or association of persons for generating electricity primarily for use of members of such co-operative society or association”. This definition is wide and covers a number of situations as compared to the restrictive definition of captive generation adopted in the past. As a result, any consumer can become a shareholder of a co-operative society or a company floated for power generation and distribution. Obviously, consumer groups which are presently being heavily subsidised will not be interested in getting power supply from such new ventures and will continue to be the responsibility of the SEBs functioning as new distribution licensees.

It is important to note that, under the Act, when a consumer is accorded an open access to avail supply from a source other than the distribution licensee of his area, he is liable to pay a transmission charge as also a surcharge. The surcharge is to be levied till such time as the cross-subsidies are not eliminated and is to be used for the purpose of meeting the requirement of current level of cross-subsidy. The Act also lays down that such surcharge and cross-subsidies are to be progressively reduced and eliminated as prescribed by the relevant commission. Most importantly, the Act lays down that such surcharge will not be levied when open access is provided to a person who has established a captive generating plant for carrying electricity to the destination for his own use. These provisions raise a number of pertinent issues. Significantly, the Act does not lay down any definite timeframe either for provision of open access or for abolition of cross-subsidisation and leaves these decisions to the SERCs. As seen earlier, the level of cross-subsidisation has come down steeply over the years due to the decline in the sales to industry and increased sales to domestic and agricultural consumers. The act should have laid down a time limit of say five years within which open access is to be provided or cross-subsidies and the surcharge based thereon is to be abolished. Second, the surcharge is to be based only on current level of cross-subsidy and therefore cannot take note of or compensate for change in future consumer mix and demand elasticities, or backing down of generating sets and costs thereof etc. Third, the surcharge apparently applies to an existing consumer of a distribution licensee and shall not apply to new consumers in the area of a licensee who prefer to take supply directly from a source outside the area. Fourth, since the surcharge is not to apply for captive generation, there will be greater impetus to setting up captive generation. Power from such a source may be cheaper than from the SEB as it does not have to bear the burden of cross-subsidy but it may not be the most cost-effective option. Over a period of time, this will lead to the country being saddled with high cost generation, thereby adversely affecting its international competitiveness.

Sixth Page

The central government has, through this Act, half-heartedly and by back door tried to do what it could not do openly due to the opposition of the states to undertaking time-bound reforms in the sector. In the process, it has failed to take the country into confidence about the likely consequences of this so-called forward looking strategy. The state governments too do not seem to have grasped the enormity of the problems they are likely to face. The Tenth Five-Year Plan has accepted the objectives of extending electricity to all villages by 2007 and all households by 2012. The financial implications of this too do not seem to have been taken into account while enacting the new law. It is clear that with the mass exodus of paying customers from the fold of SEBs as distribution licensees, the burden on the state budget would become unsustainable. The new regulatory contract regime being propounded by the World Bank will, in effect, add to this burden. This is likely to lead to demands by the state governments that the central government must come forward to share this burden. According to some news reports, the government of Andhra Pradesh has already made such a demand before the Twelfth Finance Commission. It would not be surprising if this issue becomes a bone of contention between the centre and the states in the coming years. Yet another likely implication also needs to be borne in mind. Currently, 16 states levy state electricity duty (SED). The revenue from SED has nearly tripled from Rs 1,131 crore in 1992-93 to about Rs 3,125 crore in 2000-01 (RE). Gujarat accounted for 36 per cent of the total revenue from SED in 2000-01. Average incidence of SED was about 10.44 paise/Kwh in 2000-01 with wide state-wise variations – Gujarat (38.72), MP (15.51), J and K (15.31), Rajasthan (14.14), Delhi (13.32), Maharashtra (10.27), Karnataka (9.13), AP (3.41) and so on. The SED, as a proportion of average tariff in 2001-02, varied widely from 15.9 per cent in Gujarat and 11.1 per cent in J and K to 0.6 per cent in Assam and 1.5 per cent in Andhra Pradesh. Against this background, driven to the wall of mounting financial burden of subsidising SEBs as new distribution licensees, it would not be surprising if the states which, at present do not levy SED, start levying SED on captive and other private power generation and the other states step up the rates of duty. According to a recent news item, the government of Orissa has, in July 2003, increased SED from 12 paise to 20 paise/Kwh for captive power plants, in addition to the duty on auxiliary consumption. Levy of SED will frustrate the objective of the act to do away with cross-subsidisation, as this would be nothing but cross-subsidisation by another name.7

Multiple Distribution Licences

In its anxiety to meet multiple and often conflicting objectives and to be unduly futuristic, the act provides that there can be more than one distribution licensee for a given area and such a licence cannot be denied if an applicant fulfils the prescribed conditions, on the ground that there already exists a licensee in the same area for the same purpose (section 14). This is likely to be viewed as an unduly high business risk by new entrants in distribution business and may become a major disincentive. Considering the fact that the response of the private sector to take up distribution business has been lukewarm, a number of incentives such as MYT-setting and adoption of distribution margin strategy are being proposed to enthuse the private sector. On this background, to permit more than one distribution licensee for an area can be hardly justified at this stage of reforms. Such a step may certainly be necessary in the long run to promote competition but it can wait for some time as otherwise it will further slow down the pace of privatisation in the country. It needs to be noted in this context that Tatas and BSES, who are distributing power in Mumbai for decades, are still not prepared to face competition from each other and are pursuing their claims in the courts. Another question which needs consideration is whether we, as a country, can afford to provide for so much capital redundancy in an industry which is so capital intensive.

The Act (proviso to section 14) states that “where a person intends to generate and distribute electricity in a rural area to be notified by the state government, such person shall not require any licence for such generation and distribution of electricity, but shall comply with the measures which may be specified by the CEA under section 53”. Perhaps this is based on the presumption that dispersed generation from non-conventional and mini hydel sets would be cheaper. The available data show that this is far from true. Co-generation power, depending on the season, costs in the range of Rs 2.53 and Rs 2.01/Kwh, with 5 per cent annual escalation in UP. The figure for Maharashtra is Rs 3.05/Kwh with 2 per cent annual escalation. Some states have given far too liberal incentives for non-conventional power which have led to its high cost. The buy-back rates for wind power range between Rs 2.25 and Rs 2.90/Kwh with annual escalation.8 The tariff-setting for wind power generation in Maharashtra, with excessive concessions given by the state government, has raised many contentious issues leading to prolonged hearings before the MERC whose decision in the matter is still awaited. The Government of Orissa has taken a decision to sell off 7 mini hydel power projects in the state. It is reported that these power projects are not in operation as cost of power from these plants is quite high at Rs 4 per unit.9 Insofar as rural distribution is concerned, the experience of co-operatives is far from encouraging. Almost all of them are surviving only due to SEBs supplying power to them at highly concessional rates. The most shocking case is that of Mula Pravara Cooperative Society in Maharashtra which has defaulted on arrears of hundreds of crores of rupees and their write-off by MSEB. With such cost structure of even non-conventional and dispersed generation, it is evident that agricultural tariff will have to be subsidised for several years to come. In this light, to per-mit setting up of generation and distribution projects in the rural areas without any scrutiny of their costs will foreclose the options of the state government in so far as taking over of subsidy burden is concerned.

Seveth Page

A reference may be made in this context to the concept of cost to serve as opposed to cost of supply. Ideally, tariff for every consumer group should be based on the cost to serve the concerned group. In working out the cost to serve, several factors such as the cost of generation, transmission and distribution, clustered vs dispersed supply, voltage at which supply is made, and whether supply is given only in off-peak hours or at all hours, will have to be taken into account. Ideally, a set-off in tariff should also be provided for unreliable and low quality supply based on frequency and duration of power failures and interruptions, and low and fluctuating voltages. On this basis, cost to serve for agricultural consumers should be much lower than estimated at present. Laying down uniform guidelines in this regard under the Act and its Rules would have been advisable.

The Act is weak and wanting in so far as regulatory mechanism is concerned. As brought out earlier, whatever may be the experience in other countries, in India, the success of power sector reforms hinges critically on the success of regulatory mechanism. Towards this end, the Act needs to be amended as brought out hereafter. The Act should provide for a clear and unambiguous bar against reappointment of any member or chairperson on the same or any other commission. This should also hold good for the chairperson and members of the national appellate tribunal. Section 113(b) (i) states that a person who “is, or has been, or is qualified to be, a judge of a high court” could be eligible for appointment on the appellate tribunal. Looking to the fact that this is a national level tribunal and is to decide appeals over the decisions of SERCs/CERC, it will be best to delete the words “is qualified to be” from this sub-section. The past experience brings out that, to be effective, SERCs need to be given much larger financial autonomy and independence by levy of a cess on power consumption in the state. No less important is the accountability of the regulator to state legislature/parliament. Towards this end, it will be useful if the working of the regulators is reviewed by the standing committee of parliament and the relevant committee of the state legislature. A series of other recommendations made by this author and the Prayas Group study, referred to earlier in footnote 3, need to be incorporated in the Act.

Consumer Protection

Major provisions pertaining to protection of consumer interests in the Act are: section 57(2) which makes a licensee liable to pay compensation, for non-compliance with the standards of performance, to the person affected as may be determined by the regulatory commission; section 64(3) which refers to the procedure for making tariff order after considering all suggestions and objections received from the public; section 23, which, inter alia, refers to issue of directions to licensees for promoting competition; section 60 regarding avoidance of market domination; and section 61 regarding the factors which are to be kept in view in tariff determination. Sub-section (c) thereof refers to encouragement of competition, efficiency, economical use of resources, good performance and optimum investments. Section 42(6) provides for appointment of an Ombudsman by the state commission. However, provisions of sections 173 and 174 show that the competition law passed by parliament will not be applicable to the power industry. This is indeed unfortunate. This law should be of considerable importance in protecting consumer interests, particularly with the entry of large industrial houses in this sector.

Though consumer participation is recognised as an important element in overseeing public utilities, the Act does not have much to say in so far as the participation of NGOs, consumer groups and civil society is concerned. This is in spite of the actions taken in this regard so far by some of the commissions. For example, KERC has taken steps which include appointment of a consumer advocate, survey of electricity consumers through the office of consumer advocacy, organising workshops and training programmes for consumer organisations, issue of monthly newsletters, grievance handling through consultants and so on.10 The Act needs to be amended to cast a statutory responsibility on SERCs/CERC to take pro-active actions for institutionalising consumer participation and consumer advocacy.

Section 127(6) lays down that the rate of interest on delayed payments will be “16 per cent per annum compounded every six months”. Considering the softening of interest rates in the country and their likely downward trend, the rate as above seems unreasonably high. It will also be better if the rate of interest is fixed under the Rules, rather than in the Act, so that it will be easier to change it when necessary.

The enactment of a comprehensive law on electricity was long overdue. This task has now been accomplished. However, it is important to ensure that the Act does not remain on paper as has happened with several other laws in the country. In the power sector itself, the salutary statutory provisions for a fixed tenure for the chairman and ROR of SEB have been observed more in breach. It will be equally important to ensure that the Act subserves its objectives and does not lead to more problems than it claims to solve. This will call for continuous reassessment of its underlying strategies in the light of implementation experience. After the unprecedented power blackout on both sides of US-Canada border in August 2003, Governor of New Mexico and former US Energy Secretary is reported to have said that his country was a major superpower with a third world electrical grid. The California experience of power sector reforms too brings out that there are no ready-made answers and ‘one size fits all’ approach is not the best strategy for a road map for reforms.
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