Aimed at reviving investment, Electricity Bill shows sparks of reform

The notion of privatising discoms has been in the works but some states opposed this principally because it would constrain their capacity to price power to targeted consumers
Having failed twice to push amendments to the Electricity Act, 2003 in 2014 and 2018, the Centre has issued a new set of reforms through the Electricity Bill, 2020. Aimed at reviving investment and tightening regulations for the chronically loss-making power distribution business, the proposals mark some steps, rather than a great leap, forward.

The state-owned power distribution companies (discoms) remain the weakest link in the electricity supply chain even after three financial restructurings. One of them was Ujjwal Discom Assurance Yojana or UDAY, a financial turnaround package introduced by the Centre in 2015. Despite this ambitious financial turnaround package, performance deteriorated. The national aggregate technical and commercial loss (AT&C) —power supply loss due to inefficient system) — stood at 20.8 per cent and financial losses at Rs 18,316 crore as on December 2019.

The notion of privatising discoms has been in the works but some states opposed this principally because it would constrain their capacity to price power to targeted consumers (such as farmers or rural users). The draft Bill, currently under circulation for comment, seeks to address these objections by proposing that only some areas be opened to private companies. But the relevant clause — titled “Distribution sub-licensee and modifications to existing franchisee model (DSL/DF)” — allows a state or discom to sign up a private partner for power supply or franchise an area or locality to a private player.

But the clause does not differentiate between entities handling power supply infrastructure (known in the parlance as “wire”) and those supplying power (“content”). This clause, therefore, weakens a 2018 amendment suggested by the Centre to divide the wire and content businesses into separate entities to guard against monopolies in the power supply chain. By not making this distinction, the draft Bill creates conditions for private supply monopolies, defeating the purpose of power distribution reform. “Instead of creating competition in the wires and content business of the discoms, [the clause] may also result in curtailing the prospects of having a parallel licensee,” a note from law firm HSA Advocates stated.  

 

 
The most noteworthy amendment in the draft Bill, however, is the proposal that tariffs reflect the actual cost of power and subsidies be delivered to consumers through the Direct Benefit Transfer route. To this end, the Bill has also stipulated a reduction on cross-subsidies and surcharges. These are major changes, since cross-subsidies (principally to industrial units and high-consumption users) partly compensate discoms for losses incurred from providing subsidised or free power. “States have dithered in reducing cross subsidies, the Bill could force them to act as per the Tariff Policy,” IDFC Securities said in a commentary on the Bill.

The Bill has not set out the amount by which cross-subsidies will be reduced, however. That will be outlined in the upcoming National Tariff Policy (NTP), which issues annual guidelines for State Electricity Regulatory Commissions (SERCs). The 2019 edition was not issued, and the 2018 one has no mention of reducing cross-subsidies.
Recognising that power tariffs in India do not reflect costs, the new Bill has also introduced provisions on tariff determination. The most significant proposal here are restrictions on deferring revenue recovery or regulatory assets (that is, discom expenses that are recoverable from future power tariff hikes). The problem is that SERCs do not account for them when calculating current electricity tariffs. The Ministry of Power estimates that discoms lose Rs 22,000 crore revenue annually due to the creation of new regulatory assets.

To improve states’ payment mechanism, the Bill has proposed that load despatch centres would be empowered to oversee the “payment security mechanism” or PSM before power is dispatched. The mechanism makes it mandatory for discoms to prepay for electricity through letters of credit.  

The proposal appears sound but it may create problems for generators of renewable power (wind, solar, hyro-electric), which, by its nature, cannot be stopped, controlled or regulated in the same way as thermal power units. “The PSM has not dealt with the issue of generation of renewable power which has a ‘must run’ status and gets the benefit of deemed generation,” said former vice president at Noida Power Corporation, Rajiv Goyal, who is now Principal Consultant, Mercados Energy Markets.

Among the more significant aspects of the Bill is the proposal for an Electricity Contract Enforcement Authority (ECEA) to resolve disputes over contracts of sale, purchase and transmission of power between two or more parties. The industry has welcomed the move, but the precise authority and role of the ECEA remains unclear.
Goyal points out that the draft is not clear on differentiating the powers of the ECEA and the existing Electricity Regulatory Commissions (ERCs). “The draft amendment suggests that the ERC will continue to have the power to refer to arbitration, including on those issues for which powers are proposed to be vested with ECEA,” he said.

Confusingly, the ECEA has not been empowered to take up tariff-related disputes.” The ECEA will have no jurisdiction over any matter related to regulation or determination of tariff or any dispute involving tariff. Tariff disputes are the highest contested matters,” said a former member of a state ERC requesting anonymity.

Analysts agree on the broad thrust of the latest reforms but point to the need for more explanations and detailed methodology for several amendments (the issue of cross-subsidies being key). But the bigger challenge remains whether states will come on board. For instance, on the critical issue of delivery power subsidies through the DBT only Bihar has gone down this route. But with discom losses plaguing the whole power supply chain, the incentives for states to join the reform bandwagon is strong.



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