The Electricity Act needs more power

“And God said, ‘Let there be light’, and there was light. But the electricity board said, ‘He would have to wait until Thursday to be connected!’ Spike Milligan’s light-hearted (pun intended) observation has little comic connotation for the average Indian, who still doesn’t have the option of choosing an electricity supply company.

It has been over a decade since most State electricity boards have been unbundled into generation, transmission and distribution firms. But consumers still do not have the luxury of choice. The scenario will hopefully change — or so the introduction of the Electricity Amendment Bill, 2014, would have us believe.

One of the proposed amendments is to undertake separation in two stages. In the first stage, the distribution business and the supply business of existing distribution companies would be separated. At this stage, there will be only one distribution company. In the second stage, supply licences will be granted to new entities, creating competition. It is envisaged that the retail tariff set by the regulator will be the maximum, with stiff competition among suppliers lowering tariffs.

But on implementation, there are many intricacies. It is still not clear how the amendment would tackle the already debt-laden State discoms with huge quantum of regulatory assets and insufficient and inefficient tariffs. Clarification is required on the roles of the distribution licensee and supply licensee in the settlement mechanisms related to metering, billing and collection.

The amendment needs to relook at the operational methodology of the intermediary firm, in terms of the already existing power purchase agreements (PPAs) between State utility and power generators and the future of these PPAs.

‘Open access’ to transmission lines and distribution networks given to large consumers with demand of more than 1MW was considered to be a competition enabler and key reform under the Electricity Act, 2003, though its implementation has been, at best, sketchy. Many States have found artificial constructs to block open access. A case in point is the decision by the Maharashtra regulator to block open access to all exchange-traded transactions saying a generator cannot be identified to specify open access.

Similarly, some States have not allowed the consumer to buy power from multiple sources citing that open access can be given for only one transaction for any consumer. It should be remembered that open access to large consumers is a precursor to the creation of competition for all consumers as it would establish processes, protocols and methodologies necessary for competition that would be created by a separation of carriage and content. So, it is important the government take strong steps to ensure its implementation across the country.

One of the central concerns of industrial and commercial consumers has been the high tariffs levied as a result of cross-subsidisation to agricultural and domestic users. Though the amendment Bill refers to the elimination of cross-subsidy, it is conspicuously silent on the mechanism and timeframe to be adopted for this.

The Bill must specify the period during which the State regulator must eliminate cross-subsidy. Ideally, this period should not be more than five years. In addition, the surcharge under the Act should merely cover the cross-subsidy provided. It should not become a pretext for passing on sectoral inefficiencies to hapless consumers.

Separation of carriage and content would require significant tariff and subsidy reforms.

Subsidies must be directed to needy consumers. Unwinding of cross-subsidies within categories as well as among categories would be called for. Mechanisms such as direct benefits transfer using Aadhaar card should be adopted. However, the amended Bill is silent on these.

Overall, though the proposed carriage and content separation promises to bring in competition and increase efficiency, it is worthwhile to mention its impact on renewables.

A proposal empowering licensees to extend the term by more than 25 years can have serious implications on the locked-in consumers and regulators, considering the continuous technological innovations in renewable energy.

While the amendment Bill awaits a nod of the Lower House of Parliament, it is to be seen how the changes, when in force, impact the sector, as all stakeholders would want to foresee the commercial and operational impacts in the long-run.

Deo is a former chairman of the Central Electricity Regulation Commission. Joshi is MD, IDAM Infrastructure Advisory

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