Marketing power

The Electricity Act, 2003 seeks to commodify electricity and entrust its supply to the market. The brunt of the new law will be borne by the poor and marginal consumers.

THE recently enacted Electricity Act, 2003 heralds the third phase in the `trial-and-error' process of power reforms, which has been under way since the early 1990s. The first phase was dominated by the Independent Power Producer (IPP) paradigm, and it ground to a halt within a few years of its launch owing to its many contradictions. The second phase was marked by the Orissa model of distribution reforms with its thrust on privatisation. The ignominious failure of the Orissa model ensured that this phase remained a non-starter in other States although Delhi managed to push through a slightly different model with liberal subsidy support from the government. The new electricity law ushers in yet another phase in the reform experiment. It consolidates all existing laws relating to the generation, transmission and distribution of and trading in electricity and seeks to introduce markets in electric supply in the hope that at least this will revive the country's beleaguered electricity sector.

The crux of this experiment is the introduction of competition in retail electricity distribution, hitherto considered a natural monopoly. The California fiasco of 2001 provided stark lessons on the dangers of introducing competitive electricity markets in a situation of shortages in supply. Even the European Union is treading cautiously, opening up retail markets in phases and amidst grave apprehensions. These have not, however, deterred our policy-makers from experimenting with markets in a country where peak shortages are close to 20 per cent and energy shortages are around 8 per cent.

The new law provides for `open access' to transmission and distribution networks so that consumers can source their supply from any supplier, be it the incumbent distribution licensee the State Electricity Board, or SEB, an IPP or a licensee of another area. While theoretically `open access' is available to any consumer, in practice, it will be limited to bulk consumers such as industries and commercial establishments. It is infeasible to introduce competition in low-tension supply not only because there are millions of consumers to be serviced, but also because this segment is considered unremunerative. Tariffs charged on low-tension consumers both in rural and urban areas are currently cross-subsidised by the high-tension and commercial consumer segments. Once the latter decide to source their power directly from IPPs, thanks to `open access', the incumbent utility - the SEB or its successor entity - would be left with the marginal consumer segments whose present tariffs would be insufficient to cover the costs of supply. The loss of the creamy layer of consumers would jeopardise seriously the ability of the SEB to go on servicing the unremunerative consumer segments.

To take care of this problem, Section 68 of the new law provides: "If the State government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commissions under Section 62, the State government shall... pay in advance... the amount to compensate the person affected by the grant of subsidy." While that might seem a reasonable proposition, in reality State governments have been unable to pay out the subsidies. The Andhra Pradesh government, which during the past three years had directed the regulator to peg the tariffs of rural and domestic consumers below the cost of supply, had agreed to pay out subsidies running into thousands of crores. But owing to its straitened financial condition, it ended up issuing bonds to the distribution companies and making book adjustments in lieu of cash. The Andhra Pradesh Electricity Regulatory Commission has ordered that if the State government fails to pay up the subsidy, the distcos, or distribution companies, are free to charge tariffs that reflect the cost of supply.

Section 61 (g) of the new law stipulates that in determining the tariff, the State Electricity Regulatory Commissions (SERCs) shall ensure that "the tariff progressively reflects the cost of supply of electricity, and also reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission". Since low-tension supply costs the steepest, rural and domestic consumers - with perhaps the least capacity to pay - will be saddled with the highest tariffs, while industry, which draws high-tension power, will be the beneficiary with the cheapest tariffs.

Section 42 (2) of the Act provides that `open access' can be introduced in phases and that the charges for providing such access would include, apart from wheeling charges, a surcharge to take care of cross-subsidies. But in the same clause it also says that "such surcharge and cross subsidies shall be progressively reduced and eliminated in the manner as may be specified by the State Commission". Eventually, such a move could drive a vast population of poor consumers out of the grid because they would not be able to pay tariffs that truly reflect the costs of supply.

The Bill was passed by the Rajya Sabha on May 5, ignoring over a hundred amendments suggested by the Communist Party of India (Marxist), whose members walked out in protest. The Congress (I) is reported to have desired the introduction of a time-frame by which all SERCs will be required to mandate `open access' within their respective jurisdictions. The Parliamentary Standing Committee Report on the Electricity Bill tabled in December 2002 had recommended a similar deadline. The National Democratic Alliance government at the Centre is reported to be planning amendments to the law to incorporate this provision. Electricity being a Concurrent subject, such a stipulation would be tantamount to an encroachment on the jurisdiction of the States.

In a situation where less than half of the electricity that is supplied is paid for, tackling commercial and technical losses would raise the revenues of the utilities and further tariff increases may not even be required. However, there seems to be little thrust in that direction in the present law. Section 135 of the Act prescribes a penalty of three times the financial gains accruing from theft for the first conviction and only imprisonment for subsequent convictions, that too for theft of more than 10 kilowatt hours. The emphasis on cost-reflective tariffs and elimination of subsidies in the absence of stringent anti-theft laws is a sure recipe for pushing the marginal and poor consumer segments out of the grid, limiting electricity supply to those who can afford it. The signal achievement of the new law is that it has commodified electricity and entrusted its supply to the markets.

Under Section 7 of the law, all generation, including captive generation, has been delicensed. In all probability, mini generation plants - perhaps diesel gensets - will proliferate in urban residential colonies, because Section 13 authorises the SERCs to exempt users' associations, panchayat institutions, cooperative societies, non-governmental organisations and franchisees from procuring licence for power supply. Industries too would opt for captive generating plants. Besides having its impact on the viability of the SEBs, proliferation of captive generation could lead to unplanned increases in capacity, where optimal fuel and technology choices will be the casualty. Additionally, allowing `open access' could affect grid discipline, not to mention problems associated with accounting for technical losses to be assigned to such transactions.

One important provision that did not figure in the original Bill but found its way into the Act is a proviso in Section 14, which stipulates that "the Appropriate Commission may grant a licence to two or more persons for distribution of electricity through their own distribution system within the same area", if such licensee complies with the requirements of capital adequacy, creditworthiness and so on. It further states that no such applicant will be refused a licence on the grounds that a licensee already exists in the same area for the same purpose. This is nothing but allowance for duplication of networks, a waste of national resources that even the most prosperous economies refrain from advocating. In its enthusiasm for introducing competition at any cost, the Act seems to verge on the reckless. It provides for the sub-leasing of distribution by an incumbent licensee.

If the Electricity Bill, 2001 and the Electricity Act, 2003 were documents that reflected a measure of desperation on the part of the government to do something, anything, to continue the reform agenda, the Parliamentary Committee Report was no less a disappointment for its failure to grasp the complexities of producing and supplying power in a country with a deep rural-urban divide. The report not only endorsed the most controversial provisions of the Bill but turned out to be a document replete with contradictions and non-sequiturs. On the one hand, the Committee recommended (para 10.20) that tariffs should be aligned with the cost of supply in order to rectify distortions in pricing. And it wanted this to be done within a time-frame and not left to the discretion of individual State Commissions. It also recommended that the State government should - within six months of the passing of the Bill - specify a time limit to phase out cross-subsidies. And the committee wanted the provisions made by the Centre in this regard to apply, if the State governments failed to do that.

Yet, the Committee advised the SERCs to "ensure that delivered cost of electricity to consumers does not become inordinately high to such an extent that the (sic) electricity becomes a thing of luxury instead of a basic human need". Further driving home the point, the Committee said (para 10.19) that "cost reduction exercise should be the key parameter while determining tariff" and recommended amendments in the Bill to incorporate this. Again, in Para 10.22, the Committee stated that the factors enumerated in Clause 61 of the Bill, especially the one relating to "commercial principles" guiding tariff, were "quite vague". In another place, it said, "The Committee observe that the principle of commercial expediency also provide[s] for exploitation of opportunity based on need and demand and such commercial principles are not intended to operate in respect of a basic need and requirement of the entire population." After discussing in detail the objections raised by state governments to `open access', the report said: "The provision of open access is key to the power sector reforms, particularly on distribution." It concluded by stating that "open access may be introduced in a phased manner within a definite time period". In recommending a definite time-frame within which the State governments/regulators are required to introduce open access, the Committee members have firmly endorsed the Centre's final say in matters that had hitherto been entirely in the States' jurisdiction.

On the question of captive power producers (CPP) selling surplus power directly to third parties (Third Party Sale in industry parlance) through open access to transmission networks, the Committee wanted the decision to be left to the respective States, but went on to remark: "In the opinion of the Committee, the non-discriminatory open access to transmission system is panacea (sic) for ushering power sector reforms especially for private sector participation to a large extent." It is not clear whether the Committee equates proliferation of CPPs with distribution reforms.

One salutary recommendation made by the Report was that while issuing distribution licences (Clause 14, Proviso 4 of the Bill) the area of supply of the licensee should include a mix of urban and rural or any composite remunerative or unremunerative clusters. Unfortunately, this has not been incorporated in the Act. The Committee had recommended (para 6.39) that unlicensed persons/bodies generating and supplying power in rural areas should also be subject to binding guidelines - something that the Bill overlooked - in order to ensure that rural consumers were not exploited. This recommendation has been incorporated in the Act.

Another recommendation of the Committee that has been ignored by the Act relates to safeguards in delicensing electricity generation. In para 5.42, the Committee had desired that delicensing should be accompanied by provisions to ensure that new plants were established in accordance with the National Plan, using appropriate technology and fuels, and without providing grounds for dumping outdated technology. The Committee also recommended that public sector corporations such as the National Thermal Power Corporation, the National Hydro Power Corporation and POWERGRID be allowed to diversify into transmission and distribution businesses as well.

The Act incorporates the Committee's recommendation to establish an ombudsman to safeguard the interests of consumers. But on the question of imposing universal service obligations - as in the case of telecom - on distribution licensees, both the Committee and the Act have demurred. While the original Bill required the licensee to provide any new consumer a connection within six months (if it entailed the extension of distribution mains or the commissioning of new substations), and said that failing which the former would incur steep penalty, the Committee watered it down, citing `ground realities'. Section 43(1) of the Act now leaves the time-frame within which new connections should be provided to the SERCs.

The Electricity Act, 2003 is an acknowledgement of the government's failure to privatise SEBs. With this law, the government seems to have abandoned its plans for wholesale privatisation of distribution and has settled for an even more short-sighted measure selective privatisation and competition targeting the affluent consumer categories. Its impact could well be the collapse of the already beleaguered SEBs, with the poor and marginal consumers in both rural and urban areas bearing the brunt of such a collapse.