Evaluating Reform Initiatives: Fifteen years of the Electricity Act, 2003

Fifteen years of the Electricity Act, 2003

Power sector reforms commenced in the early 1990s when the Government of India launched economic policy changes. It was recognised that power sector expansion programmes would require not only public sector investments but also, in a large measure, private sector participation in order to accelerate the pace of power generation capacity addition, and augment transmission systems and distribution infrastructure. However, in spite of several policy initiatives and efforts, the sector could not get any meaningful contribution from the private sector during the entire nineties. Even the response of the banks was totally lukewarm. What the industry and the banking sector expected was sectoral and institutional reforms aimed at unshackling and de-licensing the power generation capacity expansion.

The first NDA Government took a major initiative to have a comprehensive legislation to reform the Indian power sector. It is about 15 years since the Electricity Act, 2003 has been enacted. It is time to review and evaluate the outcomes vis-a-vis the objectives and the expected deliverables. An appropriate way for doing so will be a SWOT (Strength, Weaknesses, Opportunities, Threats) analysis of the power sector – how it was prior to the legislation and how it is now. A comprehensive and exhaustive analysis would obviously require a rather long paper; therefore, an attempt is being made to outline and highlight only the salient aspects.

Important outcomes of power sector reform initiatives

The Electricity Act, 2003 aimed at a major overhaul of the institutional framework and management structure of the Indian power sector. It provided for unshackling and de-licensing major activities of the power industry. At the retail level of power supply, the act aimed at distancing political interventions in the area of tariff determination so as to make the power sector financially sustainable. Above all, it provided a strong institutional framework for regulating the sector by way of facilitating the growth of the sector on the one hand and improving the quality of service on the other. After about 15 years post the Electricity Act, the outcomes have been mixed – quite a bit of successes, mixed with a few shortcomings and failings, as described briefly below:

(a) The power sector has witnessed accelerated growth in generation capacity. In March 2002, the total installed capacity was of the order of 105,000 MW – an accumulated capacity developed over more than 50 years. In a period of 15 years, between 2002 and 2017, about 225,000 MW of additional power generation capacity was added, making a total of 330,000 MW. Shortages have virtually vanished. We used to have as high as 20 per cent peaking power shortage.

(b) According to Census 2001, only about 44 per cent of rural households had access to electricity. And, those that had connectivity, used to have days of load shedding. A massive rural electrification drive, which has been further intensified by the present NDA Government, riding over unprecedented expansion of power generation capacity, has led to about 80 per cent households having electricity access, and the balance should get covered soon. The Ministry of Power has announced a new scheme, “Saubhagya”, to further intensify and accelerate household electrification and the target is to complete all the households over the next two years. This obviously would be an outstanding achievement.

(c) The development of a robust National Grid, which meant integrating various regional grids and providing for adequate transmission capacity in the system so as to move electricity from any region of the country to any other region, has been one of the very satisfying outcomes during this period.

(d) Separating system operations from the Power Grid Corporation of India and entrusting this responsibility to another independent organisation has been another landmark initiative to implement the provision of the Electricity Act. This would inspire confidence among various stakeholders – private and public sector generating companies, private and public sector transmission companies, and other concerned agencies.

(e) Competition among suppliers of power, consequent upon the sufficiency in power generation capacity, has offered opportunities to distribution companies and others to procure power on a competitive basis and on the principle of merit order despatch. The role of the private sector in creating additional generation capacity has increased significantly post the Electricity Act, 2003. In the year 2002, the private sector’s share in power generation was less than 10 per cent. By 2017, it has shot up to about 44 per cent.

(f) The regulatory commissions at the central level and those in the states have come of age to facilitate growth of the sector on the one hand and regulate the performance of various entities in the larger interests of consumers, not only by way of fixing prices, but also by way of establishing performance benchmarks.

(g) One of the underlying objectives of the Act was to distance the process of tariff determination from political interference. To a large extent, this objective has been achieved. The Electricity Act has a specific provision that the regulators will determine the tariff. If the government wishes to provide subsidy to certain sections of consumers, the government shall make the payments to the utilities, or else the tariff notified by the regulator will prevail. This has been happening. However, there is considerable scope to further reduce political intervention especially in matters relating to the price of power.

(h) An important area of concern has been the financial sustainability of the state-owned distribution utilities. Tariff determination by the state regulatory commission, together with the failure of discoms to control technical and commercial losses in distribution, have been responsible for major disconnects between the cost of supply and revenue earned. There are states that have done reasonably well, but there are others that have serious mismatches between the two. The UDAY scheme, launched by the present government, is a very strong initiative. It was necessary and gave tremendous support to the sector. However, a number of state-owned distribution companies continue to perform inadequately in areas such as loss reduction, including electricity theft control, which should be the main target for them to achieve financial sustainability.

(i) Based on experience, the tariff determination process has also seen some changes in approach, so that unforeseen cost burdens such as increases in fuel prices and unexpected increases in power purchase costs by distribution companies are allowed to be mitigated within the period of two tariff revisions rather than considering these to coincide with normal tariff revisions.

(j) According to the Tariff Policy, the regulators were expected to progressively smoothen the highly skewed tariff structure profile, which meant that the gap between the highest tariff applicable normally to industrial and commercial segments, and the tariff meant to be applicable to lower levels of domestic consumers, to be minimised between plus and minus 20 per cent of the average tariffs, over a period of five years from 2006. In almost all cases, the regulators have not been able to meet this requirement. This has had a number of adverse consequences, not only in the overall management of the power supply business but also on economic development as whole.

(k) The institution of the Forum of Regulators, as provided in the Act, has been able to generate consensus on a number of issues across the country with a view to evolving a common approach on similar issues. There are, however, many important issues that require to be addressed in terms of evolving a common approach and consistent implementation, for example, competition at the retail level and rural electricity supply through proper implementation of the Rural Electrification Policy.

(l) The Appellate Tribunal of Electricity, which is the appellate authority for the Central Electricity Regulatory Commission as well as the State Regulatory Commissions, has indeed been able to deal with a large number of cases, which would normally have gone to the high courts in different states. The speed of decision-making is, no doubt, an area with considerable scope for improvement.

(m) The sale and purchase of power through the power exchanges has been one of the major success areas, the initiative for which was taken by the Central Electricity Regulatory Commission to develop a power market in accordance with the Act and the National Electricity Policy.

(n) This period has also seen unprecedented moves and concrete actions in the field of energy efficiency and demand side management. The Bureau of Energy Efficiency, which was established in 2003, launched several initiatives and continues to do so, with highly satisfying outcomes. Star Rating, the Scheme of Perform, Achieve and Trade, Building Code, etc. have led to substantial gains. The massive deployment of LED lighting by the present government, through coordinated procurement, has been a great success.

(o) The practice of e-bidding, at the instance of power ministry, by the present government, has been a highly satisfying initiative. Not only has it achieved much-needed transparency, the process has also led to much more economical procurements.

The power sector has moved forward and has achieved unprecedented successes in the areas of adding generation capacity, augmenting transmission systems including developing the National Grid, massive rural electrification, and energy efficiency and conservation. However, the financial viability and sustainability of the whole sector hinges on how the management of the distribution sector is organised. An efficient and financially healthy distribution sector holds the key to enhanced electricity demand and consumption, higher GDP growth, better utilisation of generation and transmission assets and, above all, reliable power supply to all segments of consumers. This is one area that the state governments have to focus on to review and evaluate what changes are needed in the institutional framework and management structure of the distribution business.