The Electricity (Amendment) Bill, 2022 was introduced in Parliament in August 2022, proposing significant changes to the flagship Electricity Act, 2003. Importantly, it proposes to enable competition in retail power supply through non-discriminatory open access to multiple distribution licensees in an area and to allow consumers to choose their electricity supplier. At a recent virtual roundtable on the “Electricity (Amendment) Bill, 2022” organised by Power Line, industry stakeholders shared their views on the hits and misses of the bill and the likely impact of various provisions on the power sector. Edited excerpts…
Dr Pramod Deo
The preamble to the Electricity Act, 2003 envisages competition and not privatisation based on the idea of providing a choice to large consumers (mostly commercial and industrial) to select their supplier. While the 2005 amendment deletes the provision of elimination of cross-subsidies, the amended 2005 act retains the provision for reduction of cross-subsidies. The 2003 act had a concept of parallel licensing, but the context was different as it was only for certain areas where the electricity board was not able to supply electricity. Since December 2014, different versions of the amendment bills have been introduced. There is the central issue of the political economy, which has stalled all these attempts. As different states will be going in for elections every year, I cannot see how this bill can be taken up and passed.
Notably, how to address the issue of how to subsidise agricultural consumers – in Maharashtra, the state regulatory commission subsidises this politically influential group by raising tariffs for industrial and commercial users. Thereafter, the state government pays further subsidy directly to MSEDCL. But for the past many years, these users have not paid these subsidised bills. Discoms’ balance sheets show that these dues are recoverable. Unless these dues are written off, the discom’s balance sheet will give a false picture. This is the reason why direct benefit transfer is not expected to work for the agriculture segment.
Executing the Electricity Amendment Bill, 2022 will prove to be a real problem in semi-urban and rural areas. While the 2003 act has made metering compulsory, on the ground, meters do not exist for most agricultural consumers and even for the feeders assigned for supply to these consumers. Moreover, even if meters are installed, they are either not read or are “unreadable” – go out of order or are tampered with. While the interests of agricultural consumers need to be protected, this should not be done through freebies and without any robust compensation mechanism in place for discoms.
Even if the bill is executed, the parallel licensing scheme will operate only in urban and semi-urban areas, and the purpose of the bill will get defeated. Fundamentally, we are looking at moving towards a market mechanism that is not based on cross-subsidies. Freebies must come only from the state government’s budget. In the current form of the amendment bill, the issue that state governments will face is whether parallel licensees will operate only in urban areas, while state discoms will continue to cater to rural areas supported by the state budget.
A few of the misses of the Electricity Amendment Bill, 2022 are a consequence of the political economy. Among other things, I would have wanted to see that state regulators are pulled out of the state control and put under regional regulators. Secondly, because of faltering performance of some regulators, there is a tendency of the government to occupy more space that was originally meant for the regulator. The third big issue that I was hoping would be tackled pertains to the financial and economic reality of the sector. The Reserve Bank of India came up with a state finances risk analysis in June 2022, wherein it concluded that the impact of state subsidies included 40 per cent of all contingent liabilities related to power sector guarantees. At the national level, subsidies and contingent liabilities of the power sector, issues of regulatory assets, deferred liabilities and contended cases are becoming a bugbear for the nation. Discoms and gencos in the private sector face issues of insolvency and bankruptcy. The dues that ought to have been recovered are yet to start getting recovered in many cases, which distorts the investment sentiment in the sector. Fourthly, there is a lack of a signal from this amendment on how to integrate carbon markets, moving forward. Further, I was also hoping in this respect that there will be some principle built in section 61, which will force the hand of regulators and give strength to those who actually want to do the job.
Having said that we must acknowledge that there are certain progressive provisions in the amendment but unless the wrinkles are ironed out, there will be challenges in achieving the objective. As per the statement of objects and reasons, the bill seeks to strengthen the regulatory mechanism. But whether it will be strengthened by expanding the government’s role in the regulatory mechanism, or by actually ensuring accountability of the regulatory mechanism remains to be seen. The second issue is with respect to the adjudicatory mechanism and the bill seeks to suggest that it is not available to regulators to refer a dispute to arbitration. The lack of expediency in dispute resolution is a very costly attitude as it ultimately affects the consumer. Third, the bill seeks to streamline the concurrence of hydro generating stations, which is very logical and helpful. However, it is unclear as to why the Central Electricity Authority would not be engaged in consultation.
The amendment aims to achieve effective management of power purchase cost and cross-subsidy in the case of multiple distribution licences. The amendment cannot achieve these objectives without addressing the legacy of dissimilar regulatory assets amongst competing discoms. The amendment also does not elucidate as to how it will deal with the fact that the second proviso of section 60(a) emphasising that no additional power will be shared with other distribution licensees is completely disjuncted.
Multiple licences is a good concept from consumer’s choice point of view, except that it misses the big picture issue. The amendment is looking at eventually segregating buyers and suppliers. There was a fundamental flaw in the statute, which required that every time a second licensee comes in a distribution area, the licensee must have its own network which shall get addressed now. The challenge with multiple licensees pertains to ease and method of switching the provider, that is, the distribution licensee. This system led to myriad disputes in Mumbai that await resolution; hence, it will be challenging to execute it seamlessly on a pan-Indian basis. The main problem is when consumers switch without paying their liability due to the incumbent distributor.
Regulatory assets have been built up over the years and switching may completely derail investment plans and the business model of discoms. Any sudden changes to the revenue base will immediately impact their operations and future investment. Additionally, allowing newer entrants to come and compete with legacy players will negatively affect the recovery process and business models of legacy discoms that have not accounted for a shrinking consumer base or newer licensees.
Broadly speaking, the regulation of the sector has to be driven keeping the consumer in focus. By extension, deferring decision-making in the name of consumer interest is ineffective and erroneous as it adds burden on the consumer because resolving a case five years after its filing means that the discom will have to pay late payment surcharge at a carrying cost at 12-16 per cent compound interest and pass the heavy burden to the consumer. In contrast, consumers will proportionally adjust their level of consumption if the rise in electricity costs of is passed over to them immediately. However, enforcing the same five years later, via judgements and with higher interest rates, is a net negative.
The Electricity Act was promulgated in 2003. 19 years later, legacy issues of the sector continue. The legacy issue pertains to the poor financial strength of discoms. The Power Finance Corporation (PFC), in its report in August 2022, acknowledges harsh realities facing the power sector despite policymakers’ best efforts. I believe that the amendment will not achieve the necessary objectives unless regulators bring enabling tools and the framework to execute it and address legacy challenges.
The key hit of the bill is that it aims to bring in competition in the retail power segment. At the same time, one of the key misses of the bill is that it does not clarify how the issue of legacy power purchase agreements (PPAs) of discoms will be treated with the participation of the new retailer in power distribution. Besides this, the bill does not discuss the adequacy of infrastructure to be maintained in the distribution segment. It is not clear whether infrastructure development will be coupled with the Revamped Distribution Sector Scheme (RDSS), wherein distribution strengthening has already been mentioned. How the subsidy and cross-subsidy will be phased out is not clear. Further, there is no mention of how to leverage distributed energy resources, electric vehicles, energy storage solutions and rooftop solar to reduce the electricity cost.
Multiple licensees will be accepted in urban areas, but not in rural areas, primarily because of infrastructure inadequacy. In case a private licensee in rural areas develops infrastructure, which is almost subsidised, then how will it recover the cost? This also counters the objective of consumer price reduction. Meanwhile, is the cost of switching, if someone wants to switch the electricity supplier, then who will bear the cost involved. These ground realities need to be taken care of, while going into the implementation phase.
The success of the amendment is dependent on right implementation. It is important to see that legacy PPAs are treated in the right spirit when the new retailer comes in. In contrast, the market captured by the new retailer will make it difficult for discoms to remain solvent, given the absence of demand/consumer base estimated by the latter. The impact of consumer shift on electricity prices remains to be seen. It is important for the government/regulators to compute the exact cost and analyse the impact of the new paradigm.
One of the key focus areas in the power distribution segment in the past two decades has been to reduce the average cost of supply (ACS)-average revenue realised (ARR) gap. Providing guidelines to achieve parity in ACS-ARR will help discoms. Moreover, on the energy transition front, it is important to leverage distributed energy resources, electric vehicles, energy storage solutions and rooftop solar. However, retailers will not invest in energy transition if there is no revenue certainty.
The regulators need to clarify how the distribution infrastructure will be treated with the new retailer coming in. With the RDSS, the distribution infrastructure will be strengthened and optimised. Some of the states are overburdened with assets as they are not properly utilised despite distribution franchisees coming in. Hence, proper planning, guidelines and market designs are required to reap optimal benefits of these assets. The arbitration judgements need to come in time. Keeping all these things in mind, the method of implementation is going to matter, going forward.
Broadly, the electricity amendment bill is a positive change; however, one disadvantage is that with power being a concurrent subject, the proposal to make the Central Electricity Regulatory Commission (CERC) a stronger entity goes contrary to the federal ethos. The problem in the distribution segment lies at the state level, as certain states are not doing enough to make discoms financially sustainable. One can therefore argue that giving greater power to the centre is perhaps the requirement of the day. Another issue pertains to delays in resolving litigations and disputes. For instance, the issue of compensation for the use of imported coal has been ongoing for a decade, with hardly any compensation having been made so far. We have to ensure the enforcement of contracts and timely resolution of litigations. Besides, state governments should run the power sector in a cost-effective manner and without state governments being adequately on board, the fundamental turnaround of the power sector would be very difficult. Resolving legacy liabilities of discoms and ensuring that all successor entities are equally financially viable will require substantial commitments on the part of state governments.
If the amendment has to be implemented with 100 per cent accuracy, gainers would be the most efficient gencos and relatively high-paying consumers, as they would get power from the cheapest suppliers. Similarly, generating companies, if not bound by older PPAs, would be able to find the best customers. The losers in this process would be discoms, particularly those with relatively low operating efficiency and high losses. In the process, agricultural consumers and state governments will be impacted, as their ability to cross-subsidise will be restricted. The multiple licensee regime will improve the overall operational efficiency, but legacy issues relating to ownership of regulatory assets remain unanswered. Additionally, there is a possibility of losing high-paying customers in a multiple-licensee regime, which will worsen the financial position of discoms and affect their ability to undertake routine operations and maintenance activities.
The bill, in its current form, does not address the issue of cherrypicking. Based on experience, private sector participation has been successful in urban areas such as Delhi, Kolkata and Mumbai. But once you move beyond these areas, the experience/results of Odisha, for example, will be seen in the long term. There will be similar problems in Bihar, Uttar Pradesh and several districts of Madhya Pradesh where there is a large pocket of agrarian load. So, it remains to be seen to what extent private sector licensees will invest in these areas. An issue with this amendment is the possibility that the state government will possibly have to keep providing state discoms with capital support to ensure that their networks are kept at high levels.
One of the noteworthy features of the bill is that it recognises that different provisions of the bill would have different dates of application.
The act originally sought distribution licensees to develop the network and then supply power to consumers. The amendment bill provides consumers a choice to select their distribution company or licensee, but who will build that network is not clear. Considering the revenue loss per unit tariff realisation, I think the network expansion and augmentation is an issue that has not been appropriately addressed in the bill.
Delhi has regulatory assets of Rs 60 billion-Rs 70 billion, but there is no allocation between wheeling, wires or supply. The allocation of this regulatory asset has to happen to determine the wheeling cost.
With regard to the three-eligibility criterion for bidding to become a licensee, private companies will be able to meet all financial conditions. These licensees would be using wires of the existing discoms to meet the consumer demand. The state discom is investing Rs 2 billion-Rs 4 billion a year for developing infrastructure and we need to ensure continuity in the development of infrastructure at the same rate. Apart from this, there is an absence of a metering entity to validate and authenticate the movement of one customer from one discom to another and settle bills accordingly. Meters need to be owned by a third party and not any of the licensees. However, there is no such mechanism in the act. So, the amendment bill is a work in progress till these structural matters are settled, else it would lead to additional litigations in the future.
The entire policy ecosystem is working to find a solution to ensure round-the-clock supply of quality electricity to consumers in a financially sustainable way. The general trend across the country is that the cost of supplying electricity is not fully serviced by the tariff that the consumer is charged, which is leading to mounting regulatory assets. The bill talks of advanced payment of subsidy and cross-subsidy balancing fund, but there is no timeline specified.
The current regulatory structure delays the payment mechanism from consumers to discoms, leading to severe losses for discoms. Regulators in the power sector would do well to emulate the roads and highways sector, where earlier, the traveller would pay road tax and utilise whatever was available for transportation; nowadays, the traveller pays toll to access good roads.
Translating this insight to the power sector, there will be a genuine improvement in quality delivery of round-the-clock electricity, once consumers start paying the actual amount either by themselves or via subsidies paid on a timely basis. This realisation has to happen, otherwise we are heading to a situation where discoms do not have money to fund gaps and continue sustaining their operations by being bankrolled by PFC and REC. This erroneous paradigm lacking accountability is harmful for the sector.