After dilution of its key provisions, the Electricity Bill, 2021, falls short of reform objectives
In the draft Electricity (Amendment) Bill or EAB, 2021, proposing amendments to the Electricity Act, 2003 introduced in February last year, the Narendra Modi-led NDA Government intended to bring about two transformative reforms — de-licensing of the electricity distribution business and direct benefit transfer (DBT) of subsidy. Delicensing of the distribution business aims to bring in competition, and give the consumer power to choose suppliers (or “open access”).
Even as the Union ministry of power prepares to table a Bill in the upcoming Monsoon session (2022) of Parliament, both the provisions have been dropped. Under the extant arrangements, an overwhelming share of power generated by public sector undertakings (PSUs) such as the National Thermal Power Corporation (NTPC), etc., and independent power producers (IPPs), besides generating stations of State Electricity Boards (SEBs) is procured by power distribution companies or discoms (these are mostly owned and controlled by State governments) under power purchase agreements (PPA). Most of these PPAs are long-term contracts up to 25 years. A mere five percent of the electricity is traded.
Under instruction from the top political brass in the State establishment, discoms sell a major slice of electricity — thus procured — to some preferred consumers, viz., poor households (HHs) and farmers, either at a fraction of the cost of purchase, transmission, and distribution, or even free. On the units sold to these target groups, they incur colossal under-recovery. This is aggravated by aggregate technical and commercial (AT&C) losses — most of it is plain theft.
Inflated tariff allowed to IPPs/PSUs under a cost-plus formula (under the PPAs) adds to the revenue shortfall. In a bid to offset the loss, discoms charge high tariffs on supplies to industries/businesses besides non-poor HHs (NPHHs). The former are the sole suppliers of electricity; hence, the latter have no option but to pay. It is a different matter that despite this cross-subsidization, overall discoms continue to incur huge losses.
There is no reason why the industries/ businesses and NPHHs should not get access to electricity at a 'reasonable' rate. But, this will be possible only when they get access to alternative sources by allowing private firms in the distribution business. In this backdrop, the Government's decision to include a proposal to this effect in the bill was apt. To drop it now, is a retrograde move.
The trigger behind volte face by the Centre is the resistance to the proposal from the Opposition-ruled states which argued that this is an attack on federalism and will be tantamount to an “infringement on the sovereignty of the state.”
Under the Constitution, generation and transmission (G&T) are under the purview of the Union Government while distribution is a State subject. The States are using this broad subject matter classification to argue that the Centre has no right to make changes in policies relating to distribution of electricity. The generation and transmission along with the distribution are essential components of an 'integrated' supply chain for ensuring uninterrupted supply of electricity in required quantity at affordable price to all consumers. All need to be maintained in a robust and healthy state for achieving the desired objective even as weakness in any one can lead to malfunctioning of the entire system.
Power distribution is the biggest weakness in the supply chain and there is a dire need for reforms in this segment. The States should let the Centre proceed with its proposal and not allow jurisdictional issues to put a speed-breaker. Meanwhile, the Centre has proposed amendments to provide for multiple suppliers in a single area. Prima facie, it appears that other suppliers would be there to provide electricity at rates lower than what State discom charges. This is illusory as the network ownership remains with the latter, its real boss (read: State government) won't let any supplier — other than the state discom — come in.
Pertinently, even under the amended Electricity Act (2003), there was a provision for ‘open access’, which gave choice to bulk consumers to choose their suppliers. But, another provision in the Act required such customers to pay an 'open access surcharge' (OAS) to the discom that they wanted to leave. By fixing the surcharge at a high level, the States ensured that post-switch, the effective cost of power — tariff charged by the new supplier plus OAS — was higher than what they paid to the discom.
That rendered the switch uneconomical. Even two decades thereafter, nothing has changed. The other major reform in the bill was DBT. Under the extant arrangements, subsidy to target groups such as farmers and poor households is embedded in the tariff charged from them. For instance, if the cost of purchase, wheeling, and distribution is say Rs 5 per unit, instead of asking farmer to pay Rs 5/-, the discom charges him 'nil'. The latter in turn, claims reimbursement of this amount from the State government.
Under DBT, the discom will charge Rs 5/- for every unit from the farmer even as the State government will directly transfer this amount to the latter's bank account. This will yield multiple dividends. In view of the farmers/poor HHs paying the full cost-based tariff, discoms won't face any under-recovery on such sales, thereby helping them avoid losses.
They need not charge more from industries/businesses and NPHH which they do under the present regime to cross-subsidize supplies to target beneficiaries. When the States stop riding piggyback on discoms for extending subsidy, it would be easier to free the latter from controls. If, discoms can be turned into autonomous corporate entities, it will help them reduce costs by negotiating lower price of power purchased from IPPs under PPAs and reining in theft. Furthermore, in view of discoms standing on their own feet and able to compete with private suppliers, there won't be any resistance to 'de-licensing of distribution business' and it will also be easier to implement "open access".
Yet, DBT is being opposed by the States. This is because unlike the present dispensation of routing subsidy through discoms wherein, the State government can afford to take things leisurely - not making reimbursements (albeit to discoms) upfront, not paying in full and delaying payment - under DBT, they cannot enjoy any of these luxuries.
Adding to pressure on the Centre was a demand by farmers protesting against the three farm laws (Nov 2020-Nov 2021) to drop DBT from the EAB, 2022. The twin reforms - DBT and de-licensing of distribution - hold the key to pulling discoms from the brink and making them financially viable. These will also ensure supply of power to all consumers at affordable rates. Putting them off will mean 'business as usual' - ever increasing losses of the discoms, their escalating dues to IPPs/PSUs, high tariffs charged from industries/businesses and NPHHs and mounting NPAs (non-performing assets) of banks.
The EAB, 2022, contains a number of provisions such as ‘Payment security mechanism’ for generating companies (gencos), empowerment of the grid operator National Load Dispatch Centre (NLDC) to stop dispatch of power to states that do not provide payment security against their contracted supply and so on. These are meant to force discoms to make timely payments of their dues.
But, alas! without the aforementioned twin reforms which are fundamental to making discoms 'robust' and 'healthy'-now dropped from the Bill-imposing such discipline will prove to be counter-productive.
(The writer is a policy analyst. The views expressed are personal.)
