Electricity (Amendment) Bill 2021 – Explained, pointwise

Introduction

The Electricity (amendment) Bill 2021 will be introduced and is likely to be pushed for passage in the monsoon session of Parliament. The bill seeks to delicense distribution of electricity just like generation.

The bill is being considered as a panacea for the power sector by many but a holistic approach is the need of the hour.

Need of the bill

• Despite multiple sets of reforms since 2003, the electricity sector is still faces problems of operational inefficiencies and financial solvency causing a negative impact on other sectors and manufacturing competitiveness.
• Issues with discoms: The electricity distribution companies are unable to pay the generation and transmission companies as well as banks / financial institutions due to poor financial health. In this situation.

Before discussing key features of the Electricity (Amendment) Bill 2021, let’s have a look at the power sector value chain and the problems faced by discoms.

Power sector value chain

The Indian power sector value chain can be broadly segmented into generation, transmission, and distribution sectors.

The distribution sector consists of Power Distribution Companies (Discoms) responsible for the supply and distribution of energy to the consumers (industry, commercial, agriculture, domestic etc.).

This sector is the weakest link in terms of financial and operational sustainability.

Problems faced by discoms

Power distribution companies collect payments from consumers against their energy supplies (purchased from generators) to provide necessary cash flows to the generation and transmission sectors to operate. Due to the perennial cash collection shortfall, often due to payment delays from consumers, Discoms are unable to make timely payments for their energy purchases from the generators.

This gap/shortfall is met by borrowings (debt), government subsidies, and possibly, through reduced expenditure. This increases the Discoms’ cost of borrowing (interest), which is inevitably borne by the consumer.

Key provisions of the bill

1. Delicensing of power distribution: The bill seeks to delicense power distribution to reduce entry barriers for private players for creating competition in the segment, which would ultimately enable consumers to choose from multiple service providers
2. Creation of a Universal Service Obligation Fund (USOF): There is the provision of a universal service obligation fund, which shall be managed by a government company. This fund shall be utilised to meet any deficits in cross-subsidy. In case of supply through pre-paid meters, security deposit will not be required.
   • Cross-subsidy means one set of customers receives favorable prices at the expense of other customers. For eg: Assume that avg. cost of electricity is Rs 5/unit. An industrial consumer is charged Rs 6/unit while a household consumer might be charged Rs 4/unit. So, in this case a domestic consumer is being cross-subsidized by industrial consumer.
3. Strengthening of APTEL: The Appellate Tribunal for Electricity (APTEL) is being strengthened by an increasing number of members. The domains from where the chairperson and members of Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) will come have been described.
4. Responsibility of RPO shifted to central govt: Keeping in view the national climate change goals,
   the responsibility of fixing renewable power obligation (RPO) is shifted from state commissions to the central government.
   • The RPO is a mechanism by which the obligated entities (mainly power distribution utilities or discoms) are obliged to purchase a certain percentage of electricity from renewable energy sources, as a percentage of the total consumption of electricity.
5. Adjudication of LDC disputes: The role of load despatch centres is gaining importance as the interconnected power system is getting more complex with the addition of renewable generators. Adjudication of disputes related to load despatch centres (LDC) have been included in the functions of regulatory commissions.
6. Increased powers to regulatory commissions: The regulatory commissions were earlier called ‘toothless tigers’ by some. Their orders will now be executable as decree including attachment of property, arrest and detention in prison. With member (law) in the commission, these powers will be exercised appropriately, resulting in better enforcement.
7. Increased penalties: Penalty for contravention of the provisions of the Act has been increased up to Rs 1 crore. Non-fulfilment of RPO will attract stringent penalties as per the proposed amendments.

Issues with draft electricity (Amendment) bill

• Fixing costs of coal and railway freight: Discoms are unable to recover their costs, out of which nearly 75-80% are power purchase costs. These costs have increased much more than the weighted average increase of wholesale price index and retail price index. No solution (to power distribution and generation companies) has been offered to reduce the fixed cost of unutilised power through the amendment bill.
• Poor state of existing discom network: The newly registered companies are given the facility to use the power allocation as well as the network of existing discom, which may be in a poor condition in many cases due to paucity of funds. With such a network, the quality of supply to the electricity consumers will be seriously affected.
• Mandatory qualifications: By way of amendment, a fourth member is added to CERC and SERC, who should have qualifications and experience in the field of economics, commerce, public policy / public administration or management. . Such background and experience in the field of economics / finance should have been made mandatory for this post to avoid rehabilitation of favourite retired officers.
• Vague clauses are used for the removal of members of CERC / SERC which makes them liable to be misused.
• Electricity is on the concurrent list and the states have played a dominant role in electrification. The government is trying to tilt this delicate balance of authority via the draft Electricity Amendment Bill, 2021.
• Entry of private players: Reducing barriers to entry for private players will lead to suffering for consumers. A study carried out by Prayas (energy) group Pune shows that the results of operationalisation of parallel licensing in Mumbai has been contrary to the expectation, as it has taken place with a series of unnecessary litigations, skyrocketing expenses, steep consumer tariffs, and regulatory failure.

Suggestions

• AT&C losses: AT&C losses should be linked as key performance indicator for release of central funds to states by any ministry.
  • The concept of Aggregate Technical & Commercial losses provides a realistic picture of loss situation in the context it is measured. It is combination of energy loss (Technical loss + Theft + inefficiency in billing) & commercial loss (Default in payment + inefficiency in collection).
• Regulate the cost of coal and railway freight
• Provision of a risk management committee and corporate governance within discoms, irrespective of being listed company
• A broad guideline to reduce tariffs could have been part of the proposed amendment bill.
• Direct Benefits Transfer (DBT) for better targeting: Food and fertiliser subsidies have been rationalised through DBT and the same can be achieved in the electricity sector. DBT will lead to better accounting and targeting of subsidies

Way forward

Electricity regulatory commissions hold the key to take this reform forward. The commissions should be built as strong institutions and their autonomy should be respected and maintained. After providing a robust framework for fair competition, the government should minimize its frequent interventions in the sector. The government interventions often distort the market and may be resorted to only in case of market failure.

Source: Down to Earth