Electricity Bill 2022 is a remedy worse than the disease afflicting India’s power sector

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The Narendra Modi government has introduced the Electricity Amendment Bill 2022 to reform the power sector. The ‘objects and reasons’ for the Bill, which has been referred to the Select Committee, is to amend the Electricity Act 2003 that has “brought about major changes and improvements in generation, transmission, distribution, trading and use of electricity by promoting competition therein and protecting interest of consumers by ensuring supply of electricity to all areas.” The ‘objective’ statement of the 2022 Amendment Bill goes on to say that because of “the continuing as well as new challenges of sustainability of the power sector, contract enforcement, payment security mechanism, energy transition and the need to provide choice to consumers in order to promote competition and the like, it has become necessary to make certain amendments in the Act.”

First set of reforms

First, a brief recap on the original World Bank (WB) initiated and USAID sponsored reforms that commenced in 1996 based on the report submitted by US Consultants that suggested creation of ‘Independent organisations’ with ‘unbundled functions’ replacing the State Electricity Boards [SEB]. These organisations would then be turned into ‘privately owned firms’, which would provide much of the growth in the power sector since “the quest for profit will motivate their activities, and they will have a greater commercial orientation than most Government-owned organisations.” With one stroke, privatisation and profit became the new mantra of reform.

Under this reform agenda bank-rolled by the World Bank and Asian Development Bank (ADB), generation of electricity was to be privatised first with cost of power pegged high. While sovereign guarantees and special escrow mechanism were provided to pay for high-cost private power, embargo was placed on NTPC and SEBs not to create additional generation capacity. Hoping to pluck low-hanging fruits, Independent Power Producers (IPPs) owned by Multinational Utilities entered the fray in a row. But due to the near-bankruptcy of SEBs, this did not work. Instead, scandals like ENRON happened. In 2002, WB and ADB panicked and withdrew from India’s power sector. IPPs also trooped back! Despite the Electricity Act 2003, to facilitate private investment and promoting competition, the power sector continued its descent into chaos resulting in massive debt burden of the SEBs that peaked in 2011 and kept on mounting.

Second set

In July 2012, US President Barack Obama declared that “India needs a second wave of reforms.” And as if on cue, Government of India went again to the World Bank which did a fresh diagnosis in 2013 and suggested the following reforms on the distribution side of electricity:

1.Ring-fence urban and rural customers and consider license, franchise, or PPP models only in urban areas. 2. State DISCOMS remain responsible for rural supply. 3. Establish urban franchises and encourage them to gradually expand their services to cover rural areas. 4. Rationalise domestic tariff to improve targeting and reduce fiscal burden. 5. Multiple supply licensees on the consumer-end to compete with each other and retail consumers having the option to migrate from one supplier to another. 6. CERC/SERCs to issue Multiple supply licenses and in the interim state-owned DISCOMS will continue to supply electricity. 7. Retail supply to consumers opened up to multiple players, mostly private to usher in competition, providing choice to the consumers. 8. Power from newer and expensive projects to be balanced out among supply licensees to ensure a level playing field for the new players. 9. Charging nominal fee for getting supply licenses.10. The SERCs will only prescribe a price cap, as done in the telecom sector initially. 11. Distribution wire business to remain with the incumbent DISCOM. 12. Industrial consumers with load of over 1 MW to seek mandatory open access at market rates and move out of the regulated tariff regime.

The Electricity Amendment Bill 2022 is almost a carbon copy of these suggestions and its real purpose is to bail out the private players who had messed-up the power sector and are in deep financial trouble. Taking advantage of the liberal provisions of the Act, these worthies set up Mega and Ultra-Mega-Power Plants thereby substantially increasing the installed capacity in the private sector, share of which is 49.5 per cent now as against almost nil before the reforms. All of them have entered into Power Purchase Agreement (PPA) with various Discoms/Utilities in the country. Since the demand did not catch up and the cost of power purchase was high, Discoms could not buy the power so produced. Even where power was bought, they could not pay for it. Private players also skewed the power-mix in favour of thermal generation, leading to an acute mismatch and idling of the thermal capacity leading to sharp downslide of the average Plant Load Factor (PLF) to a dismal 58.87 per cent in 2021-22 [central 69.71; state 54.50 and private 53.62]. This made most of private power plants non-performing with massive stressed assets, the liability of which fell directly on the public sector banks.

Furthermore, the 2022 Bill only takes forward the market-is-solution-for-all-ills theory of Montek Singh Ahluwalia who is the prime architect of Electricity Act 2003. Allowing generating companies to sell directly to distribution companies and bulk consumers, thus creating a competitive market where producers could take investment decisions based on demand, without relying on power utilities or the State Government. This would bring electricity at par with other goods and services, where competition and market forces determine efficiency levels, investments and pricing. “Open Access” to the grid and “privatisation” of power generation were at the core of this theory. But treating electricity at par with goods and services amenable to the market economy reflects a serious deficiency in understanding electricity as a commodity, and the profile of its consumers which range from the richest-of-the-rich to the poorest-of-the-poor.

Let us critically examine some salient aspects of the Electricity Bill 2022:

1. Electricity Regulatory Commissions (ERCs) would issue Multiple Distribution Licensees in an area of supply in accordance with criteria prescribed by the Central government. This would lead to “cherry picking” because private players would obviously opt for ‘profitable areas’ leaving the ‘loss-making ones’ to the state Discoms. Further, if ERCs fail to grant the licence or reject the application within 90 days, the applicant shall be “deemed to have been granted the licence.” Companies thus getting into electricity distribution business by default is a very dangerous prospect opening up the floodgate of corruption and favouritism that can put the consumers at grave risk.
2. In the new scenario, cross-subsidising consumers will shift to private companies and subsidised consumers will remain with government company, leading to heavy burden on the State exchequer. The Bill provides for a cross-subsidy balancing fund which is analogous to the Universal Service Obligation Fund that was introduced in Telecom. This fund, specifically created to offset the losses of BSNL while providing only fixed line services in remote areas ended up supporting private operators in providing mobile services there. The same thing would happen in the power sector also.
3. The Bill prohibits the regional and the state load dispatch centres (RLDCs and SLDCs) from dispatching electricity, if payment security mechanism has not been provided by the distribution licensee. This, besides distracting these high-tech agencies from their core responsibility of ensuring grid stability would also imply that no electricity would be scheduled & supplied to State Discoms, unless fully paid upfront. This can have dangerous consequences for the states and the consumers.
4. Enforcing renewable power purchase obligations with harsh penalties is meant to favour large centralised solar plants owned by corporate business houses withsome charging very high tariffs as per pre-existing PPAs. This would also run counter to the energy transition agenda of decentralised and distributed generation and off-grid supply, particularly to rural consumers.
5. Vesting of unlimited and undefined powers with the Centrewill severely compromise the functioning of Regulatory Commissions and would make them subordinate entities of the central government instead of autonomous bodies. This could turn out to be harmful to the interests of the states.

Despite electricity being in the concurrent list, the Centre gave no time to the states to express their views on the proposed amendments and in the process, the basic tenets of federalism were trampled upon. Adopting its provisions blindly would be against the letter and spirit of the Constitution of India. The Bill would further weaken the finances of state Discoms; have adverse impact on utility employees; cripple the states’ finances and impose a heavy cost burden on the smaller subsidised consumers, especially the farmers to benefit only corporate business houses. States cannot afford to ignore the far-reaching implications of the Bill on its economy, finances, agricultural and industrial development and social equity and harmony.

The obvious object of the Bill is to turn electricity into a market commodity and introduce competition that would lead to reduction of tariffs and make power affordable and accessible to every consumer, including the poor. But the question is — Is such competition possible in the electrical power supply industry? In this context, a recent communication of Électricité de France S.A. (EDF) with the World Bank becomes relevant: “Modern economic theory tells us that competition is more difficult to introduce in network infrastructure than in other industries, and more difficult in electricity that in other networks. We also know that competition does not streamline regulation but makes it on the contrary more complex and burdensome. Introducing competition creates a “half-free, half slave” sector….” EDF goes on to say that all this talk of privatisation and competition is to open the power sector of developing countries to foreign operators and capital.

This is much truer of India than France. Considering all dimensions, the Electricity Bill 2022 would be a remedy worse than the disease afflicting India’s power sector.

M.G. Devasahayam is a retired IAS officer and chairman of People-First. He also served in the Indian Army. Views are personal.

(Edited by Anurag Chaubey)