Electricity Act, 2003: Questionable Wisdom Author(s): Madhav Godbole Source: Economic and Political Weekly, Vol.

38, No. 39 (Sep. 27 - Oct. 3, 2003), pp. 4104-4110 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4414073 Accessed: 01/11/2009 07:55
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Perspectives

Electricity Act,

2003 Wisdom Questionable

Whenthe bill which was in due course enacted as the Electricity Act, 2003 was under considerationof the standing committee of parliament,a numberof issues which deserved closer examinationhad been highlighted.Several of these issues remain unattended.TheAct, which is a halfway house, also raises a numberof new issues whichare likelyto pose seriousproblemsin the comingyears.
MADHAV GODBOLE

he Electricity Act, 2003 (hereafter to referred as the Act) which has comeintoforce(exceptfor section 121) on June 10, 2003 is statedto be the 'distilledwisdom'of a seriesof commissioned international and national consultancy studies and seminars and conferences held at the all-India level the during lastthreeyears.It is acclaimed to be the roadmap the electricityinfor dustrywhichwill help hastenthe pace of economicreformsin the country.When the bill on this subjectwas underconsiderationof the standing committee of I a of parliament,hadhighlighted number issues which deserved closer examination.I Several theseremain of unattended. TheAct,whichis ahalfwayhouse,raisesa number new issues whicharelikely to of in problems thecomingyears. poseserious It will be best to begin the discussion with a brief overview of the power sector.2Thereport thePlanning of Commissionon theworking thestateelectricity of boards (SEBs)fortheyear2001-02brings outseveralareasof concern.Itis seenthat power sector reformsso far have been The half-hearted halting. driving and force is for thereforms not a convictionamong the statesthatthe reforms imperative. are Rather is theallurement largefinancial it of assistancefrom the World Bank, Asian Bankandthebilateral donors Development whichis goadingthe statesto reluctantly showjust enoughprogressto qualifyfor the releaseof the next instalment aid of fromexternalsources!If this was not so, the financial of performance SEBs would 4104

nothavedeteriorated sharply so the during reference period1996-97to 2001-02.The percentagerecovery of cost of supply tariffhasgonedownfrom through average 76.7 per cent (82.2 per cent in 1992-93) to 68.6 percent.Average tariff agricultural in the reference yearswas just 21.2 paise and41.54 paiserespectively. Commercial losses(withsubsidy) haveincreased nearly six times from Rs 4,674.31 crore to Rs 24,837.2 crore.These losses (without havetripled fromRs 11,305crore subsidy) to Rs 33,177 crore.Net internal resources of SEBs whichwere (-) Rs 2,090.7 crore deteriorated sharplyto (-) Rs 19,103.90 crore. Subsidy for domestic consumers increased from Rs 4,386.01 crore to Rs 12,238.51crore.Subsidyfor agricultural consumers increased from Rs 15,585.20 crore to Rs 30,462 crore. Grosssubsidy(subsidyfor domesticand agriculturalconsumers and inter-state sales) wentup steeplyfromRs 20,210.75 crore to Rs 43,060.10 crore.Gross subsidy perunitof sale increasedfrom 75.4 Revenue paise/Kwhto 126.6paise/Kwh. arrearsin 1999-2000 were Rs 24,773.1 croreand accounted 40.4 per cent of for the totalrevenuefor the year.The rateof return(ROR), which statutorilyshould have been at least 3 per cent of assets in service (excludinginterestanddepreciation), is in a bottomlesspit and has deteriorated from(-) 12.7 per unbelievably cent in 1992-93 to (-) 19.6 per cent in 1996-97, (-) 43.1 per cent in 1999-2000 to (-) 44.1 per cent in 2001-02. Attentionshouldalso be invitedto the fact that the level of cross-subsidisation hasbeendecliningsteeplyovertheyears.

Cross-subsidy from commercial and of industrialsectors(as a percentage effective subsidyto domesticand agriculturalconsumers)which was as much as declined 41.7 percentin 1992-93sharply to 16.7 per cent by 2000-01 (RE) and is to declineto 14.3percent expected further in 2001-02. Surplusgenerated crossby subsidisationfor the year 2001-02 was only Rs 5,759 crore.Thisis dueto thefact thatthe sharein the totalenergysales of domestic agricultural and who consumers, get powersupplyat subsidisedrates,has beenprogressively overthe years increasing and stood 50.1percentin2001-02against at 49 per cent in 1996-97, while the share of industrial sectorconsumption dehas clined from 34.7 per cent in 1993-94 to 33 per cent in 1996-97 and further 29 to percentin 2001-02.A reference mayalso be invited to the average tariff (paise/ Kwh) chargedby SEBs to their various customers 2001-02.Itrangesfrom41.6 in at the lowest end, chargedto agripaise, cultural consumers 194.4paiseforinterto statesales, 195.6 paise for domesticconsumers, 378.7 paise for industry,426.3 use paisefor commercial and449.2 paise for traction.This data has considerable bearingon the furtherdiscussionon viabilityof SEBs in the coming yearsdue to the liberaldefinitionof captivegenerationintheActleadingto so-called'cherrypicking'. Changing Ownership Profile Yetanother feature thepower of striking sectoris the rapidlychangingownership that profileof assets. It is often forgotten initially there was considerableopposition to the central governmentmaking investments powergeneration. in Several states consideredit an unnecessaryencroachment their field. On this backin to ground,it is interesting see thatas on March31, 2002, central sectorgeneration accountedfor a little over 30 per cent of the total installed generation capacity Overthe (1,04,917.5MW)in thecountry. coming decade,this shareis expectedto Purchase powerby SEBs of go upfurther. fromcentralsectorgenerating as stations, a percentage availability, increased of has from33.08 in 1996-97 to 36.77 in 200102. Theinvestment inter-state in transmissionlinesis mostlybycentral publicsector

Economicand PoliticalWeekly September27, 2003

(PSUs).The financialassisundertakings tancefromthecentreandits PSUsto SEBs has also increasedsubstantially. Another feature thepower of noteworthy sector is the sharp decline in the Plan outlaysfor the sectorbothat the all India and the statelevel. At the all Indialevel, the Plan outlay for power sector, as a percentageof the total Plan outlay, has come down from 19.04 per cent in the SeventhPlan(1985-90)to 14.49 per cent intheNinth Plan(1997-2002). theannual In Planfor 2001-02, it was as little as 12.19 At per cent (excluding Jharkhand). the state level, the power sector outlay, as a of percentage the total Plan outlay, has come downfrom31.55 percent in 199091 and about26-27 per cent for each of the threeyearsthereafter just 15.25 per to cent in 2001-02. As a result, capacity additionin the NinthPlan was only 47.2 per cent or 19,015 MW againstthe Plan targetof 40,245 MW.This is particularly as disconcerting the per capitaelectricity consumptionof 355 Kwh during 19992000 in Indiacompares veryunfavourably with that of 719 in China in 1997. It is also important note that the elasticity to of electricity consumptionto GDP for 1980-81to 1998-99 was 1.41. Thus, any shortfallin poweravailabilitywill inevitablylead to slowerrateof growthof the of economy.If thesevereconstraint financial resources to be addressed, is stepswill need to be takento increasethe internal of resources SEBs.If it hadbeenpossible to adopta tariffof 50 paise per Kwh for sales, SEBs wouldhave been agricultural able to mobilise additionalresourcesof Rs 1,984crorein2001-02.Theirresources could improveto over Rs 33,176.8 crore even with a 0 per cent ROR and over Rs 35,432.5croreat3 percentROR,rather thanthe shockingRORof (-) 44 percent recorded thatyear.Given the political in will, this shouldnot be difficultas, on an average,at all India level, SEBs would haveto raisetariffby about117paise/Kwh forachieving percentRORandby about 0 117 paise/Kwhfor achieving3 per cent ROR in thatyear. Not only are the state not the governments permitting SEBs to chargecost-basedtariffbut are not even coming forwardto take over the burden of subsidy received fully.Thus,subvention was by SEBs fromthe stategovernments whiletheuncovered onlyRs 8,339.62crore subsidy burden was as much as Rs 28,976.92 crorein 2001-02. The provisions of the Act need to be examined againstthis background. At the outsetit mustbe mentionedthat the whole scheme of the Act gives an

thatthe subjectof electricity, impression insteadof beingin the Concurrent is List, in the Central List. Thereis far too much and centralisation standardisation. Policies on all matters, electrinamely,thenational city policyandplan,andeven thenational policy on stand alone systems for rural areasand non-conventional systems,and the nationalpolicy on electrification and local distribution ruralareasare to be in formulatedby the central government (section 3). As in the case of enactment of this Act, the formality consultations of with the state governmentswill be observed but, in the light of experienceso this far,whether processwill be meaningful is difficultto say. It also needs to be notedthatnationalconsensusand agreements arrivedat, year after year, in the national councilandconferdevelopment ences of chief ministersand powerministershavemostlyremained paper. on The ActlaysdownthatSERCsaretobeguided, inter alia, by the principlesand methodologiesspecifiedby the centralcommission for determination the tariffappliof cable to generating companiesandtransmissionlicensees(section61(a)).Thereis to be an unduly large centralelectricity authority(CEA) consistingof not more than14 members which8 areto be full of timemembers (section70(3)).Itsindependence is, however,highlydoubtfulas the members shall hold office during the (secpleasureof the centralgovernment tion 70(6)). The critical importanceof of independence CEA becameclearduring the approvalprocess of the highly controversialEnronpower project.The three-member selectioncommitteeto select membersof SERCsis to includethe of chairperson theCEAorthechairperson of the CERC (section 85 (l)(c)). The of is chairperson the appellatetribunal to exercisegeneral powerof superintendence andcontrolover the appropriate commission (section121).Mercifully, section this has not been notifiedand given effect to so far. The chairpersonof the central commission to be thechairperson the is of forumof regulators (section166 (3)). The continuance SEB as the statetransmisof sionutilityora licenseefora further period beyond one year has to be mutuallydecided by the centralgovernment the and state government(section 172).

in mind that there is a strong opposition to privatisation of power sector in India. Like the words 'family planning', which came into disrepute after the Emergency and had been replaced by the words 'family welfare', the word privatisation too has negative connotation in political and social parlance in India and has been replaced by words such as divestment and disinvestment. It is necessary to underline that, with all their limitations3, the transparent, participative and open working of the state and central electricity regulatory commissions has createdpublic awareness of the serious problems facing the SEBs and a climate in favour of reforms in the sector. Unfortunately, several provisions of the Act discussed hereafter are likely to be counter-productive in these endeavours and may lead to increasing the resistance to reforms in general and much larger involvement of private sector in particularwithout adequate, effective and transparent safeguards. Entry of large industrial houses such as Reliance in the sector has strengthened these misgivings. The act is largely based on the reform strategy advocated by the World Bank. The World Bank often claims that its lending strategyis owner-drivenratherthan being donor-driven.But this is hardlyborne out in practice. For example, the training and visit (T and V) strategy adopted by the World Bank for lending to agriculture for a number of years was thrust on India, in spite of serious reservations in the country. The advocacy by the Bank to reduce government support to higher education and for its marketisationhas led to serious social tensions. Insistence on eliminating agricultural power subsidies in India, in spite of large agricultural subsidies being given in US and a number of other developed countries, is increasingly difficult to comprehend. The flat rate tariff for agriculture propagated by the World Bank in the mid- 1970s was similarly misconceived and India is paying the heavy price for it for over three decades. Same is true of the several strands of the new power policy advocated by the World Bank for (what it itself describes as) its 'client countries'. Unfortunately, the precept of accountability which the Bank preaches so assiduously to its client countries is hardly ever considered relevant in its own work. The most important element of the reform strategy contained in the Act is of Unbundling SEBs unbundling of SEBs. A great deal can be The reformstrategyon which the Act said in favour of selective approach to is basedraisesseveralquestions may, unbundling rather than this being advoand in fact, seriouslyundermine intended cated as a mantra, as the Act seems to do. the reforms themselves. is necessary bear The experience, world over, is not uniform It to

Economicand PoliticalWeekly September27, 2003

4105

in this regard. In USA itself, reportedly there are about 200 vertically integrated privately owned power utilities. There are also countries in which vertically integrated PSUs are functioning successfully. Further,the Act itself says thatdistribution licensees would be free to undertake generation and generating companies would be free to take up distribution business. As a result, Reliance, for example, have already announced their plans to integrate theiroperationsfrom gas fields to common consumer of electricity. Tatas too have announced plans to expand their generation capacity as also to take up new distribution responsibilities. How can there be separate dispensations for the private sector and SEBs? This is nothing but denying a level playing field to SEBs with a vengeance. At this critical stage of reforms, it would be counter-productive to create a public perception that the sector is to be left at the mercy of the private sector. But this is precisely what is going to happen with' the recent advocacy by the World Bank of 'regulation by contract' to promote larger private sector investment in electricity distribution.4In brief, the discussion paper

of the World Bank asserts that the key lessonof thelast 10yearsis thatregulatory independence,by itself, creates neither commitment balanceddenor regulatory independence cision-making. Regulatory mustbe combined witha clearlyspecified contract mustbe negotiated that regulatory Sucha regulatory by politicalauthorities. contract would substantially limit the discretion. idea is to limit The regulator's in of thediscretion theregulator areasthat are known to deter investment.The key is of contract a component the regulatory tariff-setmulti-year performance-based, ting system. It is arguedthatthe concept of independence notlogicallyrequire does that a regulatory commissiondesign the The tariffsystemthatit implements. paper as suggeststhat,insofar Indiais concerned, it wouldbe betterto, interalia,(i) transfer backto thegoverntariff-setting authority ment on a one-time basis for the initial post-privatisation period,(ii) incorporate the tariff-setting formuladirectlyinto the and agreement, (iii) establish privatisation fairly detailed tariff principlesand processes that would apply to subsequent tariff(MYT)periods.Accordmulti-year without of ingto theperceptions thepaper,

such changes, any privatisation will take place under a cloud of legal uncertainty. It is furthersuggested that, in this process, risks should be shared between the private party, consumers and the state government. The paper asserts that a multi-year tariff system can be put into operationeven in the absence of high quality data. The paperhas a touching faith that"dataquality will improve through privatisation". This is an amazing assessment in the light of shocking corporate scandals such as of Enron and a host of others due to falsification of accounts and records and collusion by accountants. The fact that this advocacy is not just a straw in the wind is further underlined by its serious consideration by the government of Karnatakaas a part of the strategy for privatisationof distributionin thatstate. The distribution margin (DM) approach accepted by the state government has two components: base revenue and incentive charge. It is importantto note that the base revenue is the amount of revenue that the distribution company is allowed to retain to meet its cost of operating the distribution business. The strategy is based on the acknowledgement that "because the

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Economicand Political Weekly September27, 2003

has systemcurrently a large cash deficit and the requiredinformation unavailis able, the current regulatory arrangements need to be modifiedbeforeinvestorscan takebusinessandregulatory risks."' The of has active government Karnataka under consideration amendmentof the state commissionAct for introducregulatory tariff.The consultants tion of multi-year appointedby the stategovernmenthave, that interalia,recommended of theseveral risks facing the investorin privatisation, risk of onlythecollection inrespect metered theft consumers, risklimitedto thestarting levelsof theft,riskin respectof inaccurate risk meters,operational management and capital expenditure management risk shouldbe borneby the investor.All other risksshouldbe borneby the stategovernment. In its comments, the Karnataka Electricity Regulatory Commission (KERC)has observedthat"theseamendthe mentsseem to operationalise concept of a regulatory holidayfor a periodof ten years".KERChas advisedagainstunderand takingsuch amendments has further stated if thisview doesnotfindfavour, that "it [the commission]be kept in a suspended animationduring this period of 10 years to avoid the completelyunnecRs of essaryexpenditure around 2 croreper annumon its maintenance upkeep". and Regulatory Contracts Theaboveregulatory contract approach is fraughtwith seriousconsequencesand should not be accepted as blindly and mindlesslyas similarotherprescriptions in thepast.Whatmaybe acceptable and in suitedto LatinAmerican EastEuropean or countriesmay not eitherbe acceptable or relevant India.Eachcountrymustlook in at its own ethos, past experience,institutional and legal framework and other relevantparameters beforefollowing the adviceof international agencies.This aid is the least that we can do, at least now, with the comfortableforeign exchange reservesposition.But,this will call for an altogethernew mindsetthan in the past. At the outset it must be noted that the contract have all the charwill regulatory acteristicsof the series of highly controversial (PPAs), purchase power agreements such as in respectof Enron,enteredinto by the state governmentsfor generation of projects, adoption MOUroute,after by the onset of reformsin this sector.These had totallyundermined credibilityof the the government bothat the centreandthe states.Itwas on thisbackground there that

was widereception theideaof approval muchmorereliabledata,the projections, of of all investmentsin the sectorby regu- for a five-yearperiod,madequinquennicommissions anopen,transparent ally by state governments the centre in and latory andparticipatory manner. Goingbackon for submission to the central finance this progressive step will be grosslyinad- commissionin respectof their revenues visable. Second,it needs to be notedthat andexpenditures foundto be farfrom are of at approval a contract thepoliticallevel realistic. The same is true also of the is moreproneto risksof it beingdisowned, projections madeby the financecommiscancelledor abrogated than if a contract sions themselveson which their recomhasbeenapproved a statutory by authority mendationsfor vertical and horizontal suchas CERC/SERC anopenandtrans- devolution central in of resources thestates to and parentmannerwith a 'speakingorder'. are based.On this background expeThird, the Act provides for arbitration rience,thereareboundto be severelimiWith the present (section 158). Appealover the decisions tationsto MYT-setting. of the CERC/SERC to the national stateof highlyunreliable lies data,suchMYTtribunal overby ajudge setting may give rise to and incentivise appellate presided of the SupremeCourt. There is also a manipulation dataandcreative of accountfurtherappeal providedto the Supreme ing by utilities.Eighth,currently conthe Court.By anyinternational otherwell sumerrepresentatives ill-equipped and are to recognised standards,these are enough go into the complex facets of MYT-setexcesses. ting. As far as one can see, the approach safeguards against regulatory any risk' con- suggested by the World Bank does not Fourth,the words 'regulatory notea contradiction terms.Infact,there envisageconsumer in bodiesparticipating in is moreriskof arbitrary unpredictable this exerciseat all. But,even if they were and decisions on contractualmattersat the to be given sucha right,it is doubtful how bodiessuch far they will be able to do justice to it. It politicallevelthan statutory by as regulatorycommissions.Why should will thereforebe necessaryto strengthen to privateinvestorsnot be prepared face the NGOs by training their personnel, suchso-calledriskswhentheyareassured enablingthemto have theirown panelof of fair and open hearing and judicial independentexperts etc. before MYTprocess? Fifth, in all mattersinvolving settingis takenup seriously.Ninth,much pricingof power,decisionsinevitably get is being madeof the risks which have to politicised and lead to controversies. be facedby the privatesectorin takingup business.PrivateutiliAcceptance of such decisions becomes powerdistribution less painfuland simplerif the consumer ties cannotbe permitted blameothers to have to representatives anopportunity look if they fail to do theirhomeworkbefore at all relevantdata and place theirpoint takinginvestment decisions.It is for them of view before the regulator. They must to take steps to satisfy themselvesabout also be convincedthatstrictstandards will thevalidityandauthenticity thedataput of be laid down for monitoring perfor- out by government the tendernotices. the in manceof the utilityandthatits inefficien- Theymustalsomakea realistic assessment cies will not be passedon to them auto- of their own capabilitiesin setting and in in matically wayof increase tariff.This achievingtargetssuch as for reduction by is all themoreimportant a situation in such aggregate technical commercial and losses, as in Indiawhere the existing tariffsfor testingof meters,energyaudit,recovery certain etc. politicallysensitivegroupsarelow of arrears, Assuredrateof returnon and will need to be steppedup in prac- capital,coverageof foreignexchangeand and ticallyeachof the yearsin thenearfuture. other risks by the state government Sixth, the concept of automatic pass- government transmission utility,andprothroughof certaincosts such as power viding for distribution marginas a first can of purchases be opento seriousquestion. chargeon revenuemakea mockery the This will be particularly in the case veryjustification true underlying privatisation. of verticallyintegrated utilitiesor where Tenth,the whole purposeof privatisation thereare cross-holdings relevantcom- is to bringin theriskcapital,management in The panies. Seventh,MYT-settingshouldbe expertiseandbusinessacumen. reguan important contract seemsto be based objectivebutit cannotbe put latory approach intopractice The data on theassumption private that sectorlacks immediately. present basein SEBsis so weakandunreliable that these attributes. this is to be so, it can If based on it are boundto hardlybe trustedto createconditionsfor any projections be way-off the mark.This is brought out andconfidenceamonginvestorsfor infuin the reportsof SERCsyear afteryear. sionof freshcapital thebusiness, in thereby It is necessaryto underline even with defeating yet another objective of that 4107

Economicand PoliticalWeekly September27, 2003

one Eleventh, otherjustificaprivatisation is tion for privatisation to reducethe burin den of subsidieson the stateexchequer Thispurmanner. anopenandtransparent by pose too is likely to be frustrated the as contract approach riskswhich regulatory are to be borneby the state government will not explicitly come up for public the eitherinitiallyorduring transcrutiny, sition period.It may also not be clear as to howlongsuchsubsidisation thestate by government may have to be continuedas there will be a tendencyon the part of the utilitiesto pressurise stategovernment to continuethe regimeof sharingof risks. Thisis all themoreso sincesuchdecisions are to be made by political authorities. Finally,a questionmaybe askedwhether such a regulatory contract be entered can into underthe provisionsof the new Act as it would waterdown the authorityof and theSERCsubstantially mayevenmake it superfluous. referencemay be made A in this context to the provisions of of Article254 (2) of theConstitution India. It statesthat,"Wherea law made by the legislatureof a State with respectto one in enumerated the Concurof the matters rentListcontains provision any repugnant to the provisionsof an earlierlaw made or law byparliament anexisting withrespect to thatmatter, thenthe law so madeby the of legislature suchstateshall,if it hasbeen for of reserved theconsideration thepresident and has receivedhis assent, prevail in the state."Thus, all that would be reof is quired forthegovernment Karnataka to obtainpriorapprovalof the president before undertakingsuch a legislation. to of Bank, Looking theleverage theWorld if it wouldbe surprising thecentrerefuses such a request.In fact, it would not be if is surprising this new approach incorporatedin the centralAct. TheAct is a half-wayhouseon theroad to reforms in more ways than one. It professes that its basic premise is that SEBs should not be continued in their in form.Thetransitional present provision section 172 (a) states that a SEB constituted under the repealed laws shall be deemedto be the statetransmission utility anda licenseeunderthe provisionsof the Act for a period of one year from the dateor such earlierdate as the appointed stategovernment notifyandfunction may accordingly.However, importantly,its proviso states that the state government authorise SEB to the may,by notification, continueto functionas the statetransmission utilityor a licensee for such further periodbeyondthe saidperiodof one year 4108

as maybe mutually decidedby thecentral The andthestategovernment. government same positionemergesfrom section 131 of dealing with vesting of property SEB in state government. inter alia, states It, that,"witheffect fromthe dateon which a transferscheme, prepared the state by to government give effect to the objects and purposesof this Act, is publishedor such further dateas may be stipulated by no finaldatehasbeenset for the abolition of SEBs andthis decisionhas been left to thestategovernments. to Looking thelikely compulsionsof centre-staterelationsin the mediumterm, it is unlikely that the centre will ever be able to turn down of for proposals the continuance SEBs as the licensees underthe Act.6 In such a scenario,thoughthe SEBs will cease to exist,their placewillbetaken byseparate up andseveral formed government companies transmission distribuand for generation, tion.This insistenceof the Act on unbundlingat anycost is difficultto understand as it is unlikelythatprivate sectorwill have the capacityto take over the whole elecbusinessfromSEBsevenduring the tricity nexttwodecades.As therecent experience of most reforming stateshas shown,creationof government alonedoes companies notleadto anynoticeable in improvement their performance and, in fact, leads to increasein the tarifffor the consumerby addingto overheadcosts at each stage. Implications for Government Finances Onceit is accepted thestategovernthat mentsmay not find it possibleor be in a hurryto privatisethe SEBs wholly, it is to imperative examineas to what implicationsthe Act will have on the finances of thestategovernments. thestatesshow If or are unableto privatise unwillingness the customers SEBs, of distribution, paying namely, industrial,commercialas also domesticconsumerswhose consumption is morethan,say, 300 units a monthand thereforeare in the highestslab of tariff for the domesticconsumersare likely to desertthe SEBs.The ministry railways of has alreadyannounced plansto take supply of electricitydirectlyfromthe central PSUs. This process is expected to be completed in the next five years. It is necessaryto note in this contextthatthe Actdefinescaptivegenerating plantasone "setupby anypersonto generate electricfor his own use andincludes ity primarily a powerplantset up by any co-operative
the state government ..." This shows that

of society or association personsfor generating electricity primarilyfor use of membersof such co-operative society or association". This definitionis wide and coversa number situations compared of as to the restrictive definition of captive in generation adopted thepast.As a result, consumercan become a shareholder any of a co-operativesociety or a company floatedfor powergeneration distribuand tion. Obviously,consumergroupswhich will arepresently beingheavilysubsidised in not be interested gettingpowersupply fromsuchnew ventures will continue and to be the responsibility the SEBs funcof licensees. tioning as new distribution Itis important notethat,under Act, to the when a consumeris accordedan open access to availsupplyfroma sourceother thanthe distribution licensee of his area, he is liable to pay a transmission charge as also a surcharge. surcharge to be The is leviedtill suchtimeas thecross-subsidies are not eliminatedand is to be used for the purpose meetingtherequirement of of currentlevel of cross-subsidy.The Act also lays down that such surcharge and cross-subsidiesare to be progressively reducedand eliminatedas prescribed by therelevant commission. Mostimportantly, theAct laysdownthatsuchsurcharge will notbe leviedwhenopenaccessis provided to a personwho has established captive a to generating plantfor carrying electricity the destinationfor his own use. These provisions raise a numberof pertinent issues. Significantly, Act does not lay the down any definite timeframeeither for provisionof open access or for abolition of cross-subsidisation and leaves these decisions to the SERCs.As seen earlier, the level of cross-subsidisation come has down steeply over the years due to the decline in the sales to industryand increasedsales to domesticandagricultural consumers. actshouldhavelaiddown The a timelimitof say five yearswithinwhich open access is to be providedor crosssubsidiesandthe surcharge basedthereon is to be abolished.Second,the surcharge is to be based only on currentlevel of cross-subsidyand thereforecannot take noteof orcompensate changein future for consumer anddemand mix elasticities,or sets backingdownof generating andcosts thereof etc. Third, the surchargeapparently applies to an existing consumerof a distribution licensee andshallnot apply to new consumers the areaof a licensee in who preferto takesupplydirectlyfroma sourceoutsidethe area.Fourth,since the surcharge is not to apply for captive

Economicand Political Weekly September 2003 27,

generation, there will be greater impetus to setting up captive generation. Power from such a source may be cheaper than from the SEB as it does not have to bear the burdenof cross-subsidy but it may not be the most cost-effective option. Over a period of time, this will lead to the country being saddled with high cost generation, therebyadversely affecting its international competitiveness. The central government has, through this Act, half-heartedly and by back door tried to do what it could not do openly due to the opposition of the states to undertaking time-bound reforms in the sector. In the process, it has failed to take the country into confidence about the likely consequences of this so-called forward looking strategy. The state governments too do not seem to have grasped the enormity of the problems they are likely to face. The Tenth Five-Year Plan has accepted the objectives of extending electricity to all villages by 2007 and all households by 2012. The financial implications of this too do not seem to have been taken into account while enacting the new law. It is clear that with the mass exodus of paying customers from the fold of SEBs as distribution licensees, the burden on the state budget would become unsustainable. The new regulatory contract regime being propounded by the World Bank will, in effect, add to this burden. This is likely to lead to demandsby the stategovernments that the central government must come forward to share this burden. According to some newsreports, the government of Andhra Pradesh has already made such a demand before the Twelfth Finance Commission. It would not be surprising if this issue becomes a bone of contention between the centreandthe states in the coming years. Yet another likely implication also needs to be borne in mind. Currently, 16 states levy stateelectricity duty (SED). The revenue from SED has nearly tripled from Rs 1,131 crorein 1992-93 to aboutRs 3,125 crore in 2000-01 (RE). Gujarataccounted for 36 per cent of the total revenue from SED in 2000-01. Average incidence of SED was about 10.44 paise/Kwh in 2000-01 with wide statewise variations Gujarat (38.72), MP (15.51), J and K (15.31), Rajasthan(14.14), Delhi (13.32), Maharashtra 10.27), Karnataka ( (9.13), AP (3.41) and so on. The SED, as a proportion of average tariff in 2001-02, varied widely from 15.9 per cent in Gujaratand 11.1 per cent in J and K to 0.6 per cent in Assam and 1.5 percent in AndhraPradesh.Against this background, driven to the wall of

mountingfinancialburdenof subsidising SEBsasnewdistribution it licensees, would not be surprising the states which, at if do present notlevy SED,start levyingSED on captive and otherprivatepower generation theotherstatesstepuptherates and of duty.Accordingto a recentnewsitem, thegovernment Orissa inJuly2003, of has, increased SED from 12 paiseto 20 paise/ Kwhfor captivepowerplants,in addition tothedutyonauxiliary consumption. Levy of SED will frustrate objectiveof the the act to do away with cross-subsidisation, as this would be nothing but crosssubsidisation anothername.7 by Multiple Distribution Licences In its anxietyto meetmultiple often and conflicting objectives and to be unduly futuristic,the act providesthattherecan be morethanone distribution licenseefor a given areaandsuch a licencecannotbe deniedif anapplicant fulfilstheprescribed conditions,on the groundthat there alreadyexists a licenseein thesameareafor the same purpose (section 14). This is likely to be viewed as an unduly high business risk by new entrantsin distributionbusinessandmaybecomea major disincentive. the Considering factthatthe responseof the privatesectorto take up distribution businesshas been lukewarm, a numberof incentives such as MYTof settingandadoption distribution margin are to strategy beingproposed enthusethe private sector. On this background,to morethanone distribution licensee permit for an areacan be hardly justifiedat this Sucha stepmaycertainly stageof reforms. be necessaryin the long run to promote but competition it can waitfor some time as otherwiseit will further slow downthe of privatisation the country. It in pace needsto be notedin thiscontextthatTatas andBSES, who aredistributing powerin Mumbai decades,arestillnotprepared for to face competitionfrom each otherand are pursuingtheir claims in the courts. Anotherquestionwhich needs consideration is whetherwe, as a country,can afford to provide for so much capital redundancyin an industrywhich is so capital intensive. The Act (provisoto section 14) states that "wherea personintendsto generate anddistribute electricityin a ruralareato be notifiedby the stategovernment, such person shall not requireany licence for such generation distribution elecand of tricity,butshallcomplywiththemeasures whichmaybe specifiedby theCEAunder

section 53". Perhaps this is based on the presumptionthatdispersedgenerationfrom non-conventional and mini hydel sets would be cheaper. The available data show that this is far from true. Co-generation power, depending on the season, costs in the range of Rs 2.53 and Rs 2.01/Kwh, with 5 per cent annual escalation in UP. The figure forMaharashtrais Rs 3.05/Kwh with 2 per cent annual escalation. Some states have given far too liberal incentives for non-conventional power which have led to its high cost. The buy-back rates for wind power range between Rs 2.25 and Rs 2.90/Kwh with annualescalation.8 The tariff-setting for wind power generation in Maharashtra,with excessive concessions given by the state government, has raised many contentious issues leading to prolonged hearings before the MERC whose decision in the matter is still awaited. The Government of Orissa has taken a decision to sell off 7 mini hydel power projects in the state. It is reported that these power projects are not in operation as cost of power from these plants is quite high at Rs 4 per unit.9 Insofar as ruraldistribution is concerned, the experience of co-operatives is far from encouraging. Almost all of them are surviving only due to SEBs supplying power to them at highly concessional rates. The most shocking case is that of Mula Pravara Cooperative Society in Maharashtrawhich has defaulted on arrearsof hundreds of crores of rupees andtheirwrite-offbyMSEB. Withsuch cost structure of even non-conventional and dispersed generation, it is evident that agriculturaltariffwill have to be subsidised for severalyearsto come. In this light,to permit setting up of generation and distribution projects in the ruralareas without any scrutiny of their costs will foreclose the options of the state government in so far as takingover of subsidy burdenis concerned. A reference may be made in this context to the concept of cost to serve as opposed to cost of supply. Ideally, tariff for every consumer group should be based on the cost to serve the concerned group. In workingout the cost to serve, severalfactors such as the cost of generation, transmission anddistribution,clusteredvs dispersed supply, voltage at which supply is made, and whether supply is given only in offpeak hours or at all hours, will have to be taken into account. Ideally, a set-off in tariff should also be provided for unreliable and low quality supply based on frequency and duration of power failures and interruptions,and low and fluctuating voltages. On this basis, cost to serve for

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consumersshould be much refers to encouragement of competition, agricultural lower than estimatedat present.Laying efficiency, economical use of resources, down uniformguidelines in this regard good performance and optimum investunderthe Act and its Rules would have ments. Section 42(6) provides for appointment of an Ombudsman by the state combeen advisable. The Act is weakandwantingin so far mission. However, provisions of sections is mechanism concered. As 173 and 174 show thatthe competition law as regulatory out earlier,whatevermay be the passed by parliament will not be applibrought in in experience othercountries, India,the cable to the power industry.This is indeed success of power sector reformshinges unfortunate. This law should be of concritically on the success of regulatory siderable importance in protecting conmechanism.Towards this end, the Act sumer interests, particularlywith the entry out as needsto be amended brought here- of large industrial houses in this sector. after.The Act shouldprovidefor a clear Though consumer participation is bar and unambiguous againstreappoint- recognised as an important element in on or mentof anymember chairperson the overseeing public utilities, the Act does Thisshould not have much to say in so far as the commission. sameoranyother also hold good for the chairpersonand participation of NGOs, consumer groups membersof the nationalappellatetribu- and civil society is concerned. This is in nal.Section 113(b)(i) statesthata person spite of the actions taken in this regard so who "is,or has been,or is qualifiedto be, far by some of the commissions. For a judge of a highcourt"could be eligible example, KERC has taken steps which on for appointment the appellatetribunal. include appointment of a consumer advoLookingto the fact thatthis is a national cate, survey of electricity consumers and level tribunal is to decideappealsover through the office of consumer advocacy, it the decisionsof SERCs/CERC, will be organising workshops and training to bestto deletethewords"isqualified be" programmes for consumer organisations, The fromthissub-section. pastexperience issue of monthly newsletters, grievance brings out that, to be effective, SERCs handling throughconsultants and so on.10 need to be given much larger financial The Act needs to be amended to cast a and by autonomy independence levy of a statutory responsibility on SERCs/CERC cess on power consumptionin the state. to take pro-active actions for institutionof alising consumer participation and conis No less important the accountability to theregulator statelegislature/parliament.sumer advocacy. Section 127(6) lays down that the rate Towardsthis end, it will be useful if the is workingof the regulators reviewedby of intereston delayed payments will be "16 and per cent per annum compounded every six the standing committeeof parliament the relevantcommitteeof the state legis- months". Considering the softening of A lature. seriesof otherrecommendations interest rates in the country and their likely and madeby thisauthor the PrayasGroup downward trend, the rate as above seems in to study,referred earlier footnote3, need unreasonably high. It will also be better if the rate of interest is fixed under the in to be incorporated the Act. Consumer Protection Majorprovisionspertainingto protection of consumerinterestsin the Act are: section 57(2) which makes a licensee lifor able to pay compensation, non-comof pliancewiththestandards performance, to the person affected as may be determined by the regulatory commission; section64(3) whichrefersto theprocedure for makingtarifforderafter considering all suggestions and objections received from the public;section 23, which, inter alia,refersto issue of directionsto licenssection60 ees for promoting competition; regardingavoidanceof marketdominathe tion;andsection61 regarding factors which are to be kept in view in tariff determination.Sub-section (c) thereof
4110

Mexico and former US Energy Secretary is reported to have said that his country was a majorsuperpower with a thirdworld electrical grid. The California experience of power sector reforms too brings out that there are no ready-made answers and 'one size fits all' approach is not the best strategy for a road map for reforms. 311 Address for correspondence madhavg@vsnl.com

Notes
1 MadhavGodbole, 'The ElectricityBill, 2001: Need fora FreshLook',EconomicandPolitical Weekly, May 18-24, 2002. 2 Governmentof India, PlanningCommission, Annual Report (2001-02) on the Workingof the State Electricity Boards and Electricity Departments, May 2002. 3 Madhav Godbole, 'Electricity Regulatory Commissions:TheJuryIs Still Out',Economic and Political Weekly,June 8-14, 2002, and PrayasEnergy Group,A Good Beginning but Challenges Galore, Pune, February2003. 4 Tonci Bakovic,Bernard and Tenenbaum Fiona A Woolf, 'Regulationby Contract: New Way to Privatise Electricity Distribution?', The WorldBankGroupandthe EnergyandMining No SectorBoardDiscussionPaper 7, May 2003. 5 Karnataka Commission, ElectricityRegulatory Annual Report 2002-03, pp 131-33. 6 This is also borneout by the experienceat the time of the enactment of the Electricity Regulatory Commission Act. The Common Minimum National Action Plan for Power (CMNPP), approvedby the chief ministersin 1996, had envisaged that within threemonths of the coming into force of the above act, all state governmentsshall constituteSERCs and the agricultural tariff should be fixed at a minimum of 50 paise per unit and it should not be less than50 percent of thecost of supply in threeyears.However,theseprovisionsmade in the ERC Bill had to be withdrawnafter the bill was introducedin Parliamentdue to the opposition of some state governments.See P Abraham,Power Sector Reforms: Focus on Abraham Memorial Distribution, Suryakumari Foundation, New Delhi, 2003, pp 189-90. 7 The parallel experience of the states and the centrepursuing contradictory policies is in respect of the pricing of certain petroleumproducts. The objective underlyingthe abolition of the administeredprice mechanism by the centrewas to bringthe pricesof theseproducts in line with international prices.This objective has, however, been frustratedwith the states calibratingthe rateof sales tax to compensate forfall in revenueswhenreduction the prices in of suchproducts announced oil companies. is by 8 Initiativesin Wind Power,Power Line, Vol 7, No 7, April 2003, pp 76-77. 9 Prayas Energy Group, India Power Sector 2003, ReformsUpdate,Pune,IssueV, February p 5. 10 Karnataka Commission, ElectricityRegulatory 4th Annual Report 2002-03, July, 2003, pp 62-65.

Rules, ratherthan in the Act, so that it will be easier to change it when necessary. The enactment of a comprehensive law on electricity was long overdue. This task has now been accomplished. However, it is important to ensure that the Act does not remain on paper as has happened with several other laws in the country. In the power sector itself, the salutary statutory provisions for a fixed tenure for the chairman and ROR of SEB have been observed more in breach. It will be equally important to ensure that the Act subserves its objectives and does not lead to more problems than it claims to solve. This will call for continuous reassessment of its underlying strategies in the light of implementation experience. After the unprecedentedpower blackout on both sides of US-Canada border in August 2003, Governor of New

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