Electricity (Amendment) Bill-2022 Will Have Far Reaching Impacts On The Finances Of States

The Government of India (GoI), a few years ago, had unilaterally enacted the three farm laws, in addition to introducing a Bill to amend the Electricity Act-2003, without taking the States and the farmers’ association into confidence. Since both the farm laws and the Electricity Bill would adversely affect agriculture and farmers’ interests, the latter launched an intense agitation across the country.

During the later part of 2021, sensing that the agitation was gaining momentum, the ruling political dispensation found it expedient to repeal the farm laws straight away and put on hold the Electricity Bill. In order to appease the farmers, the government assured them that neither the farm laws nor the electricity bill would be revived without prior consultation with all the stakeholders including the States, the farmers’ associations etc.

According to recent reports (https://www.business-standard.com/article/economy-policy/amendments-to-electricity-act-could-be-tabled-in-monsoonsession-r-k-singh-122061600907_1.html), GoI plans to table the Electricity Bill in Parliament during the coming monsoon session. If this is so, the government would be reneging on its earlier assurance that the Bill would not be introduced in the Parliament without consultation with the States and the other stakeholders. This is yet another example of how the Centre would be ignoring the States and crossing the lakshman rekha of federalism.

The People’s Commission has examined the essential components of the Bill and the implications thereof for the States, the consumer groups, especially the farmers, the small businesses and the weaker sections of the society and has come to the conclusion that the Bill will have far-reaching impacts on the finances of the States, the State utilities and the different consumer groups. The State power utilities are entities set up in terms of Article 19(6)(ii) of the Constitution. Under Article 12, they are to be deemed to be the instruments of the State. As such, the State power utilities are expected to fulfil the welfare obligations of the State in terms of the Directive Principles enumerated in Part IV of the Constitution. These include “minimising income inequalities” [Art 38(2)], “ownership and control of material resources of the community are so distributed as best to subserve the common good” [Art 39(2)9b)], “operation of the economic system does not result in the concentration of wealth and means of production to the common detriment” [Art 39(2)(c) and so on.

The electricity distribution networks are indivisible parts of the electricity supply system and deliver electricity to the community as a whole. As such, fragmenting and privatising them will certainly be to the detriment of the common good of the community, especially since the creation of such privatised segments would run counter to the interests of the weaker sections of the society, adversely impact the farming community and the small businesses. Considering that private entities function necessarily with the objective of profit maximisation, they tend to cherry-pick the more remunerative groups of the consumers and are not inclined to serve the interests of the disadvantaged sections, who cannot afford to pay high tariffs. Also, private entities may not be inclined to extend electricity supply to remote areas, which is an essential obligation of the State to promote all-round economic development. Privatisation by itself may also run counter to the State’s obligation to minimise income inequalities, reduce the concentration of wealth and so on.

In view of these considerations, the Commission would caution the government not to fragment and privatise the electricity distribution networks, which in effect would violate its welfare obligation in terms of the Directive Principles. Features of the proposed Electricity Bill that need to be opposed:

1. Introducing the concept of “Distribution Company” instead of “Distribution Licensee” and doing away with the licensing process. All that is required is for a Distribution Company to register itself in order to undertake trading in electricity, and there is no need for a licence. To license means to authorise, or to grant permission to carry out that activity which would require due diligence by the Electricity Regulatory Commission (ERC) to satisfy itself as to the competence and capacity of the Company to undertake electricity distribution business. Registration means adding one’s name to an official list. ERC is required to issue a Registration Certificate to the applicant Distribution Company, within 60/75 days of application, if the applicant meets eligibility criteria. If no order of Registration is passed by ERC, within 60/75 days, the Distribution Co’s Registration shall be deemed to have been granted. Companies getting into the electricity distribution business by default is a very dangerous prospect, opening up the floodgate of corruption, and favouritism and can put the consumers at grave risk.
2. While the existing state-government-owned Discoms will continue to exist, EB-2022 provides for multiple private-owned Distribution Companies in the same area. In the new scenario management of Power Purchase Agreements (PPAs), subsidy and cross-subsidy will rest with the multiple Distribution Cos in the same area. Power from PPAs with existing Distribution Licensees shall be shared amongst all Distribution Cos, in the area of supply. Distribution Company may enter into additional PPAs, without sharing it with other companies. On Registration of more than one Distribution Company, in an area of supply, Universal Supply Obligation (USO) fund shall be created to be managed by a Government Co. or an entity managed/created by State Government. Cross-subsidising consumers will shift to private companies & subsidized consumers will remain with Government company leading to a heavy burden on the state exchequer. Any surplus with Distribution Company on account of cross-subsidy or Cross Subsidy Surcharge shall be deposited into the USO fund to be utilized to fund any deficits in cross-subsidy in the same or other areas of supply. All these do not appear to be feasible and would make the electricity distribution highly complicated.
3. The Bill empowers SERC to fix the minimum & maximum ceiling of tariff for sale or purchase of electricity in case of shortage of supply, in pursuance of an agreement, entered into between a Genco and Distribution Cos, for a period not exceeding one year to ensure reasonable prices of electricity. This will create practical problems where SERCs have already issued Multi Year Tariff (MYT) orders.
4. The Bill prohibits the Regional and the State load despatch centres (RLDCs and SLDCs) from dispatching electricity, if adequate payment security, as agreed in the contract, has not been provided by the distribution licensee. The paramount responsibility of the RLDCs and the SLDCs is to ensure Grid discipline as per the Grid Standards /Code and a provision like this drags them into an area that is not theirs, thereby causing disruptions to the important merit order load despatch system. Imposing a “Payment Security mechanism” on electricity flows to State utilities by LDCs, implies that no electricity would be scheduled & supplied to State Distribution Co, unless fully paid upfront. This can have dangerous consequences for the states and the consumers.
5. Bill proposes harsh and heavy penalties for non-compliance with Renewable Power Purchase Obligations as prescribed by GOI. This is obviously being done to favour large centralised Solar plants owned by corporate business houses and crony capitalists some 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.
6. The Bill mandates CERCs to discharge such other functions as may be assigned under this Act or as may be prescribed by Central Government. This vesting of unlimited/undefined powers with GOI will severely compromise the functioning of CERCs making them subordinate entities of the central government instead of autonomous bodies. This could turn out to be harmful to the interests of the states.
7. “Electricity” is a concurrent subject and both Central & State Govts have powers to make laws on this subject. But the proposed amendments to the Electricity Act substantially usurp the powers of the state and concentrate them with the Central Govt. and its agencies.  With CERC issuing registration for multi-State Distribution Company, SERC’s role will get drastically reduced while the responsibility of O & M of the distribution infrastructure would remain with the state.
8. With the plan to propagate Open Access at LT consumer level, there will be intense “cherry-picking” to favour the private players. This may commend itself to market fundamentalists but is bound to raise very complex issues on the ground with the potential to create chaos in the last mile delivery system of a basic service. There is no clarity as to who will provide infrastructure for the new consumers and who is accountable for the delay.  There is also no clarity as to what happens to existing commercial agreements with consumers. All these will have adverse management and financial impact on existing Discoms. Additional legal entity may have to be
   created to sort out these complex issues as the litigations are bound to increase.
9. Government of India, Ministry of Power (MoP) which is keen to introduce the Bill in the Parliament have not bothered to explain the reasons for proposed changes and their implications on finances of States & their utilities, their likely impact on agriculture, small businesses and their implications for the electricity employees. They have also not circulated a comprehensive paper for eliciting the States & views, as the State Utilities are 100% connected with consumers. Instead, MoP has only aped the suggestions and prescriptions given by expatriate consultants with little knowledge of India’s economy and power sector.
10. Sum and substance is that the proposed Bill would:
    i. weaken the finances of State Discoms,
    ii. have adverse impact on utility employees,  
    iii. cripple the States’ finances   
    iv. impose a heavy cost burden on the smaller subsidized consumers, especially the farmers to benefit only Corporate Business Houses.

States cannot afford to ignore the far-reaching implications of the Bill on their economy, finances, agricultural and industrial development and social equity and harmony. The bill is a continuing assault on India’s federal structure. As mentioned earlier, Electricity is in the concurrent list of the Constitution and its entire distribution is with the States. Yet, in the reform era commencing from 1996, this sector is being virtually treated as a central subject. All the policies are being framed by the Centre, laws enacted by Parliament and directions issued by MoP as if states are mere vassals. For the sake of formality, meetings are held and so-called consultations are done with the states but all decisions concerned with generation, transmission and distribution of electricity as well as regulatory matters are taken by the Centre. States are made to obey under duress since it is the centre that has control over the money as well as developmental, financial and regulatory institutions.

All the ‘reform measures’ originate at the Centre and are sent down as directives to the states along with a carrot and stick package. Generation-oriented reforms of the mid-nineties were pushed through by adopting the ‘Structural modules’ as the mantra and yardstick for appraising SEB’s performance. The extent of financial and technical assistance by WB, ADB and other Agencies for the reform process also depended upon the rigidity with which these modules were adopted and implemented. MoP and its organisations like Power Finance Corporation adopted this criterion by segregating States into ‘reforming’ and ‘non-reforming’ ones! Cash-strapped states fell easy prey, starting from Odisha.

Each and every post-EA-2003 reform measures and schemes were accompanied by stringent conditionalities which state governments had to obey lest they be declared pariah! In the same vein, EB-2022 lays down the reforms in the distribution segment as prescribed by external agencies thereby trampling upon the exclusive jurisdiction of the states. Adoption of these blindly would be against the letter and spirit of the Constitution of India.

The news article is based on a press release issued by People’s Commission on Public Sector and Services