electricity act, 2003 questionable wisdom

8/3/2019 Electricity Act, 2003 Questionable Wisdom

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Electricity Act, 2003: Questionable WisdomAuthor(s): Madhav GodboleSource: Economic and Political Weekly, Vol. 38, No. 39 (Sep. 27 - Oct. 3, 2003), pp. 4104-4110Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4414073

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PerspectivesElectricity A c t , 2 0 0 3QuestionableisdomWhen he bill whichwas in due course enacted as the ElectricityAct,2003 was under considerationof the standingcommitteeofparliament,a numberof issues which deserved closerexaminationhad been highlighted.Severalof these issues remainunattended.TheAct, which is a halfwayhouse,also raises anumberof new issues whichare likely opose seriousproblems n thecomingyears.MADHAVGODBOLE

heElectricityAct,2003 (hereafterreferredo as the Act) whichhascome ntoforce(except or section121)on June10,2003 is stated o be the'distilledwisdom'of a series of commis-sioned international and nationalconsultancystudies and seminars andconferencesheld at the all-India levelduringhelast threeyears.It is acclaimedto be the roadmapor the electricity n-dustrywhichwill helphasten hepaceofeconomic reforms n the country.Whenthe bill on this subjectwas underconsi-derationof the standingcommitteeofparliament,hadhighlighted number fissues which deserved closer examina-tion. Several f theseremain nattended.TheAct,which sahalfwayhouse, aisesanumber f new issues which are ikelytoposeseriousproblemsnthecomingyears.It will be best to begin the discussionwith a brief overview of the powersec-tor.2Thereport f thePlanningCommis-sionon theworking f the stateelectricityboardsSEBs) or heyear2001-02bringsoutseveralareasof concern. t s seen thatpower sectorreforms so far have beenhalf-heartedndhalting.Thedrivingorcefor the reformss not aconvictionamongthestates hat hereforms re mperative.Rathertistheallurementf large inancialassistance romthe WorldBank,AsianDevelopmentankand hebilateral onorswhich s goading hestates o reluctantlyshowjustenoughprogress o qualifyforthe releaseof the next instalment f aidfromexternal ources! f this was notso,the financialperformancef SEBs would

nothavedeterioratedosharply uringhereference eriod1996-97 o 2001-02.Thepercentagerecoveryof cost of supplythrough verageariffhasgonedown rom76.7 percent (82.2 percent in 1992-93)to 68.6percent.Average griculturalariffin the reference earswasjust21.2 paiseand41.54paiserespectively.Commerciallosses(with ubsidy) ave ncreased earlysix times from Rs 4,674.31 crore toRs24,837.2crore.Theselosses (withoutsubsidy)have ripledromRs11,305croretoRs33,177crore.Netinternal esourcesof SEBs which were(-) Rs 2,090.7croredeterioratedharply o (-) Rs 19,103.90crore. Subsidyfor domestic consumersincreased from Rs 4,386.01 crore toRs 12,238.51crore.Subsidy or agricul-tural consumers increased fromRs 15,585.20crore to Rs 30,462 crore.Grosssubsidy subsidy ordomesticandagriculturalconsumers and inter-statesales)wentupsteeply romRs20,210.75crore to Rs43,060.10 crore.Gross sub-sidy perunitof sale increased rom75.4paise/Kwhto 126.6paise/Kwh.Revenuearrears n 1999-2000 were Rs 24,773.1croreandaccounted or 40.4 percent ofthetotalrevenue or theyear.Therateofreturn(ROR),which statutorily houldhave beenat least 3 percentof assetsinservice(excluding nterestanddeprecia-tion), is in a bottomlesspit and has de-teriorated nbelievablyrom(-) 12.7percent in 1992-93 to (-) 19.6 per cent in1996-97,(-) 43.1 percent in 1999-2000to (-) 44.1 per cent in 2001-02.Attention houldalso be invited o thefact that the level of cross-subsidisationhasbeendeclining teeplyovertheyears.

Cross-subsidy from commercial andindustrial ectors(as a percentage f ef-fective subsidyto domesticandagricul-turalconsumers)whichwas as much as41.7 percent n 1992-93sharply eclinedto 16.7percentby 2000-01 (RE)and isexpectedo further ecline o 14.3percentin 2001-02. Surplusgeneratedby cross-subsidisation or the year 2001-02 wasonlyRs5,759crore.This s dueto thefactthat he share n thetotalenergysales ofdomestic ndagriculturalonsumers,whoget powersupplyatsubsidised ates,hasbeenprogressivelyncreasingverthe earsand tood t50.1per ent n2001-02against49 percent in 1996-97,while the shareof industrial ectorconsumption as de-clined from34.7 percent in 1993-94to33 percent in 1996-97 and further o 29percent n2001-02. A referencemayalsobe invited to the averagetariff (paise/Kwh)chargedby SEBs to their variouscustomersn2001-02.Itranges rom41.6paise,at thelowestend,charged o agri-cultural onsumerso 194.4paise or nter-statesales, 195.6paisefor domesticcon-sumers,378.7 paise for industry,426.3paisefor commercial se and449.2 paisefor traction.This data has considerablebearingon the furtherdiscussionon vi-abilityof SEBs in the coming yearsdueto the iberaldefinition f captivegenera-tion n theAct eading o so-called cherry-picking'.Changing Ownership Profile

Yetanothertrikingeature f thepowersector s the rapidly hangingownershipprofileof assets. It is oftenforgottenhatinitiallythere was considerableopposi-tion to the centralgovernmentmakinginvestmentsnpowergeneration. everalstates considered t an unnecessary n-croachment n theirfield. On this back-ground, t is interestingo see thatas onMarch 1, 2002,central ectorgenerationaccountedor a littleover30 percent ofthe total installed generationcapacity(1,04,917.5MW) nthecountry.Over hecomingdecade, his share s expected ogo upfurther. urchase f powerbySEBsfromcentral ectorgeneratingtations, sapercentage f availability, as ncreasedfrom33.08 in 1996-97 to 36.77 in2001-02. The nvestmentninter-stateransmis-sion ines smostlybycentral ublic ector4104 EconomicandPoliticalWeekly September 7, 2003


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undertakingsPSUs).Thefinancialassis-tance rom hecentreand tsPSUsto SEBshas also increased ubstantially.Another oteworthyeature f thepowersector is the sharpdecline in the Planoutlays or thesectorbothattheall Indiaand the state evel. At the all India evel,the Plan outlay for power sector, as apercentageof the total Plan outlay, hascome down from 19.04 per cent in theSeventhPlan 1985-90)to 14.49percentintheNinthPlan 1997-2002). n heannualPlan for2001-02,it was as little as 12.19per cent (excludingJharkhand).At thestate evel, the powersectoroutlay,as apercentage f the total Plan outlay, hascome downfrom31.55 percentin 1990-91 and about26-27 percent for each ofthethreeyears hereafterojust 15.25percent in 2001-02. As a result, capacityadditionn the NinthPlanwas only 47.2percentor 19,015MW against he Plantargetof 40,245 MW. Thisis particularlydisconcerting s theper capitaelectricityconsumption f 355 Kwh during1999-2000 in India ompares eryunfavourablywith that of 719 in China in 1997. It isalso importanto note thatthe elasticityof electricity consumption o GDP for1980-81to 1998-99was 1.41.Thus,anyshortfall n poweravailabilitywill inevi-tably eadto slowerrateof growthof theeconomy. f thesevereconstraintf finan-cialresourcess tobeaddressed,tepswillneed to be takento increase he internalresources f SEBs.If it hadbeenpossibleto adopta tariffof 50 paiseperKwhforagriculturalales,SEBs wouldhave beenable to mobilise additional esourcesofRs 1,984croren 2001-02.Their esourcescouldimprove o overRs 33,176.8croreeven with a 0 per cent ROR and overRs 35,432.5crore t3percentROR, atherthan heshockingRORof (-) 44 percentrecorded n thatyear.Giventhe politicalwill, thisshouldnot be difficultas, on anaverage,at all Indialevel, SEBs wouldhave o raise ariffbyabout117paise/Kwhforachieving percentRORandbyabout117 paise/Kwh or achieving3 per centROR in thatyear.Not only are the stategovernments ot permittinghe SEBs tochargecost-based ariffbutarenot evencomingforward o takeover the burdenofsubsidy ully.Thus, ubventioneceivedby SEBs from he stategovernmentswasonlyRs8,339.62 rorewhile heuncoveredsubsidy burden was as much asRs 28,976.92crore n 2001-02. The pro-visions of the Act need to be examinedagainstthis background.At the outset t mustbe mentioned hatthe whole scheme of the Act gives an

impression hatthe subjectof electricity,insteadof being n theConcurrent ist,isin theCentralList.There s fartoo muchcentralisationndstandardisation.oliciesonallmatters, amely, henational lectri-city policyandplan,andeven thenationalpolicy on stand alone systemsfor ruralareasand non-conventionalystems,andthe nationalpolicyon electrification ndlocal distributionn ruralareasareto beformulatedby the central government(section3). As in the case of enactmentof thisAct, theformality f consultationswith the state governmentswill be ob-servedbut, in the lightof experience ofar,whether hisprocesswillbemeaning-ful is difficultto say. It also needs to benotedthat national onsensusandagree-mentsarrivedat, year afteryear, in thenationaldevelopmentouncilandconfer-ences of chief ministersandpowermin-istershavemostlyremained npaper.TheAct aysdown hatSERCs re obeguided,interalia, by the principlesand metho-dologiesspecifiedbythecentral ommis-sion for determinationf the tariffappli-cable to generating ompaniesand trans-mission icensees section61 a)).There sto be an unduly argecentralelectricityauthority CEA)consistingof not morethan14members f which8 are o be fulltimememberssection70(3)).Its ndepen-denceis, however,highlydoubtfulas themembers shall hold office during thepleasureof the centralgovernmentsec-tion 70(6)). The critical importanceofindependence f CEAbecameclear dur-ing the approvalprocess of the highlycontroversialEnronpower project.Thethree-memberelectioncommittee o se-lect members f SERCs s to include hechairpersonf theCEAorthechairpersonof the CERC (section 85 (l)(c)). Thechairpersonf theappellate ribunals toexercisegeneral owerofsuperintendenceandcontrolovertheappropriateommis-sion(section121).Mercifully,hissectionhas not beennotifiedandgiveneffect toso far. The chairpersonof the centralcommission s to be thechairpersonf theforumof regulatorssection166(3)).Thecontinuance f SEBas thestate ransmis-sionutilityoralicensee orafurther eriodbeyondone yearhas to be mutuallyde-cidedby the centralgovernment ndthestategovernment section 172).Unbundling SEBs

Thereform trategyon whichthe Actis basedraisesseveralquestions ndmay,in fact, seriouslyunderminehe intendedreformshemselves. t s necessaryo bear

in mind that there is a strong oppositionto privatisation of power sector in India.Like the words 'family planning', whichcame into disrepute after the Emergencyand had been replaced by the words'family welfare', the word privatisationtoo has negative connotation in politicaland social parlance in India and has beenreplaced by words such as divestment anddisinvestment. It is necessary to underlinethat, with all their limitations3, the trans-parent,participative and open working ofthe state and central electricity regulatorycommissions hascreatedpublic awarenessof the serious problems facing the SEBsand a climate in favour of reforms in thesector. Unfortunately, several provisionsof the Act discussed hereafter are likelyto be counter-productive in theseendeavours andmay lead to increasing theresistance to reforms in general andmuchlarger involvement of private sector inparticularwithout adequate, effective andtransparent safeguards. Entry of largeindustrial houses such as Reliance in thesector has strengthenedthese misgivings.The act is largely based on the reformstrategy advocated by the World Bank.The World Bank often claims that itslendingstrategy s owner-drivenrather hanbeingdonor-driven.Butthis is hardlyborneout in practice. For example, the trainingand visit (T andV) strategy adoptedby theWorld Bank for lending to agriculturefora number of years was thruston India, inspiteof serious reservations inthecountry.The advocacy by the Bank to reducegovernment support to higher educationand for its marketisation has led to serioussocial tensions. Insistence on eliminatingagricultural power subsidies in India, inspite of large agriculturalsubsidies beinggiven in US and a number of other deve-lopedcountries, is increasingly difficult tocomprehend. The flat rate tariff for agri-culture propagated by the World Bank inthe mid-1970s was similarlymisconceivedand India is paying the heavy price for itfor over threedecades. Same is trueof theseveral strands of the new power policyadvocated by the World Bank for (whatit itself describes as) its 'client countries'.Unfortunately, thepreceptof accountabil-ity which the Bank preaches so assidu-ously to its client countries is hardlyeverconsidered relevant in its own work.The most important element of thereform strategy contained in the Act is ofunbundling of SEBs. A great deal can besaid in favour of selective approach tounbundling rather than this being advo-cated as a mantra,as the Act seems to do.The experience, worldover, is notuniform

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in this regard. In USA itself, reportedlythere are about 200 vertically integratedprivatelyowned power utilities. There arealso countries in which vertically inte-gratedPSUs arefunctioning successfully.Further, heAct itself says thatdistributionlicensees would be free to undertakegen-eration and generating companies wouldbe free to takeupdistribution business. Asa result, Reliance, for example, have al-ready announced their plans to integratetheiroperationsfromgas fields tocommonconsumer of electricity. Tatas too haveannounced plans to expand their genera-tion capacity as also to take up new dis-tribution responsibilities. How can therebe separate dispensations for the privatesector and SEBs? This is nothing butdenying a level playing field to SEBs witha vengeance.At this critical stage of reforms, itwouldbe counter-productive to create a publicperception that the sector is to be left atthe mercy of the private sector. But thisis precisely what is going to happen with'therecent advocacy by the World Bank of'regulationby contract' to promote largerprivate sector investment in electricitydistribution.4Inbrief, the discussion paper

of the World Bank assertsthat the keylessonof the ast 10years s that egulatoryindependence,by itself, creates neitherregulatory ommitment or balancedde-cision-making.Regulatoryndependencemustbe combinedwithaclearly pecifiedregulatoryontracthatmustbenegotiatedby politicalauthorities. ucha regulatorycontract would substantiallylimit theregulator's iscretion.The idea s to limitthe discretion f theregulatornareas hatare known to deter investment.The keycomponent f theregulatoryontracts aperformance-based, ulti-yearariff-set-ting system.It is argued hat the conceptof independenceoesnot ogicallyrequirethata regulatory ommissiondesignthetariff ystem hat timplements. hepapersuggests hat,nsofar sIndia sconcerned,it wouldbe better o, interalia,(i) transfertariff-setting uthority ack o thegovern-ment on a one-timebasis for the initialpost-privatisationeriod, ii) incorporatethetariff-settingormuladirectly nto theprivatisationgreement,nd iii) establishfairly detailed tariffprinciplesand pro-cesses that would apply to subsequentmulti-yearariff MYT)periods.Accord-ingto theperceptionsf thepaper,without

such changes, any privatisation will takeplace under a cloud of legal uncertainty.It is furthersuggested that,in this process,risks should be shared between the privateparty, consumers and the state govern-ment. The paper asserts that a multi-yeartariffsystem can be putintooperationevenin the absence of high quality data. Thepaperhas atouching faith that "dataqualitywill improve through privatisation".Thisis an amazing assessment in the light ofshocking corporate scandals such as ofEnron and a host of others due to falsi-fication of accounts and records and col-lusion by accountants.The fact that this advocacy is not justa straw in the wind is further underlinedby its serious consideration by the govern-ment of Karnatakaas a partof the strategyforprivatisationof distribution n thatstate.The distribution margin (DM) approachaccepted by the state government has twocomponents: base revenue and incentivecharge. It is important o note that the baserevenue is the amount of revenue that thedistribution company is allowed to retainto meet its cost of operating the distribu-tion business. The strategy is based on theacknowledgement that "because the

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systemcurrentlyhas a largecash deficitand the requirednformation s unavail-able,the current egulatory rrangementsneed to be modifiedbefore nvestorscantakebusinessandregulatoryisks."' Thegovernmentf Karnatakaasunder ctiveconsideration amendment of the stateregulatory ommissionAct for introduc-tion of multi-yearariff.The consultantsappointedby the stategovernmenthave,interalia,recommendedhatof theseveralrisksfacingthe investor n privatisation,only hecollection isk nrespect f meteredconsumers,heft isk imited othestartinglevels of theft,risk nrespectof inaccuratemeters,operationalmanagementiskandcapital expenditure management riskshouldbebornebytheinvestor.All otherrisksshouldbe bornebythe stategovern-ment. In its comments, the KarnatakaElectricity Regulatory Commission(KERC)has observed hat"theseamend-mentsseemto operationaliseheconceptof aregulatory oliday ora periodof tenyears".KERChas advisedagainstunder-takingsuch amendments nd has furtherstated hat fthisview does not ind avour,"it [the commission]be kept in a sus-pendedanimationduringthis periodof10 yearsto avoid the completelyunnec-essary xpendituref aroundRs 2croreperannumon its maintenance ndupkeep".Regulatory Contracts

Theaboveregulatoryontract pproachis fraughtwithseriousconsequencesandshould not be acceptedas blindly andmindlesslyas similarotherprescriptionsinthepast.Whatmaybeacceptablenandsuited o LatinAmerican r EastEuropeancountriesmaynoteitherbe acceptable rrelevant n India.Eachcountrymust ookat its own ethos,pastexperience, nstitu-tional and legal framework and otherrelevantparameters eforefollowingtheadvice of international idagencies.Thisis the least that we can do, at least now,with the comfortable oreign exchangereservesposition.But,this will call foranaltogethernew mindset han in the past.At the outset it must be noted that theregulatoryontractwill have all thechar-acteristicsof the series of highlycontro-versial owerpurchasegreementsPPAs),such as in respectof Enron,entered ntoby the stategovernments or generationprojects, y adoption f MOUroute,afterthe onset of reforms n this sector.Thesehadtotallyunderminedhe credibilityofthegovernment othatthe centreandthestates. twas on thisbackgroundhat here

was widereception f the deaof approvalof all investments n the sectorby regu-latory ommissions n anopen, ransparentandparticipatorymanner.Goingbackonthisprogressive tepwill begrossly nad-visable.Second, t needs tobe notedthatapproval f acontract t thepolitical evelismoreproneo risksof itbeingdisowned,cancelledor abrogatedhan f a contracthasbeenapproved yastatutoryuthoritysuchasCERC/SERCn anopenand rans-parentmannerwith a 'speakingorder'.Third, the Act providesfor arbitration(section 158). Appealover the decisionsof the CERC/SERC ies to the nationalappellateribunal resided verbyajudgeof the SupremeCourt.There is also afurtherappealprovided o the SupremeCourt.By any nternationalndotherwellrecognisedstandards, hese are enoughsafeguards gainst nyregulatoryxcesses.Fourth, he words 'regulatory isk' con-noteacontradictionn terms. nfact,thereis moreriskof arbitraryndunpredictabledecisions on contractualmattersat thepoliticalevel thanby statutoryodies uchas regulatory ommissions.Why shouldprivate nvestorsnot be preparedo facesuchso-calledriskswhen heyareassuredof fair and open hearing and judicialprocess?Fifth, in all matters nvolvingpricingof power,decisions nevitably etpoliticised and lead to controversies.Acceptanceof such decisions becomesless painfulandsimpler f the consumerrepresentativesaveanopportunityo ookat all relevantdata andplacetheirpointof view before the regulator.They mustalsobe convinced hat trict tandards illbe laid down for monitoringhe perfor-manceof theutilityand hat ts inefficien-cies will not be passedon to themauto-matically ywayof increase ntariff.Thisis allthemore mportantn asituationuchas in Indiawhere the existingtariffsforcertainpolitically ensitivegroupsare owand will need to be steppedup in prac-ticallyeach of theyears n thenear uture.Sixth, the concept of automaticpass-throughof certaincosts such as powerpurchasesanbeopen oseriousquestion.This will be particularlyrue n the caseof vertically ntegrated tilitiesor wheretherearecross-holdingsn relevant om-panies.Seventh,MYT-setting houldbeanimportantbjectivebut tcannotbeputintopracticemmediately. hepresent atabase nSEBs sso weakandunreliablehatany projectionsbased on it arebound obe way-offthe mark.This is brought utin the reportsof SERCsyearafteryear.It is necessary o underlinehatevenwith

muchmorereliabledata, heprojections,for a five-yearperiod,madequinquenni-ally by stategovernments nd thecentrefor submission to the central financecommission n respectof theirrevenuesandexpendituresrefound o be farfromrealistic. The same is true also of theprojectionsmadeby thefinancecommis-sions themselveson which their recom-mendationsfor vertical and horizontaldevolution f central esourceso thestatesarebased.On thisbackgroundndexpe-rience,thereare bound o be severe imi-tations o MYT-setting.Withthepresentstateof highlyunreliable ata, uchMYT-settingmay give rise to and incentivisemanipulationfdataandcreative ccount-ing by utilities.Eighth, urrentlyhe con-sumerrepresentativesreill-equippedogo into the complexfacets of MYT-set-ting.As faras one can see, theapproachsuggestedby the World Bankdoes notenvisageconsumer odiesparticipatingnthisexerciseatall.But,evenif theyweretobegivensucharight, t is doubtfulhowfartheywill be ableto dojusticeto it. Itwill thereforebe necessary o strengthenthe NGOs by trainingtheir personnel,enabling hemto havetheirownpanelofindependentexperts etc. before MYT-setting s takenupseriously.Ninth,muchis beingmadeof theriskswhichhavetobefacedbytheprivate ector n takinguppowerdistributionusiness.Privateutili-ties cannotbe permittedo blame othersif they fail to do theirhomeworkbeforetaking nvestment ecisions. t is for themto takestepsto satisfythemselvesaboutthevalidityandauthenticityf thedataputout by governmentn the tendernotices.Theymustalsomakearealistic ssessmentof theirown capabilities n settingandachieving argets uchas forreductionnaggregateechnical nd ommercialosses,testingof meters,energyaudit,recoveryof arrears, tc. Assuredrate of return ncapital, overageof foreignexchangeandotherrisksby the stategovernment ndgovernmentransmission tility,andpro-viding for distributionmarginas a firstchargeonrevenuemakea mockery f thevery ustification nderlying rivatisation.Tenth, he wholepurpose f privatisationis tobring nthe riskcapital,managementexpertiseandbusinessacumen.Theregu-latory ontract pproacheems obebasedontheassumptionhatprivate ector ackstheseattributes. f this is to be so, it canhardlybe trusted o createconditions orandconfidenceamong nvestors orinfu-sionoffresh apitalnthebusiness,herebydefeating yet another objective of

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privatisation leventh, neotherjustifica-tion forprivatisations to reduce he bur-denof subsidiesonthestateexchequernanopenand ransparent anner.Thispur-pose too is likelyto be frustrated y theregulatoryontractpproachsriskswhichareto be borneby the stategovernmentwill not explicitly come up for publicscrutiny,ithernitiallyorduringhetran-sitionperiod. t may also not be clear astohow ongsuchsubsidisationythe stategovernmentmayhaveto be continuedasthere will be a tendencyon the partofutilities opressurisehe stategovernmenttocontinue heregimeof sharing f risks.This s all themore o since suchdecisionsare to be made by politicalauthorities.Finally,a questionmaybe askedwhethersucha regulatoryontract an be enteredinto under heprovisionsof the new Actas it would water downthe authority ftheSERC ubstantiallyndmayevenmakeit superfluous.A referencemaybe madein this context to the provisions ofArticle254(2)of theConstitutionf India.It statesthat,"Where law madeby thelegislature f a State withrespect o oneof the matters numeratedn the Concur-rentListcontains nyprovision epugnantto the provisionsof an earlier aw madebyparliamentranexistingawwith especttothatmatter,hen helaw so madebythelegislature f suchstate hall, f it hasbeenreservedortheconsideration f thepresi-dent and has receivedhis assent,prevailin the state."Thus,all that wouldbe re-quireds forthegovernment f Karnatakato obtainpriorapprovalof the presidentbefore undertaking uch a legislation.Lookingo the everage f theWorldBank,it wouldbesurprisingf the centre efusessuch a request.In fact, it would not besurprisingf this new approachs incor-porated n the centralAct.The Act is a half-wayhouseon theroadto reformsin more ways than one. Itprofessesthat its basic premise is thatSEBs should not be continuedin theirpresentorm.Thetransitionalrovisionnsection 172 (a) states that a SEB consti-tuted underthe repealedlaws shall bedeemed obethe state ransmission tilityanda licenseeunder heprovisionsof theAct for a periodof one year from theappointed ate or suchearlierdate as thestategovernmentmaynotifyand unctionaccordingly.However, importantly, tsprovisostates that the state governmentmay,bynotification, uthorise he SEB tocontinue o functionas the state ransmis-sion utilityor a licensee for suchfurtherperiodbeyond he saidperiodof oneyear

asmaybemutually ecidedbythecentralgovernmentnd hestategovernment. hesamepositionemerges rom section 131dealingwithvestingof property f SEBin stategovernment. t, interalia, statesthat,"witheffect fromthe dateon whicha transfer cheme,prepared y the stategovernmento give effect to the objectsandpurposesof thisAct, is published rsuch further ate as maybe stipulated ythe state government ..." This shows thatno finaldatehasbeenset for theabolitionof SEBs andthisdecisionhasbeen lefttothestate overnments.ookingothe ikelycompulsionsof centre-state elations nthe medium erm,it is unlikelythat thecentre will ever be able to turn downproposalsor the continuance f SEBs asthe licensees underthe Act.6 In such ascenario, houghthe SEBs will cease toexist, heir lacewillbetaken pby separateand everal overnmentompaniesormedforgeneration,ransmission nddistribu-tion. This insistenceof the Act on unbun-dlingatanycost is difficult o understandas tisunlikelyhatprivateectorwill havethecapacity o take over thewholeelec-tricitybusiness romSEBsevenduringhenext wodecades.Astherecent xperienceof mostreforming tateshasshown,cre-ationofgovernmentompanies lonedoesnot ead o anynoticeablemprovementntheirperformance nd, in fact, leads toincrease n the tariff ortheconsumerbyaddingto overheadcosts at each stage.Implications for GovernmentFinances

Once tisacceptedhat hestategovern-mentsmaynotfind it possibleor be in ahurry o privatise he SEBs wholly, it isimperativeo examineas to whatimpli-cations he Act will haveon thefinancesof thestategovernments.fthestates howunwillingnessor are unableto privatisedistribution,hepaying ustomers fSEBs,namely, industrial,commercial as alsodomesticconsumerswhoseconsumptionis morethan,say, 300 units a monthandthereforearein the highestslab of tarifffor the domesticconsumersarelikely todesert he SEBs.Theministry f railwayshasalreadyannounced lansto takesup-ply of electricitydirectly rom hecentralPSUs. This process is expected to becompletedin the next five years. It isnecessary o notein thiscontextthat theActdefinescaptivegenerating lantas one"setup byanyperson o generate lectric-ity primarilyor his ownuseand ncludesa powerplantset up by anyco-operative

societyor association f persons orgen-erating electricity primarily or use ofmembersof suchco-operative ocietyorassociation".This definition s wide andcoversanumber f situations scomparedto the restrictive definition of captivegeneration doptedn thepast.Asaresult,any consumer an become a shareholderof a co-operative ociety or a companyfloated orpowergeneration nddistribu-tion.Obviously,consumergroupswhicharepresently eingheavily ubsidisedwillnot be interestedn gettingpowersupplyfromsuchnew ventures ndwill continueto be theresponsibility f the SEBs func-tioningas new distributionicensees.It s importanto note hat,under heAct,when a consumer s accordedan openaccess to availsupply roma sourceotherthanthedistributionicensee of his area,he is liable to pay a transmissionhargeas also a surcharge. hesurcharges tobelevied till suchtime as the cross-subsidiesare not eliminatedand is to be used forthepurpose f meeting herequirementfcurrent evel of cross-subsidy.The Actalso lays down thatsuch surcharge ndcross-subsidiesare to be progressivelyreducedandeliminatedas prescribed ytherelevant ommission.Most mportantly,the Actlaysdown hat uchsurcharge illnotbe leviedwhenopenaccess sprovidedto a personwhohas established captivegenerating lant orcarrying lectricityothe destination or his own use. Theseprovisionsraise a numberof pertinentissues.Significantly,he Act does notlaydown any definitetimeframeeitherforprovisionof openaccessor for abolitionof cross-subsidisation nd leaves thesedecisionsto the SERCs.As seen earlier,the level of cross-subsidisation as comedown steeply over the yearsdue to thedecline in the sales to industryand in-creased ales to domesticandagriculturalconsumers.The actshouldhave aiddowna time imitof sayfiveyearswithinwhichopen access is to be providedor cross-subsidiesand hesurcharge ased hereonis to be abolished.Second,thesurchargeis to be based only on current evel ofcross-subsidyand thereforecannottakenoteof orcompensateorchange n futureconsumermixanddemand lasticities,orbackingdownof generatingets andcoststhereofetc. Third,the surchargeappar-ently appliesto an existingconsumerofa distributionicenseeandshallnotapplytonewconsumers nthe areaof a licenseewhoprefer o takesupplydirectly romasourceoutside he area.Fourth, incethesurchargeis not to apply for captive

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generation, there will be greater impetusto setting up captive generation. Powerfrom such a source may be cheaper thanfrom the SEB as it does not have to bearthe burden of cross-subsidy butit may notbe the most cost-effective option. Over aperiodof time, this will lead to the countrybeing saddled with high cost generation,therebyadversely affecting its internationalcompetitiveness.The central government has, throughthis Act, half-heartedly and by back doortriedto do what it could not do openly dueto the opposition of the states to under-taking time-bound reforms in the sector.In the process, it has failed to take thecountry into confidence about the likelyconsequences of this so-called forwardlooking strategy. The state governmentstoo do not seem to have grasped theenormity of the problems they are likelyto face. The Tenth Five-Year Plan hasaccepted the objectives of extending elec-tricity to all villages by 2007 and allhouseholds by 2012. The financial impli-cations of this too do not seem tohave beentaken into account while enacting the newlaw. It is clear that with the mass exodusof paying customers from the fold of SEBsas distribution icensees, theburden on thestate budget would become unsustainable.The new regulatorycontractregime beingpropounded by the World Bank will, ineffect, add to this burden. This is likelyto lead todemandsby thestategovernmentsthat the central government must comeforward to share this burden. Accordingto some newsreports, the government ofAndhra Pradesh has already made such ademand before the Twelfth Finance Com-mission. It would not be surprising if thisissue becomes a bone of contention be-tween the centreand thestates nthecomingyears. Yet another likely implication alsoneeds to be borne in mind. Currently, 16states levy stateelectricity duty(SED). Therevenue from SED has nearly tripledfromRs 1,131crore n 1992-93 toaboutRs 3,125crore in 2000-01 (RE). Gujarataccountedfor 36 per cent of the total revenue fromSED in 2000-01. Average incidence ofSED was about 10.44 paise/Kwh in2000-01 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 proportionof average tariff in 2001-02, varied widelyfrom 15.9 percent in Gujaratand 11.1 percent in J and K to 0.6 per cent in Assamand 1.5percent inAndhraPradesh.Againstthis background, driven to the wall of

mounting inancialburden f subsidisingSEBsasnewdistributionicensees,twouldnot be surprisingf the stateswhich,atpresent o not evySED,startevyingSEDon captiveandotherprivatepowergen-eration nd heother tates tepup heratesof duty.According o a recentnewsitem,thegovernmentfOrissa as, nJuly2003,increasedSED from 12paiseto 20 paise/Kwh forcaptivepowerplants, nadditionto thedutyonauxiliaryonsumption. evyof SED will frustrate heobjectiveof theact to do away with cross-subsidisation,as this would be nothing but cross-subsidisationby anothername.7Multiple Distribution Licences

Initsanxiety omeetmultiple ndoftenconflictingobjectivesand to be undulyfuturistic,he act provides hattherecanbe more hanonedistributionicenseefora givenareaandsuch a licencecannotbedenied f anapplicantulfils heprescribedconditions,on the groundthatthere al-ready xists alicensee nthesamearea orthe same purpose(section 14). This islikely to be viewed as an undulyhighbusiness risk by new entrants n distri-butionbusinessandmaybecomea majordisincentive.Consideringhe factthat heresponseof the private ectorto takeupdistribution usinesshasbeenlukewarm,a numberof incentivessuch as MYT-settingandadoption f distribution arginstrategy rebeingproposedoenthuse heprivate sector. On this background, opermitmore hanonedistributionicenseefor an areacanbe hardlyustifiedat thisstageofreforms. uchastepmaycertainlybe necessary n the long runto promotecompetition ut t can waitfor sometimeasotherwise t will further lowdownthepace of privatisationn the country.Itneeds o benoted nthiscontext hatTatasandBSES,whoaredistributingower nMumbai ordecades,arestillnotpreparedto face competition romeach otherandare pursuing heirclaims in the courts.Anotherquestionwhichneedsconsider-ation is whetherwe, as a country,canafford to provide for so much capitalredundancyn an industrywhich is socapitalintensive.The Act (proviso o section14) statesthat"wherea person ntends o generateanddistributelectricityn a ruralarea obe notifiedby thestategovernment,uchpersonshall not requireany licence forsuchgeneration nddistribution f elec-tricity,butshallcomplywith hemeasureswhichmaybespecifiedbytheCEAunder

section 53". Perhaps this is based on thepresumption hatdispersedgeneration romnon-conventional and mini hydel setswouldbe cheaper.Theavailable datashowthat this is far from true. Co-generationpower, depending on the season, costs inthe range of Rs 2.53 and Rs 2.01/Kwh,with 5 per cent annual escalation in UP.Thefigure forMaharashtra s Rs 3.05/Kwhwith 2 per cent annual escalation. Somestates have given fartoo liberal incentivesfor non-conventional power which haveled to its high cost. The buy-back rates forwind power range between Rs 2.25 andRs 2.90/Kwh withannualescalation.8 Thetariff-setting for wind power generationinMaharashtra,with excessive concessionsgiven by the state government, has raisedmany contentious issues leading to pro-longed hearings before the MERC whosedecision in the matter is still awaited. TheGovernmentof Orissa has taken a decisionto sell off 7 mini hydel power projects inthe state. It is reported that these powerprojects are not in operation as cost ofpower from these plants is quite high atRs 4 perunit.9 Insofaras ruraldistributionis concerned, the experience of co-opera-tives is far from encouraging. Almost allof them are surviving only due to SEBssupplying power to them at highly con-cessional rates. The most shocking caseis that of Mula Pravara Cooperative So-ciety in Maharashtrawhich has defaultedon arrearsof hundreds of crores of rupeesandtheirwrite-offbyMSEB.Withsuch coststructure of even non-conventional anddispersed generation, it is evident thatagricultural ariff will haveto besubsidisedfor severalyearstocome.Inthis ight, o per-mit setting up of generation and distribu-tion projects in theruralareas without anyscrutiny of their costs will foreclose theoptions of thestategovernment inso far astakingoverof subsidyburden s concerned.A reference maybe made in this contextto the concept of cost to serve as opposedto cost of supply. Ideally, tariff for everyconsumer group should be based on thecost to serve the concerned group. Inworkingoutthe cost toserve,severalfactorssuch as the cost of generation, transmis-sionanddistribution, lusteredvsdispersedsupply, voltage at which supply is made,and whether supply is given only in off-peak hours or at all hours, will have to betaken into account. Ideally, a set-off intariff should also be provided for unreli-able and low quality supply based onfrequency and duration of power failuresandinterruptions,and low andfluctuatingvoltages. On this basis, cost to serve for

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agriculturalonsumersshouldbe muchlowerthanestimatedat present.Layingdown uniformguidelinesin this regardunder he Act and its Ruleswouldhavebeen advisable.TheAct is weakandwanting n so farasregulatorymechanismsconcered. Asbrought utearlier,whatevermaybe theexperiencen other ountries,nIndia, hesuccess of powersector reformshingescriticallyon the success of regulatorymechanism.Towardsthis end, the Actneeds o be amended s brought uthere-after.The Act shouldprovide or a clearandunambiguous aragainstreappoint-mentof anymember rchairpersonnthesameoranyother ommission.Thisshouldalso hold good for the chairperson ndmembersof the nationalappellate ribu-nal. Section113(b) i) states hata personwho"is,or hasbeen,oris qualified o be,ajudgeof a highcourt" ouldbe eligibleforappointmentn theappellate ribunal.Looking o thefact thatthis is a nationalleveltribunal nd s to decideappeals verthe decisionsof SERCs/CERC,t will bebest o delete hewords"isqualifiedobe"from hissub-section.Thepastexperiencebringsout that, to be effective, SERCsneed to be given much largerfinancialautonomy ndindependence y levy of acess on powerconsumptionn the state.No less importants theaccountabilityftheregulatorostateegislature/parliament.Towards hisend, it will be usefulif theworkingof theregulatorss reviewedbythestanding ommitteeof parliamentndtherelevant ommitteeof the statelegis-lature.A seriesof otherrecommendationsmadebythisauthor nd hePrayasGroupstudy, eferredo earliernfootnote3,needto be incorporatedn the Act.Consumer Protection

Majorprovisionspertainingo protec-tionof consumernterestsn the Act are:section57(2) whichmakes a licenseeli-able to pay compensation,or non-com-pliancewith hestandards f performance,to the personaffectedas may be deter-mined by the regulatorycommission;section64(3)whichrefers o theprocedurefor making arifforderafterconsideringall suggestionsand objectionsreceivedfrom the public;section23, which, interalia,refers o issue of directions o licens-ees forpromotingompetition;ection60regardingavoidanceof marketdomina-tion;and section61 regardinghe factorswhich are to be kept in view in tariffdetermination.Sub-section (c) thereof

refers to encouragement of competition,efficiency, economical use of resources,good performance and optimum invest-ments. Section 42(6) provides forappoint-ment of an Ombudsmanby the state com-mission. However, provisions of sections173and 174 show that thecompetition lawpassed by parliament will not be appli-cable to the power industry.This is indeedunfortunate. This law should be of con-siderable importance in protecting con-sumerinterests,particularlywith theentryof large industrial houses in this sector.Though consumer participation isrecognised as an important element inoverseeing public utilities, the Act doesnot have much to say in so far as theparticipation of NGOs, consumer groupsand civil society is concerned. This is inspite of the actions taken in this regardsofar by some of the commissions. Forexample, KERC has taken steps whichinclude appointment of a consumer advo-cate, survey of electricity consumersthroughthe office of consumer advocacy,organising workshops and trainingprogrammes for consumer organisations,issue of monthly newsletters, grievancehandling throughconsultants and so on.10The Act needs to be amended to cast astatutory responsibility on SERCs/CERCto take pro-active actions for institution-alising consumer participation and con-sumer advocacy.Section 127(6) lays down that the rateof interest ondelayed paymentswill be "16percent perannumcompounded every sixmonths". Considering the softening ofinterestratesin thecountryand theirlikelydownward trend, the rate as above seemsunreasonably high. It will also be betterif the rate of interest is fixed under theRules, rather han in the Act, so that it willbe easier to change it when necessary.The enactment of a comprehensive lawon electricity was long overdue. This taskhas now been accomplished. However, itis important to ensure that the Act doesnot remainon paperas has happened withseveral other laws in the country. In thepower sector itself, the salutary statutoryprovisions for a fixed tenure for the chair-manandROR of SEB have been observedmoreinbreach.It will beequally importantto ensure that the Act subserves its objec-tives and does not lead to more problemsthan it claims to solve. This will call forcontinuous reassessment of its underlyingstrategies in the light of implementationexperience. Aftertheunprecedentedpowerblackout on both sides of US-Canadaborder in August 2003, Governor of New

Mexico and former US Energy Secretaryis reported to have said that his countrywas a majorsuperpowerwith a thirdworldelectrical grid. The California experienceof power sector reformstoo bringsout thatthereare no ready-made answers and 'onesize fits all' approachis not the best strat-egy for a road map for reforms. 311Addressfor [email protected]

1 MadhavGodbole, 'The ElectricityBill, 2001:Needfora FreshLook',Economic ndPoliticalWeekly,May 18-24, 2002.2 Governmentof India,PlanningCommission,Annual Report(2001-02) on the Workingofthe State Electricity Boards and ElectricityDepartments,May 2002.3 Madhav Godbole, 'Electricity RegulatoryCommissions:TheJury s StillOut',Economicand Political Weekly,June 8-14, 2002, andPrayasEnergy Group,A Good BeginningbutChallenges Galore, Pune, February2003.4 TonciBakovic,BernardTenenbaum ndFionaWoolf, 'Regulationby Contract:A New Wayto Privatise Electricity Distribution?', TheWorldBankGroupand heEnergyandMiningSectorBoardDiscussionPaperNo 7, May2003.5 Karnataka lectricityRegulatoryCommission,Annual Report 2002-03, pp 131-33.6 This is also borneout by the experienceat thetime of the enactment of the ElectricityRegulatoryCommission Act. The CommonMinimum National Action Plan for Power(CMNPP),approvedby the chief ministers n1996, hadenvisagedthat within three monthsof the coming into force of the above act, allstategovernments hall constituteSERCs andthe agriculturaltariff should be fixed at aminimum of 50 paise per unit and it shouldnot be less than50 percent of thecost of supplyin threeyears.However, heseprovisionsmadein the ERC Bill had to be withdrawnafterthebill was introduced n Parliamentdue to theopposition of some stategovernments.See PAbraham,Power Sector Reforms:Focus onDistribution,Suryakumari brahamMemorialFoundation,New Delhi, 2003, pp 189-90.7 The parallelexperience of the states and thecentrepursuing ontradictory oliciesis in res-pect of the pricingof certainpetroleumpro-ducts. The objective underlying he abolitionof the administeredprice mechanismby thecentrewasto bring hepricesof theseproductsin line with international rices.Thisobjectivehas, however, been frustratedwith the statescalibrating he rateof sales tax to compensateforfall n revenueswhenreductionnthe pricesof suchproductssannounced yoilcompanies.8 Initiatives n WindPower,Power Line,Vol 7,No 7, April 2003, pp 76-77.9 Prayas Energy Group, India Power SectorReformsUpdate,Pune, ssueV,February003,p 5.10 Karnataka lectricityRegulatoryCommission,4th Annual Report 2002-03, July, 2003,pp 62-65.

4110 Economic and Political Weekly September 27, 2003

electricity act, 2003 questionable wisdom

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