The center has mooted far reaching amendments to the Electricity Act [2003] which after incorporating the comments from states [the draft was sent to them on September 7, 2018 and they have 45 days] will be taken up for consideration and approval in the winter session of the parliament. The 4 key amendments are:-
(i) capping the cross-subsidy to consumers within a distribution area to 20% immediately to be followed by complete elimination progressively within 3 years [section-61];
(ii) if a state wants to give subsidy to a particular category of consumers, the same should be given as direct benefit transfer [DBT] [section-45];
(iii) all sale/purchase of power shall be through long/medium/short-term power purchase agreements [PPAs] –– as per a format provided with central approval [section-49];
(iv) chairman and members of state electricity regulatory commission [SERC] will be selected by a committee consisting of Supreme Court [SC] serving judge, secretaries, union ministries of power and new and renewable energy, chief secretary of a state, chairpersons of central electricity regulatory commission [CERC] and central electricity authority [CEA] [section-85].
If, the amendments are carried through as intended and the relevant provisions are implemented by all stakeholders in letter and spirit, these will bring about a metaphorical change in the way power systems are run and bring to a happy end the multitude of maladies currently afflicting them.
Under the extant dispensation, the state electricity boards [SEBs]/power distribution companies [PDCs] procure power from independent power producers [IPPs] as also their own generating stations [wherever applicable] and supply it to a variety of consumers. Under diktat from their masters [read: state governments who own and control them], the SEBs/PDCs charge low tariff from farmers [in some states, this is even ‘free’] and poor households.
The tariff being a fraction of the cost [for instance, in Delhi, households with monthly consumption less than 200 units are charged Rs 1 per unit as against cost of Rs 7.4 per unit], this leads to huge under-recovery on sale to the preferred customers. To make up for this gap, industries, businesses besides households with higher load and consuming more units are charged higher tariff which may go even beyond Rs 10 per unit. The excess of this over the cost is also termed as cross-subsidy.
Even with cross-subsidy, a substantial portion of the under-recovery on sale to the preferred consumers remains uncovered. Together with large-scale technical and commercial [T&C] loss – a euphemism for power theft – these make SEBs/PDCs bleed. This affects operations at their own stations, hampers their ability to pay IPPs and sign fresh PPAs. The contagion effect goes right up to the banks who are unable to recover their loans and are saddled with mounting NPAs [non-performing assets].
In the 2000s, the union government had brokered three financial restructuring packages [FRPs] [2002/2012/2015] to bail them out. Under the FRP, the liabilities of SEBs/PDCs are taken over by the state so that they are spared the burden of servicing the debt. But, that is a short-term palliative as the generic factors behind their losses remain unaddressed.
The amendments to the Electricity Act [2003] seek to address the generic factors. The capping of cross-subsidy to 20% right-away and elimination in 3 years means that the preferred consumers would pay 80% of the cost now and 100% by 2021.
A household consuming <200 units a month in Delhi will now need to pay Rs 5.9 per unit – up from current Rs 1 per unit. In case however, chief minister, Arvind Kejriwal wants that it continues to pay @ Rs 1 per unit then his government will have to credit subsidy of Rs 4.9 per unit directly into his/her account under DBT.
Any state keen to continue with low [albeit subsidized] tariff to the preferred consumers will have to make necessary provision in the budget and ensure that the subsidy amount is transferred in advance to the account of the beneficiary. This is an absolute must to ensure that these households and farmers continue to get their quota of electricity without any disruption.
These measures together with elimination of theft will ensure that the SEBs/PDCs will be viable without having to charge the industries/businesses or higher end households any amount higher than the cost [in other words, no cross-subsidy]. Once, these distribution utilities turn financially sound, the problems facing linked entities viz. IPPs, banks etc will automatically go away.
Financially sound SEBs/PDCs will not only be able to run their own generating stations better but also negotiate better terms under the PPAs signed with IPPs [producers getting away with inflated tariff will be a thing of the past]. This should result in corresponding reduction in tariff charged from consumers..
The SEBs/PDCs have suffered in the past largely due to interference by states in their working. This should stop. They should be allowed to function as truly ‘autonomous’ entities and run ‘professionally’. They will decide tariff policies and free to sign PPAs. Whether, this can be achieved by minimizing the role of state administration in selecting members of SERC [as mooted under section-85] is debatable!
The results expected from the proposed amendments are truly revolutionary. However, the outcome will depend on the response and cooperation [or otherwise] from the states. At present, majority of the states are used to supplying electricity to farmers and households at rates almost touching zero [courtesy, their zeal to use them as vote catching machines in elections]; yet, they are unwilling to pay for resultant subsidy – citing budgetary constraints.
If, the states can shun this practice, we may move forward. On the other hand, if they continue with it [as reflected in the pronouncements of Arvind Kejriwal and his intent to mobilize other chief ministers to oppose the amendments] then, the outcome will remain highly uncertain. The reforms in power sector will remain a pipe-dream.