A new legislative framework for electricity generation and supply (and why it’s no big deal, yet)
By Accountability India Staff, 27 Jul 2014

From the late nineties onwards, States began to use the concurrent powers bestowed to them under the Constitution to deal with the power sector, to enact laws for power sector reforms. These amendments freed up generation for the private sector, unbundled the monolithic electricity boards into separate entities for power generation, transmission and distribution and constituted electricity Regulatory Commissions, which would set tariffs and standards for generation and distribution.

 In 2003, the Government of India replaced the nearly century old Electricity Act and the post-Independence Electricity Supply Act, with a new legislation; the Electricity Act.

The Act attempted to do everything that reforms pundits were seeking. In my previous blog I had described how, no sooner than the idea of unbundling and privatization of the electricity sector was being considered, than the new idea of a competitive energy market emerged on the horizon. The Act enabled both to happen, simultaneously.

 

A decade after these institutional reforms, nothing much has changed for the individual consumer. Large swathes of rural areas have wires strung up everywhere, but suffer from grievous power cuts.

 

At the outset, the 2003 Act mandated that the government would bring out a power sector policy and tariff plan from time to time, that would lay out its more detailed road map for power sector reforms. Acting in furtherance of the unbundling and privatization idea, it de-licenced generation and by virtue of that step, it extended a new liberalized regime for setting up power generation plants to those States as well, which had not enacted power sector reforms laws. Hydro power plants, given that their construction and operation would affect other public uses of water, were still mildly regulated; they had to be cleared by the Central Electricity Authority. During the long years of power shortage, captive generation of power had also emerged as a significant contributed to power supply; so that activity was also delicenced.

The Act did not de-licence transmission or distribution; though it did create an important window for de-licencing. In a ‘back to the future’ decision, it envisaged that the Central Electricity Authority could exempt any ‘local authority, Panchayat Institution, users association, co-operative societies, nongovernmental organizations, or franchisees from the necessity of obtaining a licence for distribution’. The clubbing together of such entities of varying descriptions into an exempt category is indeed interesting. While the exception carved out in favour of Panchayats and local authorities makes sense – the Constitution envisages that Panchayats can be entrusted the task of power distribution – with respect to private institutions, there is a strong bias in favour of delicencing of those entities that are not organised as limited liability companies.

In furtherance of the idea of creating a competitive energy market, the 2003 Act defined a new entity that could be licenced for operation, namely, the ‘electricity trader’, who could buy and sell electricity over the wires, linking generation entities with consumers. In order to enable such contracts to function, it mandated that the wires would be open to free access. Envisaging an era where there would be simultaneous transfer of power from generation companies to unbundled distribution entities, as well as power trading contracts entered into by power traders being implemented, the Act envisaged that three levels of ‘Load Dispatch Centres’ at the National, Regional and State levels, would act as traffic policemen, ensuring that power would be released and drawn from the grid in accordance with the plethora of arrangements that were enabled by the Act.

So, for all practical purposes, the law served the larger ideas of slicing large unwieldy monoliths into smaller and more efficient entities, and of creating an energy market. Yet, a decade after these institutional reforms, nothing much has changed for the individual consumer. Large swathes of rural areas have wires strung up everywhere, but suffer from grievous power cuts.

Why did these reforms not lead us to the promised land of abundant power? Blame it on the familiar tendency to keep things as they are, even as far reaching changes are promised.

Game theories relating to corruption describe how vested interests can stymie the best laid out plans for reducing corruption, by not seeming to oppose them at all, but playing along and destroying the essence of what reforms hope to achieve, from within the system. Those theories can easily be applied to the larger issue of institutional reforms as well.

 

The biggest impediment was the fact that many consumers for power did not pay and the government did not have the guts to seek the imposition of higher tariffs for them.

 

The idea of unbundling Electricity Boards into smaller transmission and distribution entities was greeted with enthusiasm. For one thing, there would be more jobs for the boys and girls; more Chief Engineers and IAS officers could occupy the jobs of Managing Directors of these entities. More board positions were available for distribution to political interests too; so political parties were quite happy. However, physical unbundling did not result in accounting separation straight away.Most of these entities were in reality protected and supported by the larger transmission monopoly, which was the remnant of the core of the earlier Electricity Board. Systemically, therefore, a soft budget constraint applied across all these entities. No pressure developed upon an electricity distribution company to collect tariffs, because there was no pressure for it to pay the generator. The same financial latitude that was expected to be eliminated from the system continued as before.

The delicencing of generation did not do much for the sector either. Even though companies aspiring to set up generation stations did not have to obtain licences under the Electricity Act, they still had to run an obstacle race of obtaining other clearances; for obtaining land, importing machinery, linking up to the grid and for its environmental mitigation measures. The biggest impediment was the fact that many consumers for power did not pay and the government did not have the guts to seek the imposition of higher tariffs for them. For these reasons, the rush of entrepreneurs expected to crowd into the generation sector, did not happen.

What about electricity traders and the entry of local authorities and Panchayats into the electricity generation and distribution business? That did not happen, either.

Yet, we might be on the threshold of a huge revolution in the power sector. More about that in my next week’s blog.


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