The Electricity (Amendment) Bill, 2022 may appear innocuous because it only seeks to amend an existing law. Yet, the amendments have such far-reaching consequences that essentially the very character of the power supply industry will be transformed radically if they are enforced. It is little wonder that electricity employees and farmers are opposing the Bill tooth and nail. Though the Bill needs to be examined in its entirety, this article will examine three critical issues.
Can power be denied to those who cannot pay?
One of the most significant changes that the amendments seek to make is giving the law the power to determine the tariff of electricity. This is unusual, particularly because the law provides for regulatory commissions that have this exact responsibility.
The Bill says:
14. In section 61 of the principal Act, for clause (g), the following clauses shall be substituted, namely:— “(g) the tariff recovers all prudent costs incurred for supply of electricity; (ga) the tariff reduces cross subsidies in the manner specified by the Appropriate Commission
and
23. In section 86 of the principal Act, in sub-section (1),—
(a) “Provided that the tariff recovers all prudent costs incurred for supply of electricity and also provide reasonable returns on investment and take necessary steps to ensure financial stability of the licensees:
In a country where almost 77% of consumers are not able to pay the cost to serve, the only purpose behind enforcing prudent costs without subsidies is to ensure the financial stability of the licensees.
The Electricity (Supply) Act, 1948 as well as the Electricity Act, 2003, recognised the conflict of interest between the viability of the electrical power system and the lack of purchasing capacity on the part of the consumers.
Section 59 (1) of the Electricity (Supply) Act 1948 stipulated that the State Electricity Boards should adjust the tariffs in such a manner that the total revenues in any year of account shall, after meeting all expenses properly chargeable to revenues, shall not have a surplus of not less than 3% of the fixed assets of the Board in service at the beginning of the year, or a higher percentage if specified by the state government.
Without exception, all state governments have violated the Electricity Act, 1948. The erstwhile Planning Commission used to publish an annual report on State Electricity Boards, where the monetary value of the violation of the law was tabulated.
A mechanical electricity meter. Photo: Mike1024 /Wikimedia Commons, Public domain
The Electricity Act 2003, sought to overcome this problem by prescribing that state governments pay in advance any subsidy to any consumer or class of consumers as may have been determined by the independent regulators.
Both these Acts placed the responsibility of ensuring the financial stability of the service provider on the state. The 2022 Bill, on the other hand, transfers the onus from the state to the individual consumer.
When the state itself was unable to abide by the law, how can an individual enforce the law, particularly when s/he has no financial means?
The Forum of Regulators (FOR) was constituted by the Union government and is responsible for the harmonisation, coordination and ensuring uniformity of approach amongst the Electricity Regulatory Commissions across the country to achieve greater regulatory certainty in the electricity sector. Analysing the 2022 Bill, it observed:
“Electricity lies in the concurrent list of the Constitution of India, thus making both the State and the Central Government responsible for the development of the sector. In view of this, the Electricity Act 2003 made a fine balance between the role and responsibilities of the State and the Central Governments. However, the proposed amendments to the Act, at several places, tend to shift this balance towards the Central Government.
Another objective of the Electricity Act 2003 was to distance the Government from process of determination of tariff. This was ensured through the establishment of Regulatory Commission at the Central and State levels, who were responsible for regulating the sector. However, through the proposed amendments, this basic premise of the Electricity Act is being diluted, as Central Government interventions have been suggested on various regulatory matters, which may create avoidable confusion in the sector. Such amendments should ideally be dropped in the interest of smooth functioning of the power sector.”
In the All India Power Engineers Federation vs Sasan Power Ltd, the Supreme Court held:
“If there is any element of public interest involved, the court steps in to thwart any waiver which may be contrary to such public interest. On the facts of this case, it is clear that the moment electricity tariff gets affected, the consumer interest comes in and public interest gets affected. This is in fact statutorily recognised by the Electricity Act in Sections 61 to 63 thereof. Under Section 61, the appropriate commission, when it specifies terms and conditions for determination of tariff, is to be guided inter alia by the safeguarding of the consumer interest and the recovery of the cost of electricity in a reasonable manner. For this purpose, factors that encourage competition, efficiency and good performance are also to be heeded.”
The 14th report of the Parliament Standing Committee on Energy recorded:
“Electricity amendment Bill 2005” stated, “Committee notes that due to imbalances in the regional economic development in the country and large number of consumers who have no payment capacity in a number of states. In order to provide them power at affordable tariffs minimum support through an initial subsidy in respect of power tariff is necessary. Most of the states are unable to provide a subsidy from their exchequer.”
Obviously, the framers of the law do not care for such counsel. At the operational level, this obsession to realise the prudent costs plus a reasonable rate of return is to be enforced through pre-paid meters, which can abruptly stop supply. In October 2015, riots erupted in South Africa’s Soweto over the government installing pre-paid meters without the consent of the community.
Earlier drafts of the Bill proposed setting up an Electricity Contract Enforcement Authority. Due to strong opposition, this proposal was dropped in the present Bill. The 2022 Bill requires the load dispatch centres, whose purpose is to regulate the flow of electricity in intervals of 15 minutes, to dispatch electricity only after verifying that the generators have been paid by the DISCOMS. A rather impractical idea that would ultimately affect the consumers with power cuts and blackouts.
The most affected sector on account of this Bill would the agriculture sector. Should the law not ensure the financial stability of the farmer and food security for the nation? Can the world’s most populous nation not give the highest priority to this concern? Let us take the example of Haryana. In FY 2014-15, 72% of the groundwater was extracted by electrical pump sets and 46% of the total subsidies for agriculture were for electricity. What would be the consequence of a law that prescribes the abolition of subsidies?
To grow grains, water is required which is pumped through the use of electricity which is subsided. Therefore, grain has an embedded subsidy. In 15 years, between 2002-17 Punjab gave the central pool, 290 million tonnes of paddy and wheat, utilising over 450 trillion litres of irrigation water requiring agricultural power subsidy worth Rs 25,000 crore. In return, Punjab did not get any subsidy from the Union government. Should the government of India not pay subsidies for the grain it procures from Punjab for the public distribution system and other Central sector schemes?
In the matter of subsidies, it is important to learn from recent events. Due to the sanctions that followed the Ukraine war, the cost of electricity in European countries has skyrocketed. For example, in Italy the electricity tariff has increased by 350% in the one year before October this year. In the UK, there has been an increase of almost 250%. These governments are providing huge subsidies to support the consumers.
Why is the Modi government so unconcerned with consumer interest? It is determined to even deny electricity to a majority of the people in order to protect the interests of the investors. The government refuses to accept that the people’s inability to pay for an essential commodity cannot be resolved through legislative and administrative measures. This ideological obsession is embedded in the slogan “One nation, One grid, One frequency, One price”. This is to be enforced through a national market-based Economic Dispatch Centre – a mechanism that envisages centralised scheduling for dispatching the entire yearly consumption of electricity of around 1,400 billion units!
A woman walks under high-tension power lines leading from a Tata Power sub station in Mumbai’s suburbs February 10, 2013. Photo: Reuters/Vivek Prakash/File Photo
Can competition improve efficiency and reduce tariffs?
The obvious question is to ask if competition is possible within the electrical power supply industry. The Électricité de France SA, popularly known as the EDF and a French utility company, said in a debate with the World Bank:
“Modern economic theory tells us that competition is more difficult to introduce in network infrastructure than in other industries, and more difficult in electricity that in other networks. We also know that competition does not streamline regulation but makes it on the contrary more complex and burdensome. Introducing competition creates a ‘half-free, half slave’ sector…. Marginally, the idea beyond our discussion about privatisation and competition may be to open the power sector of developing countries to foreign operators, expertise and capital….”
On July 19, 2022, France announced its plans to fully nationalise EDF. France said the nationalisation of the EDF will increase the security of its energy reserves.
Also Read: ‘Continuing Assault on India’s Federal Structure’: People’s Commission on Electricity Bill
Is competition possible in India?
On the purchase side, in FY20 the cost of generation and transmission (that is outside the control of the DISCOMS) constitutes about 77% of the cost to serve the final consumer. It is much higher in some states. Even when no power is consumed, the Power Purchase Agreements (PPAs) require that fixed costs amounting to thousands of crores have to be paid. In other words, almost 80% of the cost to serve is outside the control of DISCOMS. How then can multiple licensees provide competition that would reduce costs when they control only 20% of the cost to serve?
On the sale side, while the average cost of supply was around Rs 7.45 per unit, the average tariff charged to agricultural consumers has decreased on average nationally from 0.79 in FY16 to 0.75 in FY20. Commercial consumers paid, on average 12% over the normal. But the quantum of sales was very low for any significant recovery of cross-subsidy. There is constant pressure on DISCOMS to retain consumers by reducing cross-subsidy in order to prevent them from moving towards open access and captive sources. Multiple licensees would only deepen the crisis.
The benefits of competition are touted through a comparison with the telecom sector. Besides the fact that mobile services are wireless and electricity is a wired system, every consumer of mobile services – rich or poor – pays the same rate per call, at a rate that is above the cost to serve. Even after wilfully and completely destroying the public sector competitor, the BSNL, the government’s reforms have only succeeded in essentially establishing an inefficient oligopoly.
On granting a licence to multiple licensees the Bill provides:
6. Provided further that if the Appropriate Commission fails to grant the licence or reject the application, as the case may be, within the time so provided, the applicant shall be deemed to have been granted the licence.
The Bill also provides the Central Electricity Regulatory Commission the powers to grant licences for distributing electricity in more than one state.
The grant of a licence is independent of the purview of the state government since any potential licensee can apply for entry into several states and get the licence from the Central regulator. Similarly, ensure delays in the grant of licence and get it by default. The grant of licence is almost automatic without any parameters.
The Standing Committee on Energy in the matter of multiple licences rightly observed:
“Some well-defined parameters should be laid down so as to allay the discretionary and arbitrary powers of the commission. This becomes all the more necessary given the nature of consumer mix in our country. The norms to be laid down should envision equal apportionment of consumers for the purpose of supply of electricity taking into consideration the status of consumers, direct and cross-subsidy being paid to them and also the losses of a technical and commercial nature. This will help in dispelling the apprehension about cherry-picking of consumers by supply licensees.”
Experience with the privatisation of distribution has so far been a total failure. In almost all the cities where privatisation was attempted – Gaya, Samastipur and Bhagalpur in Bihar, Kanpur in Uttar Pradesh, Gwalior, Sagar and Ujjain in Madhya Pradesh, Aurangabad and Jalgaon in Maharashtra, Ranchi and Jamshedpur in Jharkhand – the regulatory commissions were compelled to cancel the franchise.
Having failed twice, the government of Odisha privatised the DISCOMS for the third time in 2020. The Odisha government must explain why the earlier attempts failed and on what basis is the privatisation being attempted a third time. What are the lessons of failure? What has been the experience of multiple licences in Mumbai, which is a high-density and high-revenue distribution area? What has been witnessed is multiple litigations and tariff increases in Mumbai.
Experience across the world
After examining 17 studies looking at total factor productivity and 10 studies looking at profitability, a 2009 World Bank review of privatisations in former communist (transition) countries in Central and Eastern Europe, the former Soviet Union, and also in China concluded, “The most important policy implication of our survey is that privatisation per se does not guarantee improved performance.”
The belief that the private sector is always more efficient than the public sector is disproved by empirical evidence in a global study in 1995, which compared dozens of public and private electricity operators all over the world, and found no significant systematic difference between public and private service providers in terms of efficiency.
Experience in the United Kingdom
Detailed studies of the privatisation of electricity in the UK have also arrived at similar conclusions. It said privatisation “per se has no visible impact” and there is not sufficient statistical “macro or micro evidence that output, labour, capital and TFP productivity in the UK increased substantially as a consequence of ownership change and privatisation compared to the long-term trend”.
This objective universal coverage was achieved in the UK long before privatisation at the end of the 1980s. In India, the government of India itself claims that every village has been electrified. The question is would the private suppliers maintain universal coverage? The experience of the UK has been that private suppliers have no incentive to support customers who find it hardest to pay. Although few are cut off by the companies, many are forced onto pre-paid meters so that customers often effectively cut themselves off if they are unable to feed the meter.
In the UK, the real price of electricity has increased by 67% since the year 2000, and the pre-tax price of electricity for residential consumers is the highest in the EU.
Finally, a report by Corporate Watch in 2015 calculated that the annual savings from bringing the energy, water and rail sectors into public ownership could be £6.5 billion (Rs 6,26,940 crores, at the current exchange rate) – equivalent to £248 (Rs 23,920) each year for every household in the UK. It is only a matter of time before these sectors are nationalised in the UK.
So where is the basis for the assertion made by the government of India that privatisation is being done to improve efficiency?
File photo of protesting electricity department employees. Photo: Twitter/ HarmeetHstudio
Profits without investment?
Section 42 of the 2022 Bill says that it shall be the duty of all distribution licensees to
(a) ensure an efficient, co-ordinated and economic distribution system in their area of supply:
Provided that a distribution licensee may use the distribution systems of other licensees in the area of supply for supplying power through the system of non-discriminatory open access;
(b) give non-discriminatory open access to other distribution licensees on payment of wheeling charges; and ….
Without making any investment, private licensees would be able to use the vast network built over the last 70 years by paying wheeling charges that would not even ensure recovery of interest on the investment. Would DISCOMS continue to carry the interest on the books, while enabling others to use their network on the basis of wheeling charges? The Bill provides that the regulators would set the maximum tariff. The maximum tariff would set the ceiling on the wheeling charges. Most networks have high technical losses due to a lack of investment in modernising the system. Whose responsibility would it be to ensure maintenance and modernisation of the existing network and provide for future development, as the load density increases?
What is also not clear is how the PPA be shared amongst the licensees. As explained earlier, DISCOMS, under the two-part tariffs, pay thousands of crores of rupees as fixed charges even when they do not draw a single unit.
Also Read: Diving Into the Privatisation Push in India’s Power Sector
Conclusion
Considering that private entities function necessarily with the objective of profit maximisation, they prefer to cherry-pick the more remunerative groups of consumers and ignore the interests of the disadvantaged sections that 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-around economic development. What will obviously happen is the privatisation of profits and socialisation of losses. Another major casualty would be comprehensive planning of investment – essential for a spatial and socially diverse society. This is particularly vital in the electricity sector since investment must precede demand as electricity can only be generated when consumed and vice versa.
The Electricity Amendment Bill, 2022 has a unidimensional concern, that of the private investor. Consequently, consumers like farmers and employees and engineers are opposing it. Even if enacted, resistance may prevent its enforcement like in the case of the three farm laws. That would strand the vital infrastructure. But are the Parliament and the government ready to listen?
K. Ashok Rao is patron, All India Power Engineers Forum. He can be reached at kashokrao@gmail.com.
