ELECTRICITY BILL, 2001-Presentation to M

ELECTRICITY BILL, 2001- by S L Rao for EPW

This Bill has been under discussion for almost three years. It was intended to enable a major restructuring of the electricity system in India. It has gone through over ten drafts and has been widely discussed and debated all over the country. It has many weaknesses, the principal one being the lack of compulsion on states to improve their systems. But the central government has through the Accelerated Power Development Programme (APDP) also introduced measures to use its financial clout, ability to invest through central government owned power undertakings (NTPN, NHPC, NPC, NLC, REC, PFC, etc) and a system of incentives, to tempt states to take necessary and desirable actions. It would have been better if government had amended the existing three Acts relating to electricity three years ago and introduced essential changes, leaving an omnibus legislation like the present Bill to evolve over time. In the event, the changes have not happened and the Bill has yet to be passed. It needs to be cleared speedily. This is despite its many shortcomings. Those can be addressed through later amendments after the Bill is passed. Format of Paper: This paper is divided into the following sections. I Major issues in Electricity Sector for resolution II Available Approaches III Principal changes to existing laws in New Bill IV An assessment I Major Issues The major issues that need to be addressed are categorized below in relation to the principal players in the electricity sector. Not all these issues are directly or indirectly addressed in the Bill. 1) Central Government-  Lack of consensus among political parties and lack of consistency in approach: Electricity is not a subject to which political parties in India have paid much attention except to create public opinion when out of office that it should be priced so that farmers and the poor benefit at the expense of industry and commerce. State governments have created a system of subsidies and cross-subsidies. It has brought state government finances to the brink of disaster. Subsidies are not fully reimbursed by most States. Electricity distribution companies (mostly State electricity Boards or corporations) therefore have rising outstanding amounts remaining unpaid to suppliers of fuels, electricity, equipment, etc. Provident Fund dues remain unfounded and are a disincentive to any prospective buyer of these state government owned enterprises. Cross-subsidies have made electricity very expensive for railways, industries and commercial establishments. Irrational pricing has led to the anomaly that the largest and best paying consumers are charged the highest tariffs.  Concurrent nature of subject under the Constitution has made it difficult to pursue agreed policies: Till 1998, tariffs of central government owned electricity companies were set by the central government. This has worked to the disadvantage of their buyers, the state owned electricity enterprises. State governments have pursued populist policies in electricity tariffs. State ownership has led to commercial and industrial indiscipline in these enterprises. Theft with collusion of their employees is rampant. Investment in maintenance and equipment is minimal. A substantial part of consumption is not metered, not billed and payments not collected. Quality and availability are abysmal in moat of the country.  Large unpaid dues of central government owned undertakings: These have been recently addressed by attempts at securitizing these dues. Not all States have signed up. Those that have have committed to improve viability of their electricity enterprises within specified periods. If they do not do so, they stand to lose various incentives from the central government. But it will lead to further accumulation of such unpaid amounts.  Electricity shortages and tariffs coming in the way of industrial growth and economic competitiveness: Energy intensive industries like Ferro-alloys and arc furnaces are shutting down over the country because of the high cost of electricity. A large customer, the Railways, is entering into arrangements to generate power for its own use. The captive generation capacity with industry without counting commercial establishments, small enterprises and homes, is estimated to be around 25% of the formal installed capacity for generating electricity. The stepchild treatment given by state governments to such investment in captive capacity has led to high wheeling charges for them, difficulties in getting permission to set up such capacities and inability to sell unused capacity except at low prices to state electricity enterprises.  Poor global image due to poor electricity quality and availability: Foreign investors are put off by the perennial shortages of electricity, frequent blackouts, high variations in frequency and voltage, as well as the corruption that they are subjected to.  Well-grounded suspicion that central government has favoured cpsu’s at cost of state entities: There are studies that show that bought out electricity, almost entirely from central government owned electricity undertakings account for the highest increase in the cost of state owned electricity enterprises. 2) State Governments-  Electricity sector financial deficits are the major and growing component of state government deficits: A rough calculation shows that in 2001-2002, 55% of the revenue deficits of state governments were made up of deficits on account of electricity. The figure increases each year.  State governments are short of resources to pay subsidies, invest on maintenance, modernization and capacity expansion in power  Lack of investments in SEB’s affects quality of power; Capacitors are not installed, adversely affecting the voltage. Meters are not installed or are non- functioning, allowing large quantities of electricity to be consumed without payment. Low voltage lines carry excessive loads over long distances to meet populist promises by politicians of universal rural electrification, leading to frequent and long blackouts especially in rural areas.  Poor private interest in investment in electricity generation and distribution is a result of large accumulated losses, liabilities and poor performance of state enterprises in power  SEB’s purchase electricity from cpsu’s on cost-plus basis. But efficiency gains remain with the suppliers despite all costs being passed through to the buyers.  Subsidies--no measurement, no limits. Farmers do not have a financial or quantity limit placed on their subsidized supplies of electricity.  Little money for maintenance: Frequent breakdowns are the result. Massive cannibalization of equipment is common. Equipment is worked till it breaks down and is then replaced with new or jury-rugged equipment.  Overstaffing and indiscipline: Thefts, under billing and non-billing, and other such ills in the system are it is agreed, in collusion with electricity employees, many times in connivance with management and other parties in governments.  Inefficiencies and collusion in connections, metering, billing and collection lead to rising electricity usage with static collections of payments.  Leadership of most state electricity enterprises is by IAS officers as Chairmen. They have little management or professional qualifications, are frequently transferred, and consequently lack accountability.  Mindsets are administrative, not commercial as has been studied by independent researchers. Procedure and paperwork to satisfy administrative rules take precedence over availability, efficiency and quality of electricity.  Inefficiencies in routine management tasks 3) Investors-  SEB’s run huge deficits that deter prospective investors  Accounts of SEB’s are not up to date, there are no asset registers, liabilities are not fully known, there are huge outstanding payments and large receivables, while subsidies not reimbursed by State governments.  Efficiency data on distribution is not available. As a result, regulators set tariffs for each year with consequent uncertainty to prospective investors. In addition, performance based ratemaking is not possible, since improvement targets are not based on reliable past performance data. Unreliable technical and financial data leads to tariff changes being delayed with adverse impact on finances.  Restrictions on captive generation are anomalous in a situation where new capacity additions are constrained by shortage of funds.  Access to transmission for private generators is uncertain and puts off many investors.  Load Despatch is not a neutral function and is left with SEB’s for intra- state transmission despite their conflict of interest as buyers from other electricity producers. This is also the case with inter-state transmission, which is a monopoly of Power Grid; a central government owned company and that has effectively prevented private investment in this area despite the Act having been amended in 1998 to enable such investment.  Similarly Power Grid, a cpsu is in overall charge of Regional Load Despatch Centres thus raising doubts about the neutrality of the load dispatch function, an essential pre-condition for successful trading in electricity.  Private independent power producers have made unreasonable demands, of which Enron-Dhabhol is a good example. This is possible because of the weaknesses of state owned electricity enterprises. 4) Consumers- a. Highly differentiated tariffs to different groups varying from zero for farmers in some States to over Rs. 5.50 per unit in others for Railways and industrial consumers. b. Thefts, weak laws, poor enforcement and little punishment c. Poor quality-availability, frequency and voltage d. Many studies have established that the most subsidized customers. The farmers are willing to pay more for better quality and improved availability of electricity. 5) Mindsets (in SEB’s)- e. No commercial culture or accountability f. No professional management-only engineers and administrators g. Procedure and paper rule over results 6) Independent Regulation h. Appointments of Members-The 1998 Electricity Regulatory Commissions Act lays down a timetable for search, selection, appointment and taking office of Chairmen and Members. Neither the central and state governments have followed these provisions in practice. For instance, the appointment of Chairman, TNERC was delayed by over three years, and the second Chairman of CERC was appointment over 15 months after the first one demitted office. There should be accountability of government functionaries to adhere to a timetable laid down by law. i. Membership and Staff dominated by government and ex-government career officers because of the government limits on wages. Consequently, staff from government owned enterprises and departments mostly staffs Regulatory Commissions, bringing in the same culture of administration and procedure rather than innovative and imaginative ways of tackling the issues. j. Non-compliance of orders of regulatory commissions is a common feature at both central and state levels. Since governments own over 95% of electricity capacity and almost all of distribution, and the enterprises have the ear of the governments, they are encouraged to defy, frequently appeal to the Courts, and sometimes instructed not to comply with regulatory orders. This has occurred both at the Centre and in the States. k. Judicial decisions are delayed in appeal because of the technical complexity of many of the issues. l. Low salaries deter qualified professionals from joining Regulatory Commissions which need to develop inter-disciplinary approaches and must be staff by professional managers, economists, lawyers, chartered accountants, cost accountants and industrial and power engineers. m. CERC-SERC relationships are not provided for in the present legislation. There is no formal coordination between them and with each other. This has resulted in inconsistent decisions around the country, 7) Accountability of Regulators n. Presently, all orders are subject to review by Commissions and appeal to the High Courts. In addition the media keeps an eye on the orders of the Regulators, as also public opinion through consumer groups who are encouraged by some Commissions to take an interest. o. Orders of Regulatory Commissions are placed on the tables of Legislatures for their information and in case they desire amendments, but legislatures have not so far whether at the Centre or States, demonstrated interest. p. Governments can issue Tariff Policy and Policy Directives to Regulatory Commissions. Such an unfettered government right leaves much scope for excessive restrictions by bureaucrats and the possibility that their aversion to change might stall necessary changes. In any case government policy is spelt out in the Laws. Any policy direction would dilute the independence of Commissions that in any case are mandated to function in a transparent and consultative manner. q. One possibility is that these Regulators could be made accountable to Committees of the Legislatures. Public hearings might be held by these Committees though it must be ensured that the Commissions (who are quasi- judicial bodies) are not required to explain or change their orders since that is possible through appeals in Courts. II Available Approaches: Different approaches to electricity reform have been developed. They have all floundered on the rock of the present financial unviability of the state electricity sectors. The principal approaches are: 1) By World Bank as in Orissa- This blueprint that was pushed for many years required the unbundling of generation, transmission and distribution into separate enterprises, then their corporatization, followed by their privatization. However, what was not done was an adequate preparation in advance in terms of gathering reliable performance data, establishing consumption by different consumer categories, assessing quality of supply lines, full metering, establishing the extent of subsidies required to be given to vulnerable groups and reimbursed by the government, training to staff and change in mindsets, strong law and order support against thefts and collusion, setting aside accumulated actual and potential (e.g. unfunded provident fund dues) liabilities, guarantees on subsidy reimbursement, controlling politicized agitations against tariffs determined by independent regulators, developing a political and public consensus, and establishing the independent regulation of tariffs. 2) Kerala model- the communist government proposed this. It intended to retain the integrated state utility as it was but to distance government from its management However, no government has yet shown an ability to implement this model in India in the last fifty years and it is very unlikely to be able to do it now. 3) Gujarat model-This was proposed to have integrated utilities but in much smaller geographical areas than statewide as at present. This model like the previous one is still to be implemented. It will result in local monopolies and there is need for high quality independent regulation to prevent exploitation of consumers. One possibility is to make each such small utility responsible to the local authorities rather than keep them under state government direct control. But in the context of such a model not having worked at the State level for so many years where there is available a larger pool of competent officers, it appears unlikely to succeed and it would be an excessive risk to undertake this experiment in the present messy situation 4) Desirable Approach: This approach takes into consideration the experiences and observations of the last few years. It will  Unbundle operations where it can be done;  Privatize all entities, even well run ones to the extent possible for raising more resources,  Encourage all possible generation investments, whether for captive use or for merchanting,  Stimulate transmission investment,  Separate distribution wires from supplies,  Allow open access,  Put a cap on subsidies in terms of entitlements,  Avoid loading subsidies for one set of consumers on to the tariffs of others,  Make LDC a neutral function,  Encourage trading,  Let the Regulator set out detailed rules for long term contracts, spot purchases, trading and markets,  Isolate low cost power for rural consumers,  Give entitlement stamps instead of open ended subsidies to poor and favoured consumer groups  Establish strong and reliable baseline performance data, both technical and financial,  Improve discipline and honesty among staff  Make management more professional  And introduce training to change mindsets to commercial attitudes among all employees. 1II Principal Changes In Electricity Bill, 2001 (Relevant numbers of the Sections in the Bill are given in brackets). 1. Definitions: This Act specifically recognizes many activities that earlier were subsumed under generation of electricity so long as that was specified in the company’s memorandum of association. It therefore defines, captive generation, cogeneration, electricity trader and trading. It recognizes specifically many other concepts that were not defined earlier: area of supply, conservation, Grid Code, National Load Despatch Centre, open access, and stand alone system. It defines the Appellate Tribunal and the Regional Power Committee replaces the earlier Regional Electricity Board. It enables easier trading between parties. 2. Unlike in the earlier Acts there is no stipulation that the Central Commission ‘shall’ aid and advise the central government in the preparation of a national tariff policy as part of a national power policy. This keeps out a neutral body like the Regulatory Commission, working transparently, from being asked to recommend on major reform measures after public consultations. {3(1)} 3. The Act gives freedom to ‘construct, maintain and operate’ captive generation plants and dedicated transmission lines. In a time of shortages of electricity and investment in additions to new capacity, this ensures that at least those who are in need will alleviate it by this means, though it does take away good customers from the distribution companies and SEB’s. There needs to be specific permission to captive generators to sell surplus power directly to customers so that the surplus power that is available at times, is used. {4(1)} 4. The Bill provides for open access to captive generation plants to the destinations of their use subject to availability of adequate transmission facility as determined by the central or state transmission utilities as applicable. Open access is essential if power is to move easily from where it is available to where it is needed. {4(2)} 5. For the first time in India there is recognition of the activity of trading in electricity. A license is required for the purpose and will be issued by the appropriate electricity regulatory commission. {2, 14} 6. Sections 20 to 22 lay out detailed provisions relating to the sale and acquisition of a utility. This may help in avoiding the situations as occurred in Orissa when liabilities were left with the residual company while government took away the proceeds from the sale of the distribution circles. 7. Regarding inter state transmission the Bill provides for the establishment of a national load dispatch centre for optimum scheduling and dispatch by the regional load dispatch centres. This is welcome. {26}. 8. Section 27(2) says that the RLDC is to be operated by a government company and later this also is applied to the SLDC. This is unfortunate since the load dispatch function should be a neutral one in which none of the commercial parties in the power system should have a say by themselves. With so much of the distribution in the hands of the SEB’s there should have been a specific provision to ensure their separation. In other countries the load dispatch function is with an ISO, an independent service operator, who also operates the electricity market under the Regulator. In many cases the ownership of these Centres is with a collective of all the users. 9. A new provision is that the concerned governments can issue directions to RLDC/SLDC’s for smooth, stable transmission and supply of electricity to any region or state. This provision could create conflict with the Regulators since the functions of regulating inter-state and intra-state transmission are with the CERC and SERC’s. {37}. 10. Section 38 states that the central and state transmission utilities are to undertake transmission and coordinate inter and intra state transmission respectively. They are not to engage in trading. They are to function as transmission licensees and the companies performing these functions are to be deemed as such. Section 40 specifies that transmission licensees are to comply with the directions of the RLDC/SLDC. It would be better if this relationship of the ctu/stu’s to rldc/sldc’s were to be more specifically stated. This is important since under the present law (Section 55 of E.S. Act, 1948) the ctu/stu are to operate the rldc’s and sldc’s respectively. There must be no ambiguity that the rldc/sldc will now oversee the functioning of the whole transmission system, including the ctu/stu, a vital element in proper load dispatch. 11. A new provision is that there will be a surcharge for non-discriminatory open access, which will be used to fund cross-subsidies and is to be overseen by the concerned Commission. It is a pity that cross-subsidies are thus again being introduced. Cross-subsidies tend to balloon and it becomes difficult to keep them in balance, so that they ultimately end up as subsidies remaining unpaid to the operators. {38, 39} 12. Section 42(3) permits a SERC to allow consumers to get supplies from other than the distribution licensee for the area. But the consumer has to pay an additional surcharge over the wheeling charge to meet the fixed costs of the distribution licensee. Thus for the first time, the present SEB veto over consumers being supplied by any other than the distributor for the area is removed. Section 49 reinforces this by allowing consumers who have been allowed open access by the SERC to enter into agreement with anyone for supply or purchase of electricity. However, Section 42 gives implicit recognition of the right to a veto to the distributor (most times the SEB) with the provision for the payment of a surcharge to the licensee to meet his fixed costs. There must be no limits on the free purchase and sale of electricity between parties. This introduction of competition to SEB’s is vital if they are to improve performance and the consumer is to benefit. 13. Another element that should have been introduced is to make a distinction between the wires part of distribution from the supply of electricity. Each should be licensed separately. This would enable many small local suppliers (cable television operators, newspaper distributors, milk distributors, etc) to supply electricity in limited localities, without the need for the huge investments if they were to take over the wires, for which as mere suppliers, they can pay rent. Thus many bidders can emerge for supply circles than do now for distribution circles when they are offered for sale. 14. Section 45 (2) (a) provides that the tariffs of the distribution licensee shall be in accordance with “methods, and principles as may be fixed by the concerned SERC”. Methods, principles, etc, are defined in the dictionary as part of ‘regulation’ and elsewhere in the bill these actions are part of the tariff responsibilities of the CERC. This section thus suggests that the SERC will now ‘regulate’ distribution tariffs and not as at present, only ‘determine’ them. There could be a conflict here with Section 61, which says that the SERC’s will be guided by principles and methodologies specified by the CERC for generation and transmission. The clause needs to be amended. 15. There is just one Section 52, which asks SERC’s to specify requirements for traders licensed by them-technical, capital adequacy and credit (52-1). However, trading in electricity requires elaborate regulation and rules. These should be common for the whole country and must be laid down by the CERC. There is no mention of these aspects in the Bill and must be mentioned. 16. Section 53 lays down a limit of two years from an appointed date after which supply can be made only through meters. This is an excellent provision. However there is no mention of any consequences if the distribution licensee does not implement it. 17. Section 56(1) for the first time in electricity legislation deals with non-payment to licensee or generating company in respect of supply, transmission or distribution or wheeling and permits the cutting off of supply up to within two years from the due date for payment. It is now for the regulatory commissions to lay down the rules under which this can be done without disrupting the system. 18. Section 57 imposes penalties for failure in meeting standards of quality laid down by the Commission after due hearing. TARIFFS 19. The SERC’s are to be guided by principles/methodologies specified by CERC for generation and transmission. This is a long overdue provision since the earlier legislation made no provision for coordination and consistency between different parts of the country. Electricity in the same country should be priced on the same basic principles so that investors do not get confused. Principles used by the CERC for the companies in its jurisdiction must apply to others under the jurisdiction of SERC’s as well. {61 (a)} 20. Section 61(h) also wants cross subsidies to be progressively reduced and eliminated. This is a general statement with no penalties or timetable. Section 61(i) encourages co-generation and generation from renewables. Regulators must use this provision intelligently in tariff fixation to promote their use. 21. Section 62(3) introduces the idea of differential tariffs between consumers on tariffs on factors such as consumer load, power factor, voltage, total consumption of electricity, time of day, geographic position, nature of supply and the purpose for which supply is required. But this section does not lay down the principle of multi-year tariffs, which is said to be desired by investors to ensure predictability and as being essential to satisfy lenders about financial projections. However, Section 62(4) forbids the determination of tariffs more than once a year, except under exceptional and laid-down circumstances. 22. Section 65 requires state governments to pay subsidy amounts in advance, but has no consequences to them if they fail to do so. 23. The appropriate SERC under Section 65 is to promote the development of a market (including trading) in such manner as may be specified. This appears to be merely an enabling provision and their development needs much more elaboration. Since trading will be both inter and intra state, CERC must be given specific authority to lay down the detailed and stringent rules for trading and markets. In the case of electricity this could run into a large number since many issues have to be resolved. The use of up to date information technology will also be vital. We need to learn from the experiences of the U.K. and elsewhere on the development of electricity trading and markets. REGULATORY COMMISSIONS 24. Section 76(5,6) continues the provision in the ERC Act, 1998, of having Chairman, CEA as ex-officio member. While this may be useful in terms of coordination between the two agencies, it is highly impractical. The Chairman, CEA, has a major job to do and has not had the time in past years to participate in the deliberations of the Commission in an effective way, nor to attend complicated hearings running over days and weeks. The Bill does not face up to the question as to why there must be two regulatory bodies, the CEA and CERC. 25. The need for two separate bodies in electricity, both with statutory powers, requires reexamination. The regulatory roles of CEA and CERC can be combined and the technical advisory role to government of the CEA could be extended to the state governments as well, with CEA offices in the States. In this way the expertise of the CEA could be made available to all governments, and the private sector as well. Any possible conflict of jurisdictions between the two can thus be obviated. More importantly, there will be a single regulatory body that is responsible for technical and commercial aspects of electricity. 26. Section 78(1,2,3,4) prescribes a Selection Committee for searching for members of commissions. It packs the committee with people who are or have been in government. There is not one outsider from consumer groups or specialist professional bodies or representatives from private sector. It needs also to specifically bar the members of search committees from themselves being selected. 27. Section 78 (5,6,7,8,9) gives a timetable for appointments to start and be completed. These provisions are the same as in the earlier Act, and have never except at the outset, been followed. The Bill needs to prescribe consequences for not following the law. Perhaps there should at the least be a report on the table of the house when the date schedule has passed and the appointments are not made and suitable explanations must be provided to the Legislature. It would be preferable for the consequences of non-compliance to be stronger. 28. Section 79, which lists the functions for CERC and in later sections for SERC’s, is more complete than in the earlier Act. It adds the Grid Code, specifying and enforcing standards with respect to quality, continuity and reliability of service by licensees. 29. Section 79(2) says that CERC ‘may’ advise the central government on the national electricity policy, tariff policy, promotion of competition, efficiency and economy, promotion of investment, and any other matter referred to it by government. In the earlier Act this function was mandated as “shall discharge” the function “to aid and advise central government in formulation of a tariff policy”. Thus the Bill leaves it to the Commission to give such advice on its own, without being asked. This should be changed, and government must be compelled to consult the Commission as an expert body. 30. The term of Members is now reduced to three years from the earlier five, but the earlier provision of an upper age limit of 65 years remains. (89). In that case, there should have been a provision that no one above the age of 62 would be appointed so that a Member serves at least one three-year term. 31. What is worse is that there is a provision for the maximum of a second term of three years but it is not specified that this would also be subject to an independent search committee’s recommendation. Hence the second term might well be subject to the will of government, and become a way of capturing regulators who could be subservient to the will of the governments. 32. Section 89(5)(b) bans Regulators from any ‘commercial’ employment for two years in the electricity industry. This is far too sweeping and denies freedom of employment. Instead, the section might restrict employment to such organizations that come within the jurisdiction covered by the Member during his tenure. 33. Section 90 provides one more way in which the independence of Members is to be limited. This is regarding removal from office. The earlier provision was that the President (Governor for SERC’s) could remove a CERC member from office after investigation by and recommendation from the Supreme Court (High court for SERC’s). Now the removal is by government after the recommendations of the Appellate Tribunal. The government can decide on termination and the government comprises of officers who control the state owned enterprises that are regulated by the ERC’s. This jeopardizes the distancing from government that is needed for the Regulators to be truly independent. FUNDS 34. The provisions of Section 95 are superior to the earlier provision for the budgets of commissions to be ‘charged’ items, i.e., not requiring debate by the legislatures. The Ministry was the nodal point, with Pay and Accounts Officers and Drawing and Disbursement Officers in the Ministry who actually handled the payments and disbursements. The new provisions provide for the Commissions retaining all fees and also receiving grants and funds from government as well as other agencies. This gives greater financial independence from the Ministry who otherwise could and have at times interfered in many ways with the functioning of the Commissions. 35. Sections 107 and 108 provide for directions on policy by central and state governments to the appropriate Commissions in the public interest. The section provides for no consultation as to what is policy on which the decision of government is to be final. However, as can be seen from a perusal of the Bill, it lays down many policy directives where they should be, in the Bill itself that is to be approved by Parliament. It is not necessary for government to lay down policies other than in legislation after due debate by the legislatures concerned. Any more detailed statement of government desires would be tantamount to micromanaging the Commission and reducing it to the status of a clerical employee of government. 36. Sections 111 and 125 provide for an Appellate Tribunal that will hear appeals from both SERC’s and the CERC. It will certainly speed things up. However it must be ensured that the Tribunal is independent of government and considers appeals on law and not on facts, if the Commission concerned has given reasoned orders. The Tribunal needs to be staffed with adequate expertise and the possibility that it might be headed by a judicial officer leaves room for doubt as to whether it can be adequately competent on technical matters of economics, finance, management and engineering. The appeal from the Tribunal is to the Supreme Court. 37. 128(8) enable Commissions to specify the minimum information to be maintained by the licensee/generating company. This is a good move since poor information has made the work of electricity regulators almost in fructuous. However here again there is need to specify the consequences for violation of this provision. 38. To enable better coordination within the power sector, the Bill provides for a Coordinating body consisting of the CERC, CEA, generating companies and transmission licensees (similar provision at state level). In addition it also provides for a forum of central and state regulatory commissions. (Sections 161-1 and 2). The first proposal goes against the transparency enjoined by the Bill on the commissions, since consumer groups apart from other interested parties, are not included. The second is superfluous since a Forum of Indian Regulators has been in existence since 1999 and been very effective in sharing experiences and enabling new Commissions to take off quickly. Such interactions are best undertaken under academic auspices and government would do well to fund the setting up of inter-disciplinary centres for the purpose. Both provisions need amendment to delete the first and recognize and support the existing Forum of Indian Regulators. 39. Section 167 specifically enables the SEB to function as the state transmission utility. This perpetuates a mixing up of the neutral function of the transmission operator with generation and distribution. The stu must be separate from the SEB, which is in generation and distribution. V. An Assessment The proposed Electricity Bill, 2001, is a substantial improvement on the earlier three Acts. It makes an attempt to deal with the basics of the problem, that is, of the structure of the market. The structure has to change towards more competition. We need investments in generation, but they do not take place because presently, the electricity can be sold only to state-owned or other ‘single buyer’ entities. The ‘single buyer’ model perpetuates monopolies. In the absence of commercially run distribution, with charges set on the basis of costs and correct and universal measurement, there are inefficiencies and subsidies that are not calculable, and subject to misuse. 1) The emphasis on private investment in generation over much of the 1990’s was clearly misplaced. The buyers of such electricity were to be the SEB’s whose revenues were falling behind expenditures. Private investors therefore sought sovereign guarantees, making the central government liable for state debts. Escrows, in vogue for a while, mortgaged future cash flows for present liabilities. Some SEB’s have improved their generation efficiencies to an extent, but their losses in distribution on account of theft, subsidies and cross-subsidies to farmers and household consumers, continue and are rising. As a result their financial situation is much worse, amounting last year to almost half of the state revenue deficits. States have tried to make up a part of these losses by charging increasing tariffs to good paying customers, namely, industries, commercial establishments, railways and such of the prosperous households who are not thieves. This is raising the costs of energy to levels that have in many cases make India uncompetitive in an open economy. If the trend continues, more sections of the economy will become uncompetitive. 2) State governments have paid lip service to improving the viability of their electricity assets. They have to be compelled to bridge the gap between revenues and expenditures and meanwhile, the good paying customers, primarily bulk consumers, and must not lose competitiveness. One way to do this would be by bypassing the state distribution system and allow such customers to generate their electricity or to buy directly from efficient independent generators anywhere, in competition with the state distribution system. This Bill goes some way towards this. 3) The Electricity Bill, 2001, provides an opportunity to enable this happening. It provides for freeing of captive generation, open access to transmission lines and for trading. However it has various lacunae that will make for very limited and ineffective trading. a. It provides for a surcharge on wheeling charges to bear some of the state costs on subsidies. This should be removed. The charge must only reflect costs and a reasonable return. Subsidies should be limited to state budgets and recovered through taxation. It should be left to the regulator after open hearings to decide the extent to which cross- subsidies should be used to reduce the cost of subsidies, and for a defined period only, after which all subsidy payments should be a charge on government. b. The Bill should allow merchanting generators who may supply to bulk consumers or groups of them on the Grid or on their own transmission lines. c. Captive and merchant generators should be permitted by the Regulator on a case- by-case basis to make direct supplies to bulk consumers without any veto power for the SEB. This freedom to supply directly to consumers should apply both within and without the state. 2) In order to give state electricity boards the time to adjust to this new situation, the Regulators might be given powers to monitor and regulate this movement for three years. After three years, this free sale should not be subject to regulation. The central government could also use the carrots and sticks available to it for ensuring that the states do not overrule this provision. 3) The bill makes slight reference to non-payments and delays in payments by SEB’s and other distributors for bulk electricity purchases. The Bill should specifically deal with this issue and provide for consequences if they occur. These consequences should not merely be the ultimate one of disconnection, but the others that apply for example, when borrowers do not pay bank principals and interest, when their assets can be attached and sold. 4) The creation of Regulatory Commissions will not by itself bring about fairness, predictability, a consultative process and transparency. However, because they are required by law to be independent, open, consultative and transparent in their decision-making, they can be better relied upon to take decisions in the common interest and not merely in the interests of sections of the community. If they are to move the electricity sector into an efficient and competitive situation, they must have the necessary jurisdiction. The present law requires them to “promote competition, efficiency and economy” but gives them powers primarily for regulating electricity tariffs, licensing private entry into transmission and overall regulation of transmission and distribution. These lacunae in the present ERC Act, 1998 and in the new Bill must be corrected. Some of them are: a. They do not provide for truly independent search committees that will find professionals and not as now, primarily retiring government servants as Members and Chairmen. b. Not filling vacancies in Commissions in the time provided by the law should result in consequences for those responsible for not implementing the law. c. A three-year term to Regulators without provision for automatic renewal is a way of exercising control. d. The Commissions must be able to scrutinize all aspects of the commercial and economic aspects of electricity. Specifically, they must be required to advise on reforms and restructuring, privatization, examination of power purchase agreements, etc. e. They must be the deciding authority on all matters relating to entry and exit into the electricity sector, and for creating and operating an electricity market (determining the various market operators, rules for operating the electricity exchange, accounting and settlement of transactions, etc.) f. They must have the flexibility in offering salaries that can attract the best experts to the staffs of the Commissions. g. The provision that governments can issue policy directives to regulatory commissions might be qualified so that such directives are issued after prior consultation, and the Commissions place the policy directives before the public. 5) By enabling competition for bulk supplies and putting strong independent regulation in place, we will move towards more efficient and market determined outcomes. State governments will be forced to rationalize subsidies to levels that their Budgets can bear, and to improve efficiencies. The object must be to move the State out of the electricity sector over time. But immediate privatization will not solve anything. It will only bring in private ownership into a financially unviable sector and require the State to subsidize it, with all that implies for fudged accounts and false claims. 6) The Accelerated Power Development Programme of the Government of India announced in 2002 is the central government’s action plan to proceed speedily with the policy objectives embedded in the Bill. The Programme aims to bring in two essential changes in the SEB power system. They are: i. A commercial mindset ii. Professional management and the interactions between different specialists in management, cost accounting, financial accounting, human resources, etc., along with engineering. The Programme has two principal objectives that are to be achieved through a massive training programme to change existing mindsets. These are:  “Cheap” Power defined as reasonably priced power with optimal prices for suppliers. In other words, this does not mean free or very much below cost supplies of power.  Quality Power defined specifically as superior in Voltage stability and Frequency. All actions are intended to achieve these objectives. The details of the programme Can be summarized as follows. 1) Do away with Free Power within a given time frame. 2) Create conditions for Competition in the electricity industry, between producers, suppliers, transporters and traders so that the consumer benefits from choice. 3) Tariff rationalization must be consistent over the country. Government will issue Tariff Policy soon that will attempt to achieve this. However, this action seems at variance with the provision in the Bill for CERC to set out the principles for tariff determination to be followed in the States. 4) Regulators are to play the key role in Tariff Regulation, Determination and Fixation. This means that the Tariff Policy to be set out by the central government will set out objectives but not the details of tariff regulation, such as rates of return, depreciation norms, etc. One hopes that this interpretation is correct. If it does not, the central government would have created the institution of independent regulation but taken away its powers from it. 5) Eliminate electricity thefts speedily, not gradually. The Programme emphasizes the need for stringent State legislation with severe penalties as in Andhra, Karnataka, Haryana and Rajasthan. 6) Replace uncertainty in measurements due to human element by Technology 7) Priority to *improve capacity usage, *Expand existing plants *And then add capacity through *Lower cost projects 8)Announce a Fuel Policy 7) Priority to Transmission Planning & Implementation to enable more inter regional transfer 8) No government guarantees but PFC will be helped to improve mobilization of resources 9) Role of PTC to enlarge for increased electricity trading 12) To reduce uncertainty, * Desirable to have uniform principles in tariff determination • For example, multi-year tariffs 13) New system of Independent Regulators is evolving well and States without them will fall behind 14) GOI to rate SEB’s through independent Agency and GOI grants to be contingent on rating of the State in loss reduction and quality improvement. States will be big losers of grants and cpsu investment if there is inadequate progress 15) Milestones for success to each step, with assigned responsibilities

CONCLUSION This Bill marks significant changes from existing legislation. It does not go far enough. India has fragmented the approach to energy by creating many Ministries and Departments. There is no justification for electricity, coal, oil and gas being dealt with separately. As a result, India does not yet have a cohesive policy on energy security. The fuels are used as fuels for electricity generation and also as inputs for fertilizers and petrochemicals, with a growing use in transportation. Since they form a major part of the cost of energy and energy is a vital element determining the nation’s global competitiveness, they should be considered jointly. The new Regulatory Commissions also follow this Ministerial division. This makes no sense. For example, the electricity regulator cannot examine the price of coal, or demand the enforcement of the contracts to supply gas. We must have one energy regulator at the central level where these matters can be considered together and in a holistic, not piecemeal, fashion. Further, the Bill does not go far enough in stimulating electricity trading subject to stringent supervision by Regulators. This is a solution to the shortages in the country, since they are not constant over time or space, and shortage at one time or place may be matched by demand elsewhere. Nor does the Bill enable a change in management to professional from administrative management. The independent regulator might intelligently interpret his jurisdiction to bring about some of the changes required in information and operating systems, management methods and mindsets. The bill must find ways to increase the accountability of regulators by various means such as issuing draft orders for discussion before finalization, being subject to open examination once a year by a Committee of the Legislature, which however must give them the respect due to a quasi-judicial authority. The Bill is a major step forward and needs to be passed without delay. (7567)