Centre aims to reform power sector, but why are some states opposing?

Supratik Mitra | Updated: June 24, 2020, 11:44 IST

Centre aims to reform power sector, but why are some states opposing?

The Ministry of Power (MoP) has released the draft of the Electricity Amendment Bill 2020 amid the Coronavirus pandemic. The proposed amended version of the Electricity Act is brought to address the systemic problems the power sector has been facing for a long time.

After failed attempts in 2014 and 2018 due to protests from employees and states, the Modi Government is trying again to implement sweeping structural reforms. The draft bill had emerged on 17th April, with the Central Government asking stakeholders to respond to the Draft Bill within 21 days, and this period was further increased till June 2nd.

Although according to the MoP, the new electricity act will address the “critical issues weakening the commercial and investment activities in the electricity sector”, there has been opposition from many states, experts, and working professionals from the sector.

Key amendments proposed in the draft electricity amendment bill 2020

Establishment of the Electricity Contract Enforcement Authority (ECEA): While there are several provisions provided for the sell and purchase of electricity in the current Electricity act, there are no provisions dealing the with issues regarding power purchase agreements (PPAs), which are executed for sale and purchase of electricity, or contracts relating to transmission. The Centre, through this proposed amendment, sets to establish the ECEA, which will adjudicate on matters regarding specific performances of PPAs between a generating company and a licensee, or between licensees.

The ECEA shall have exclusive power and jurisdiction to adjudicate on the matters related to performance of obligations under a contract pertaining to sale, purchase, or transmission of electricity. However, the Enforcement Authority will have no jurisdiction on any dispute involving tariffs.

The Amendment seeks to avoid a situation that was created in Andhra Pradesh after the change in Government. The existing authorities that are the APTEL, CERC, and SERCs under the Electricity Act, 2003 do not have the judicial authority over the enforcement of contracts, unless the matter are related to tariffs, licencing, metering or other related matters. Considering the importance of a robust and supervised contractual obligation and the fear of implementing agencies not honouring contracts, a body, which keeps constant vigilance, is reassuring to all existing and future stakeholders. 

Phasing out of Cross-subsidies: When a group or subgroup consumes power at a subsidised rate, due to various reason of economic inequality, and need etc., there are some losses that take place, and these losses are made up by charging the other group for power at a higher rate; this is essentially how cross-subsidisation works. In India, the farmers are generally charged at a lower rate, while Industries at a higher rate. The new bill, if passed, grants for fixing of tariffs at the cost of supply, which does not account for cross-subsidies. It also puts up direct benefit transfers to the farmers of India from the state, in order to support those who cannot afford power at the market cost.

Although, it reduces the cost of power for industries, and thus their cost of production, this provision has been heavily criticized by experts and state officials.

The first problem is that the cost of supply of power to the farmer is higher, because of the longer power lines and lack of infrastructure. Thus, after the amendment, the farmer needs to pay more from their own pockets until the direct benefit transfers arrive. The question, therefore is, in such a catastrophic economic condition, will a farmer of India be able to pay upfront when he barely manages to feed his family?

The other question that experts have asked is about the efficiency of the direct benefit transfers. The Indian administrative system has been proven to be inadequate and inefficient, especially in terms of direct benefit transfers. The Centre has also shoved the burden of such transfer to the State Governments, which have barely stayed afloat financially in dealing with the pandemic, and even in such situations, the Centre, in multiple cases, has failed to provide relief, or even payout GST debts to respective states. In such a dire financial condition, direct fund transfer instead of cross-subsidies seems to financially strangle not only the state governments, but also the poor farmers of India.      

The Distribution sub-licensee and Franchisee: The draft amendment bill also drives through the idea of privatisation, especially in the distribution of electricity. It proposes that distribution licensees, with the permission of the relevant State Commission, can recognise and authorise a person as "distribution sub-licensee" for the purpose of distributing electricity on its behalf in a particular area in its area of supply. However, the original distribution licensee will remain the licensee, and will ultimately be responsible for ensuring the quality of the distribution of electricity in its area of supply. It is also proposed that such distribution sub-licensee is not required to obtain a separate license. 

The New Amendment only eases the burden of distribution licensees, and promotes some form of demographic specialisation. According to the MoP, this is supposed to drive down the cost of power procurement and cost of operation. On the contrary, historically, similar moves of privatisation have failed, even when only urban agglomeration had been taken up by private companies. For example in Mumbai, where most of the urban areas have private electricity providers, the end cost for customers has not been reduced, and prices have only risen which attracted several protests. Odisha, which was the only state to include rural areas to have private distributors in the past, has failed massively, and the entire distribution is again back to the Government. 

 It is not the first time that privatisation of the power sector has been pushed for, even the 2003 Electricity Act called for privatisation in the generation and distribution of electricity. Although, there have been a lot of investments in the generation of power, there is a lack of such drive when it comes to the distribution of the generated electricity. The Bill, thus, does not seem to address certain basic problems before implementing such a frontline solution. 

Push for Renewable Energy: There is a mention of a National Renewable Energy policy in the projected legislation itself which surely pushes for cleaner energy use. The Amendment, via an insertion, delegates the Central Government with the power to prepare and notify a National Renewable Energy Policy “for promotion of generation of electricity from renewable sources”, in consultation with State Governments. The policy also mandates the purchase of a certain percentage of power by DISCOMs from renewable sources. This also assures power generators and incentivises the use of renewable sources for power generation. 

Centre - State controversy 

States like West Bengal, Tamil Nadu, Telangana, Bihar, amongst others have publicly spoken up about the new Electricity Amendment Draft Bill 2020. The Bill has had mixed responses, being opposed by many state ministers and officials, while few independent power bodies have supported it. Chief Ministers, including YS Jagan Mohan Reddy, and Mamata Banerjee have publicly criticised the bill for dismantling the federal polity and increasing central control over the sector. With bodies like the ECEA, centralisation of state electricity regulatory commissions’ powers, and NLDC undermine the already existing state agencies. 

YS Jagan Mohan Reddy also commented on the direct fund transfer being a progressive policy, but the practicality of this solution seems far-fetched with the current situation of the state treasuries. 

Can the Centre make laws on issues regarding electricity?

Laws are made regarding various subjects by the Centre and the states. For an effective policy making, and to ensure robust Centre-State relations, the Constitution of India provides for a three-fold distribution of legislative subjects between the Centre and the states. The Schedule 7th of the Constitution pertains to the Union List (List-I), State List (List-II), and Concurrent List (List-III), which contain subjects on which the Centre, states, and both can make laws respectively.

While ‘Taxes on the consumption or sale of electricity’ is in the State List, ‘Electricity’ (as a whole) finds a place in the Concurrent List. If a subject belongs to the Concurrent List, the Centre shall consult the states to make any new law or to propose any amendment to the existing law regarding that particular subject. 

The Power Sector of the Indian economy had deep-rooted problems right from the start, and to solve those problems, multiple acts which have been passed by various governments in the past, but none have solved some of the basic problems fully, and only have implemented half-hearted solutions, which made the problem more complex. This new bill, with some of its provision, seems to be a step towards the right direction but, a structured roadmap to bridge the gaps between the existing problems and proposed solutions is what is needed, to mend the Indian Power Sector.

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