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Draft Electricity (Amendment) Bill, 2021: A Paradigm Shift to Privatisation

Published: Dec 04, 2021

 

By Prashanth Shivadass & Sneha Philip*

EXPANSION OF THE ELECTRICITY MARKET VIS-À-VIS ENTRY OF PRIVATE PLAYERS

In February 2021, the Ministry of Power proposed major amendments to the Electricity Act of 2003 1 ('the Act'). The amendments proposed in the Draft Electricity (Amendment) Bill of 2021 2 ('Amendment Bill') seeks to open the last vault of Government monopoly - the electricity distribution sector, to private participation. In India, the electricity distribution sector has been dominated by state owned distribution companies ('DISCOMs'), owned by the respective State Governments, enjoying monopoly in the distribution sector for decades. While the entry of private electricity distributors has been allowed to a certain extent, this at present is only applicable to Mumbai, Delhi, and Ahmedabad. 3

The Amendment Bill has been proposed in light of the Government's intention to cut State losses in the distribution sector and improve the quality of services provided to the consumers through establishment of a versatile market. Presently, DISCOMs are neck deep in debt with the combined total debt expected to rise to 6 lakh crores by FY 2022 4. This has been exacerbated by rising fuel costs, bearing the burden of subsidies offered by the State Government and the recent outbreak of COVID 19 pandemic, which have resulted in mass default and worsened the financial situation of DISCOMs due to which, certain DISCOMs were forced to renegotiate its Power Purchase Agreements ('PPA') with its generators due to their inability to honor the terms at their current contractual prices 5.

The proposed amendments seek to facilitate the entry of private players in the sector by removing the stringent licensing requirements under Section 12 of the Act which did not permit any entity to engage in the supply of electricity without a license issued by the Government. This amendment seeks to bring the distribution sector in line with the generation sector where private players have been active for some time. Additionally, the proposed amendment seeks to ease the process of private players by attempting to introduce a transparent and hassle-free process through which private players could enter the sector and commence business as soon as possible.

WHAT ARE THE PROPOSED AMENDMENTS?

The proposed amendment substitutes the term 'licensee' in the Act with the phrase ' distribution company', thus, enlarging the scope of participants in the distribution sector. In this regard, it is pertinent to note that a license is required for undertaking transmission, distribution, and trading activities in terms of Section 12 of the Act.

The Amendment Bill seeks to introduce a system of registration vide insertion of Section 24B in lieu of a license in terms Section 12 of the Act. Further, the removal of distributors from the ambit of Section 12, would allow registered distribution companies to also engage in the activity of trading of electricity, without having to obtain a separate license for the same 6. By removing the stringent licensing regime, the Government aims to incentivize private companies with easy and expeditious registration process, allowing them to commence business swiftly.

The Amendment Bill proposes to insert new provisions such as Sections 24A, 24B, 24C and 24D to the Act, in order to facilitate the entry of private players into the distribution sector. These sections pertain to registration of distribution company, conditions of registration and amendment and cancellation of registration.

The process under the proposed Section 24B differs significantly from the present process of licensing enshrined under Section 15 of the Act. The differences can be seen as under:

- Section 24B prescribes a strict timeline within which the certificate of registration should be granted. However, the grant of license under Section 15 is only discretionary and not mandatory in nature.

- Further, Section 24B does not prescribe a validity period for the registration granted unlike Section 15, wherein a license granted is valid for 25 years (typical timeline of a PPA), post which the licensee would have to renew the same.

IMPLICATIONS OF THE PROPOSED AMENDMENTS

The amendment promises to open one of the most lucrative sectors in the country to privatization. The Government intends to replicate the success of privatization in Delhi where the entry of private electricity distributors resulted in the reduction of the aggregate technical & commercial losses (AT&C) from 55% in 2002 to 9% in 2019 7 . The ailing health of the DISCOMs is beginning to be seen as a liability which is causing a burden on the Government exchequer. 8 The Government hopes that the competition would serve as a catalyst for restructuring DISCOMs and make it more competitive and profitable. Further, the Government hopes that by breaking the monopoly of the state owned DISCOMs in the sector, the customers would be provided better choices/alternatives including industries, who are forced to bear the brunt of cross subsidies provided by the Government.

However, there have been strong opposition from states such as West Bengal, Tamil Nadu and Kerala, who have claimed that by allowing private sector entry to the distribution market would worsen the situation of DISCOMs. They have also raised concerns with respect to private players cherry picking the most lucrative areas of supply, leaving the less lucrative areas to DISCOMs which would aggravate the situation.

THE DICHOTOMY: STATE V. PRIVATE PLAYERS

Allowing the entry of the private sector into the distribution sector is indeed a bold move and is met with skepticism. However, electricity is the blood of the modern economy and without an efficient electricity sector there can be serious negative implications on the country's economic growth. Allowing private players to enter the sector would allow the consumers to benefit from the resources and the expertise they would bring with them. In this regard, it can be expected that the customers would benefit the most from such entry as they would have cheaper alternatives to DISCOMs. However, it is not yet clear as to how the Government would modify the existing tariff system in light of these new developments. More importantly, it would release a massive burden on the Government which can reroute its monetary reserves to developing the power sector rather than bailing out the DISCOMs. Access to cheap and efficient sources of electricity is no doubt important to the country's growth, however there are also certain downsides to the same.

The cost of electricity remains a major concern as the profit motive of private players would lead to hike in the prices of electricity which would deprive the country's marginalized of access to electricity. While it is unlikely that the Government would allow private companies to determine prices without establishing any system of checks and balances, the Government should modify the existing tariff determination mechanism to accommodate new changes. Privatization is not an easy formula, however, after years of state control over one of the country's most vital sectors, it is time for the Government to welcome private entry into the sector.

[*The authors are Partner and Associate respectively, with Shivadass & Shivadass (Law Chambers). The Authors would like to acknowledge the contributions of Mr. G Nitin, a Law graduate from Symbiosis Law School, Pune. The views expressed are strictly personal.]

1 https://cercind.gov.in/Act-with-amendment.pdf

2https://tnebeaengineers.in/wp-content/uploads/2021/02/Board_Proposed-amendment-to-Elelctricity-Act-2003-522021.pdf

3 https://www.niti.gov.in/sites/default/files/2021-08/Electricity-Distribution-Report_030821.pdf

4Supra (Note 3)

5Supra (note 3)

6Please refer to proviso 9 of Section 14 of the Electricity Act.

7Supra (note 3)

8 Supra (note 3)

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