[Editorial] Implication of using Bankruptcy Code against Discoms

Background of power sector:

  • Under the Constitution, electricity is a concurrent subject. However, since pre-independence period, the state governments have played a critical role in the electricity sector.
  • State Electricity Boards (SEBs) were established under The Electricity (Supply) Act, 1948 for the electricity generation, distribution and transmission.
  • The state governments retained control over the distribution part though the sector was opened up to private players in 1991 for electricity generation.
  • In 2001, the SEBs had to be bailed out after their arrears towards central power generation PSUs. This led to the enactment of the Electricity Act, 2003 which mandated the unbundling of SEBs into separate companies for generation, transmission and distribution.
  • Since then, most SEBs have been unbundled with different market structures.
  • However, the discoms are bogged down by poor financial health. This is despite being bailed out 4 times in just the last 20 years.

Can privatization be an option?

  • These problems could be solved by privatizing the discoms.
  • However, these is opposition to such a move from the states.
  • Hence, the central government is mooting the de-licensing of electricity distribution itself. This too is facing opposition.

Most probable and repeated topics of upsc prelims

Why aren’t the states privatizing the discoms?

  • Some 47% of the electricity is now privately generated. However, most discoms are still owned by the state governments.
  • Discoms are being used as a tool of redistribution.
  • States try to win over important political constituencies by selectively enforcing against unauthorised power use, charging a lower tariff, etc.

How can IBC help here?

  • The threat of creditors triggering IBC proceedings against state owned discoms would compel the state governments to take steps:
    1. Reformation of the financially struggling discoms
    2. Privatization of the discoms through insolvency resolution
  • For the successful privatization through IBC, there are several key determinants, such as- geography and consumer mix.

What are the challenges?

  • A report from NITI Aayog highlighted the challenges in privatization, when a discom services a rural area:
    • Tariff deferential
    • Difficulties in billing, collection and metering
    • Cost of providing service to agricultural consumers may become commercially unviable
  • The lack of independence of the state regulators from state government control poses a major risk to investors. State regulators are responsible for setting tariffs and issuing distribution licenses.
  • Such sectoral factors pose a challenge to the sale of discom assets via IBC route.

What is the way ahead?

  • The central government recently said that IBC proceedings could be initiated against discoms owned by the state governments. This is expected to have major implications for the sector.
  • However, successful resolution of state owned discoms needs further shaping of policy.
  • Policymakers need to consider the interplay between the insolvency tribunal and the electricity regulators. In the USA, the bankruptcy code has provisions solidifying the rate-setting authority of regulatory agencies under a plan of reorganisation.
  • Similar provisions are absent in the IBC. There is a need for clarity the NCLT’s (National Company Law Tribunal) power to approve resolution plans that propose change in tariff. If the NCLT had this power, the tariff change from the plan would be binding on the SERC (State Electricity Regulatory Commission).
  • These are providers of critical utility service, the disruption of which would be disastrous for the economy. To ensure the continuous supply of power, special treatment is needed.
  • India needs institutional safeguards similar to the type used in the UK: the right of energy generators and creditors to start insolvency proceedings is restricted. The financial distress must be notified to the Secretary of State and the energy regulator, Ofgem. The regulator assesses the responsibility of the failed supplier could be taken over by a supplier of last resort. If not, the regulator or the Secretary of the State applies to the court to start a special administration system. This ensures that the financial distress doesn’t affect the continuous supply.
  • While policy solutions should be informed by precedents in foreign jurisdictions, they must be rooted in domestic realities.

Conclusion:

Continuous and quality supply of electricity is crucial for the economic growth of a country. However, state-owned discoms are bogged down by financial arrears. The recent announcement regarding the use of IBC proceedings against such companies has major implications for the sector.

Referred Sources
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https://indianexpress.com/article/opinion/columns/discoms-privatisation-bankruptcy-code-insolvency-resolution-7648042/

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