The Draft Electricity Act Bill 2020: A Detailed Analysis

Draft Electricity Act Bill

Electricity is one of the most critical components of infrastructure which is essential for sustained growth of the Indian economy and welfare of the nation. Ministry of Power, in an attempt to further develop the power sector, has issued a draft proposal for amendment of the Electricity Act, 2003 in the form of the draft Electricity Act (Amendment) Bill. This is the fourth draft since 2014.

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What is the existing legal status of the electricity sector?

  • The current electricity scenario is guided and regulated by the Electricity Act, 2003.
  • The act consolidates the laws related to different aspects of electricity: Generation, transmission, distribution, use ad trading.
  • It facilitated significant private investment, market development, and transparent tariff mechanism, etc.

What is the need of the new Draft Electricity Act bill?

Despite some good changes brought in by the Electricity Act. 2003, the electricity sector is seized with few critical issues which have weakened the commercial and investment activities in the electricity sector that needs to be addressed immediately to ensure sustainable growth of the country. Some of the issues are discussed below

  • Non-reflection of cost in tariffs
  1. The 2003 Act mandated the regulatory Commissions to determine the tariff after receipt of the subsidies but there is no provision for fixation tariff with fair cost. Over the period, the regulatory Commissions have been recognizing cost but defer it to recover in future periods and also factoring the subsidies based on commitment.
  2. Consequently, the tariff determined is not cost-reflective and resulted in weakening the financial health of the distribution companies due to under-recovery of the prudent cost. It also hampers the transparency in cost-reflective tariff as mandated under the 2003 Act
  • Issue of Subsidy
  1. Section 65 of the act mandates the state government to grant a subsidy to any consumer or class of consumers, but there are no corresponding provisions about the treatment of subsidies in the tariff determined by the state commissions
  • Sanctity of contracts
  1. The 2003 Act recognizes the contracts for supply and purchase of electricity but it is not specifically dealing with the issues related to the performance of the contract.
  2. Non-performance of the contract may create uncertainty, upset investment decisions and adversely affect the investment environment and ease of doing business.
  • Regulatory issues

Electricity Regulatory Commissions established have been entrusted with multiple responsibilities under the Electricity Act such as regulatory functions, tariff fixation issues, grant of licenses, etc with limited powers for adjudication of disputes.

  • Payment security issues
  1. Unlike other commodities delivered by the contracted parties, the dispatch of electricity is being undertaken by load dispatch centres through scheduling. The 2003 Act do not recognize any watch or monitoring on payment security mechanism for such dispatch of electricity
  2. The load dispatch center is scheduling electricity without a payment security mechanism. Presently, there is a huge accumulation of unrealized revenues.
  • Sub-licensing

Many States Distribution Companies have been assigning the distribution of electricity (regionally) to Franchisees / Sub-Distribution Licensees.  However, there is a lack of clarity regarding the legal provisions related to sub-licensing.

Most probable and repeated topics of upsc prelims

How does the draft bill propose to deal with the outstanding issues?

  • Tariffs and subsidy
  1. It is being provided that the Commissions shall determine tariffs that are reflective of costs so as to enable Discoms to recover their costs.
  2. It is proposed that the state commissions should determine tariff for retail sale of electricity without any subsidy under section 65 of the Act. The subsidy should be given directly by the government to the consumers.
  • Security of contracts

it is proposed to establish an Electricity Contract Enforcement Authority (ECEA) which shall be a sole authority and having original jurisdiction to adjudicate upon the matters regarding specific performance of contracts related to purchase or sale of power between a generating company and a licensee or between licensees; and contracts related to the transmission of electricity between a generating company and a licensee or between licensees.

  • Regulatory Mechanism
  1. The Appeal against orders of the Electricity Tribunal shall be heard by Appellate Tribunal for Electricity. It is proposed to strengthen the Appellate Tribunal in terms of strength of Members and powers of the tribunal so that multiple benches can be set-up to facilitate quick disposal of cases.
  2. It is proposed to have one Selection Committee for selection of Chairpersons and Members of the Central and State Commissions and uniform qualifications for appointments of Chairperson and Members of the Central and State Electricity Regulatory Commissions.
  3. Section 142 and section 146 of the Electricity Act are proposed to be amended to provide for higher penalties so as to ensure compliance with the provisions of the Electricity Act.
  • Payment security

It is proposed to empower the load dispatch centers to oversee the payment security mechanism before scheduling the dispatch of electricity and it is to be made mandatory considering the sanctity of existing contracts unless it is waived by the parties to contract themselves.

  • Franchise and Distribution sub-licensees
  1. It is proposed to provide that the Distribution Companies, within its areas of supply, may engage in Franchisees or giving Sub-Distribution Licensees to distribute electricity on its behalf.
  2. However, it will be the DISCOM which shall be the licensee. So, it is made responsible for ensuring the quality distribution of electricity in its area of supply.

Apart from these corrective actions, the draft also deals with some other important issues such as,

  • It is proposed to provide for a policy document for the development and promotion of generation of electricity from renewable sources of energy.
  • It is also proposed that a minimum percentage of purchase of electricity from hydro sources of energy is to be specified by the Commissions and to levy penalties for non-fulfillment of obligation.
  • To harmonize the national level commitments for environment protection, it is proposed to empower the State Commissions to specify the Repurchase obligations (RPO) as per RPO trajectory prescribed by the Central government from time to time
  • The central commission has been empowered to oversee cross-border transactions due to the emerging requirements to regulate the cross-border transactions of electricity with other countries.
  • It is proposed to address the time taken for adoption of tariff and identify timeline as timely adoption of tariff discovered under competitive bids as per section 63 of the Act is important to avoid cost escalations and impacts sustainability of the project.
  • The Draft Bill, if becomes an act, will be applicable to the whole of India, including the erstwhile exempted region of Jammu and Kashmir.

Detailed analysis of the draft

  1. Considering the importance of robust and supervised contractual obligations vis-à-vis one another, and the constant fear of implementing agencies not honoring contracts, the new proposed authority i.e. Electricity Contract Enforcement Authority keeping a close watch on such issues is reassuring for all stakeholders.
  2. The payment security mechanisms provided would be a welcome safeguard for all project developers and power generators.
  3. Streamlining of the selection process for all commissions and authorities is a step in the right direction, bringing in uniformity and higher accountability
  4. The proposals regarding franchise and distribution sub-licensing could possibly give more leeway to power generators and licensed distributors to sub-contract the obligations and allot risk to specific parties, where they belong.
  5. The proposals regarding tariff and cross-subsidy will give a much-needed respite to the Discoms which are in the severe need of cost-effectiveness and practical policy of tariff.
  6. Most importantly, the draft focuses especially on hydropower. Draft tries to build surety with a minimum percentage in the form of assurance and incentive for power generators.

What is the status of the draft bill?

The draft bill has been put in public to gather feedback. Initially the feedback deadline was May 8th, 2020. However, in the new notification, the ministry has extended the time until June 5, 2020 as it had received requests from various stakeholders for extension of time for submission of comments on the draft Amendments.

What are the issues being raised regarding the Draft Bill?

  • The concerns about setting up of ECEA as it can dilute the power of the states and central regulatory commission to settle matters related to Power Purchase Agreements (PPAs) between Discoms and Gencos.
  • There is a potential of electricity tariffs being increased exponentially due to privatization and sub-licencing.
  • Experts say that the franchisee model has not worked in India. The government tried it in several states but with little success.
  • The Transfer of subsidy through DBT, though a move towards transparency, will be ill-served as the majority of the farmers will find difficult to pay the actual tariff from their pockets. The majority of the farmers are subsistence-based in India.
  • In an attempt to improve regulatory discipline, through amendments in the selection of members in state and joint commissions, the government is actually impinging on the powers of the states. Because, State Commissions are a product of state laws and electricity is a concurrent subject.
  • There are concerns also over the move of privatization in times of COVID-19 as the experience of the pandemic makes us think twice about privatization. It is the public bodies who have been leading the fight against the pandemic while the condition of the private sector, especially in the health sector, has been exposed.

What should be the way forward?

  • As the draft is still in the public domain, it is subject to improvements with feedbacks.
  • While competition in transmission and distribution is essential, for better governance and planning there is an imminent need to invest in building capacity of state institutions
  • The draft needs to consider some of the genuine concerns raised. Especially those over the potential of usurpation of power of the states be the central government, farmer’s ability to pay the bill, etc.
  • The state governments need to be accommodated in the process, as it is important to build legitimacy for the proposed amendments, and embark on a path of more aggressive reforms based on the spirit of cooperative federalism.
  • Instead of trying to govern and regulate the sector, the Ministry of Power’s objective function of improving sector performance shall be better served by resting more accountability with state institutions while ensuring their independence in functioning.
  • The revenue and compensation mechanisms envisaged for sub-licensing and franchisee needs more clarification. The just mechanism and clarity should alleviate fears of private favoritism.
  • The issues of DISCOMs in non-compliance with RPOs should be studied before mandating already reeling organizations with RPO targets with penal provisions.
  • As far as possible, the finalizing of the draft should be deferred until the pandemic situation normalizes. As the whole country is grappled with it, there is a possibility that not enough stakeholders are consulted. It will lead to a half-baked act.
  • Increased participation of consumers in the decision-making space can facilitate a new scheme of accountability and efficiency.

Conclusion

The Electricity sector and its performance is of critical importance in the schemes of the nation’s development. India needs to upgrade its physical and social infrastructure in a huge way.  The amendments proposed in the draft are progressive and they aim to address some immediate concerns about the power sector. The draft needs to be discussed further to finetune its many provisions, so that a forward-looking electricity regime ensues in the country.

Practise Question for Mains

Draft Electricity Act Bill takes the Electricity regime in the country forward. Critically analyze. (250 Words)

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