Electricity Act to get a facelift for reform

Written by Sumit Jha | New Delhi | Updated: Oct 27 2014, 06:59am hrs
ElectricityThe government has proposed some key changes in the Act to remedy the situation and prevent the loss-ridden sector.
With a decades existence of the Electricity Act of 2003 doing precious little in infusing efficiency and competition into the sector, the government has proposed some key changes in the Act to remedy the situation and prevent the loss-ridden sector, which is struggling to meet the reformist conditions of a financial restructuring package (FRP), from plumbing fresh depths.

The Union power ministrys draft amendments to the Act, to be placed before the Cabinet soon, seek to separate carriage from content meaning there will be separate licences for the wire business and the actual supply of electricity with a provider-of-last-resort (POLR) facility, in what could eventually pave the way for open access for ordinary consumers.

Click here for graph

While open access for even bulk buyers, despite the 2003 Act providing for it, has rarely been achieved due to the prohibitive surcharges levied by the regulators, the ministry now proposes to make open access mandatory for buyers with a load of of 1 MW and more.

According to the draft amendments, to start with, the distribution network business and supply business of the extant discom in an area will be separated with dual licensing. While for the initial one year, there will only be functional separation with common ownership, subsequently, ownership will also be segregated and additional supply licences will be given to new players. Initially, the incumbent supply licencee only will have universal service obligation (USO). This means a consumer can resort to him if other suppliers fail. Over a period of three years from the grant of licence, each supplier will also have the USO, so that consumers are not deprived of supply, even while having the freedom to switch from one supplier to another, in search of cheaper and quality power.

Experts welcomed the move saying itll help bring down tariffs but added that to perform the role of POLR, licencees must be given incentives as in other countries where open access at the retail power distribution level is a reality. POLR should have recourse to a Fund which the regulator will create by way of some levy to make good any loss that could be suffered by him due to this responsibility, said Kameshwar Rao, leader, energy, utilities and mining at PwC India. Although there are concerns over a proposal to deprive bulk consumers using open access of the services of PLOR, Rao said since suppliers usually compete to rope in large consumers, it might not be problem.

What's important is how ably various state regulators enforce the provisions, analysts said, citing the unimpressive track record of most of them in meeting obligations under the 2003 Act like reduction in cross-subsidisation and ensuring procurement from renewable energy firms. Few state electricity regulators are able to do justice to even the reform obligations like timely revision of tariffs under the FRP introduced last year.

Of course, the ministry's new draft recognises this and proposes to give supervisory powers to Forum of regulators (FoR) to ensure tariff rationalisation does take place. The FoR, headed by the chairman of the Central Electricity Regulatory Commission and comprising state regulators, will also have to submit a report to the government detailing the working of various state regulators.

Discoms are also concerned about a proposal to form an intermediary company and vest all existing power purchase agreements (PPAs) with it. The idea is to re-assign power from a pool of PPAs among the supply licensees on the basis of consumer mix, total consumer load with each and after factoring in transmission and distribution losses. Although the details of how this mechanism will be evolved will be clear only when the relevant rules will be framed, this could create uncertainties for discoms, while power producers will have little to worry about as the sanctity of the PPPs will be protected. In the proposed intermediary model, licensees with cheaper power purchase pacts will lose out if they have to supply under more expensive PPAs negotiated by other licensees, Praveer Sinha, CEO, Tata Power-Delhi Distribution said.

Apart from the changes concerning the distribution sector, the power ministry has also sought cabinet approval for amendments related to grid security, whereby significant increase in penalty has been sought to ensure discoms comply with the norms prescribed.

The proposed amendments also seek to entrench the shift towards tariff determination through competitive bidding by limiting the amount of power whose tariffs are determined by the regulators. This would mean while state-run NTPC, which has signed several PPAs between 2004-2009 under Section 62 under which tariffs are regulated by the SERCs, the avenue for private players to this route will now remain closed. The good news is that there is also a proposal to allow automatic pass-through of the power purchase cost. Several projects under Section 63 (where tariffs are determined through competitive bidding) are under arbitration with the procurers over adjustments sought for rising costs of fuel.