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A truly level playing field for discoms

If the government wants more than one discom to spur competition, then all such discoms should serve exactly the same area so that the consumer mix and all other relevant parameters are common to all.

A truly level playing field for discoms
There has been a lot of debate about whether we are really ripe for competition in the distribution sector. (IE)

According to the Distribution of Electricity License (Additional Requirements of Capital Adequacy, Creditworthiness, and Code of Conduct) Rules, 2005, whenever a second, or more, distribution licence is to be granted, the minimum area to be served by such new entities shall at least cover the area under the municipal corporation/municipal council/revenue district. However, a recent judgment of the Supreme Court relating to Chhattisgarh, holds that given the wordings of the Electricity Act 2003 (Act) and the Rules (2005), the new distribution licensee(s) need not serve the entire area under the municipal corporation/municipal council/revenue district but may serve only a part of it. This new interpretation has huge implications for public-owned distribution companies (discoms).

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Ever since the first amendment Bill for the Act was drafted in 2014, we have heard about the impending competition in the distribution sector. It has been a long journey since then, and various distribution models have been floated in successive amendment Bills. First, we had the separation of ‘content and carriage’, where there would be only one owner of distribution wires, and all others would be retailers who would use the same set of wires to connect to their retail consumers. All retailers would pay wheeling charges to the owner of the wires. In the latest version, the Electricity (Amendment) Bill, 2022—now referred to a Select Committee—there can be two or more distribution companies (discoms) in an area, but all the discoms will use the wires of the existing discom, which is a public sector entity in most states. Somewhere between 2014 and now, there was also a talk of delicensing the distribution sector.

There has been a lot of debate about whether we are really ripe for competition in the distribution sector. Can competition coexist with high commercial losses, a regime of cross-subsidies, and faulty and non-existent meters for a certain class of consumers? Though this author is of the view that we are not ripe for competition as of now, this is not the point he would like to labour on here. Instead, we will discuss what the area of supply should be for the new retailers/discoms. If one looks at the existing Act, the sixth proviso of Section 14 says that there could be more than one distribution licensee in the ‘same area’ though each one will need to have its own set of wires. Since the Act mentions ‘same area’, it definitely gives the impression that the geographical coverage of the incumbent licensee and the subsequent licensee(s) would be one and the same. The subsequent licensees, however, would need to adhere to the capital adequacy, credit-worthiness, and code of conduct (also known as the three Cs) rules to be framed by the central government. The three Cs, incidentally, were mentioned in Rules 2005 which were made effective from March 23, 2005; the Rules 2005 also indicated that the minimum area of supply for any subsequent licensee(s) shall either be the area under the municipal corporation/ municipal council/revenue district. By doing so, one wonders whether the government went beyond its mandate, since the Act (on a higher pedestal vis-a-vis the Rules) clearly indicated ‘same area’.

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There are a couple of points to ponder here. If the subsequent licensees are allowed to operate in an area that is according to what is indicated in the Rules (2005), then the incumbent and the subsequent licensee(s) will face different ground realities, which may affect their profitability. It is only natural that the incumbent licensee has a level playing field when compared to the subsequent licensee(s). All licensees should thus have the same mix of consumers, and that can happen when all such licensees serve exactly the same geographical area. If this principle is not followed, then the new licensees will have the advantage of ‘cherry-picking’, ‘salami slicing’—whatever one may like to call it. In the Electricity (Amendment) Bill 2022, licensing conditions are very strict and time-bound, and a regulatory commission will find it very difficult to ward off a potential aspirant wanting to serve only high-end consumers concentrated in an area. Besides, the area under any municipal corporation/council is not carved in stone and can keep changing. The case of Delhi is the perfect example where three municipal corporations have been merged into one. It would be impossible for a single new discom to serve the whole of Delhi (in case a new distribution license is granted now) which is currently being served by three licensees.

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The short point is that if the government is desirous of having more than one discom in an area, then all such discoms should serve exactly the same area so that the consumer mix and all other relevant parameters are common to all. This would, of course, mean that the current Rules (2005) will have to be amended. We need to protect the existing state-owned discoms, and any failure to do this will push them into oblivion. In such a situation, it is the relatively poor consumers (small agriculturists and low-end domestic) who are going to suffer.

The writer is Senior visiting fellow, ICRIER and former member (Economic & Commercial), CEA

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First published on: 22-11-2022 at 04:15 IST