Google as licensee ill-conceived

The first thing which comes to one’s mind is whether it is legally possible to grant a deemed distribution licensee status on the basis of an executive order, especially when there is no such provision in the parent Act, that is Electricity Act, 2003. The Electricity Act speaks of a deemed licensee status for transmission companies already in the business of transmission prior to the law’s enactment. There is no mention of deemed distribution licensees unless it’s a government company — which Google, of course, is not. In the case of a deemed licensee status, it seems, regulatory commissions do not hold hearings on whether to grant a licence or not. They simply grant the licence, even as they are free to hold the licensee accountable to the conditions stipulated by them in it.

To issue this notification, the state government has relied on an amendment made by the central government to the 2005 rules on additional requirements of capital adequacy, creditworthiness, etc. while granting a new distribution licence. The amendment was made in 2022, which granted the state government the power to determine the minimum area of supply of a new distribution licensee. Prior to that, the minimum area was that of a municipal corporation/revenue district.

There are some grey areas which need clarity as far as the present case is concerned. While it is clear that this particular deemed licensee cannot supply to a consumer outside its area, what is ambiguous is whether a consumer within the area of the deemed licensee can source power from the original incumbent utility. The Andhra Pradesh government notification says that the deemed licensee can only supply power for activities which fall under the operations of a data centre. What if there is a cafeteria operating within the geography of the data centre, or a medical bay? Will they be treated as parts of the date centre? If this will be treated as an external activity, the deemed licensee is forbidden to supply power to that entity.

As mentioned, the regulatory commission will stipulate conditions in the licence of the deemed licensee. The licensee will have to abide by all the prescriptions covering renewable purchase obligations, hydro purchase obligations, etc. It will also have to conform to all the technical standards set by the commission relating to supply. But what about the aggregate revenue requirement (ARR) of the deemed licensee? How will the regulatory commission determine the ARR when the deemed licensee is sourcing all the power it needs on its own and for its own consumption? There is no distribution involved and for all practical purposes, this is akin to an open-access consumer operating in the geography of a distribution licensee. The only difference is that an open-access consumer pays for the open access and other related charges for the loss of revenue to the incumbent utility. In this particular case, no open-access charges would be paid since it is a distribution utility by itself, albeit a deemed one.

It is not difficult to see why this route has been adopted by the state government. The idea is to ensure that the data centres do not pay open-access charges and can access power at a much cheaper rate. If the deemed licence finally comes through, there will not be any immediate impact on the revenue of the incumbent utility since the data centre is not one of its existing consumers. However, its future revenue will be unduly affected. The utility serving Vishakhapatnam is Eastern Power Distribution Company of Andhra Pradesh Limited, and its peak load is about 4 Gw.

The data centre will have a final load of 1 Gw, which means that it would have been a gold mine for the utility had the data centre been one of its consumers. Surely, some other method could have been thought of to ensure that data centres get power at some cheaper rate but remain an open-access consumer and not a deemed utility. There is no denying that the power consumption of a data centre is huge and constitutes a big chunk of its operating cost, which increases exponentially if artificial intelligence is used in its operations.

Historically, our experience with designating a deemed distribution licensee just to avoid payment of cross-subsidy has not been pleasant. We have had the case of railways, where we stretched the provisions of the Electricity Act, 2003, to a unreasonable scale just to designate them as a deemed distribution licensee. The fallout was inevitable as the matter went into litigation. The Supreme Court, in a May order, has said that the railways is a consumer and not a deemed distribution licensee. Similar to the railways case, the move to award a deemed licensee status to Google is ill-conceived and legally untenable. It’s not a good decision and somebody needs to bell the cat.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.