Powering long-pending electricity reforms

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July 19, 2021 6:00 AM

Scope of proposed Electricity Act reforms promising; but for these to work, states must shed irresponsible subsidies

They believe SERCs are better placed to calculate the cross-subsidy since they would take into account factors that vary from state to state.

The proposed delicensing of the supply of electricity, by allowing multiple distributors to operate in the same area, and ending the monopolies of state-run entities, is a big step towards reforming the power sector. The Cabinet is expected to soon consider the proposal to enable consumers to switch between power suppliers, following which the Bill to amend the Electricity Act will be introduced in Parliament, possibly in the session starting today. What’s important is that the distribution infrastructure of an incumbent discom can now be used by a new entrant to supply power in the area. The draft Bill proposes to curtail the powers of SERCs with regard to cross-subsidies. Essentially, it seeks to shift the responsibility of framing the regulations relating to the calculation of the cross-subsidy away from the SERCs. The idea is to get them to determine the extent of the cross-subsidy using the National Electricity Tariff Policy. The move has been initiated because it is felt that the tariff determined by the SERCs doesn’t reflect the real costs, with political considerations overruling financial prudence. The maximum tariff that industrial consumers pay is proposed to be capped at 20% of the average cost of supply; in some states, the commercial tariff is more than 20% than the ACS. Experts believe the states could challenge this in the court since electricity is a concurrent subject. They believe SERCs are better placed to calculate the cross-subsidy since they would take into account factors that vary from state to state.

A long-overdue move to strengthen the Appellate Tribunal for Electricity (Aptel) is now being initiated. Experts point out Aptel has not functioned properly for several years since the bench has almost always been short of members. There is also a move to strengthen the SERCs. However, the regulators are usually hand-picked by the state governments and therefore obliged to do their bidding. Not surprisingly, they have failed to do their job which is to improve the health of the discoms and they must share the blame for much of the mess in the power sector.

The obligations to purchase renewable power could be onerous on discoms. It is always possible they do not have the financial wherewithal to buy renewable power; if they are going to be compelled to do so, they need to be able to offset this with smaller purchases of thermal energy. Typically, thermal power producers like NTPC will not allow buyers to stop purchasing from them. It is all very well to pursue a green agenda, but to penalise discoms for not meeting their renewable purchase obligations is somewhat unfair. Another important measure being proposed is that the retail tariff, in any state, be determined without taking into account the subsidy to be provided by the government. Instead, much like it has happened in the case of LPG subsidies, consumers should pay the full tariff and receive the subsidy directly in their bank accounts. This way, the discoms would receive the full tariff from users.

While the amendments to the Electricity Act are a great effort, state governments must discontinue—or lower—subsidies for retail users and farmers at the cost of industrial consumers. In order to keep tariffs affordable, discoms must bring down the cost of power and minimise technical losses. State governments have remained irresponsible for way too long partly because the Centre is always bailing them out. Taxpayer money should not be frittered away.

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