Why power supply liberalisation won’t work | The Financial Express

Why power supply liberalisation won’t work

The risks and the rewards both lie in the network, or the ‘wire’, business. The supply business is likely to be unattractive to potential entrants.

Why power supply liberalisation won’t work
State electricity boards/reorganised utilities have a monopoly over the network and wires business in the whole of the state, causing inefficiency.

By Arijit Maitra

The Electricity Amendment Bill 2022 was introduced in the Lok Sabha in the monsoon session. Thereafter, it was referred to the relevant departmental Standing Committee.

One of the most important changes that is proposed as an amendment to the Electricity Act 2003 (the 2003 Act) is to grant licence to distribute electricity as a distribution licensee in an area of supply. At the heart of this provision is also the deletion of the words “through their own distribution system” contained in the Fifth Proviso to Section 14 of the 2003 Act.

The consequent inference is that new companies/entities will be eligible to distribute electricity as a distribution licensee without installing or setting up their own distribution system, comprising substations, transformers, electrical wires, and all other associated facilities, which is hugely capital-intensive, entailing major capital works and time outlay of several years, to cover an area of supply.

The words “through their own distribution system” was interpreted in the legal battle between Tata Power and Reliance Energy, which went up to the Supreme Court of India, in Tata Power Co. Ltd. v. Reliance Energy Ltd., (2008) 10 SCC 321. The apex court held “The concept of wheeling has been introduced in the 2003 Act to enable distribution licensees who are yet to install their distribution line to supply electricity directly to retail consumers, subject to payment of surcharge in addition to the charges for wheeling as the State Commission may determine.”

Also read: Is the dollar rally over?

Currently, in the Amendment Bill 2022, the proposal to delete the words “through their own distribution system” effectively means implementing the observations laid down by the Supreme Court in the case of Tata Power. However, the enabling provision to allow new entrants to secure a distribution license without requiring them to set up their own distribution system actually cuts across the other way. In other words, the main inefficiency lies in the distribution system of networks and wires, which requires to be addressed and rectified by disinvesting them and getting in new players to bring efficiency to the wire business. Even the Return on Equity, the reasonable return, lies only in the wires business and not the supply business. The risks and rewards both lie in the distribution system, i.e., network business. Thus, enabling new entrants only in the supply business will be unattractive, as it would neither entail any significant reward nor would it be easy to procure power cheaper than what is otherwise available to incumbent discoms in the market through competitive bidding.

Another unshackling effect for the power sector has been made by the Appellate Tribunal for Electricity in its recent judgment in the Noida Power Corporation Ltd. Vs. UPERC in Appeal No. 72 of 2021. The issue was whether Noida Power had a perpetual licence, because of the absence of tenure/term in its 1993 licence. The tribunal held that Noida Power did not have a licence in perpetuity but would operate for 25 years computed from 10.6.2004, i.e., one year after the enactment of the 2003 Act. This is in consonance with the First Proviso to Section 14, read with Section 15 (8) of the 2003 Act. The First Proviso to Section 14 applies to entities like Noida Power which existed on or prior to the date of enactment of the 2003 Act and saved the balance of term of their licence. But it also says that the repealed laws which hitherto applied to them would continue to apply to them for a period of one year after the enactment of the 2003 Act, i.e., 10.6.2003. The tribunal held that Noida Power has licence till the year 2029, i.e., 25 years from 10.6.2004 (one year after the enactment of the 2003 Act).The tribunal’s judgment will have a strong bearing on all those state electricity boards/reorganised utilities in India where either no licence has been granted by the SERCs to them or no conditions are specified defining the term of licence. All these bodies will now have to gear up to deal with the end of their licence term in 2029, since the deadline of 25 years post the enactment of the 2003 Act would also apply in their case. If Noida Power cannot have licence in perpetuity, the entities/utilities that are operating with the assumption that they have perpetual licence can’t either.

Also read: The cost of the Fed’s challenged credibility

State electricity boards/reorganised utilities have a monopoly over the network and wires business in the whole of the state, causing inefficiency. Even their supply business incurs humongous losses, inter alia, on account of their failure to recover arrears of dues from consumers.

To sum up, the provision to introduce competitors only in the supply business by omitting the words “through their own distribution system” is a non-starter. This should not be carried out into effect by the legislature. Secondly, a substantial network business in our country will open up for new investments by efficient government bodies or private enterprises should the regulators and the state governments have the teeth to implement the Noida Power judgment in letter and spirit.

The writer is independent counsel and power sector regulatory expert

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.