Draft Electricity Bill, 2000

Filling a vital gap in the power sector

By Mohit Saraf,
Partner, Luthra & Luthra Law Offices
Earlier attempts to privatise the power sector have faced their share of setbacks, largely due to the absence of forward-looking legislation that could keep pace with the changing economic scenario. The existing legislative framework was more suited to a monopolistic regime rather than a market driven by competitive forces. Thus, there was urgent need for legislation that could provide an impetus to private participation and permit restructuring of the sector on commercial and market principles, besides bringing in transparency, efficiency and accountability. It was with these objectives in mind that the Draft Electricity Bill, 2000 was initiated.

The bill is a culmination of extensive consultation and the active participation of intellectuals, the stakeholders, experts, consultants, bureaucrats, politicians and various other parties with interests in the power sector. It involved comparisons of different successful models, overseas experiences, experiments and lessons learnt. Although in western countries such a democratic approach has been adopted while drafting important legislation, this is probably the first time such an exercise has been attempted for drafting legislation in India.

The Draft Bill, a by-product of experience and vision, strikes a balance between the conflicting interests of various stakeholders - the consumers, the transmission company, the distribution company and the supply company.

It is hoped that the Bill, which is to be introduced in Parliament soon, goes through in its present form, as prepared by the Ministry of Power and NCAER. Any move to introduce modifications, amendments or variations without the same level of consultation would only create an imbalance and undo the positive effect brought about through the consultative approach adopted for the bill. It would make the long-drawn consultative process meaningless and, importantly, may send wrong signals to the international financial community, which would be dissuaded from bringing in additional investments in this sector.

The bill has introduced several new concepts. These deserve special attention:

Regulation Authority

The bill envisages the establishment of an independent and autonomous regulatory authority aimed at creating an environment in which a competitive market yields higher efficiency and transfers the benefit to the consumer. The bill contains the requisite regulatory benchmarks such as legislative competence, accountability, due process, expertise and efficiency. Regulatory institutions have a definite edge over ministerial departments as they offer a greater degree of continuity and predictability in policy, more so where the incumbent is a dominant player in the sector.

The bill has defined the role of the regulator and has provided adequate powers to the central and state regulators in tariff fixation, issuing of licences, regulating licensing conditions, search and inspection, and in deciding penalties in case of a breach.

Focus on distribution

The journey of the electricity sector started from being a monopolistic sector, which experienced a partial opening up in the early 1990s with private sector participation in the generating sector. The Draft Bill for the first time is attempting to open up the distribution sector in a big way. Most of the power projects could not tie up their finances due to the SEB's lack of adequate escrowable capacity.

Let us examine the Enron controversy. MSEB is required to pay for power on a monthly basis, but due to the lack of reforms in the distribution sector, MSEB's revenue stream has not correspondingly increased to meet the payment obligations to Enron. Unless there is significant improvement in revenue collection, there can be no feasible development of generating stations in the private sector.

Electricity as a product and consumer choice

The draft Bill for the first time proposes to treat electricity as a product capable of being bought, sold and transported. The "product" status had not been granted in the previous legislative framework to electricity.

The treatment of electricity as a product also provides a choice to consumers to select the supplier from whom one has the liberty to purchase electricity using the same distribution network.

Price determination
The procedure for determination of tariff has been clearly laid down in the bill. This responsibility has been assigned to the regulatory authority. The bill prohibits the government from issuing directives to the regulatory authority on tariff matters and directs the government to bear the cost of the subsidy provided at its direction. In other words, electricity rates would be based on cost-oriented principles and affordability to the weaker sections of society. The bill leaves sufficient scope for tariff to be driven by market forces without regulatory intervention.

The regulatory authority would be responsible for preventing predatory pricing whereby a company can price its product below cost in the hope o driving competitors away from the market. This would give the company a degree of domination, which could then be used by it to recover the cost of predating by increasing profits at the expense of the consumers.

Restructuring of the state electricity boards

The issue of the restructuring of the SEBs is crucial to power sector reforms. The poor financial health of the SEBs can be attributed to the losses suffered on account to the losses suffered on account of the weak billing system, lack of proper machinery for recovery of dues, pilferage T&D losses including theft and subsidies. There is also an absence of functional autonomy, financial independence, professional management and operation on commercial principles.

The model of restructuring envisaged in the bill involves the unbundling of the SEBs and other utilities into generation, transmission, distribution and supply companies, each functioning as individual profit centres. The bill further endeavours to provide non-discriminatory access to T&D lines.

It has also made provision for the manner of utilisation of the proceeds of privatisation, that is, for employee retirement benefits, debt repayment, etc.

Financial Independence

In the proposed scheme, the administrative ministry is the link between the regulatory authority and Parliament or the state legislature as the case may be. Parliament or the state legislature approves the expenditure of the regulatory authorities on the basis of the recommendation of the administrative ministries. In other words, the government has the power to prune the financial needs of the authorities before sending it to Parliament.

One school of thought opposes this arrangement and advocates financial independence of the regulatory authority. It proposes that the regulatory authority should have fund-raising capacity. However, the fact is that the funds of even the Supreme Court of India are approved by Parliament - and yet this has not compromised its independence.

Since 1991, we have been trying to reform the power sector. But instead of a comprehensive legislative framework, there has been a piece-meal approach to the whole matter. As a result, private sector participation has not been able to make the desired impact on this sector and consumers have not reaped any benefits. It is high time a comprehensive legislation that can spur competition and improve the pace of investment is introduced. The Draft Electricity-Bill, 2000 fills this vital gap in the power sector.