Gopal Daga,  M.D. Mundhra,  Yogendra Prasad,  Mohit Saraf,  Anil Sardana,  Arun Srivastava,  A.J. Talaulicar,  T.N.Thakur

Gaps in the Act... And some solutions

While the new Electricity Act has elicited a mostly positive response, industry experts feel there is room for improvement. Some of the changes they suggest are to free hydel generation from the “license raj”, restrict the tenure of regulatory commission members to one term, and allow captive projects to sell power to the SEBs and third parties without preconditions. They also want a specific time frame for introduction of open access to T&D networks and for elimination of cross-subsidies. We present their views…

Do you have any suggestions for changes to the Electricity Act, 2003? What provisions in the act need further clarification from the government?

P.N. Bhandari
Partner, Paras Kuhad and Associates (advocates)
The Electricity Act, 2003 is a big leap towards modernization of the Indian power sector. However, a statute is not and should not be static document. It should have adequate flexibility to remain a living document. Based on actual experience, it may have to be amended from time to time. Even our Constitution has been amended more than 80 times.

The provision to liberate generators from licensing is a bold and welcome feature. I have repeatedly canvassed that techno-economic clearance for private generation projects is totally avoidable. A company that is investing millions in setting up a power plant is fully qualified to assess whether the project is technically sound and financially viable. But surprisingly, for hydel projects we are still clinging to the old and outdated philosophy. There is no rationale for excluding hydel projects from this liberalization process. Rather the need for liberalizing the hydel sector is much greater because the ratio between thermal and hydel generation is tilting against hydel. Licensing has been dispensed within the thermal sector because it was felt that it leads to delay, to harassment and possibly corruption. All these arguments are equally valid for hydel projects. The only objection could be that hydel projects may involve construction of dams, etc., where safety is very important. But the state irrigation departments would in any case look into the safety of such civil structures and interception of water. The risk, if any, is from civil construction, which would be taken care of by the civil engineering departments. No extra electrical engineering risk is involved in hydel projects compared to thermal projects. Rather, the capacity of an average hydel generating station is going to be much smaller compared to an average thermal station. Hence, there is no justification for discriminating against hydel projects at a time when the country needs to give a push to hydel generation and other non-conventional energy projects that are eco-friendly and involve minimal recurring costs and consequently reduced tariffs. In order to give a boost to hydel generation it should be equally liberated from the licence raj.

Another provision that needs a relook is the tenure of the chairman/members of the regulatory commission. Unlike the higher judiciary, many of the regulatory commissions in the infrastructure sector have yet to establish their credentials for independence and ability to withstand government pressures. Very often the appointments in the regulatory commissions reflect the “flexibility” and “adjustability” of superannuating civil servants in the eyes of the government. Against this backdrop, there should be no provision for grant of a second term to such members. A term of three years is too short to fully understand the system, particularly for members who have no background in the power sector. There should be a one-time tenure of five or six years. Once appointed, the chairman/members should be totally immunized from government favours. Under the present dispensation, while considering cases for a second term, the government is bound to evaluate the members’ performance in the light of whether they have been “convenient” to the government or not.

At the higher level, we have been glibly talking of 100 per cent metering. However, those associated with the grassroots working of the electricity boards would confirm that such a provision in isolation can be counterproductive and installation of a larger number of meters may leed to lesser revenue. In the agricultural sector particularly, a large numbers of farmers either do not allow the installation of meters to operate. Because of this, the revenue from flat-rate connections in the agricultural sector have been substantially higher than that from metered connections. Hence, meter installation should be preceded by a substantial increase in the minimum charges so that even if some consumers damage the meters, they will have to pay a substantially higher minimum amount. Then alone will the consumer appreciate that a running meter is better than a stopped meter.

In statutory matters, there is very little scope for “clarification” by the government. In actual practice, if certain provisions turn out to be problematic, the government should not hesitate in amending the act from time to time. Obsolescence in technology is well known. We should be conscious about obsolescence in laws also and be willing to amend them promptly, whenever the need arises, particularly during the initial period.

Gopal Daga
Senior Executive, Shree Cement
My suggestions to make the Electricity Act, 2003 more compatible in connection with captive power projects (CPPs) are as under:

A CPP should be allowed to sell its surplus power either to the state electricity board (SEB) or to third parties immediately without any precondition. IN case the SEB is not willing to buy the same, the CPP should be allowed to sell the same to a third party at a mutually agreed upon rate. The power should be transmitted to the destination of use through the state gridline and the state compensated by paying wheeling charges. This will allow the CPP full capacity utilization as well as increase the availability of power. This will create a win-win situation for the state as well as for the captive power producer and buyer.

M.D. Mundhra
Vice-President, Commercial, Malana Power Company
The Electricity Act, 2003 is definitely a step forward, but a lot more needs to be done to give an impetus to the development of hydel power, which has vast untapped potential. This will require pragmatic and transparent policies for allotment of hydel power to the private sector and steps to make the power cheaper. In order to achieve this, we would suggest the following:

Delicensing: While all other modes of power generation have been delicensed in the Electricity Act, for hydel power generation beyond a particular capital expenditure, clearances from the CEA continue to be mandatory. In our opinion, since hydel power projects are capital intensive, the capital cost limit beyond which clearances should be made mandatory should be Rs.10 billion. Hydel power projects without any interstate issues should be delicensed.

Allotment of hydel projects: The act does not, in itself, address the key issue of allotment of hydel projects. As per the earlier policy, all hydel projects below 100 MW could be allotted on the MoU route and for projects above 100 MW, competitive bidding was to be followed. However, some states have experimented with the competitive bidding route for allotment of hydel projects below 100 MW also. By and large, such experiments of inviting competitive bids based on “royalty”, “upfront premium” or “rates of power” have failed and allotment of hydel projects to the private sector is practically at a standstill. We suggest that our of the 158 schemes covered in the prime minister’s initiative of 50,000 MW, at least 95 projects below 200 MW covering 11,805 MW should be earmarked for development by the private sector. Feasibility reports for these should be prepared e~editious1y and those pro­jects found viable should be allotted in a transparent manner through a two-stage bidding process without waiting for detailed project reports. The basis of the allocation of projects should be early completion time, which, in turn, will fetch more royalty to the states.

Reduction in cost of hydel power: At pre­sent, power is supplied at subsidised rates to cone class of consumers, particu­larly for agriculture. To offset this, power is supplied to industries at high rates, which makes them uncompetitive. Thus we are caught in a vicious cycle. The solution lies not in cross-subsidising one class of consumer by charging more from another class, but in taking steps to make the cost of power cheaper at the source, that is, at the generation level. We suggest the following steps to reduce the cost of hydel generation:

Rationalisation of royalty: At present 12-15 per cent royalty is charged from hydel projects. In the case of coal, there is a royalty because coal is consumed, but in the case of hydel, water is only diverted, not consumed. As such, there is no justification for charging royalty save for the need of resources for the development of hilly states. To balance this, the royalty should be reduced to 6 per cent in the first 15 years and increased to 18 per cent in the remaining years to make hydel power economical without sacrificing the interest of the state.

Waiver of customs and excise duties: The mega power policy, under which cus­toms and excise duties have been waived, should be extended to all power plants irrespective of their size and without any preconditions.

Creation of a hydel power development fund: A 5 per cent interest subside should be given to hydel projects by creation of a hydel power development fund on the pattern of the Textile Upgradation Fund.

Incentive for peak power generation: As is well known, hydel power can cater to peak demands. To provide incentive for peak generation, an additional 15-25 per cent premium should be provided on the normal tariff for generation during the peak period.

Open access: It seems that there will be multiple surcharges at various stages of transmission/distribution in case of open access to consumers. The surcharge in lieu of cross-subsidy needs to be capped. It should not be more than 50 per cent of the difference between the landed cost to the industrial consumer, including the rate negotiated by him with the generating company and wheeling/transmission charges and the rate being charged by the discoms now.

Time limit for abolition of cross-subsidy: There should be a cap on the time during which a state regulator should bring down the cross-subsidy to zero. In our opinion, this period should not be more than five years and should be declared now so as to avoid uneconomical investments in captive power.

Yogendra Prasad
CMD National Hydroelectric Power Corporation
Yes, the following are the suggestions for changes to the Electricity Act:

• Generation has been delicensed. However, hydroelectric schemes are to be submitted to the Central Electricity Authority (CEA) for concurrence but no time-frame has been fixed for the authority to issue concurrence. A time frame should be specified.

• Run-of-the-river schemes with non­consumptive use of water should be kept free from the interstate angle.

• The provision for exemption of concurrence for hydro schemes by the CEA below a certain amount of capital cost as fixed by the union government should be at par with the provision of other statutory clearances to be issued by government agencies like the Ministry of Environment and Forests.

The provisions in the act that need further clarification from the government are:

One of the functions of the state com­mission as specified in the act is to regulate the electricity purchase and procurement process of distribution licensees, including the price at which electricity is to be procured from the generating companies, licensees or other sources through agreements for purchase of power for distribution and supply within the state.

If the distribution company purchases power from a generating company whose tariff is determined by the CERC, then the distribution company need not get the purchase price approved by the SERC. This will delay their power purchase agreements with the gene­rating companies. This point needs clarification.

Mohit Saraf
Senior Partner, Luthra & Luthra, Law Offices

And God said, “Let there be light” and there was light. But the electricity board said: ‘He would have to wait until Thursday to be connected!”

Spike Milligan’s “light-hearted” observa­tion has little comic connotation for the average Indian. For decades, state-owned monopolies have through sheer inefficiency crippled the growth of the power sector. Hopefully, all that is about to change — or so the preamble to the act would have us believe.

The act has a laudatory objective-pro­moting competition in the electricity sector, rationalisation of electricity tariff, protecting consumer interests, et al. There is an insightful observation that “we promise according to our hopes and perform according to our fears”. By ana­logy, while the preamble offers many promises, the act itself performs a remarkable act of self-sabotage. In an attempted Japanese-style hara-kiri, the act scuttles the very notions that it ostensibly seeks to promote. Let us examine how.

Captive question: A captive generating plant as defined under the act means a power plant set up by any person to gen­erate electricity primarily for his own use and includes a power plant set up by any cooperative society or association of persons for generating electricity pri­marily for use of the members of such a cooperative society or association.

However, it is not clear whether a power plant set up through a special purpose vehicle (SPV), that is an incorporated body, for the use of the shareholders of such SPV would fall under the definition of captive generating plant. This assumes added significance when we consider that in order to shield a power project from any unrelated liability, banks and financial institutions would generally prefer to finance a project undertaken by any new SPV incorporat­ed for that purpose.

It is advisable that the said definition be amended to include incorporated bodies. It is the hallmark of a law well made that it recognises and reflects elements of the economic reality that it seeks to regulate.

Bungling on bundling: The act provides that transmission licensees cannot engage in trading activities. The objec­tive is to promote non-discriminatory open access to transmission lines. This well-intentioned provision, sadly, is doomed to fail. The reason: a loophole that is every businessman’s dream there is no restriction on the common ownership of the transmission and trad­ing entities. The absence of such a restriction would immediately impact the proposed “non-discriminatory open access” model.

This is especially ironical since the act provides for unbundling of the SEBs. The absence of a restriction on common ownership would lead to the bundling of transmission and trading activities in the hands of private players. It is highly recommended that the provisions concerning transmission licensees specific­ally provide that even the entities under common ownership wilt not engage in trading activity. Failure to do so might ­mark an avoidable-and dangerous- shift from public monopolies to private monopolies.

Open access: Open access to transmission lines and distribution networks is universally regarded as the key to increasing competition and ultimately promoting consumer interest. Though the concept of open access has been recognized in the act, the state commission has been given the power to introduce open access in successive phases and subject to such conditions as it may specify. Since no specific time-frame has been provided for the introduction of open access, this would doubtless cause uncertainty and defer the much needed investments in the capital starved power sector. It is advisable that the act itself specifies a common dead line (for all states) for full implementation of open access.

Cross-subsidy: One of the central concerns of industrial and commercial consumers of electricity has been the issue of cross-subsidy provided by them to agricultural and domestic users. Though the act refers to the elimination of cross-subsidy, it is conspicuously silent on the mechanism and time-frame to be adopted.

In addition, the surcharge under the act should merely cover the cross-subsidy currently being provided. It should not become a pretext for passing on industry inefficiencies to the helpless consumers.

Independence of regulatory bodies: There are various provisions in the act that could limit the growth of an independent regulatory body, on whose independence the entire growth and development of the sector is dependent. Hence, such provisions should be amended keeping in view that the government, which appoints and removes the regulator, is also a dominant and incumbent player in the power sector.

In conclusion, an often-overlooked fact is that electricity is a core infrastructure requirement for all other industries, in addition to being central to running commercial establishments and simply ensuring a comfortable stay at home. For interested parties, the act is not a mere legislation but an act of faith that the days of intermittent blackouts are finally over. Amending the act suitably would, hopefully, ensure just that.

Anil Sardana
Chief Executive Officer, North Delhi Power Limited
As a distribution company, the act is a welcome catalyst to promote competi­tion in distribution, which would force existing companies to perform and improve asset turnover and efficiencies. However, as regards implementation in the true sense of the framework con­tained in the act, one has to wait for supplementary policy documents such as a national tariff policy, national elec­tricity policy, national rural electrifica­tion policy, and a policy on criteria for award of additional distribution licences. These documents are being issued for discussion and debate to get the views of stakeholders. Once the entire policy documents and rules are in place, the framework of the act will become more credible.

Arun Srivastava
Managing Director, Essar Power Limited
I have the following suggestions:

• The act is silent on whether the power purchase agreement (PPA) signed by the SEBs prior to implementation of the act would not be reopened by the SERC. This has serious implications for those who have invested a lot of money.

• The act provides that generators can sell power to bulk consumers subject to levy of wheeling/transmission charges, including surcharge in lieu of cross-subsidy to be decided by the CERC/ SERC. I feel to make the state govern­ment serious about phasing out subsi­dies, the act should provide a cap on the surcharge rate and time limit for the phasing out instead of leaving it to the SERCs to decide.

• At present various state governments levy different rates of electricity duties on consumers. All the-good intentions of the act would go to the winds if this aspect is not covered. In my opinion, the act should mention that the rate of elec­tricity duty would be uniform through­ out the country or would not be more than that prevailing in each state before June 10, 2003.

• The scope of captive generation has to be clarified. Technically, as per the pre­sent act, even houses/shops and colony clusters can have captive generation. Captive generation should be limited to industrial activity and HT consumers.

A.J. Talaulicar
President& Exec. Director, Power Generation Business
and Cummins Diesel Sales and Services (India) Limited
We are in the process of analysing the implications of the new act with a num­ber of-external parties and refining our business strategies. As such, I believe it is somewhat premature to participate in a group forum. However, the following are our suggestions on the Electricity Act:

• Early announcement of a fuel policy to ensure longer-term predictability of fuel costs without which no significant pri­vate sector capacity investments would take place due to the uncertainty.

• The current move by some SEBs (such as Andhra Pradesh and Tamil Nadu) to impose electricity cess/duty even on captive generation for own use will act as a deterrent and is against the spirit of the Electricity Act, which seeks to encourage captive power capacity addition.

• A peculiar situation has arisen in states like Gujarat where the SEBs are returning captive power plant licence requests to industries, directing them to the SERCs, which say they do not know how to go about the matter, This needs to be addressed. There should be an interim nationwide directive to all states to allow users/industries to go ahead with captive power plant installation without licence hassles.

• Use of standby power generation capacity should be actively encouraged to aid in curtailing the peak demand-supply gap by providing incentives to users/industries that go off the grid dur­ing peak demand hours There should be stiffer differential power tariffs during the peak period. This would result in efficient utilization of and investment in overall power generation capacity.

• Incentives should be provided for dis­tributed generation in rural areas, for grid discipline, for usage of non-conven­tional energy and for cogeneration plants that help maximise efficiency.

• Environmentally responsible capacity additions should be encouraged. And penalties imposed for use of dirty fuels to ensure a cleaner environment by review and quicker implementation of modified/ appropriate emission norms in line with developed countries.

• CPPs should be allowed to supply power to an association of persons with a third-party financier. Alternatively, CPPs should be allowed to supply power to any cluster of customers without any additional surcharge. This will help mar­ket forces operate to close the capacity demand gap more efficiently.

• Competition should be promoted to bring down power costs to the end-user and allow market forces to enforce discipline on power providers. Increased competition among power producers and the play of market forces will allow customers to demand quality power (at right frequency and voltage), and penalise players that are providing poor quality power.

Clarity is required on:

• The definition of a CPP. Does the word “primarily” mean 80 per cent of the power generated or anything else?

• Whether CPPs using dedicated trans­mission lines also need to pay surcharge towards subsidy.

• Whether open access is subject to avail­ability. Does availability mean as of arty particular moment/ day/month /year?

T.N. Thakur
CMD, Power Trading Corporation
We are generally in agreement with the framework of the act but we would like to wait for the framework to be given body by the regulatory commissions and the policy-makers A lot of the legislation will be given substance through case law, and we would be keenly observing the developments on this front.