What, according to you, are the likely changes the UPA government will effect in the Electricity Act, 2003?

V.S. Ailawadi
I think that it is the time-frame for unbundling of the SEBs and the universal access provided to captive power plants, which are being seen as the real problem areas. Some states are not prepared for unbundling. International experience shows that in order to create a robust electricity industry structure, generation, transmission and distribution should be separate business operations to capture efficiency and productivity improvements. It will also lead to more transparency and accountability of the utilities. There should be no objection on unbundling per se but some states feel that the time-frame of one year is too short. The transmission business must be hived off on priority basis in order to create effective non-discriminatory access. There is no justification for delay in unbundling of the transmission network. One can understand delay with the more complex distribution network, which has more employees and spreads out across states. The Electricity Act gives options for more than one model for restructuring. It is open to states keeping generation and distribution integrated or separating the business and there is no compulsion towards privatization. It is political and vested interests that are raising unjustified concerns for unbundling. Let there be more transparency and accountability and this is best achieved by separating distribution and generation.

A concern has also been expressed by some regulators about the unconditional and non-discriminatory access granted to captive power generators. There is prima facie discrimination as no surcharge is to be levied for transmission of power from captive generators while the same is payable by a licensee or generating company.

P.N. Bhandari
The review may be concerned with agricultural tariff. Andhra Pradesh and Karnataka were among the foremost pro-reform states but the ruling parties in these states have lost heavily. In Tamil Nadu, the government has revived free power to agriculture. Andhra too has declared free power to farmers. In Madhya Pradesh, unbundling has been deferred. After the recent elections, politicians have realized that unless the farmers “feel good”, other reforms would prove to be of a peripheral nature. The act mandates gradual subsidy reduction. But in order to placate the farmer lobby, perhaps it may be provided that in agriculture, the tariff will not be more than 50 per cent of cost.

The issue of unbundling of SEBs may also come up for review. Frankly, unbundling is not reform. When the general trend all over the world is towards mergers and acquisitions, one finds little merit in this World Bank prescription, which has been blindly followed. The advantage of economies of scale is lost with the splitting up of SEBs into smaller companies. The logic of unbundling stands punctured when the act allows a generator to also be a distributor. In fact Section 14 exempts a generator from any licence, if he chooses to combine power distribution in a rural area.

In India, the most successful private utilities combine generation, transmission and distribution. Instead of unbundling, the creation of separate profit centers could also serve the same purpose. With heavy subsidies in agriculture and rural areas, privatizing discoms may be difficult. The private companies are inclined to take up urban areas only. Instead of the complex unbundling, it would suffice if the transmission is insulated as a highway to provide a level non-discriminatory field for buyers and sellers of electricity. In the major reform agenda, that is, distancing from government, reduction of T&D losses, checking theft, reducing subsidies, improving quality of service, etc., unbundling has no role.

The definition of captive plant may perhaps be reviewed because, under the garb of a captive plant, a parallel system can be operated by an association of unrelated and unconnected persons. If a captive plant is set up in an industrial area, the most paying customers can be hijacked by the captive generator.

While deli censing generation under Section 7 of the act the same facility has not been extended under Section 8 of the act for hydel generation. The only possible justification could be to ensure safety of dams and other water impounding structures, but civil engineers are better qualified to handle this work, rather than electrical engineers. At a time, when hydel generation is to be accorded highest priority, this restriction is totally unwarranted, at least for intra-state projects.

Anjan Ghosh
The principal apprehension many states have is that by introducing competition, there is a likelihood that the areas and customers with the most favourable load characteristics will be taken away by private players. This may result in a further deterioration in the financial performance of already weak SEBs, since they would be left with the most unremunerative segments. Further, the targeted reduction in cross-subsidy could result in politically unpalatable increased in tariffs for domestic consumers. Changes, if at all, could be designed to provide for a more level playing field so that the “burden” of serving unremunerative segments does not fall only on SEBs. It could also attempt to provide more breathing space to the SEBs by extending the time-frame within which competition is introduced. Similarly, the time-frame within which cross-subsidy is to be eliminated may also be increased. Some additional measures could also be introduced to accelerate the pace of rural electrification.

S.L.Rao
They would like to keep the monopoly and monopsony powers of the state governments in electricity intact so that they do not lose the “golden geese” – the customers who are large users, prompt payers and can be charged tariffs well above the costs of service. The SEBs do not want privatisation and are also against unbundling. They are against measures to reduce costs by reducing overstaffing, improved work norms, penalties for collusion in theft and other activities that lose money for the undertaking. They are against the loose definition of captive generation. They are against the elimination of cross-subsidies since that is in keeping with the philosophy of “soaking the rich to pay for the poor”. While it has not come up so far there is bound to be a demand that the central commission should not have overriding power to set rules that would apply to the states, in what is constitutionally a concurrent subject.

Mohit Saraf
Most likely there will be no significant changes to the act itself. The act in its present form is sufficient to allow for many of the concerns expressed by the various parties.

The left parties have claimed that they are against the principle of cost-based tariffs since there should be differential prices for different users and that the act does not permit the same. In doing so, they have selectively quoted Section 61 of the act. But a complete reading of Section 61 clearly indicates that the cross-subsidies are to be eliminated only within the period to be specified by the appropriate commission. However, no specific period is specified in the act itself and the commission is free to determine the appropriate time-frame for elimination of cross-subsidies. Therefore, if the government wishes to continue with cross-subsidies it need not amend the act. The same may be achievable by convincing the appropriate commission to suitably stagger the time period.

The prime minister recently highlighted the importance of differential tariff and indicated that this was a mechanism which could be aptly utilized to help the poor but he emphasized that the subsidy mechanism needs to be funded through budgetary support. He also indicated that there would be an increased emphasis on rural electrification – which is mandated in Section 5 of the act. It is at once clear that a proper implementation of the act would help ensure that electricity reforms are carried out with a “human face”.

The CMP also provides for the postponement of unbundling. The finance minister has reportedly remarked – ostensibly due to pressure from the left parties – that unbundling of SEBs is not a precondition for private participation in generation and distribution. Some industry sources have remarked that the left was not against unbundling SEBs but against any consequent privatization, which may lead to job redundancy. These perceptions again do not clearly take into account the scheme of the act. First, it must be noted that unbundling is a definite requirement for private sector participation in generation and distribution. Unbundling is required because it is a necessary condition for open access to take place. Open access can be ensured only if there is an independent transmission utility and without unbundling, such an independent transmission utility cannot come into existence. Without open access the power sector will not attract private sector participation. Unbundling need not necessarily be followed by privatization. As mentioned earlier, the key reason for unbundling is the separation of the transmission utility and as long as this is done the provisions of the act are satisfied. There is no further statutory mandate to privatize the unbundled entites.

It appears that that calls for a review of the act are merely rhetoric, driven by political compulsion and grounded plainly on an incorrect appreciation of the act. A careful consideration would lead to the conclusion that no amendments are required. A thoughtful implementation of the act would be able to address the issues which are being currently raised.

T. N. Thakur
The announcements have been mainly on two fronts. First, the 12-month period mandated for restructuring of the SEBs has been relaxed. Second, the issue of phasing out subsidy may be reviewed. At the same time, there have been announcements to state that subsidies would have to be explicit, and provided through the budget. A reaffirmation has been given to increase private participation.

On balance, therefore, I do not foresee a major departure from the existing legislative intent. There could of course be some mid-course correction to the sequencing of various components of the reform process, and this by itself may be necessary to enable benefits of the reforms to accrue to all segments of society.

How would this so-called “review” of the act affect investor confidence in the sector?

V.S. Ailawadi
Investor confidence is a casualty in an uncertain environment. There are many issues that must be resolved before we can say that we have created a predictable policy framework and regulatory process in the power sector. That is a reason investments are not coming in power infrastructure as compared to the telecom sector.

P.N. Bhandari
Investors are very often guided in these matters by “perception”. The fact that the reviewing of the act has been incorporated in the CMP at the instance of the leftists would weigh heavily with them. Investor confidence is like the sensex rising or falling on faint hints. However imaginary the fears may be, until the review is concluded, the sector would be beset with uncertainty and investor confidence would remain shaken.

Anjan Ghosh
In case the review does lead to major changes in the act, investor confidence will be affected since it will show that an act, passed by both houses of Parliament, cannot be considered a binding document on all participants. It would once again expose the fact that the “sanctity of contracts” cannot be taken for granted, and it does introduce an element of unquantifiable uncertainty that potential investors will have to live with.

S.L.Rao
Distribution privatization will not progress. Privatization of profit-earning central enterprises will be held up. The poor leveraging of resources by NTPC, NHPC and NLC had prevented their establishing new capacities in line with the permitted debt-equity ratios. This will continue since there is no particular measure that has been mentioned to improve autonomy and incentives for management of such enterprises. Trading will slow down and hence the optimization of supplies will not take place. New private generation capacities may not grow as fast as needed since there will be doubts about the paying capacity of the monopoly government undertakings to whom sales must be made. Efficiency improvements will slow down. Cross-subsidies will hamper the competitiveness of industry. The mounting losses in the sector will be huge burden on governments and prevent them from investing in physical and social infrastructure.

In the year since the Electricity Act was passed, the share values of private electricity companies and others supplying to the sector have boomed. This is so for government-owned enterprises like BHEL as well. Companies like Reliance Energy have raised vast sums of money overseas. Many companies have entered into electricity trading and are also attempting to set up electricity exchanges. Big projects in generation and transmission are at the starting point. Substantial investments are being made in private distribution. All these hopeful signs will be dashed if the anticipated changes take place. We need to move forward and not back. The poor and vulnerable groups must get electricity and at affordable prices. That is a social responsibility, not a corporate one. Even such subsidies must be targeted properly and be limited to the essential minimum. Governments have not shown the ability to target and cap such subsidies in any field. They must fined other ways to give subsidies. We need changes in the act in due course to carry availability, accessibility, affordability and quality further. This will happen only if there is freedom to all to enter the sector and as much competition as possible.

Mohit Saraf
Stocks in the power sector, which have been bullish for some time, nose-dived on the news that the act would be reviewed. Any attempt to amend the act to prevent rationalization of tariffs, phase out cross-subsidies and reorganize the SEBs is bound to negatively impact investor confidence. Presently, investors are adopting a wait-and-watch approach to see if the proposed changes are actually implemented.

If the SEBs are not reorganized and the agricultural/domestic tariffs are kept low then the financial conditions of SEBs will not improve. In these circumstances an investor would not be able to sell the power at the desired price, and even for power which is sold, there would be difficulty in receiving payments from SEBs, which appear to oscillate on the brink of imminent bankruptcy.

However, such a grim scenario appears hypothetical since it is unlikely that any adverse amendments to the act would actually ensue. Occasionally, inertia – a fundamental force in Indian politics – can be unlikely friend.

T. N. Thakur
Investors hate uncertainty. However, I believe that in the present situation, the uncertainty is being overstated. The long-term prospects of the businesses in the sector may not be affected. Investment in the industry will remain an attractive option.