A tale of disconnected dots: The regulatory algorithm behind Electricity Amendment Bill 2020

Economic Times, May 24, 2020

By Pradeep S Mehta and Sarthak Shukla

The Ministry of Power recently floated an amended version of the Electricity Act, after consecutive unsuccessful attempts to introduce changes in 2014 and 2018. Hailed as sweeping structural reforms by many, the proposed amendments have recently been subject to resistance by many states, including opposition by Tamil Nadu, Telangana and even Bihar, an ally of the Central Government.

The Electricity (Amendment) Bill 2020, according to the MoP, is brought in to address “critical issues weakening the commercial and investment activities in the electricity sector”. It prescribes multiple policy tools to achieve this objective.

Privatisation, which is one of the potential impacts of the amendments, is also the preferred narrative of the Government of India to deal with the ongoing Covid–19 pandemic. The Finance Minister, has recently announced that Union Territories will soon have private discoms and the same model will be subsequently replicated in various states.

But are these steps enough?

For answering this crucial question, an effective regulatory test can be deployed to assess whether the solutions proposed are viable, sufficient and sustainable in addressing the core problems faced by the sector.

Before putting the amendments to this test, a brief historical recap of problems of this sector becomes crucial.

The current challenges plaguing the Indian power sector seem to be derived from a long-drawn history of structural issues being sub-optimally addressed, if not neglected. These include operational and financial inefficiencies of generation, transmission and distribution utilities, access and quality of power supply, political interference, lack of private investments, inadequate public infrastructure and lack of consumer participation.

To address them, so far many steps have been taken by the Government but these issues have remained persistent.

And yet again we are poised with a set of “sweeping” reforms, without any prelude to the effectiveness, viability and suitability of the proposed solutions. Some of the key reforms proposed and their foreseeable impact are discussed here.

Firstly, there is a concerted effort to centralise decision making in the power sector. The provision to dilute the power of State Governments by setting up a National Selection Committee for appointment of Chairperson and members of state regulatory commissions reflects this narrative. Furthermore, empowering the National Load Dispatch Centre to oversee payment security mechanisms before dispatch of any power also reaffirms this direction.

The objective seems to bring uniformity in the broader direction of governance of this sector, whereby the states are aligned to the vision of the Centre. However, a significant critique is the dilution of state level concerns by digressing from the decentralised, un-bundled governance structure that has been envisaged through previous legislations.

Secondly, there is an element of expanding the scope of privatisation in the power sector. The provisions relating to establishment of franchise or distribution sub-licensee models of discoms are a step in this direction. The underlying reasons seem to be two-fold, firstly that more private investments would flow into the distribution business and secondly, privatisation of utilities would bring in operational and financial efficiency in this sector.

Although, the immediate objective of enhancing investment potential in the sector is a likely outcome from this amendment, the much larger objective of de-stressing the discoms needs careful consideration. The critique to the argument that privatisation ensures efficiency, stems from the fact that electricity is a public good and for universal access the State has to step in to ensure last mile delivery. In addition to it, several national and international experiences also suggest that the unintended consequences of privatisation including rent-seeking and friction between consumers and suppliers, leads to a difficult situation for policymakers. Therefore, a careful assessment of circumstances under which privatisation could yield desirable results is a pre-requisite for standardising such a system. Independent monitoring and evaluation of existing distribution franchise models can be the first step in this endeavour.

Thirdly, there are proposed changes that aim to do away with some of the common bottlenecks hampering the scope of private investments in the power sector. These include establishment of an Electricity Contract Enforcement Agency (ECEA), doing away with subsidy regime by mandating cost-reflective tariffs and institutionalisation of payment security mechanisms. These are some of the long-outstanding demands of investors in the power sector and can be considered a progressive move. The formation of ECEA also highlights the urgency of enforcing the sanctity of contracts in the Indian power sector, especially after the Andhra Pradesh episode.

The key to achieve these objectives of contract enforcement lies in enhancing the capacity of stakeholders to plan, design, implement and monitor contracts. Similarly, the abolishment of subsidized tariff has political and social implications. The states may perceive it as a threat for their political strategy of promising power at subsidized rates or for free. On the other hand, consumers may perceive it as a threat to their cash flows, resulting from inefficiencies or delays in direct transfers of allocated subsidies.

Finally, to give clean energy a greater push, there is a mention of a national renewable energy policy in the legislation itself. This will certainly provide a policy preference to India’s clean energy ambitions but more clarity is needed in this regard. An example to learn from is the European Union Green Deal which provides a detailed roadmap with clear timelines and sources of finance to achieve a climate neutral Europe by 2050. For it to become binding and operational, a legislative approval is required unlike in India, where a legislative mention is used to expedite the transition.

Thus, the given amendments may be a move in the right direction, but lack a structured roadmap for bridging the gaps between the existing problems and the proposed solutions. Joining these disconnected dots is the need of the hour to do justice to the long-standing reforms required for a sustainable power sector and growing national economy.

*The authors work for CUTS International, a global public policy research and advocacy group.

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