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Electricity Amendment Bill 2021 – Why it is opposed by some States ?

Electricity Amendment Bill 2021 – Why it is opposed by some States ?

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  • GS 3 || Economy || Infrastructure || Power & Energy

Why in the news?

  • The central government is facing opposition to the Electricity Amendment Bill 2021 even before it is introduced in Parliament. The bill seeks to delicense both generation and distribution of electricity.

The rationale behind the bill

  • Electricity distribution is at the cutting edge of the power sector. Despite the last 25 years of power sector reforms, the electricity distribution companies are unable to pay the generation and transmission companies as well as banks / financial institutions due to poor financial health.
  • The discom companies are running under huge losses and are also in debt. The Bill brought by the Government would allow several schemes that would restructure the outstanding debts of these power companies and would in turn incentivize them to reduce their loss. But these schemes are only of short-term financial use to the discoms and the debts tend to accumulate.

Key provisions of the bill

  • Power distribution delicensing: The bill seeks to delicense power distribution to lower entry barriers for private players and create competition in the segment, allowing consumers to choose from multiple service providers.
  • Establishment of a Universal Service Obligation Fund (USOF): There is a provision for the establishment of a universal service obligation fund, which will be managed by a government corporation. This fund will be used to cover any cross-subsidy deficits. There will be no need for a security deposit if you get your power from pre-paid metres.
  • APTEL is being strengthened: The Appellate Tribunal for Electricity (APTEL) is being bolstered by an increasing number of members. The domains from which the chairman and members of the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) will be appointed.
  • Transfer of RPO responsibility to the central government: Keeping in mind the national climate change objectives, the responsibility for determining Renewable Power Obligations (RPO) has been transferred from state commissions to the federal government.
    • The RPO is a mechanism that requires obligated entities (primarily power distribution utilities or discoms) to purchase a certain percentage of electricity from renewable energy sources as a percentage of total electricity consumption.
  • Cross-subsidy means one set of customers receives favorable prices at the expense of other customers. For eg: Assume that average the cost of electricity is Rs 5/unit. An industrial consumer is charged Rs 6/unit while a household consumer might be charged Rs 4/unit. So, in this case, a domestic consumer is being cross-subsidized by the industrial consumer.
  • Adjudication of LDC disputes: As the interconnected power system becomes more complex with the addition of renewable generators, the role of load dispatch centres is becoming more important. Dispute resolution involving load dispatch centres (LDC) has been added to the functions of regulatory commissions.
  • Increased authority for regulatory commissions: Some referred to regulatory commissions as “toothless tigers” in the past. Their orders will now be enforceable as a decree, including attachment of property, arrest, and incarceration. These powers will be exercised appropriately with a member (law) on the commission, resulting in better enforcement.
  • Increased penalties: The penalty for violating the Act’s provisions has been increased to Rs 1 crore. According to the proposed amendments, non-compliance with RPO will result in severe penalties.

Issues/Concerns  with the bill

  • Private-sector entry: Lowering entry barriers for private-sector players will result in consumer suffering. According to a study conducted by Prayas (energy) group Pune, the results of parallel licensing operationalization in Mumbai have been contrary to expectations, as it has resulted in a series of unnecessary litigations, skyrocketing expenses, steep consumer tariffs, and regulatory failure.
    • Except for cities like Delhi, Ahmedabad, and Mumbai, the power supply in most parts of the country is controlled by state-owned companies.
    • The states have highlighted that the private players could become the reason for cherry-picking as they would provide benefits only to industries and commercial consumers. This could lead to a loss in the general customer’s rights or residential and agricultural consumers.
    • West Bengal Chief Minister Mamata Banerjee had argued that the entry of private players could lead to private players providing power to only commercial and industrial consumers, while the poor and rural consumers will be left to public sector discoms.
  • Spirit of federalism being defied-Also, States are objecting to the requirement that Regional Load Dispatch Centres and State Load Dispatch Centres follow instructions by the National Load Dispatch Centre. This proposed amendment is criticised as being the spirit of
  • The poor condition of the existing discom network: Newly registered companies are permitted to use both the power allocation and the network of the existing discom, which may be in poor condition in many cases due to a lack of funds. The quality of supply to electricity consumers will suffer as a result of such a network.
  • Mandatory Qualifications: A fourth member is added to Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC), who must have qualifications and experience in economics, commerce, public policy / public administration, or management. To avoid rehabilitation, such a background and experience in economics/finance should have been made mandatory for this position.
  • Vague clauses are used for the removal of CERC / SERC members, making them vulnerable to abuse.
  • AT&C losses:The Aggregate Technical & Commercial (AT&C) losses of 12 states were more than 25 percent and of six states between 15 and 25 percent, according to a report released by the distribution utility forum based on the Uday dashboard in 2020.
  • Electricity- A concurrent item
    • States have highlighted concerns that allowing the entry of private players could lead to “cherry-picking”, with private players providing power to only commercial and industrial consumers and not residential and agricultural consumers.
    • Experts also said there is the possibility that the move could lead to cherry picking by the private sector, especially till the time the tariff structure builds in cross subsidies.
  • Varying tariffs – Tariffs for power currently vary widely in India with commercial and industrial players cross subside the power consumption of rural residential consumers and agricultural consumers by paying far higher tariffs.

Way forward

  • A Universal Service o\Obligation, in which any private player is required to provide power to all consumers, including residential and agricultural consumers, may aid in addressing the issue of cross-subsidization. The minimum area to be covered by private sector competitors must be defined in such a way that it includes an urban-rural mix, a universal service obligation, and cross-subsidization elements in the ceiling tariff.
  • Electricity regulatory commissions: The commissions should be established as strong institutions, with their autonomy respected and maintained. Following the establishment of a solid framework for fair competition, the government should reduce its frequent interventions in the sector. Government interventions frequently distort the market and should be used only in the event of a market failure.
  • Reduction in tariffs-The proposed amendment bill could have included a broad guideline to reduce tariffs.
  • Better targeting through Direct Benefits Transfer (DBT): DBT has been used to rationalize food and fertilizer subsidies, and the same can be done in the electricity sector. DBT will result in improved accounting and subsidy targeting.
  • Other reforms
    • The provision of coal and railway freight regulators.
    • Linkage of Aggregate Technical & Commercial losses as a key performance indicator for release of central funds to states by any ministry.
    • Provision of a risk management committee and corporate governance within discoms, irrespective of being a listed company.

Conclusion

  • The Bill provides the Central government more power to determine tariffs and regulations in the power sector. Since electricity is a Concurrent subject, States must not be deprived of their powers, through this Amendment.

Mains model Question

  • Discuss the problems faced by the power sector in India and give suggestions on what needs to be done to better the situation?

References