When the bill which was in due course enacted as the Electricity Act, 2003 was under consideration of the standing committee of parliament, a number of issues which deserved closer examination had been highlighted. Several of these issues remain unattended. The Act, which is a halfway house, also raises a number of new issues which are likely to pose serious problems in the coming years.

The Electricity Act, 2003 (hereafter referred to as the Act) which has come into force (except for section 121) on June 10, 2003 is stated to be the ‘distilled wisdom’ of a series of commissioned international and national consultancy studies and seminars and conferences held at the all-India level during the last three years. It is acclaimed to be the roadmap for the electricity industry which will help hasten the pace of economic reforms in the country. When the bill on this subject was under consideration of the standing committee of parliament, I had highlighted a number of issues which deserved closer examination.¹ Several of these remain unattended. The Act, which is a halfway house, raises a number of new issues which are likely to pose serious problems in the coming years.

It will be best to begin the discussion with a brief overview of the power sector.² The report of the Planning Commission on the working of the state electricity boards (SEBs) for the year 2001-02 brings out several areas of concern. It is seen that power sector reforms so far have been half-hearted and halting. The driving force for the reforms is not a conviction among the states that the reforms are imperative. Rather it is the allurement of large financial assistance from the World Bank, Asian Development Bank and the bilateral donors which is goading the states to reluctantly show just enough progress to qualify for the release of the next instalment of aid from external sources! If this was not so, the financial performance of SEBs would not have deteriorated so sharply during the reference period 1996-97 to 2001-02. The percentage recovery of cost of supply through average tariff has gone down from 76.7 per cent (82.2 per cent in 1992-93) to 68.6 per cent. Average agricultural tariff in the reference years was just 21.2 paise and 41.54 paise respectively. Commercial losses (with subsidy) have increased nearly six times from Rs 4,674.31 crore to Rs 24,837.2 crore. These losses (without subsidy) have tripled from Rs 11,305 crore to Rs 33,177 crore. Net internal resources of SEBs which were (-) Rs 2,090.7 crore deteriorated sharply to (-) Rs 19,103.90 crore. Subsidy for domestic consumers increased from Rs 4,386.01 crore to Rs 12,238.51 crore. Subsidy for agricultural consumers increased from Rs 15,585.20 crore to Rs 30,462 crore. Gross subsidy (subsidy for domestic and agricultural consumers and inter-state sales) went up steeply from Rs 20,210.75 crore to Rs 43,060.10 crore. Gross subsidy per unit of sale increased from 75.4 paise/Kwh to 126.6 paise/Kwh. Revenue arrears in 1999-2000 were Rs 24,773.1 crore and accounted for 40.4 per cent of the total revenue for the year. The rate of return (ROR), which statutorily should have been at least 3 per cent of assets in service (excluding interest and depreciation), is in a bottomless pit and has deteriorated unbelievably from (-) 12.7 per cent in 1992-93 to (-) 19.6 per cent in 1996-97, (-) 43.1 per cent in 1999-2000 to (-) 44.1 per cent in 2001-02.

Attention should also be invited to the fact that the level of cross-subsidisation has been declining steeply over the years. Cross-subsidy from commercial and industrial sectors (as a percentage of effective subsidy to domestic and agricultural consumers) which was as much as 41.7 per cent in 1992-93 sharply declined to 16.7 per cent by 2000-01 (RE) and is expected to further decline to 14.3 per cent in 2001-02. Surplus generated by cross-subsidisation for the year 2001-02 was only Rs 5,759 crore. This is due to the fact that the share in the total energy sales of domestic and agricultural consumers, who get power supply at subsidised rates, has been progressively increasing over the years and stood at 50.1 per cent in 2001-02 against 49 per cent in 1996-97, while the share of industrial sector consumption has declined from 34.7 per cent in 1993-94 to 33 per cent in 1996-97 and further to 29 per cent in 2001-02. A reference may also be invited to the average tariff (paise/Kwh) charged by SEBs to their various customers in 2001-02. It ranges from 41.6 paise, at the lowest end, charged to agricultural consumers to 194.4 paise for inter-state sales, 195.6 paise for domestic consumers, 378.7 paise for industry, 426.3 paise for commercial use and 449.2 paise for traction. This data has considerable bearing on the further discussion on viability of SEBs in the coming years due to the liberal definition of captive generation in the Act leading to so-called ‘cherry-picking’.

Changing Ownership Profile

Yet another striking feature of the power sector is the rapidly changing ownership profile of assets. It is often forgotten that initially there was considerable opposition to the central government making investments in power generation. Several states considered it an unnecessary encroachment in their field. On this background, it is interesting to see that as on March 31, 2002, central sector generation accounted for a little over 30 per cent of the total installed generation capacity (1,04,917.5 MW) in the country. Over the coming decade, this share is expected to go up further. Purchase of power by SEBs from central sector generating stations, as a percentage of availability, has increased from 33.08 in 1996-97 to 36.77 in 2001-02. The investment in inter-state transmission lines is mostly by central public sector undertakings (PSUs). The financial assistance from the centre and its PSUs to SEBs has also increased substantially.

Another noteworthy feature of the power sector is the sharp decline in the Plan outlays for the sector both at the all India and the state level. At the all India level, the Plan outlay for power sector, as a percentage of the total Plan outlay, has come down from 19.04 per cent in the Seventh Plan (1985-90) to 14.49 per cent in the Ninth Plan (1997-2002). In the annual Plan for 2001-02, it was as little as 12.19 per cent (excluding Jharkhand). At the state level, the power sector outlay, as a percentage of the total Plan outlay, has come down from 31.55 per cent in 1990-91 and about 26-27 per cent for each of the three years thereafter to just 15.25 per cent in 2001-02. As a result, capacity addition in the Ninth Plan was only 47.2 per cent or 19,015 MW against the Plan target of 40,245 MW. This is particularly disconcerting as the per capita electricity consumption of 355 Kwh during 1999-2000 in India compares very unfavourably with that of 719 in China in 1997. It is also important to note that the elasticity of electricity consumption to GDP for 1980-81 to 1998-99 was 1.41. Thus, any shortfall in power availability will inevitably lead to slower rate of growth of the economy. If the severe constraint of financial resources is to be addressed, steps will need to be taken to increase the internal resources of SEBs. If it had been possible to adopt a tariff of 50 paise per Kwh for agricultural sales, SEBs would have been able to mobilise additional resources of Rs 1,984 crore in 2001-02. Their resources could improve to over Rs 33,176.8 crore even with a 0 per cent ROR and over Rs 35,432.5 crore at 3 per cent ROR, rather than the shocking ROR of (-) 44 per cent recorded in that year. Given the political will, this should not be difficult as, on an average, at all India level, SEBs would have to raise tariff by about 117 paise/Kwh for achieving 0 per cent ROR and by about 117 paise/Kwh for achieving 3 per cent ROR in that year. Not only are the state governments not permitting the SEBs to charge cost-based tariff but are not even coming forward to take over the burden of subsidy fully. Thus, subvention received by SEBs from the state governments was only Rs 8,339.62 crore while the uncovered subsidy burden was as much as Rs 28,976.92 crore in 2001-02. The provisions of the Act need to be examined against this background.

At the outset it must be mentioned that the whole scheme of the Act gives an impression that the subject of electricity, instead of being in the Concurrent List, is in the Central List. There is far too much centralisation and standardisation. Policies on all matters, namely, the national electricity policy and plan, and even the national policy on stand alone systems for rural areas and non-conventional systems, and the national policy on electrification and local distribution in rural areas are to be formulated by the central government (section 3). As in the case of enactment of this Act, the formality of consultations with the state governments will be observed but, in the light of experience so far, whether this process will be meaningful is difficult to say. It also needs to be noted that national consensus and agreements arrived at, year after year, in the national development council and conferences of chief ministers and power ministers have mostly remained on paper. The Act lays down that SERCs are to be guided, inter alia, by the principles and methodologies specified by the central commission for determination of the tariff applicable to generating companies and transmission licensees (section 61(a)). There is to be an unduly large central electricity authority (CEA) consisting of not more than 14 members of which 8 are to be full time members (section 70(3)). Its independence is, however, highly doubtful as the members shall hold office during the pleasure of the central government (section 70(6)). The critical importance of independence of CEA became clear during the approval process of the highly controversial Enron power project. The three-member selection committee to select members of SERCs is to include the chairperson of the CEA or the chairperson of the CERC (section 85 (1)(c)). The chairperson of the appellate tribunal is to exercise general power of superintendence and control over the appropriate commission (section 121). Mercifully, this section has not been notified and given effect to so far. The chairperson of the central commission is to be the chairperson of the forum of regulators (section 166 (3)). The continuance of SEB as the state transmission utility or a licensee for a further period beyond one year has to be mutually decided by the central government and the state government (section 172).