Multiple Distribution Licences

In its anxiety to meet multiple and often conflicting objectives and to be unduly futuristic, the act provides that there can be more than one distribution licensee for a given area and such a licence cannot be denied if an applicant fulfils the prescribed conditions, on the ground that there already exists a licensee in the same area for the same purpose (section 14). This is likely to be viewed as an unduly high business risk by new entrants in distribution business and may become a major disincentive. Considering the fact that the response of the private sector to take up distribution business has been lukewarm, a number of incentives such as MYT-setting and adoption of distribution margin strategy are being proposed to enthuse the private sector. On this background, to permit more than one distribution licensee for an area can be hardly justified at this stage of reforms. Such a step may certainly be necessary in the long run to promote competition but it can wait for some time as otherwise it will further slow down the pace of privatisation in the country. It needs to be noted in this context that Tatas and BSES, who are distributing power in Mumbai for decades, are still not prepared to face competition from each other and are pursuing their claims in the courts. Another question which needs consideration is whether we, as a country, can afford to provide for so much capital redundancy in an industry which is so capital intensive.

The Act (proviso to section 14) states that “where a person intends to generate and distribute electricity in a rural area to be notified by the state government, such person shall not require any licence for such generation and distribution of electricity, but shall comply with the measures which may be specified by the CEA under section 53”. Perhaps this is based on the presumption that dispersed generation from non-conventional and mini hydel sets would be cheaper. The available data show that this is far from true. Co-generation power, depending on the season, costs in the range of Rs 2.53 and Rs 2.01/Kwh, with 5 per cent annual escalation in UP. The figure for Maharashtra is Rs 3.05/Kwh with 2 per cent annual escalation. Some states have given far too liberal incentives for non-conventional power which have led to its high cost. The buy-back rates for wind power range between Rs 2.25 and Rs 2.90/Kwh with annual escalation.⁸ The tariff-setting for wind power generation in Maharashtra, with excessive concessions given by the state government, has raised many contentious issues leading to prolonged hearings before the MERC whose decision in the matter is still awaited. The Government of Orissa has taken a decision to sell off 7 mini hydel power projects in the state. It is reported that these power projects are not in operation as cost of power from these plants is quite high at Rs 4 per unit.⁹ Insofar as rural distribution is concerned, the experience of co-operatives is far from encouraging. Almost all of them are surviving only due to SEBs supplying power to them at highly concessional rates. The most shocking case is that of Mula Pravara Cooperative Society in Maharashtra which has defaulted on arrears of hundreds of crores of rupees and their write-off by MSEB. With such cost structure of even non-conventional and dispersed generation, it is evident that agricultural tariff will have to be subsidised for several years to come. In this light, to per-mit setting up of generation and distribution projects in the rural areas without any scrutiny of their costs will foreclose the options of the state government in so far as taking over of subsidy burden is concerned.

A reference may be made in this context to the concept of cost to serve as opposed to cost of supply. Ideally, tariff for every consumer group should be based on the cost to serve the concerned group. In working out the cost to serve, several factors such as the cost of generation, transmission and distribution, clustered vs dispersed supply, voltage at which supply is made, and whether supply is given only in off-peak hours or at all hours, will have to be taken into account. Ideally, a set-off in tariff should also be provided for unreliable and low quality supply based on frequency and duration of power failures and interruptions, and low and fluctuating voltages. On this basis, cost to serve for agricultural consumers should be much lower than estimated at present. Laying down uniform guidelines in this regard under the Act and its Rules would have been advisable.

The Act is weak and wanting in so far as regulatory mechanism is concerned. As brought out earlier, whatever may be the experience in other countries, in India, the success of power sector reforms hinges critically on the success of regulatory mechanism. Towards this end, the Act needs to be amended as brought out hereafter. The Act should provide for a clear and unambiguous bar against reappointment of any member or chairperson on the same or any other commission. This should also hold good for the chairperson and members of the national appellate tribunal. Section 113(b) (i) states that a person who “is, or has been, or is qualified to be, a judge of a high court” could be eligible for appointment on the appellate tribunal. Looking to the fact that this is a national level tribunal and is to decide appeals over the decisions of SERCs/CERC, it will be best to delete the words “is qualified to be” from this sub-section. The past experience brings out that, to be effective, SERCs need to be given much larger financial autonomy and independence by levy of a cess on power consumption in the state. No less important is the accountability of the regulator to state legislature/parliament. Towards this end, it will be useful if the working of the regulators is reviewed by the standing committee of parliament and the relevant committee of the state legislature. A series of other recommendations made by this author and the Prayas Group study, referred to earlier in footnote 3, need to be incorporated in the Act.

Consumer Protection

Major provisions pertaining to protection of consumer interests in the Act are: section 57(2) which makes a licensee liable to pay compensation, for non-compliance with the standards of performance, to the person affected as may be determined by the regulatory commission; section 64(3) which refers to the procedure for making tariff order after considering all suggestions and objections received from the public; section 23, which, inter alia, refers to issue of directions to licensees for promoting competition; section 60 regarding avoidance of market domination; and section 61 regarding the factors which are to be kept in view in tariff determination. Sub-section (c) thereof refers to encouragement of competition, efficiency, economical use of resources, good performance and optimum investments. Section 42(6) provides for appointment of an Ombudsman by the state commission. However, provisions of sections 173 and 174 show that the competition law passed by parliament will not be applicable to the power industry. This is indeed unfortunate. This law should be of considerable importance in protecting consumer interests, particularly with the entry of large industrial houses in this sector.

Though consumer participation is recognised as an important element in overseeing public utilities, the Act does not have much to say in so far as the participation of NGOs, consumer groups and civil society is concerned. This is in spite of the actions taken in this regard so far by some of the commissions. For example, KERC has taken steps which include appointment of a consumer advocate, survey of electricity consumers through the office of consumer advocacy, organising workshops and training programmes for consumer organisations, issue of monthly newsletters, grievance handling through consultants and so on.¹⁰ The Act needs to be amended to cast a statutory responsibility on SERCs/CERC to take pro-active actions for institutionalising consumer participation and consumer advocacy.

Section 127(6) lays down that the rate of interest on delayed payments will be “16 per cent per annum compounded every six months”. Considering the softening of interest rates in the country and their likely downward trend, the rate as above seems unreasonably high. It will also be better if the rate of interest is fixed under the Rules, rather than in the Act, so that it will be easier to change it when necessary.

The enactment of a comprehensive law on electricity was long overdue. This task has now been accomplished. However, it is important to ensure that the Act does not remain on paper as has happened with several other laws in the country. In the power sector itself, the salutary statutory provisions for a fixed tenure for the chairman and ROR of SEB have been observed more in breach. It will be equally important to ensure that the Act subserves its objectives and does not lead to more problems than it claims to solve. This will call for continuous reassessment of its underlying strategies in the light of implementation experience. After the unprecedented power blackout on both sides of US-Canada border in August 2003, Governor of New Mexico and former US Energy Secretary is reported to have said that his country was a major superpower with a third world electrical grid. The California experience of power sector reforms too brings out that there are no ready-made answers and ‘one size fits all’ approach is not the best strategy for a road map for reforms.