Changes to the Electricity Act, 2003 have been put out in the public domain for comments. The current version was in the making for at least two years now. Successive prior attempts did not see the light of day. The present changes are less ambitious on the remit and hence perhaps more implementable. Whether it is adequate to address the issues of the power sector is the moot question though, and answers on that are less than clear.
At the conceptual level, the proposed changes aim to bring in reforms by taking discretion out of the hands of the states and utilities in areas where such discretion has affected the commercial construct and governance. The biggest change is through the Electricity Contract Enforcement Authority (ECEA) which aims to take out payment delays and defaults, as a lever available to the utilities, to manage finances. This will have a huge impact because power purchase costs typically constitute about 80% of discoms’ overall costs. Past defaults have caused a domino effect on the rest of the sector.
If they can be contained then not only will the sanctity of commercial arrangements be restored, but there may also be significant improvement in commercial discipline.
A second key change proposed is to take away the discretion of individual states on selection of state regulators. Independent regulation was a fundamental premise of the Electricity Act, 2003 that never really worked at the state level. The proposed formulation of a common national selection committee for all regulatory functions is much more elegant and implementable.
There are a number of additional fixes proposed including on transparent administration of subsidies through Direct Benefit Transfer (DBT). There is also a huge thrust on promotion of clean power. An attempt has also been made to explicitly recognise distribution franchising as a means of better service delivery. A new concept of distribution sub-licensing has been introduced, but needs detailing.
The intent of the changes proposed is unexceptionable. The two questions that stick out though pertain to adequacy and implementability. On the question of adequacy, it is noteworthy that some of the issues discussed in the past relating to markets, competition, efficiency, financial viability, sector restructuring, etc. are largely unattended in this draft. There is also an effort to push through changes through rules formulated by the central government which may be contested.
The states are the major players in the electricity sector, especially in distribution. They would be the principal entities impacted by the changes. Even as they probably would appreciate the logic, given their condition resistance is only to be expected. They must be communicated to and consulted with and the resistance worn down.
Which brings us to the efficacy of the proposed changes. Given the deep-seated issues facing the distribution sector, these changes would probably be inadequate to turn the sector around. With the economic effects of COVID-19 likely to last for long, the capacity of the already bankrupt discoms to comply with the new requirements is very suspect. Hence, instead of trying to keep the sector structure and ownership intact, the need of the hour may be much more radical reforms that divest the state of ownership and bring in better governance and accountability. The ECEA, regulatory reforms and other measures proposed in the Bill would arguably have a much better chance of success without the state being so deeply enmeshed in the ownership and operations of the power sector.
(A version of this article appeared in Financial Express dated 11 May 2020)