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Distribution Reforms: Coming out of the shadows

Distribution Reforms: Coming out of the shadows

Accountability and minimum interference can help the power sector in the country to undergo reform.

Although power has always been an area of focus, the ever-widening gap between supply and demand throws light on the endemic problems in the Indian power sector. Power generation is certainly a cause of grave concern. The recent woes besetting coal supply and their adverse impact on the power sector generally as well as the slow adoption of alternate energy generation methods have long been in focus. It almost overshadows the equally urgent issues about power distribution in India. The World Bank´s recent report on power distribution underlines these issues and raises questions around the regulatory framework around power distribution and its implementation.

Regulatory Framework and History
The power sector in India is currently governed by the provision of the Electricity Act, 2003 (EA).
Prior to its enactment, this sector was governed by the provisions of the Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948, under which the generation, distribution and transmission was carried out by the various State Electricity Boards (SEBs). However, these legislations failed to address the burgeoning problems relating to power supply in the country.

Recognising this, the Government of India organised two Conferences of Chief Ministers to discuss the whole gamut of issues in the power sector and the outcome of these meetings was the adoption of the Common Minimum National Action Plan for Power (CMNPP). The CMNPP recognised the widening gap between power demand and supply. It acknowledged that the financial position of SEBs was deteriorating and the future development in the power sector cannot be sustained without viable SEBs and improvement of their operational performance.

The CMNPP identified creation of a regulatory commission as a step in this direction and specifically provided for establishment of the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERCs). After the finalisa¡tion of the national agenda contained in CMNPP, the Ministry of Power assigned the task of studying the restructuring needs of the regulatory system to Administrative Staff College of India (ASCI), Hyderabad. The ASCI report strongly recommended the creation of independent Electricity Regulatory Commissions both at the Centre and in the States. Based on this the Electricity Regulatory Commissions Act was enacted in 1998.

At the same time, various States enacted reform legislations toward unbundling and corporatising SEBs into separate generation, transmission and transmission companies. In this background, the EA was enacted to consolidate the various legislations and encourage private sector participation in the power sector. Despite these efforts, the problems in the power sector still subsist. Availability of power could prove a critical stumbling block in India´s developmental plans.

Issues in Distribution
The Government of India requested the World Bank to conduct a study on the state of power in India. The World Bank, on June 24, 2014, released its study paper titled ´More Power to India: The Challenge of Electricity Distribution´ (Study) of the power sector´s performance since the passage of EA. The Study has focused on distribution as key to the performance and viability of the sector.

While the Study has praised certain initiatives of the last government, such as the Rajiv Gandhi Grameen Vidyutikaran Yojana, crediting to it an increase in access to electricity from 59 per cent of the population in 2000 to 74 per cent in 201 , the Study states that power distribution reforms are the need of the hour for India to ensure electricity access to all by 2019. Currently, three-quarters of India´s population has an electricity connection although the power supply remains inadequate and unreliable as most States have heavy load shedding. More than 300 million Indians still live without electricity, approximately 200 million of them in villages that are considered ´electrified´ . As of today, India´s annual per capita power sector consumption is at around 800 units, which is among the lowest levels in the world.

The Study has recognised the unreliability of the power grids in India, with large parts of several States having to load-shed throughout the day. The Study also mentions the huge losses the sector is running, to the extent that the sector was bailed out twice, costing the exchequer Rs 350 billion in 2001, and more than four times that-Rs 1.9 trillion-as recently as 2011, which equals approximately 1 per cent of the nation´s GDP.

The reason for such heavy losses in the sectors appears to be, among other things, the heavy subsidies provided by the distribution companies and power theft, wherein consumers tap electricity from the grid without paying. It may be noted that the EA stipulates stiff penalties as well as imprisonment for power theft.

Rampant power theft inevitably leads to the consequent and equally serious problem, viz., mounting debts of power distributors. Power theft exacerbates the already weak financial condition of distribution companies arising out of heavy subsidies that they provide. The result is that distribution companies having to distribute power at less than cost, making it unviable for them to operate efficiently, resulting in greater borrowings. The Reserve Bank of India has recently raised concerns about the ability of the State Governments´ debt repayment capacity due to higher market borrowings which could lead to heavy repayment obligations in 2017-18. Could this result in another bailout if these latent problems have not been addressed?

Reform Measures
The question that arises is whether the current regulatory framework is adequate to combat these issues. We would submit that what is required, is not new legislation, as the EA together with the various amendments have provided for a strong power regime, but the implementation of the EA at every level. Given that this is a highly politicised issue, impediments in further, certain State level reforms could possibly be replicated in other States.

  • Corporatisation: The EA provided for corporatising of SEBs together with setting up independent regulators at the Central as well as State government level, thereby creating a dichotomy of the State and the discoms. These institutions can be further strengthened by Guidelines on Corporate Governance for Centre Public Sector Enterprises (CPSEs) being made mandatory as opposed to just being guiding principles for PSUs. These Guidelines cover issues like composition of board of directors, setting up of audit committees, role and powers of audit committees, issues relating to sub¡sidiary companies, disclosures, accounting standards, risk management, compliance and schedule of implementation, etc.

  • Implementing unbundling of SEBs: In what seems to be a clear case of reform, Gujarat was power deficient barely a decade ago, but now has a surplus of 2,114 MW and a vibrant energy sector. This is largely due to the passage of the Gujarat Electricity Industry (Reform and Reorganisation) Act, 2003, which led to the unbundling of the Gujarat SEB which then became a holding company with a power generation company, a power transmission company and four distribution companies under its umbrella. This enabled better management and more efficient operations. ? Measures undertaken by the State Electricity Regulatory Commissions. Under the EA, each State is required to set up a State Electricity Regulatory Commission (SERC) as a company. These SERCs are in principle supposed to be free from legislative and political interference though in reality, they are accountable to the State legislature, as the SERC submits rules and regulations to the legislature before issuance. Often initiatives are undertaken by SERCs such as the Maharashtra Electricity Regulation Commission, which is the first and only SERC to form a panel of authorised consumer representatives to represent the interests of consumers in SERC proceedings. The Delhi Electricity Regulation Commission (DERC) began conducting consumer surveys in 2007, and is the only State in which surveys are carried out regularly, with the results used to measure licensee performance. The survey asks domestic consumers about their preferences along parameters such as supply continuity and quality; their satisfaction with their discom along several micro parameters; and their ranking of the importance of each parameter. The DERC publishes the survey findings in its annual reports along with the scores of the three discoms and the best- and worst-performing areas for each discom. Madhya Pradesh Electricity Regulation Commission is notable for raising consumer awareness of standards of performance. As can be seen, the proactive stance by SERCs have contributed to improving distribution systems.

The path to a turnaround
Rather than an extensive overhaul of the law, what is required is the overhaul of the perspective towards electricity reforms. Reforms in power distribution and capacity building require that bailouts by the government become a thing of the past, subsidies be rationalised, upward revisions of the tariffs and distributions charges as genuinely required should be permitted to be implemented and power theft be seriously prosecuted and punished in accordance with the EA. The key to the solution seems to be accountability, transparency and freedom from interference by interested parties.

This article has been authored by Aakanksha Joshi, who is an Associate Partner and Tarini Menezes, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice.

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