Electricity reforms – ‘open access’ stymied by populism

An over-arching component of prime minister Modi’s good governance mantra is effective implementation of the laws and policies & programs of the government. He has amply demonstrated this in several areas viz., DBT [direct benefit transfer] of LPG subsidy, Jan Dhan Yojna [JDY], MGNREGA etc with substantially positive outcomes. However, electricity reforms is one area where proper execution is hamstrung primarily due to non-cooperation from states.

At the core of reforms initiated by present dispensation in the power sector is improvement in the functioning of state electricity boards [SEBs], greater regulatory oversight over SEBs and power generators besides creating conditions for enhanced competition in the sector so that consumers get the benefit in terms of lower tariff and better quality of electricity supply.

A major objective of the amended Electricity Act [2003] was to provide for ‘open access’. Under this policy to be implemented within 5 years, choice is given to bulk consumers [those with consumption more than 1 megawatt (MW)] to choose their supplier. While, enabling them to access power at cheaper rates, this also serves the purpose of putting pressure on SEBs to take steps for improving their working leading to reduction in tariff offered by them.

The state electricity regulatory commissions (SERCs) were set up in each state for effective regulatory oversight and intervention, enforcing higher governance standards, bringing in competition and ensuring that correct tariffs were charged.

Since, the proposed dispensation would inevitably lead to SEBs loosing their good customers [industries and businesses who pay higher rates and yet do not default] at least in the near term, the Act also required them to pay an ‘open access surcharge’ to concerned SEB whom they want to leave. This was meant to be a support [albeit temporary] in lieu of latter having to subsidize supplies to vulnerable groups such as farmers and low income households. Over a period of time, the surcharge was to be reduced.

Unfortunately, states have used this very leeway to prevent good customers of SEBs from leaving. By keeping surcharge at a fairly high level [and not bothering to reduce as mandated under the Act], they ensured that effective cost of power post-shift to a new supplier [tariff plus surcharge payable to SEB] is higher than what they pay to SEB. As a result, customers had no incentive to switch. The states have also used frivolous arguments [for instance, saying there was no capacity in the system to carry electricity to them from a different supplier] to turn down the request made by customers.

The net result is customers have remained glued to SEBs – despite their willingness to switch and availability of cheaper alternatives – thereby defeating the very objective of amendment in the Act. This has also led to a collateral damage of latter remaining complacent in regard to their working which meant continuing electricity outages coexisting with high levels of un-utilized capacity.

How far states can go in protecting inefficiencies of SEBs at the cost of bleeding their balance sheets and at the same time, perpetuating stranglehold over good consumers [to somehow limit the extent of bleeding] is best illustrated by the example of railways.

The railways is the biggest consumer of fuel. It has an annual fuel bill of Rs 26,000 crores which includes Rs 12,000 crores as expenses on purchase of electricity. Under the Railways Act, it is allowed to distribute and supply electricity and is a “deemed” licensee as it is buying electricity for its own consumption. Therefore, it is exempt from payment of surcharge.

The above position was confirmed vide an order of Central Electricity Regulatory Commission [CERC] in November 2015 which ruled that the Railways was a deemed licensee under the Electricity Act [2003] and as such, it did not need to pay the surcharge. This was upheld by the Supreme Court [SC] and also reiterated in guidelines on tariff policy notified by the power ministry in January 2016.

Yet, it is paying around Rs 2,500 crore by way of ‘open access surcharge’ to various SEBs viz., Uttar Pradesh, Chhattisgarh, West Bengal and Odisha. In a bid to seek waiver from this payment, it has been trying to get no-objection certificate [NOC] yet, the latter are delaying giving it. This is not even needed as per the law and SERCs have no interest in enforcing it either.

Pertinently, bringing about substantial savings in fuel bill in particular, electricity was one of the several innovative measures contemplated by the reformist railway minister, Suresh Prabhu to improve its functioning and reduce operating cost. The extant legislation too is supportive and yet, he is far from achieving the objective, courtesy continued intransigence of states. This leads to troubling questions.

Why are states sabotaging enforcement of the provisions of the Electricity Act? Why are they misusing powers available to them under federal structure [that Modiji is trying to strengthen]? Why are the SERCs are not performing the role assigned to them? What is the utility of having a law which cannot be implemented?

At the root of all this is the lack of political will to tackle the high transmission and distribution [T&D] losses – a sophisticated nomenclature for power theft – as also supplies to farmers and poor households at heavily subsidized rates [even free in some states] which leads to heavy losses of SEBs. To some extent, they reduce the loss by charging exorbitant tariff from good customers.

It is precisely this buffer that states do not want to loose which if allowed, would further aggravate their losses. The provision for ‘open access surcharge’ in the Electricity Act [2003] was also kept ostensibly to bail them out. But, then states are using it to the hilt to perpetuate status quo thereby shattering the very foundation of reforms embodied in concept of “open access”.

It is good to see the Modi – government making all out efforts to help states strengthen transmission and distribution lines [in addition to a financial restructuring package granted last year to mitigate SEBs accumulated losses] so that T&D losses can be reduced. But, this will be of little use unless the scourge of theft and cult of subsidies [not supported by state budget] is eliminated.

The states must shun their old [albeit populist] ways of running government to make way for meaningful reforms leading to lower cost of power to industries and business establishments thereby making them competitive and help enhance their contribution to growth.

No Comments Yet.

Leave a Comment