From 1948 to 2003 and now to 2020 the power sector has seen many so-called reforms. The author argues these measures introduced in the post-liberalization world are not in the public interest and undermine our right to life in relation to an essential public service.
Structural changes in legislation relating to economic issues – post-1991
The fundamental difference between a colony and an independent state is that legislation is enacted by the people, in the interest of the people,; whereas colonial legislation is primarily enacted to enable the coloniser to extract and transfer wealth. After the signing of the structural adjustment loan conditionalities in 1991, almost every legislation relating to the management of the economic sector were amended. The Electricity Act of 2003 amended the Electricity supply industry.
The amended legislation was not motivated by the legislative failure of the Electricity (Supply) Act 1948 but was guided and motivated by the World Bank and ADB. The first of the policy papers prepared by the World Bank, after the commencement of loans for “sectoral adjustment” or “structural adjustment” was -The World Bank’s Role in the Electric Power sector, (known as Power paper). It laid out the Bank’s plans to move away from supporting ‘the single national electric utility operating as a public monopoly (in developing countries) and to ‘aggressively pursue the commercialization and corporatisation of, and the private sector participation in, developing country power sectors. In a joint conference organised by the World Bank and Ministry of Power in 1993, it was agreed that the:
“solution to the sector’s problems lies in effecting structural, institutional, and regulatory reorganization along market lines, opening the sector to competition where possible (i.e., in generation and marketing of electricity), and providing arms-length regulation in the remaining areas, as a prelude to implementing other financial reform measures”[i]
Unfortunately, even after almost three decades, there has hardly been any studies whether these changes were beneficial to the majority of the people, particularly the vulnerable.
From Electricity (Supply) Act 1948 to Electricity Bill 2003
The operating philosophy of the changed legislation – Electricity Act 2003 – is the principle that sovereignty of a state is a hindrance to private investment. Investors should be free to negotiate terms without any regulations and conditions. A regulatory mechanism, independent of the legislative control, should be in place to prevent discrimination between investors, particularly between foreign and domestic investors.
Further, that legislation should enable investors to take over existing public assets. Statutory conditions such as performance requirements; measures to promote the economic development of weaker sections of society; enforcement of labour standards are considered burdensome because they inhibit investment. This is the philosophy that informs the entire Act
Socially purposeful areas were well defined in the Electricity Acts of 1910 and 1948.
- Reasonable returns to the licensee.
- Only proper expenditure allowed to the licensee.
- The straight-line method of depreciation.
- Role of inspectors as a link between the consumer and the licensee.
- Formulation of new schemes and methodology of their sanctions.
- Techno-economic scrutiny by the Central Electricity Authority.
Whereas, the objectives of the 2003 legislation were to achieve the following:
- To enforce the unbundling of the vertically integrated State Electricity Boards (Ironically, the vertically integrated character for the existing Private sector (e.g., TEC, BSES, CESC) were still retaining) in order to facilitate the privatization of the generation and distribution components and facilitate the multinationals to replace a public monopoly with a private monopoly. This is what was done in Orissa when US multinational AES replaced OSEB. This resulted in complete failure when AEs just abandoned the state and fled.
- To create institutions – regulatory commissions – that have no accountability to the legislature, yet regulate and control a highly capital-intensive industry (a single paisa increase in tariffs implies an additional annual revenue mobilization of Rs. 70,000 per MW at 80 % load factor)
- To create a “half slave and half free” sector in order to maximise private profits.
- To ensure that the Governments are demobilized and the entire fund requirement in this capital-intensive industry is based on and controlled by national banks and international finance capital.
- To eliminate any form of meaningful and informed techno-economic scrutiny (from a national perspective), thus giving MNCs a free run.
- To remove the distinction between power equipment manufacturer, fuel supplier and consultant by making them all equity holders of Independent Power Producers (IPPs). For example, in India Enron-GE-Bechtel together formed the Dhabol Power Company.
- To provide this essential public service only to those who can pay by themselves or through subsidies in the form of direct cash transfers, while eliminating cross-subsidies.
Why the urgency for the Electricity Bill 2020
The Electricity Bill did not achieve what it was supposed to. Investments from abroad did not flow in abundance. Largely, domestic investment was in the form of bank loans. The financial health of the distribution sector deteriorated. Privatisation of the State Electricity Boards either in its entirety or through franchisees failed. Private power plants with imported equipment became stressed assets.
Once again, all these failures were attributed to legislative failure on the one hand and inadequate incentives to private investors on the other. And so, Electricity Bill 2020. The opposition from State and engineers and employees forced the Government of India not to introduce similar legislation in 2014 and 2018. The 2014 Bill was even put scrutinised and approved by the Standing Committee of Parliament.
What better, God sent opportunity could when the entire nation is locked down. And for good measure, even the highest court has suspended its hearings save for the rarest of rare urgent matters.
The statement of objects and reasons of the Electricity Bill 2020, makes it very clear that the purpose of the bill is essential to:
a) Create a semi-judicial authority to ensure the protection of the contracts,
b) ensuring timely payment to the generators
c) privatising distribution systems
d) removing subsidies and cross-subsidies.
Creating an authority to enforce contracts – Where is the need?
The obvious questions that should be asked:
- Is the existing Indian jurisprudence, relating to contracts, not capable of handling contracts arising in the electrical supply industry?
- Why then separate legislation exclusively for one commodity or service (whichever way electricity may be defined)
- If indeed the electricity supply industry is so specialised, why should the authority be headed by a Judge whose knowledge of electricity is not likely to more than as a consumer?
- Would this be a forerunner to creating similar authorities in every economic activity?
- Since there are already Electricity Regulatory Commissions, what would be the distinction between regulating and enforcing contracts?
Should electrical supply industry contracts be enforced, even if there is a conflict with the public interest?
Contracts against the public interest
In the All India Power Engineers Federation Vs. Sasan Power Ltd and others, the Honourable Supreme Court has held that “it is clear that the moment electricity tariff gets affected, the consumer interest comes in and public interest gets affected….. if there is any element of public interest involved, the court steps in to thwart any waiver which may be contrary to such public interest” What is paramount, public or private interest?
Contracts requiring payment even when nothing is consumed
Immediately after the sector was opened by almost all the state governments, for questionable motives, signed contracts on a negotiated basis before competitive bidding was stipulated. These contracts required that the cost per unit of electricity purchased would be broken into two parts, the fixed cost and the variable cost. The fixed cost was payable irrespective of whether electricity was drawn by the distributors (mostly state-owned DISCOMS) or not. Several state DISCOMS are paying thousands of crores of rupees even when they are not drawn a single unit from these generators.
It must be pointed out here that the decisions to draw or not draw electricity from a particular generator is not decided by the DISCOM but by the efficiency of the generator. This is because electricity can only be consumed when produced and produced when consumed, therefore the quantity of power being put into the grid is decided (scheduled) by the Load Dispatch Center based on the efficiency of the generator. Costly is scheduled last and dropped first. Therefore, does public interest not require the contract to be amended, rather than be enforced?
High priced long term contracts
When large scale solar electrical power was inducted, huge power solar power plants with capacities in thousands of kilowatts were set up Several states entered into long term contracts for the supply of solar electrical power at Rs. 4.50 per kWh (which translates into Rs. 7095 Crores per year per GW at 18% capacity utilization factor) The current prevailing price is Rs. 2.44 per kWh. When the present Andhra Pradesh Government tried to rework the contracts and reduce the tariff all hell broke loose.
Ambassadors of countries including Japan, Canada and France, some financial institutions and renewable energy developers took up the matter with the Prime Minister, the Union power minister R K Singh and the Chief Minister Jaganmohan Reddy. Union power minister R K Singh decreed that the A.P. Govt. shall immediately reverse its orders. The Andhra Pradesh high court dismissed the case asking the renewable power companies to raise their objections before Andhra Pradesh Electricity Regulatory Commission (APERC).
The Solar Power developers who have commissioned Solar Power Plants in Gujarat in the years 2011 continue to get a tariff rate of Rs. 15 per unit. In 2018, in reverse bidding for 500 MW capacity solar power plant, Gujarat discovered tariff of Rs. 2.44 per unit[ii]. But the rate paid to the older units continues to be Rs. 15 even today. An opportunity loss, due to excess payment, of Rs. 1980 crores per Megawatt per year. (WOW !! is perhaps the immediate response)
Why should state governments not be able to renegotiate contracts when there are technological and market changes that reduce the tariffs? It happens in every sector, why not in the electrical power sector? Today due to COVID the oil prices have sharply fallen to even negative in the USA, would the long-term purchase agreements not be renegotiated? Entrepreneurs are rewarded for taking risks, are they not?
The Electricity Act 2003 removed the statutory obligation to obtain a techno-economic approval, from the Central Electricity Authority (CEA), for setting up a thermal power plant. The private sector set up 34 thermal power plants, importing power generating equipment from China. Equipment for over 40,000 megawatts, that is equivalent to four years production capacity of BHEL. As a consequence, BHEL has posted losses after about four decades of posting profits. Most of these 34 power plants became stressed assets for reasons that the thirty-seventh report of the Parliamentary Standing Committee on Energy identified:
- Non-availability of Fuel: – Cancellation of coal block. – Projects set up without Linkage.
- Lack of enough PPAs
- The inability of the promoter to infuse the equity and working capital
- Contractual/Tariff related disputes
- Issues related to Banks/Financial Institutions (FIs).
- Delay in project implementation leading to cost overrun.
- Aggressive bidding by developers in Power Purchase Agreements (PPAs).
Every one of these reasons constitutes managerial misjudgement, if not complete incompetence.
The Parliamentary report noted that, as of June 2017, the power sector had nearly Rs 6 lakh crore of total bank loans. Of this, Rs 37,941 crore are non-performing assets, while restructured advances amounted to Rs 60,858 crore. The concern is not limited to financial stress but also criminality. The Directorate of Revenue Intelligence (DRI) has issued show-cause notices worth over Rs. 50,000 Crores for alleged over-invoicing of coal and manufacturing equipment. A case filed in the High Court of Delhi by the Center for Public Interest Litigation has quoted very specific and detailed data of over-invoicing. However, the High Court of Bombay has denied DRI even the right to obtain information from outside India If investors
Why should contracts that belong to the various categories discussed above be enforced?
Legislation based on myths?
Should legislation be based on myths and their promotion? The first myth is that competition is possible in a wired system. Electricite de France in a Round Table with the World Bank on ‘Power supply in Developing Countries – will reform work?’ stated:
“Modern economic theory tells us that competition is more difficult to introduce in network infrastructure than in other industries, and more difficult in electricity that in other networks. It is odd that the World Bank derives no consequence from this, and treats electricity as any other commodity…. We also know that competition does not streamline regulation but makes it on the contrary more complex and burdensome. Introducing competition creates a “half-free, half slave” sector …. Marginally, the idea beyond our discussion about privatisation and competition may be to open the power sector of developing countries to foreign operators, expertise and capital….”
Many of the initial generation contracts were based on assumed 16 % rate of return. How are these compatible with the competition?
Many distribution companies were bifurcated and given to franchisees. These franchises were monopolies in their own areas. In Mumbai, there are areas where both TATA and Reliance (now Adani) have a licence. A study should be made of the resultant litigations. But state after state went ahead with parcelling cities or parts of it to the favoured franchisee. In the cities of Gaya, Samastipur and Bhagalpur in Bihar, Kanpur in Uttar Pradesh, Gwalior, Sagar and Ujjain in Madhya Pradesh, Aurangabad and Jalgaon In Maharastra, Ranchi and Jamshedpur in Jharkhand to name a few the regulatory commission was compelled by hardcore evidence of failure to cancel the franchise.
Another myth It is often argued that the mobile phone has many service providers and a consumer can shift from one to another without changing the phone number, so why not in the case of electricity. The fallacy in this argument is that the mobile telephone is a wireless system, but electricity has to be a wired system. Whereas in the mobile service the cost to serve is recovered, in the case of electricity most of the households and agricultural pump sets pay below the cost to serve and the service is provided at a loss. Some countries with more favourable conditions have introduced multiple licences in distribution. This has been possible because of very capital-intensive metering at various levels. There is no evidence to show that there has been a significant advantage to consumers.
The Electricity Bill 2014 and the Electricity Bill 2018 spelt out in detail how the privatisation of distribution would be carried out, it also spelt out details of unbundling distribution and introducing multiple licences, the Electricity Bill 2020 does not even do that yet it deals with distribution sub-license and franchise leaving huge gaps which are bound to result in litigation. Why the Electricity Bill 2020 wants distribution sub-license and franchise to be introduced without even the provision made in the earlier Bills.
Rewriting the constitution?
The Constitution puts electrical power under the concurrent list. Systematically, the role of the state has been eroded. The Electricity Bill 2003 unbundled the state electricity boards, transferred to independent regulators the power to set tariff and parameters for the working of the supply industry. The Electricity Bill 2020 would create an independent contract enforcement authority and empower load dispatch centre to oversee the payment security mechanism before scheduling the dispatch of electricity.
On the operational side, the contribution of state generation is diminishing rapidly. Solar power and large parts of the thermal and hydropower generation are either privately owned or owned by the Govt. of India till they are disinvested. In transmission, States have little role. Central Govt. owned NTPC and power grid, contrary to the provisions of the Electricity Act 2003 that prescribe unbundling, is to enter the distribution field. The Electricity Bill 2020 enforces privatisation of distribution. What then is left for the states?
Should legislation not be based on reality?
Finally, the question that is of great importance is should legislation not be based on ground reality? Briefly, the Indian reality is reflected in this passage from the concluding chapter of Mapping Power[iii]
“.. many citizens remain at economic levels where electricity prices make material difference of livelihood prospects. In a context where the historical salience of electricity to Indian development outcomes remains powerful , the political credibility of promises to address social concerns in electricity – whether directly or indirectly – has to be won and not assumed……in a poor country such as India, with persistent demands for social gains through access and subsidies can reforms occur in a context of competitive populism.”
The experience of the United Kingdom is not very encouraging either:
The ultimate aims of the U.K. reforms were to remove the sector from government funding and to reduce prices for consumers through the increased efficiency of private sector operation and the pressure of competition. Broadly speaking, the first objective has been accomplished, but the second objective has yet to be convincingly achieved”[iv]
As the last word, in the modern world, just to mention a few aspects of life, it is not possible without electricity, it is not possible to live on the 20th floor, maintain means of communication and even entertainment, obtain proper medical diagnostics or treatment. Electricity should be classified as a fundamental right under Article 21 of the Constitution. Instead, the power reforms reinforced by the Electricity Bill 2020 are making it a luxury.
[The author, K Ashok Rao, is Patron of the All India Power Engineers Federation]
Note: Views expressed are personal