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Power possibilities

Electricity Act reform welcome, but challenges remain

Business Standard Editorial Comment  |  New Delhi 

The Union government has announced its plans to further open up the electricity distribution and transmission sector. According to a report in this newspaper, the planned reform would require the Electricity Act, 2003, to have certain enabling provisions that would allow for competition in electricity distribution. In essence, multiple supply licensees, including private companies, would now be allowed. The Electricity (Amendment) Bill was first introduced in 2014, and, while movement on it has been slow, it is now hoped that it will be passed by the end of the year. The proposed changes have been overdue for long as they would help achieve the primary goal of allowing greater competition in the sector for the benefit of consumers.

The goals of the Bill, therefore, are laudable. In essence, the benefits of open access under the Electricity Act will now be extended to smaller power consumers, with consumption of less than one megawatt. There are other progressive measures in the draft Bill - such as the suggestion that at least 10 per cent of a generation company's installed power capacity should be from renewable energy. The Standing Committee of Parliament has recommended that this measure be diluted, but doing so would be unwise as it could run counter to both global and national commitments to climate change mitigation. It is also proposed that the current system of licensing, in which a single licence is provided to a company for both the transmission and the distribution of electricity - in other words, for both the maintenance of the network and for the supply of electricity to end-users - will come to an end. Instead, separate supply and transmission licences will be handed out. Then, private companies will be granted supply licences -although the draft Bill specifies that, in each area, at least one supply licensee will be a public company, which will serve as the "supplier of last resort" in case other licensees abandon the area and leave their customers hanging. The presence of competition in the supply of power will hopefully improve consumer welfare.

However, there are several hurdles that the government must overcome while implementing the proposed changes. A major challenge will be the standard obstacle whenever two different entities are dependent on the same network. If one is responsible for the upkeep of the network, and the other one provides access to the network and collects fees from end-users, then conflicts can arise and these ideally need to be eliminated or resolved without any delay. The company responsible for the network may find that the funds available to it for the upkeep and investment are insufficient. More often, the company responsible for supply or access may find that the monopolist, who controls the network, is choking off business. The experience from the railways is instructive: Indian Railways' control of the railway network has never really allowed private users of the tracks - in 2006, container companies were allowed in - to take off. Terminal access charges, haulage charges, and transit guarantees were a constant source of tension. Their equivalents in open access to electricity - wheeling charges and so on - may prove to be stumbling blocks in the implementation of this amendment, as indeed they were in the original Electricity Act. Supply companies cannot be left to be dependent on carriage companies. If there is no effective regulatory oversight on carriage companies, and supply companies are not free to make choices, the benefits of this reform will be limited. Thus, the amendment must be accompanied by a strengthening of the regulatory authorities, which cannot show partiality to the carriage companies.

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First Published: Mon, July 25 2016. 21:50 IST