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Electricity Act


The Electricity Act 2003 repeals a old legacy of 1910 and another of 1948 and has, in one stroke, forced the inevitability of total reforms in the electricity sector. No more can the States hide behind some excuse or the other not to unbundle the huge monoliths they have built over the past five decades.

Who does it benefit and who are the losers? A close look into the Act and its possible effects in the future indicates interesting trends.

The best beneficiary is industry - large and small - and the commercial establishments which have been hitherto bearing the brunt of the SEB onslaught in terms of high tariff, unstable supply, impossible conditions and the wrath of a state monopoly.

Generation of electricity does not require any approvals from any body so long as the same is used for own use. Hitherto, the electricity boards had a strangling hold on captive generation often stipulating that a consumer pay a certain minimum demand charges, 30-50 per cent of the tariff on connected load as minimum monthly charges whether used or not, and serious restrictions on parallel and standalone use of the captive plants.

Non-industrial users such as hotels, hospitals and commercial establishments were also subject to such restrictions and many electricity boards refused to wheel and set off power for these commercial users from their own windmills and mini hydels.

The new-found freedom allows commercial and industrial users to set up their generation facilities and the industry is expected to use its freedom totally. The cement, paper, metal industries, petroleum, fertiliser, ferroalloys, and such other bulk user industries and the hotels and commercial establishments will switch over to captives in the next two or three years.

They can use any easily available fuel - coal, gas, diesel, fuel oil - or any other conventional or non-conventional so long as they are able to generate stable power for their requirements all through the year without any interruption.

The definition of captive generation includes cooperatives and association of persons and not necessarily industrial or commercial. As the captive markets grow, the industries also would look at using the open access system to produce power in remote stations - primarily pit heads - and transport the power cross-border to their consumption centres. Jharkhand, Chhatisgarh, Orissa and Bihar, which have a large coal sources, will encourage setting up of pit-head power plants and the industries will seek crossborder transfer through the open access system. It is significant to note that the Central Electricity Regulatory Commission will be the authority to decide on the transmission cost so long as inter-state issues are concerned. Thus, the pit-head stations need not depend on the state-level bureaucracy for determining the inter-state wheeling charges.

Under Sections 38 and 39, the Centre and the State governments are empowered to charge a surcharge for authorising open access for transmission; primarily to cover the loss of cross-subsidies the electricity boards have been collecting from industrial consumers to support other weaker sections.

The Act has stipulated that while the ERCs have powers to levy a surcharge to cover these cross-subsidies, they have to ensure that these cross-subsidies are not continued beyond a specified time-frame to be in consultation with the respective governments.

However, under 38 (2) (d) (ii) and 39 (2) (d) (ii) reading as "Provided also that such surcharge shall not be leviable in case the open access is provided to such a person who has established a captive generating plant for carrying electricity to a destination of his own use", this surcharge cannot be collected from captive generation units.

Thus, the captive users of all classes are fully exempted from the need to support the cross-subsidies which they have been bearing all along. Thus, the captives are fully free whether they are set up inside their premises or outside and use open access for transmission. This is a great boon for the consumers. At this stage, it is to be emphasised that the Electricity Act has not been partial to the `haves' only. By including cooperatives and association of persons in the captive generation, the Act has envisaged that any community can plan captive plants jointly so long as they find this viable.

This is to be taken note of by NGOs as well as leading electricity equipment suppliers so that they can look for viable consumer groups for setting up economic viability of captive generation. In fact, there is a large market in villages for captive generation and distribution under stand-alone system and smaller village communities will become good profitable propositions as they are more eager to pay for the electricity so long as stable and uninterrupted power is available to them.

Incidentally, in view of the Sections 38 and 39, the recent Electricity Tax, as levied by the Government of Tamil Nadu, under the new Act enacted by the Government, may not be legally valid to the extent related to captive users. The new Act by Tamil Nadu was passed after the Electricity Act 2003 was passed by both Houses of Parliament and, hence, the intent maybe questionable.

Who are the losers? The EBs. Over the next two or three years, while the captive generation systems are set all over the country, including smaller village communities, the EBs or the Transcos, Gencos and Discoms as their arms would be called, will have no consumers unless they adopt themselves to a retail and viable distribution models.

This would mean significant reduction in transmission losses and thefts, less interference from the political system, efficient management of the generation and transmission facilities and setting up of affordable tariffs. Open access will develop only if viable and affordable wheeling charges are levied. In the absence of this, users and communities will tend to move away from using these transmission assets by delinking themselves from the grid.

The electricity boards will suddenly find in the next three years that they have no demand for the electricity produced or bought by them and they would be under severe pressure on tariff because of market factors. The bureaucracy will be faced with market-related realities and if they do not cope, one will find that their establishment collapsing over the next five to ten years. In this context I am reminded of the recent controversy in the US about outsourcing jobs to India, China and other countries.

While in the short run, this may be harmful to the job markets for US citizens, long-term economics will reveal that continuation of these jobs in US will lead those companies to economic disaster and liquidation. Electricity boards are in the same boat and the Employees Unions must have realised this and allowed the states to reform the sector long back. Now they are driven to a corner and they are damned if reformed and damned if continued in the present status. The Act has let the consumers flee the stables.

Some of the IPPs are supplying power at a huge cost - naphtha units, lignite units - and some of the state units are running at very low efficiencies, thus significantly increasing the cost of procurement. While the inefficient units can be closed down or modernised to reduce costs, the high-cost IPPs are under long-term contracts and the high cost is not due to their doing. It was due to the high cost of fuel on which they have no control. In a highly developmental market, these high tariffs are not sustainable and hence the PPAs have to be dealt with contractually.

The Central and State governments will need to sit together and work out a mechanism to set up a long-term fund to buy back the IPPs on contractual terms if they cannot be made viable so that they are not a burden to the current economics. The cost of removing such redundancies have to be borne by the system over a long term and stronger economies have come out successful when redundancies and inefficiencies are removed from the system.

There is a strong feeling that the villages and the rural electrification process will be seriously hampered by the Act. This not a correct situation. The Act allows freedom and the rural communities can delink from the system and go for standalone systems. While the industrial and commercial consumers may have supported the cross-subsidies arising out of the deficits of the EBs, the rural communities have been sacrificing their growth over the last 50 years. They have not been able to demand more efficient, regular and uninterrupted supplies of electricity because of free or concessional supply.

The new Act gives the rural communities freedom. They no more have to suffer the metro and urban demands. They can also demand for good and efficient service for quality and uninterrupted power. While in the short run, they may look for support, in the long run,they would enjoy the freedom and use the same to their benefit. The richer communities have a responsibility to hold their hands for a short time in the interim. At the end, there are no losers; the Act is a win-win situation and it is in the hands of the bureaucrats and employees unions to force the acceleration of the reforms process, and if they do not, they would be left behind to handle the mess, while other communities - industrial, commercial, urban, metro and rural - move along and carry the benefits themselves.