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Approach:

  1. Introduction
  2. Then, state the loss making scenario of discoms.
  3. The attempt to reform – explain the key provisions of Electricity Bill 2022.
  4. Conclusion

The State Electricity Regulatory Commissions (SERCs) constituted under state-level legislation in seven states from 1995 and subsequently under the Electricity Regulatory Commissions Act 1998, have failed to uniformly tackle the twin problems of high operational cost and distorted retail tariff structures that do not reflect the cost of supply.

The frail scenario: The average technical and commercial loss in distribution was 21% (2019–20) and discoms incurred a loss of INR 867 billion after giving support of INR 1.1 trillion from the government. As of August 2022, discoms have accumulated overdue, unpaid bills of INR 1.37 trillion. Since 2000, the 4th attempt to reform discom finances is underway which includes legislative changes.

Attempt to reform: The Union government proposes to infuse some reform momentum by tweaking the existing legislative provisions of the Electricity Act 2003 through an amendment bill tabled in the Parliament on 8 August 2022. In earlier legislative attempts at reform, the focus was on creating competitive conditions on the demand side of retail supply by, for example, allowing open access for large users of electricity. This time around, the primary focus is to open the supply side in distribution to competition in the market.

  • Ending monopoly of discoms: The monopoly of discoms over retail supply in their licensed areas will end. A multiplicity of suppliers was previously possible. However, the incumbent was not obliged to let the newcomers use its network. This made contestation almost impossible because of the implementation challenges in laying new networks and the associated time lag.
  • This difficulty is now proposed to be removed by allowing new licensees to use the existing network on payment of a user (wheeling) charge. Regulations will be needed to specify non-discriminatory access to network monitoring data for the new licensee, along with sufficiently high penal provisions, and compensation for loss of business, due to system outages in addition to compensation for customers.
  • CERC gets licensing powers: In a major change, the Central Electricity Regulatory Commission (CERC) will now license applicants for distribution in more than one state. Previously, licensing distribution was purely SERCs’ function.
  • Regulations would need to be in place to separate the regulatory mandates of the two commissions. Both the existing licensees and SERCs need to be heard before the market structure is dramatically altered. It remains unclear which commission could revoke the license. CERC, the licensor, should typically also have the authority to revoke the license.
  • Existing liabilities from power purchasing agreements to be shared: The amendment specifies that liabilities arising from the existing PPAs of the incumbent discom will be shared proportionately between the incumbent and the new player.
  • Regulations must specify how the actual (not average) costs would be allocated between the two discoms if significant variations in their load profiles generate differential costs of supply. There is also concern about how the universal service obligation will be enforced. Both discoms would strive to shed loss-incurring customers and maximise profit-giving customers.
  • Cross subsidy fund: To guard against selective poaching of customers, a new institutional mechanism for sharing the cross subsidies generated is proposed. The “surplus” cross subsidy (the difference between the allowed cost and regulated tariff) collected by any licensee is to be deposited in a cross-subsidy fund managed by a government company nominated by the respective state government.
  • SERCs will now determine the minimum and maximum tariffs, giving individual licensees free play in charging tariffs within the range. This will encourage efficient licensees to reduce the tariff to gain market share.
  • Empowering NLDC: In a welcome move, the primacy of the National Load Despatch Centre over Regional (RLDCs) and State level load despatch centres (SLDCs) has been explicitly established. All constituents of the grid are obliged to comply with the directions of the NLDC. This will help in maintaining grid discipline and stability.

The 2007 amendment to the Electricity Act 2003, deleting the regulatory objective of eliminating cross subsidy, did a great disservice to the sector. Cross subsidy harms the economy and retards carbon mitigation; it must be eliminated. Furthermore, income support should be transferred directly to targeted customers by the state government, allowing them to choose their level of supply. Discoms must operate on a commercial basis, only then will the competition have teeth.

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