Electricity Act: Open access best for consumer, say experts

The year 2003 was quite a watershed year in India's power industry because the 2003 electricity act was put in place. That was also the year when State Electricity Boards were given a one time cleaning of their balance sheets with partly the government and partly banks absorbing the losses.

But, the important point was the Electricity Act and the changes it brought. It promised at that time that it will be possible for power generators to sell over the heads of SEBs directly to power consumers and the process is called open access. But, that never happened. It never got implemented.

The Electricity act also put in the State Electricity regulators - The MERCs and the CERCs who are now very important actors, were first established by the State Electricity Act 2003. The power minister Veerappa Moily is meeting the state electricity regulators to suggest some amendments to the act.

As Moily is all set to push for power reforms, the Former Power Secretary, RV Shahi believes there is nothing wrong with open access but, it has not been implemented due to the interference of state governments. According to him, the state regulatory commissions should act a little more formally with the state load dispatch centers and with state governments to roll out the process.

HD Khunteta, Former Director-Finance of REC also agrees with Shahi and says that open access would have increased competition for the discoms and made them responsible. Eventually, consumers would have benefited from it as "Consumers who wants more than 1 megawatt power would have taken it directly from the generator, developers and they would have got power at a lesser rate compared to what they are paying to the discoms," added Khunteta.

Here is the edited transcript of the interview on CNBC-18.

Q: Let us start with some of the suggested changes in the electricity act. We understand that open access will be implemented. Now you know that open access was very much put into the electricity act, wasn't it? Do you think the wording was wrong or something can be done to ensure that power generators can bypass the SEBs and directly sell to big consumers, can that be done now, will that be done?

Shahi: There is nothing wrong with open access because we framed the act in 2003 and it has given a description to the state regulatory commission to introduce open access in various phases and stages. But within a year we changed the act, we amended the act to say that by January 2009 it will be obligatory on the part of the state regulatory commissions to see that consumers of more than 1 megawatt have the option of open access. So, there is nothing wrong in the act as such.

Q: But why hasn't it happened then?

Shahi: I think state regulatory commissions should act a little more formally with the state load dispatch centers, with state governments. The state governments' interference in this matter has been defeating this purpose.

Recently, the ministry of power issued an instruction and advice that it should be allowed, it should be facilitated to be implemented. There is a provision in the law that says, the tariff of consumers using more than one megawatt would not be determined by the state regulators.

I would say that the larger portion blame for non-implementation of this open access for consumers of more than one megawatt will go to the state regulators and the state governments. It is a matter of enforcement. It is not a matter of amendment as such. There is nothing that is missing in so far as this provision is concerned.

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Q: What is your view with regards to open access?

Khunteta: Actually if open access would have been allowed, it would have created competition amongst the discoms and it would have made them more responsible. And since any consumer who wants more than 1 megawatt power would have taken it directly from the generator, developers and they would have got power at a much lesser rate than what they are paying to the discoms.

So open access is very essential for two reasons. One it is good for the consumer and secondly it will make the discoms more responsible. They will try to reduce their losses, increase the efficiency and they will also charge reasonable rate from the consumer.

In case of subsidy, if the government wants to provide power at a subsidized rate, it will be liable to make the payment to the discoms. So their financial positions will not be affected.

Q: If the act allowed and it is the regulators who perhaps were not active or the governments were not active, how can that be enforced now? What kind of changes would you recommend in the electricity act now, would your suggestion be that state electricity regulators should be differently selected or should be differently empowered so that we are not beholden to state governments?

Shahi: Some amendment in the act is required so that the regulator's accountability is established. They could be made accountable to the appellate tribunal, partly they could be made accountable to the Central Electricity Regulatory Commission also. There could be divisions of jurisdictions.

For example, for an open access it is very crucial that cross subsidy is reduced. Tariff policy mandates that within five years of the tariff policy, that is by January 2011, cross subsidy was to be managed within plus minus 20% of the average tariff. Most of the regulators have not been able to put in place this mechanism.

Once cross subsidy is reduced, open access can be encouraged or can be facilitated. There are a host of issues on which we find failings on the part of the state regulators. There have been state regulators who have not revised tariff for five years, six years or seven years. In the last six months, there has been some momentum on this score. If state regulators have failed to see the financial health of the electricity distribution company, in the last five years the loss has mounted from Rs 20,000 crore annually to Rs 80,000 crore.

Q: I would assume the electricity regulators could not do it because they were not really independent of the state governments. How would you ensure that independence?

Shahi: No that's not correct. The state regulators are fully independent of the state governments. You can say that if the state government or Chief Minister has tried to select someone whom he likes and if that someone obliges him that it is a different matter.

But, that we can say for the judicial system. Judges are also appointed by the government but, they function independently. In the act they have been given enormous power, they cannot be transferred and they cannot be sacked for 5 years. So in spite of that if they don't take their responsibility, their function and their duty sincerely and honestly then it is a different issue.

I don't think that this is a correct assessment of the situation that they are not independent of the government. CERC is independent of the government, SERC is independent of the government and therefore, they must function. But, there must be some provision now coming out of this 9-10 years of experience of implementation of the electricity act.

We should bring about a certain degree of accountability, a certain degree of performance audit of the state regulators and some degree of provisions which will discourage them not to comply with or not to discharge their responsibilities.

Q: Had a couple of questions, the first one being with regards to a proposed amendment in section 42 which we understand is to allow multiple suppliers of power in any licensed area. Just take us through this sort of amendment and what would be the ramifications?

Shahi: I think in the Electricity Act we provided two things, one is open access to consumers of more than 1 MW and there is another provision which says that in the same area of supply there could be more than one licensee. The only thing that is to be safeguarded there is that a new licensee or the second or third licensee cannot have cherry picking. It can’t be that the second licensee picks up such customers who are paying customers or meaty customers. That cannot happen.

I think there are guidelines issued on the subject but, if there is any ambiguity and it needs verifications this is one provision which could be further elaborated. But, as I can see the spirit of the law was that the consumers should benefit out of the competition between one, two or three suppliers.

Of course, open access gives one way of doing it but there are other ways of doing it. In Mumbai it is happening. In Mumbai you have Tata that is supplying power, you have BSES or Reliance Power also supplying. So consumers in Mumbai do have a choice, ofcourse the recent judgment or decision of the Maharashtra regulatory commission has clarified it that if you pick up an area you need to have the universal service obligation.

You can't say that in we will not supply power in slum areas and I will supply power to big shops, malls and factories only. That's the only safeguard that we have to see. Otherwise, this is a good provision. Unfortunately, this provision has not been facilitated to be implemented by various state governments. This processes have to be catalyzed.

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Q: According to you, you have seen the implementation of The Electricity Act and the behaviour of the power sector in the past nine years since the act was passed. According to you, are any legislative changes needed or are changes needed all together?

Shahi: No legislative changes are needed. I think the government would be right since they setup a task force. It should study this subject; it should see the good and bad experiences of what we have seen in the last nine years. It should consult the industry, it should consult the consumer bodies and it should consult other organizations and suggest a set of amendments that are necessary.

As is said that section 11 has been misused in the past by the Karnataka government. We need to clarify that section in a more elaborate way. Open access has been defeated so we need to see what best we can formulate to prevent it from being defeated. Regulator's accountability needs to be fixed and free power should be banned totally. They could have direct subsidy once.

Tamil Nadu government did that and said, we will pay Rs 1100 per year to the BPL families but, they will be having metered supply. There are a host of other things which we have learnt in the last seven, eight or nine years. They need to bear upon formulation of the amendment that maybe necessary to the Electricity Act.

Q: I just wanted your thoughts with regards to the comments which were made by the Attorney General and then we had Veerapa Moily counter them as well. Just wanted your opinion with regards to all of the to and fro on that.

Shahi: No, I don't think the honourable Power Minister Mr. Moily has countered anything. All that he has said is that PPA change cannot be a routine matter, but in extraordinary situations it may warrant case to case examination. I have seen that comment and I entirely agree with the comment and with the opinion of the Attorney General that we have an extraordinary situation.

Imported coal prices have shot up, Indonesia has changed its policy and law, it has become totally uncommercial. It cannot work. Tata Power and other power companies have to depend on imported coal and while they produce power, they don't get paid to take care of the excessive increase in imported coal cost. Obviously it’s an extraordinary situation like a force major situation.

If you have change in law in India, you factor in this change. If you are changing laws in another country which has direct bearing on your Power Purchase Agreement (PPA), I would still say that there is no contradiction between what, the Attorney General Vahanvati has said and what Mr. Moily has said.

He has said that it cannot be a routine, I agree. All PPA can’t be just changed for the heck of it but, if there are extraordinary situations calling for it, warranting this, then it has to be examined. CERC has the correct jurisdiction and I understand that they are ceased with the matter.

Q: You referred to the Karnataka government and the Section 11; can you elaborate on that further? What exactly is the change?

Shahi: Section 11 was provided in the Electricity Act 2003 which says, if there are threats to the security of the state and a major natural calamity happens, the state government can issue direction to a generating company to generate to a level. Suppose it wants to do maintenance but, the state government may ask it to postpone the maintenance work and the power station is run because we have such a problem.

Karnataka government started using it or misusing it for very ordinary situations to defeat the purpose and the objective of the open access to supply power from captive power plants to other places where it is needed. So, that was misused.

I think a communication was issued by the government of India but, they took a lot of time to comply with this. I am told, later on they have not done it as a matter of abundant precaution. In order that nobody misuses Section 11, there could be a better formulation of the section so that in the future no state government is able to misuse it.