Electricity Act,2003: Critical Analysis

Introduction

The technology revolution has brought electricity to the forefront. To regulate the generation, supply and use of electricity, the first legislation was the Electricity Act of 1887 which provided for the protection of person and property, from injury and risks, attendant to the supply and use of electricity for lighting and other purposes. This Act was repealed and replaced by the Indian Electricity Act, 1903 (3 of 1903). Many practical, electro technical and commercial difficulties were realised during the period of 1903 to 1909. To deal with these difficulties a bill viz. The Indian Electricity Bill was introduced in the Central legislation to amend the law relating to the supply and use of electrical energy.

Power shortage may very well be one of the major bottlenecks threatening the economic growth of India. Thus power, and particularly electricity, assumes top priority in maintaining a stable growth rate and ensuring energy security. 

For the purpose of distancing state governments from tariff determination, The Electricity Regulatory Commissions Act was enacted in 1998. So as to reform the electricity sector further by participation of the private sector and to bring in competition, the Electricity Act was enacted in 2003. 

Role and purpose of  State authority

The Central government, on its part, has formed a central authority with responsibility to develop a national power policy and coordinate activities of various agencies or state electricity boards. The authority advises the Department of Power on technical, financial and economic matters. The country has been demarcated into five regions – North, West, South, East and North-east. Regional electricity boards were set up in 1964-65 in each of these regions.

1. The Northern Region covers Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajasthan, Uttar Pradesh, Chandigarh and Delhi.
2. Western Region covers Gujarat, Madhya Pradesh, Maharashtra, Goa, Daman and Diu and Dadra and Nagar Haveli.
3.  The Southern Region covers Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Pondicherry.
4. Eastern Region covers Bihar, Orissa, West Bengal and Sikkim.
5. North-Eastern Region covers Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura.

These boards are merely advisory bodies. They review the progress of power development schemes in the region; plan and ensure integrated operation of all the power systems in the region; prepare a coordinated overhaul and maintenance programme for the generating plants in the region; determine the operation schedules to be followed by all the plants in the region; determine the amount of surplus power available for exchange between the states; and determine tariff struc­tures governing exchange of power within the region. No single state can possibly solve the problem of energy deficiency and hence has arisen the need for the formation of regional power grids.

Development and growth

Significant progress has been made in the expansion of transmission and distribution facilities in the country. Fairly well interconnected systems are presently available in all regions of the country except the north-eastern region. Inter-state and inter-regional transmission lines would form part of the national power grid. It will promote integrated operation and transfer of power from one system to another with the ultimate objective of ensuring optimum utilisation of resources.

Every successive Five-Year Plan has added to the energy capability of the nation and the national and regional power grids have resolved the power shortage crisis in underdeveloped states. Moreover it has helped in rapid and uniform industrial development of the country. The states feel reassured of their energy requirements and are inviting global investments on the basis of this infrastructural facility of the grids.

The functioning of electricity before and after the introduction of the Privatisation sector in the Power sector.

Process	Then	Now
Generation	Slow growth in capacity addition. Difficulties in coal availability.	Phenomenal growth in capacity addition. Surplus electricity. Renewables have grown. Declining PLF’s(Plant load factor) however.
Transmission	Monopoly.  Regional grids	Competition. National grid implemented
Distribution	Alarming losses	Restructuring. Losses minimised

 

Regulatory framework

The Constitution of India places electricity on the concurrent list, that is, both the centre and state legislatures are authorised to enact law and make policies to promote the electricity sector.

The Electricity Act 2003 (Electricity Act) framed by the central legislature covers major issues involving generation, distribution, transmission and trading of power.

The main regulatory authorities that regulate the tariff of generating companies are CERC and SERC.

CERC is responsible for:

• Determining and regulating tariffs for generating companies owned or controlled by the central government.
• Generating companies other than those owned or controlled by the central government, if those companies have entered into a composite scheme for generation and sale of electricity in more than one state.

SERCs determine and regulate tariffs for intra-state generation, supply, transmission and wheeling of electricity in the relevant states. The Electricity Act governs the following, among other things:

• Generation. Licensing requirements were removed for the generation of electricity (except for permission for certain hydro projects) (Electricity Act). Anyone can therefore develop a generating station in accordance with the applicable Indian laws. Generating companies are now permitted to sell electricity to any trading and distribution licensee and to consumers directly (subject to getting open access approvals).
• Transmission. Transmission is a regulated activity that requires a licence from the appropriate regulatory commission (CERC or SERC), unless exempted in accordance with the Electricity Act or if deemed a licensee under the Electricity Act. The Central Government must designate one government company as the central transmission utility (CTU), which would be deemed a transmission licensee (Electricity Act). Similarly, each state government designates one government company as a state transmission utility (STU), which would also be deemed as a transmission licensee. CERC and SERC are the regulators and licensors for anyone seeking to undertake transmission activities. CTUs are prohibited from generating electricity or trading in electricity (Section 38, Electricity Act). The prohibition on STUs, however, is only for engaging in trading in electricity. Transmission licensees can also engage in any other business in addition to transmission (except trading), provided prior notice is given to the appropriate regulatory commission (Section 41, Electricity Act).
• Trading. Trading of electricity is a licensed activity, which is defined as the purchase of electricity for resale to any person (Electricity Act), which can involve either:
  • wholesale supply (that is, purchasing power from generators and selling to the distribution licensees); or
  • retail supply (that is, purchasing from generators or distribution licensees for sale to end consumers).

 

• The regulatory authorities responsible for granting a trading licence are CERC (if the trading is proposed to be inter-state) and SERC (if the trading is proposed to be intra-state). A trading licensee must keep the accounts of the trading business separate from any other business carried out by it.
• Distribution and retail supply. The Electricity Act does not make any distinction between distribution and retail supply of electricity. Distribution is a licensed activity and distribution licensees are allowed to undertake trading without any separate licence. A distribution licensee can engage in any other business with prior notice to the appropriate commission (Section 51, Electricity Act).

 

   Regulatory authorities

 Companies involved in the four main functions of Electricity 

 

• Generation: The main companies involved in electricity generation are the National Thermal Power Corporation, National Hydro Power Corporation, Damodar Valley Corporation, GMR Energy, Torrent Power, Essar Power, Tata Power, Reliance Power, Adani Power, Lanco Power and Jaypee Power Ventures.

• Transmission: The main companies involved in transmission are the Power Grid Corporation of India (CTU), STUs (such as Delhi Transco), Powerlinks Transmission Pvt, Kalpataru Power Transmission, Sterlite Technologies and Isolux Infrastructures.

• Distribution and supply: The main distribution and supply companies include Tata Power, BSES Rajdhani Power and BSES Yamuna Power.

 

Insolvency under power sector

The Insolvency and Bankruptcy Code 2016 (IBC) consolidated the law in relation to insolvency and reorganisation of (among others) companies. The IBC also applies to the insolvency framework with respect to the electricity sector.

 

Unlike other infrastructure sectors such as highways, airports, metro railways etc., where the revenue collection risk is dispersed amongst a multitude of users, in the power generation sector, the entire offtake and revenue risk is concentrated on single buyers that are state-owned monopolies.

 

IBC, however, is prescriptive in nature and mandates a certain course of action without making any distinction between sectors or indeed the causes leading to the financial situation. If corporate insolvency resolution process under Chapter II of Part II of the IBC is initiated against a company or the company initiates voluntary liquidation proceedings under the IBC, the most desirable outcome is that the debts of the creditors are satisfied and there is a change in the management of the company so that after resolution, the company does not go back into the hands of the promoters or directors who have led to its downfall in the first place.

 

Given the sectoral inefficiencies that can directly be attributed to the state, and are responsible for the sectoral stress in private power production, there is an urgent need for creating a special dispensation for the power sector within the IBC framework.In light of this, it would seem that applying a purely commercial framework for resolving stress in the power sector seems inequitable at the very least and, in fact, presents a compelling argument as to why there should be reconsideration on the blanket applicability of the IBC on the power sector.

 

In this context, it also relevant to note that, in addition to IBC, there are other pieces of legislation that are perhaps more suited to this sector such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which enables lenders to enforce the security interest put forward by the borrowers in order to recover their loan amounts, without necessarily derailing the management and essentially bringing the entire company to the ground. This also provides a chance to the company to revive itself, base the remaining assets and continue its business operations as a going concern, which, in the context of the power sector, would be in the best interest of the economy of the consumers.

Conclusion

There is little doubt that the power sector has come a long way in the last two decades. The power sector has opened doors to private participation, increasing competition and transparency in the process and greater certainties in the policy-level interventions today. While the power demand is expected to slowly limp back to high-single digits in tandem with GDP growth, several overarching fundamental trends are expected to drive the sector transformation in 2021.

The sector has grown and developed itself in several segments and with the introduction of Privatisation in the sector, it has changed drastically and in an unimaginable way. While the sector has been undergoing an overhaul over the last few years, the coronavirus pandemic underscored the need for accelerated technological upgradation. Going forward, the focus on implementation of smart technologies like an evolved grid system, smart metering, digital asset management will help transform the seemingly traditional, manpower-heavy sector into a smarter, more efficient power system with each element in the value chain re-imagining their processes and streamlining infrastructure. 

Author: Pooja Shukla

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi