[Ed Note: This article has been written by Rishika R, a fellow at the Regulatory Governance Project, NLSIU. The article has been co-edited & coordinated by Eeshan Sonak, Bhavisha Sharma & Anushri Bhuta from our Student Editorial Team.]
The Electricity (Amendment) Bill, 2021 (Bill) was introduced with the intention to table it in the Monsoon Session, despite urges to put it on hold by the power engineer’s body, and protests by certain states, power sector employees and farmers. The proposed amendments introduce several key changes to the power sector which has long been facing numerous challenges. As per the Statement of Objects and Reasons of the Bill, it has been introduced in the context of issues plaguing the power sector for decades including the loss-making distribution utilities (DISCOMs), increasing uncertainty in the sector impacting private investment and non-performance of long term power purchase agreement between power generators and state utilities. The Central Government in the last decade has also been pushing for an increase in India’s renewable energy capacity in both generation and manufacturing capabilities, to establish soft power in the sector. It is intended that the amendments would support this goal and increase renewable energy capacity as well.
The Bill proposes changes to the regulatory framework of the power sector to seemingly address the above concerns. First, it introduces a new authority, the Electricity Contract Enforcement Authority (ECEA) with powers similar to that of a tribunal; second, it increases the powers of the Appellate Authority; and third, it proposes changes to the powers and composition of the State Electricity Regulatory Authority (SERC). In this article, I discuss the Bill from a regulatory governance perspective, and seek to understand whether the changes to the regulatory framework of the power sector correlate to the goals of the Bill.
Background to governance of electricity sector
The main legislation governing the electricity sector is the Electricity Act 2003 which lays down the law relating to generation, transmission, distribution and trading of electricity. The Act constitutes two regulatory authorities – the Central Electricity Regulatory Commission (CERC) and the State Electricity Regulatory Commissions (SERC) governed by the Electricity Regulatory Commissions Act 1998 and state Electricity Regulatory Commission Acts respectively. Electricity falls in the Concurrent List of the Constitution, thus granting law making powers to both states and the Centre.
CERC has the responsibility to regulate generating companies owned by the Central Government, and regulate transmission, determine tariff, issue licenses and adjudicate disputes relating to inter-State operations. SERCs enjoy similar functions at the state level and govern all intra-State operations. Section 86 of the Electricity Act 2003 sets out the functions of SERCs which include:
- Regulating purchase and procurement of electricity by Distribution Utilities (DISCOMs)
- Determining tariff for generation, supply, transmission and wheeling of electricity within the State;
- Promoting co-generation and generation of electricity from renewable sources of energy;
- Adjudicating disputes between DISCOMs and generating companies.
Every State also has one or multiple DISCOMs, which are primarily state-owned companies, who are in charge of the purchase and sale of power in their supply area. DISCOMs typically enter into long-term power purchase agreements with power generators and sell the power to consumers at differential tariffs depending on the consumer. For example, residential and agricultural consumers have a lower tariff compared to industrial and commercial consumers. Due to several long-standing issues, DISCOMs suffer from weak financial health, currently owing a total of Rs. 97,111 crores to power generating companies.
The electricity sector has long been scrutinised for the lack of an efficient and independent regulatory body. SERCs are often at the centre of several competing interests including access to reliable electricity at a low cost to consumers, promoting renewable energy, and increasing private sector participation. States have struggled to meet these goals, a large part attributable to the lack of financial capability of DISCOMs.
What does the Bill propose?
The Bill limits the power of SERCs wherein the proposed ECEA will now adjudicate upon disputes relating to the enforcement of contracts. In recent years, several states including Andhra Pradesh, Karnataka, and Madhya Pradesh have attempted to either cancel or renegotiate existing Power Purchase Agreements (PPAs) given state DISCOMs’ struggle to purchase power at the tariff rates determined at the time of signing of the contract. The most frequent disputes between DISCOMs and private generators involve DISCOMs seeking lower tariff rates due to delays in the performance of contracts or other non-performance of obligations by the generator.
From the Centre’s perspective, non-performance of contracts comes in conflict with its goal to increase investment in the sector, since it may create uncertainty and disincentivize private participation. Currently, disputes between DISCOMs and generators are heard by the SERCs, who decide upon both – whether there has been a breach in the contract and the subsequent determination of tariff. However, given recent trends of cancellation and re-negotiation of such contracts, the Bill introduces the central ECEA to hopefully strengthen contract enforcement. The ECEA will consist of a Chairperson, two or more Judicial Members and three or more Technical Members to be appointed by the Central Government on the recommendation of a Selection Committee. The ECEA has sole jurisdiction over disputes involving the performance of contracts of purchase and sale between generating companies and DISCOMs which was earlier under the jurisdiction of SERCs.
The new reforms have significant implications on the electricity sector’s federal structure, which falls under the Concurrent List of the Constitution. The proposed ECEA will decide upon contractual disputes which will impact power purchase and sale agreements entered into by the State. Under the Electricity Act 2003, the function to adjudicate disputes between DISCOMs and power generators rests solely with the SERC. The Bill, which was drafted without consultation with state governments, now prescribes that “the sole authority and jurisdiction to adjudicate upon matters regarding performance of obligations under a contract related to sale, purchase or transmission of electricity, provided that it shall not have any jurisdiction over any matter related to regulation or determination of tariff or any dispute involving tariff.”
Currently, contracts entered into for the sale or purchase of electricity by states are governed by SERCs which are granted the following functions:
- approve Power Purchase Agreements (PPAs) entered into by DISCOMs and generators;
- determine the tariff at which electricity will be purchased by DISCOMs, and;
- adjudicate upon dispute that arises between the parties.
Although, the Bill retains the first two functions with SERCs, contractual disputes often have significant implications on both, the power purchase arrangement entered into by States and tariff determined by the SERCs. The proposal to grant a central authority to adjudicate disputes goes against the spirit of federalism by granting a central authority the power to effect changes to tariffs and purchase power arrangements.
In addition, the proposed Bill forms a central Selection Committee for the appointment of the Chairperson and members of all three regulatory authorities – CERC, SERCs and the ECEA. The ‘Statement of Objects and Purposes’ states that a single selection committee would bring uniformity and efficiency in the selection process. The concern of ‘regulatory capture’ by states will merely be replaced by the potential capture by the Central Government for all state institutions. States including Tamil Nadu, West Bengal and Kerala have also opposed the Bill arguing that the Centre is entering into the domain of states.
Second, the proposed Bill in essence splits the regulatory function and the adjudicatory functions of the SERCs. A large number of cases are related to contractual disputes which are currently being heard by SERCs. The Bill, by also removing the requirement for a Judicial Member in SERCs, strips them of their adjudicatory powers. Similar divisions can be seen across regulators and have also been recommended for the proposed Data Protection Authority, the rationale being to maintain independence between the adjudicatory functions and the law-making and executive functions. However, this is not met when one central committee is in charge of appointments for both authorities. The Bill, being designed based on a limited and near-sighted goal of contract enforcement, has failed to incorporate learning and recommendations from other regulators which have similar enforcement structures.
Third, according to the Bill, the benches of the ECEA shall ‘ordinarily sit in Delhi’, with the possibility of other benches as decided by the Central Government in consultation with the Chairperson of the ECEA. Situating a regulatory body in Delhi, with the responsibility of adjudicating disputes between state DISCOMs and generators can prove to be inaccessible for many people. This conflicts with the goal of the Bill to promote renewable energy, which comprises several small players including farmers and residents with solar rooftop systems. Having a centralised authority located in Delhi can disincentive renewable energy generation by making contract enforcement out of reach.
Fourth, the Bill does not have clarity on the jurisdiction between the ECEA and the SERCs. Most disputes have implications on tariffs which rest with SERCs. Often, contractual disputes and tariff determination overlap, which may lead to conflict between the two authorities. This may also incentivize forum shopping by both DISCOMs and private generators. Orders of ECEA could be appealed before the Appellate Authority and subsequently the Supreme Court. It is to be noted that High Courts do not have appellate powers over decisions by the ECEA. During the pendency of these disputes, contracts may remain on hold and only after resolution will the tariff be determined by SERCs. Further, the SERCs will have to refer any matter that comes to them to the ECEA, if it concludes that it falls under their jurisdiction. With the current practice of generators approaching SERCs for dispute settlement, SERCs are likely to hear several jurisdictional challenges with each state taking different approaches on the same. While the Bill makes the distinction between disputes relating to non-performance of contracts from other disputes, in practice, this line is not very clear. Attempting to delineate one form of disputes from the others, may prove to be complicated to implement for SERCs. States may also attempt to retain their power in this process by avoiding referring matters to the ECEA, thus leading to non-uniform implementation across states.
The ‘Statement of Objects and Reasons’ to the Bill claims that the proposed amendments to the regulatory structure will better deal with issues related to the performance of contracts by both DISCOMs and generators. However, in pursuance of that goal, the Bill merely introduces a centralized authority, replacing the several state authorities that were earlier entrusted with this responsibility. The Bill follows the recent trend of the Centre relying on regulatory bodies and tribunals to resolve sectoral issues. However, it remains unclear whether these bodies in their current form can effectively deliver the goals they are entrusted with. With regulators being created for key sectors such as real estate and data protection, careful thought needs to go into designing their powers.