ICRA feels that the introduction of an entity like Electricity Contract Enforcement Authority (ECEA) with the authority to adjudicate upon matters regarding performance of obligations under a contract related to sale, purchase or transmission of electricity, is likely to uphold the sanctity of the power supply contracts.
These reactions came in wake of the proposed amendments to the Electricity Act, 2003, by the Ministry of Power, in the form of draft Electricity (Amendment) Bill, 2020 notified on April 17, 2020.
While the establishment of ECEA is a positive move, there should be clear demarcation of responsibilities between existing regulators and ECEA, feels ICRA
Commenting on the proposed amendments, Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA Ltd says, “While the establishment of ECEA is a positive move, there should be clear demarcation of responsibilities between existing regulators and ECEA to avoid jurisdiction issues. Furthermore, the proposals to notify a National Renewable Energy Policy (NREP) for promotion of renewable and hydro power, enabling state commissions to adopt the central government notified renewable purchase obligation (RPO) norms, introduction of per unit penalties for shortfall in meeting RPO target, deemed approved of the tariff discovered through bidding route and incorporation of provisions of the payment security mechanism in the electricity act, once implemented, are likely to revitalize investor confidence, especially in the renewable power sector.”
A key amendment includes simplification of tariff structure by mandating state electricity regulatory commissions (SERC) to determine cost reflective tariffs with reduction in cross subsidies.
This apart, the other key amendments include simplification of tariff structure by mandating state electricity regulatory commissions (SERC) to determine cost reflective tariffs with reduction in cross subsidies. Moreover, the tariffs must be determined without considering the state government subsidy, which is to be directly paid to the consumers by the government. Further, the amendments propose to bring in uniformity in appointments to central and state electricity regulators, by constituting a single selection committee for the entire country. There is also a provision to entrust the functions of a state commission to another state commission or joint commission, in the absence of chairman and members of the SERC, which would avoid any delay in addressing regulatory matters. The proposals also include appointment of distribution sub-licensee with the approval of the SERC and distribution franchise by informing the SERC, to operate on behalf of the distribution utility in a specific area of the licensee’s area of supply. However, there is no reference to the separation of the supply and distribution functions in the proposed bill, which was key for introduction of competition in the power distribution segment.
Dues pending from discoms to generation companies are estimated at over Rs.920 billion, as of February 2020.
The power distribution segment remains the weakest link in the power sector, owing to the weak operating efficiencies, inadequate tariffs and subsidy in relation to cost of supply and a resultant accumulation of regulatory assets. This is reflected in the large dues pending from discoms to generation companies of more than Rs.920 billion as of February 2020. This is expected to be further exacerbated by the ongoing lockdown due to COVID 19 outbreak, which is adversely impacting the electricity demand and in turn the revenues and cash collections for distribution utilities.
The effective implementation of these provisions requires the support of the state governments and the utilities, says ICRA
“While the amendments proposed such as direct benefit transfer for subsidy, cost reflective tariff determination and uniformity in appointment of SERCs, are certainly positive for the distribution segment in the long run, the effective implementation of these provisions requires the support of the state governments and the utilities, through proactive efforts on operational improvements, timely filing of tariff petitions, and cost reflective tariff revisions by the regulators. Also, the central and state governments must devise a mechanism to liquidate the regulator asset position of the discoms and outstanding dues to power generators.” says Vikram V., Associate Head & AVP, ICRA Ltd.
