ICRA Stands in Favour of Draft Amendments Proposed in Electricity Act

ICRA believes that the draft amendments proposed in the Electricity Act can strengthen the sanctity of power supply contracts and bring reforms in the distribution segment.

ICRA Limited, an independent investment information and credit rating agency, has stated that it believes that the draft amendments proposed in Electricity Act, 2003 have the scope to strengthen the sanctity of power supply contracts and bring reforms in the distribution segment.

The Ministry of Power (MoP), Government of India, has recently proposed amendments to the Electricity Act, 2003 in the form of draft Electricity (Amendment) Bill, 2020 notified on April 17, 2020, to address the issues plaguing the power sector and impeding its investment prospects. As per ICRA note, the introduction of an entity like Electricity Contract Enforcement Authority (ECEA) with the authority to adjudicate upon matters regarding the 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.

Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA Ltd said 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 hydropower, enabling state commissions to adopt the central government notified renewable purchase obligation (RPO) norms, the introduction of per unit penalties for a 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 revitalise investor confidence, especially in the renewable power sector,” he added.

This apart, the other key amendments include simplification of tariff structure by mandating state electricity regulatory commissions (SERC) to determine cost-reflective tariffs with a 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 the chairman and members of the SERC, which would avoid any delay in addressing regulatory matters. The proposals also include the 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 the introduction of competition in the power distribution segment.

According to ICRA, 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 the cost of supply and 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 the COVID-19 outbreak, which is adversely impacting the electricity demand and in turn the revenues and cash collections for distribution utilities.

“While the amendments proposed such as direct benefit transfer for subsidy, cost-reflective tariff determination and uniformity in the 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,” said Vikram V., Associate Head & AVP, ICRA Ltd.

In March, the ratings agency had stated that the lockdown announced by the government to control the spread of the Novel Coronavirus (COVID-19) pandemic will adversely impact electricity power demand, and cash flows for distribution companies (Discoms) – leading to payment delays for power generation and transmission companies. And that the shutdown of the industrial and commercial establishments and the stoppage of passenger railway services will adversely impact the all India electricity demand and account for an even greater percentage of the Discoms sales revenues given that they are the subsidising segments.

A month later, the agency had stated that the imposition on lockdown has adversely impacted the electricity demand and the average thermal PLF since March 24, 2020, with the demand slowdown likely to lead to a de-growth of 1.0 percent in electricity demand for the full year of FY2021. As a consequence of which the book loss level for Discoms at all India level is expected to rise to Rs 200 billion in FY2021, with further downside risks arising from any extension in the lockdown period and any delay in issuance of tariff orders or inadequate tariffs approved by the state electricity regulatory commissions (SERCs).