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Accelerating India's Energy Transition through Electricity Act

Harsha V Rao
29 May 2020

The thunderous court-room rant — “tarikh pe tarikh” — delivered by Indian actor Sunny Deol in the 1993 Bollywood movie Damini has achieved pop-culture status. The dialogue and the scene were a commentary on delayed and denied justice in the Indian judicial system. But, what brings one to Sunny Deol in 2020? The answer is India’s power sector crisis! The Electricity Act (EA), 2003, which was a watershed moment in the development of the power sector, has fallen short of adhering to the spirit of the Act, much like the Indian justice system portrayed in the movie. In a span of fewer than six years, we have seen attempts after attempts in amending the EA. On two previous occasions, there was no progress but with a strong central government, we are at what feels like a nearly there moment. A new set of amendments has now been proposed and they could have far-reaching consequences for the way the sector will be governed.

With all eyes on a power sector in crisis, the latest INR 90,000 crore bailout, and with an additional INR 3.5 lakh crore to be sunk in, it is imperative that we as consumers take more interest in the future of the sector. Bailout after bailout, and there has been no end in sight for the beleaguered power sector. If we saw the states, with a supporting role from the central government, muck up the sector thus far, it certainly looks like the Centre now wants to get in there and clear it all up. The intent is there, but there is a feeling that states will be mere bystanders in the drama that will play out from here on. What can we expect from the proposed amendments? The Centre wants to do away with cross-subsidies, deliver subsidy straight to a consumer’s account, whip discoms into shape, set the regulator straight, and make the sector’s judicial processes more reliable. Something for everyone – a family entertainer, if you will. Will it be a happily ever after if it is implemented or will we need expensive sequels to get to the end?

Separating Regulation and Adjudication Through a Proposed New Judicial Arm

If the Electricity (Amendment) Bill 2020 is passed, the regulation and adjudication functions in the power sector would largely be separated through the creation of a new agency — Electricity Contract Enforcement Authority (ECEA). The ECEA shall have all the powers of a civil court. Its jurisdiction will include adjudication “upon matters regarding performance of obligations under a contract related to sale, purchase or transmission of electricity,” — functions that previously rested with the electricity regulatory commissions (ERCs). However, the state or the central ERCs will continue to have jurisdiction over determination of tariffs and several other matters. It is argued that the ECEA has the potential to build regulatory capacity in the ERCs. In this blog, we examine how the proposed ECEA will interact with the existing ERCs and Appellate Tribunal for Electricity (APTEL).

Composition and administrative control of ECEA

As per the proposed amendments the ECEA will consist of at least six members – one chairperson, two judicial members, and three technical members. It will sit in Delhi; and only the central government shall have the power to notify new seats for the benches. The chairperson of the ECEA should be or should have been a judge of a high court. The judicial members should be or should have been a district judge or additional district judge for at least seven years. The technical members will be sourced from civil servants or persons experienced in relevant sectors.

The central government will appoint all the members based on the recommendation of the selection committee constituted under the amended section 78 of the Act. The selection committee will consist of a serving or retired Supreme Court judge; a secretary level officer nominated by central government; chief secretaries of two state governments (who shall serve for a year each in alphabetical order of the states); and secretary-in-charge of the ministry of the central government dealing with power.

The ECEA will be entirely dependent on the central government for staff, salaries, allowances, and terms and conditions of service. The central government will notify rules on the financial and administrative powers of the chairperson. In the current system for the ERCs, the government sets up a fund based on appropriation that the Parliament approves for the central government and state legislatures approve for the state governments. Essentially, there will be no legislative control or oversight on the finances of the ECEA.

Regulatory structure and approach

As proposed by the amendment, both ERCs and ECEA will have judicial functions and will adjudicate various disputes. Also, ERCs continue to have the power to refer disputes to arbitration. Therefore, one of the major concerns surrounding the creation of the ECEA has been the lack of clarity in dividing responsibilities between these two bodies. Almost all electricity disputes can be said to have an angle that relates to tariff setting.

The questions surrounding the requirement of a new body in the electricity sector are also pertinent. The ECEA has most likely come up as a response to recent instances of tariff renegotiation under existing power purchase agreements (PPAs). However, there is no explanation of how and why the current structure has not worked and how this new structure would solve those issues. Moreover, the same panel will select members to the ECEA and all ERCs (state and central). Clearly, state control has been replaced with central control.

Electricity is a concurrent subject and technically, there is no hindrance on the centre occupying the field in terms of the regulatory framework. The centralisation of appointments and location of the bench only in Delhi, at least initially, is likely to see opposition from the states. The central government must consider an appointment committee that factors in the expertise available within the state in determining suitable candidates for the state ERCs. It would be prudent to separate the selection committees for the central and state ERCs for this reason. However, legal options for the states to challenge the proposed framework might be limited. There are multiple regulatory structures in different sectors, and there is no unified regulation or practice on how regulatory bodies should be structured. Further, the way the ECEA has been conceived (Delhi-based) raises practical concerns of access to the judicial forums and its ability to handle the caseload of the ERCs. These can be solved by creating multiple benches across the country, but the result is a rather unwieldy and bloated regulatory architecture. Nevertheless, at least one of the design flaws that the ECEA does have a potential to solve is the separation of judicial functions from regulatory ones.

Currently, there are serious gaps in the review and monitoring of discom operations, resource planning, enforcing norms on data recording, sharing, and analysis, ensuring compliance with obligations, and monitoring power dispatch and curtailment. The ERCs need substantial regulatory capacity to enable the energy transition which is currently underway.

At the same time, given the rapid change in the electricity sector, different types of disputes are bound to arise. Such disputes may be on account of payment delays, bankruptcies, change in law, forecasting challenges, curtailment of power, etc. Further, the introduction of electric vehicles, deepening markets, and new technologies will bring in many unforeseen circumstances. In this context, vesting of all disputes pertaining to the purchase and sale of bulk power (from generators or other market elements to discoms), including transmission entities with the ECEA has the potential to remove a significant burden of adjudication from the ERCs. This will free up their capacity to be responsive to needs highlighted above. The envisaged regulatory design and approach is explained below:

  • Role and approach of ERCs

    ERCs must mainly perform the ‘regulatory’ functions in line with the stated objectives set out in the Act and the national level policies. These could include tariff determination, approval of PPAs, granting open access (OA) and transmission licenses, and setting market rules. Once the rules are set, the role of the regulators can be limited to that of monitoring. Implications for retail tariff, arising from disputes between discoms and the counterparties selling electricity (to them) would result in a direct pass through. The ERCs are only expected to maintain objectivity in passing through these and the arms length process that enables recovery of costs for discoms. This should be accompanied with the ERCs moving away from an adversarial process (where the issues are framed as disputed contentions) to a consultative process, like regular and inclusive public hearings and transparent advisory committees, to improve the decision-making process.

  • Role and approach of ECEA

    All adjudication and interpretative functions pertaining to the sale, purchase, and transmission of bulk power should vest with the ECEA. The ECEA should be the forum of the first instance. Once the ERC has approved PPAs, MTOA/LTA agreements, questions of its applicability should vest with the ECEA. Disputes pertaining to wheeling, banking agreements, etc. should also fall within the scope of the ECEA as these materially impact the overall electricity procurement needs of the licensee. The ECEA will conduct ‘judicial proceedings’ which will be limited to applying the rules/contract/license terms to the facts. Fair and unbiased dispute resolution will benefit all stakeholders.

  • Role and approach of the APTEL

    The clear segregation in the roles of the ERC and ECEA will also help the appellate process. APTEL will be the forum for appealing decisions of both the ERC and ECEA. However, the grounds of reviewing will be different. Judicial review of ERC’s decisions will be judicial review of ‘administrative action’ which would include:
    - whether the decision was illegal, arbitrary and or unreasonable,
    - whether principles of natural justice were followed,
    - whether the prescribed procedure was followed, and
    - whether the actions were within the authority of the agency (principles of ultra vires).
    Hence, there will be limited grounds for review of an ERC’s actions. The APTEL should not be entitled to substitute itself for the ERC and make decisions on policy. However, judicial review of ECEA’s decisions will follow principles of reviewing ‘judicial actions’ where merits of the arguments will also be reviewed.

Illustrations

For example, under Section 57, the ERC has the power to impose penalties on discoms if they fail to meet standards specified by the ERC. Under the new structure, the ERC will specify standards and the penalties upfront. In case of a failure to meet the specified standards, the ERC will be bound to impose prescribed penalties. If aggrieved, the licensee will approach the ECEA for relief. This will ensure compliance with the standards through appropriate checks and balances.

Another example can be that of the life cycle of a project bid by a central entity such as the Solar Corporation of India (SECI). Here, the ERC’s role will be limited to approving the PPA. Since the tariff is determined competitively, ERC does not have to decide on tariffs. Any dispute over a change in law, curtailment, force majeure, time extensions, or compensations, would be adjudicated upon by the ECEA. It will therefore be necessary that the PPA covers all possible instances of disputes. If there is a gap, for example if the PPA does not specify the allocation of costs on account of a force majeure situation, then the government will have to provide general guidance through rules or circulars. The SECI and the project developer could allocate the costs on a case to case basis. In case of any dispute, either party may approach the ECEA, and subsequently the APTEL in case the parties are still unsatisfied.

Changes required in the proposed amendments

  • The amendments proposed in Section 121, which require the APTEL to hear the ECEA as well give directions to the ECEA will be inappropriate. A judicial forum does not represent itself before the appellate body to defend a ruling given by it.
  • In Sections 79(1)(f) and 86(1)(f), the reference to arbitration should be omitted. The requirement of applying to the ERCs before any dispute is taken to arbitration should also be removed in Section 158. Going forward, the terms of the licence should clearly contain procedures for arbitrators’ appointment without requiring a reference from the ERC. Parties signing contracts should be free to arbitrate their disputes. Any objections to resolving disputes through arbitration may be resolved at the stage of approving the PPAs.
  • In Section 109B(5), it is proposed that ECEA will mandatorily direct that the obligations under the contract be performed and may also impose damages. Deciding on remedies before an issue is resolved is an incorrect approach. A law should not take away the flexibility to decide on the remedies which can be given based on the fact situation. It may lead to many unintended and avoidance consequences such as forcing a project to run even after it becomes unviable. The language may be modified as follows: “(5) Upon a finding that there has a violation/breach of obligation under a contract by a party or parties, the Electricity Contract Enforcement Authority may direct performance of the contract or payment of any liquidated damages specified in the contract or any other remedy available in law”
  • Section 109J, which gives extraordinary powers like power of attachment, sale of property, arrest and detention in prison, appointment of receiver, should be removed. The ECEA will anyway be vested with all powers of a civil court. Such extraordinary penal powers can be counterproductive. If the entity against whom contracts are going to be enforced will be the state controlled discoms, any of these penal powers will not be ever exercised.
  • As per Section 109C, the ECEA will sit in Delhi with other benches being constituted only by the central government. Only one ECEA will not be sufficientto handle the cases being heard by the 26 ERCs operating currently. Hence, the central government should account for the case load when notifying the ECEA. It can start with regional benches and progressively increase the number of benches as may be required. This will also enable access for the concerned parties.
  • Public participation in regulatory decision making should be formalised in the Act. Appropriate amendments should be made in Section 79 and Section 86 which talk of the role and functions of the ERCs. All orders of ERCs should be reasoned orders, with detailed justification. Public hearings should be made mandatory and ERCs should be required to provide detailed responses to all stakeholder objections.

The regulatory framework proposed here is similar to that prevalent under the Insolvency and Bankruptcy Code, 2016 (IBC). In the IBC framework, the Insolvency and Bankruptcy Board of India is the regulator and publishes relevant rules and regulations; the National Company Law Tribunals are the forum of the first instance, and the National Company Law Appellate Tribunal is the appellate body. The crucial distinction in the electricity sector is the fact that there are regulatory bodies at the state level, while (significant) adjudication will be confined to two agencies, both located in Delhi.

It is argued that paring down the judicial functions of the ERCs will help build regulatory capacity and increase the accountability of the regulators and the ECEA may be beneficial in this aspect. It will also result in regulatory stability and predictability. However, the questions regarding centralisation and an efficient regulatory design do require a deeper examination and analysis. It remains to be seen if the ECEA will be successful in dealing with challenges such as tariff renegotiation (in power purchase agreements) or the other underlying problems in the electricity distribution sector that lead to disputes.

Harsha V Rao is a Research Analyst at the Council on Energy, Environment and Water. Send your comments to harsha.rao@ceew.in.  

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