Abstract

The Indian economy has seen a smooth shift from a socialist structure to a privatized one and as a result of this we have seen many private players entering the market. After the liberalisation of the Indian economy in the early 1990s, many sectors that were run exclusively by the State also became privatised, one of the best examples being the power sector. The sector has seen tremendous growth since then. It becomes apparent that with the entry of various competitors in the sector, it needed a properly structured regulatory framework mainly aimed at maintaining healthy competition in the sector and preventing market failure. Therefore the establishment of a regulator became imperative in order to safeguard the interest of consumers.

This article focuses on the existing regulatory regime in the power sector- how it came into being, its main powers and functions, the loopholes and prevailing issues plaguing the sector, and how these problems can be done away with.

Introduction

The regulatory regime of any industry prevailing in a country is one of the determining factors of its economic conditioning. It is an evolving discipline that developed massively in the preceding decade, especially in India. Regulations in India, cover multifarious facets of activities encompassing the public and private sectors. An absence of regulations would lead to an economic upheaval and mayhem.

The Indian economy has seen a shift in recent years from a socialist welfare economy to a gradually changing privatized structure. However, despite the changes taking place, at an albeit steady but definite pace, the State’s control over the regulatory sector remains intact. In such a scenario, a chasm has now been created dividing the public interest at large and the State’s aim for revenue realization. Clearly, this leaves ample room for disputes in a space where private and public entities have to work through a similar structure to reach their varied goals. Therefore, to harmonize the activities of public and private entities the need for a regulator in a well-endowed regulatory set up becomes of paramount importance.

In India, like many other developed as well as developing economies of the world, the power sector developed and took its present form through public sector utilities. It was a well-accepted thought till the 1990s in India that it is best for the government to hold a monopoly over the sector since they enjoyed economies of scale and scope. [1] The power sector in India was dominated by one large, vertically connected entity which performed all the functions viz. generation, transmission, and distribution of electricity. [2] However, this monopolisation of the sector led to suboptimal usage of resources, customer dissatisfaction due to high costs and degrading quality of services. Ultimately, post-liberalization, the sector gradually began welcoming private players. Since there were numerous players in the market, the need for a regulatory authority was felt so that it could foster healthy competition in the market as well as safeguard the interest of consumers.

The present article explores the need for regulation in the power sector, the existing regulatory framework and the issues and challenges that the sector often ends up facing.

The Need To Regulate

The term ‘regulation’, in general parlance, refers to a mechanisms through which discipline (directly or indirectly) is imposed in a market so as to promote a healthy competition between the competitors, protect the interest of the consumers, prevent abuse of dominance and market failure. The powers to regulate areawide and include under its ambit aspects such as intervention in price, entry, market structure, procurement process and quality. The same is also evident from the interpretation ascribed to the term ‘regulate’ in a catena of judgments by the Hon’ble Supreme Court of India. The word ‘regulate‘ is wide enough to confer power on the State to regulate either by increasing the rate, or decreasing the rate, the test being what is it that is necessary or expedient to be done to maintain, increase or secure supply of essential activities in question and to arrange for its equitable distribution and its availability at fair prices. [3] It is pertinent to note here that there are sectors such as electricity distribution, ports, roads etc. which are completely monopolistic; whereas on the other there are industries like electricity generation, oil, gas etc. that have scope for price-based competition. [4] Nevertheless, market abuse is possible in both cases and this is where independent regulators step in.

The Advent of the Regulatory Regime In The Electricity Industry

At this point, it is pertinent to go back in time and see the manner in which the present-day regulatory regime came into existence in the Indian electricity sector. In India, the electricity sector, like most other sectors, was a monopoly of the government wherein it handled all the functions viz.- generation, transmission, distribution and trading through a vertically integrated setup [5]. The Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 were the governing statutes for the electricity industry in India. Independent regulatory Authorities (IRAs) began to form only after the Indian Economic crisis of 1991. The power sector underwent tremendous growth by way of major policy changes and regulatory reforms. After the liberalization of the Indian economy in the early 1990s, there emerged a ‘new-style of regulation’ in which separate and independent statutory bodies were set up and as result, eventually, in the year 1996 the state of Orissa (Odisha) set up its first electricity regulatory body whose major function was the facilitation of distribution by private entities in the sector. [6] The Electricity Regulatory Commission Act, 1998 was enacted as a means to establish the Central Electricity Regulatory Commission (“CERC”) and the State Electricity Regulatory Commission (“SERC”) with an aim to promote competition, investments, increase efficiency and transparency and remove any barriers in the demand-supply side of the sector. [7]

However, it was only after the enactment of the Electricity Act, 2003 (“Electricity Act”), that a watershed transformation in the power sector was witnessed. The Electricity Act subsumed within its ambit all previous legislations, as mentioned hereinabove, and consolidated laws relating to generation, transmission, distribution and trading of electricity. Prior to the enactment of the Electricity Act, generation of power was also a licensed activity. The de-licensing of generation is one of the most important reforms to have taken place in the Indian power sector. Further, the previously existing electricity boards were unbundled and generation, transmission and distribution of electricity were separated from each other giving rise to the formation of Distribution Companies (“DISCOMS”) and Transmission Companies (“TRANSCOS”) [8]. Distribution and transmission of electricity however continued to be licensed activities, yet the reforms eventually opened the market for private investors.

Constitution of Regulators and Appellate Authority

After the enactment of the Electricity Act, CERC was constituted in accordance with Section 76 and SERCs were constituted under Sec. 82 of the Electricity Act, with the primary aim and objective being to rationalize tariff, formulate policies regarding subsidies, increasing transparency &efficiency and, in general, creating consumer and investor-friendly market. Apart from this, other major functions carried out by CERC and SERC include facilitating inter-state/intra-state transmission of power and working towards consumer advocacy. The regulatory bodies, apart from all this, were responsible not only for ensuring that consumers had access to electricity but also that it was affordable and also to make sure that these processes do not have an adverse impact on the environment.

The Electricity Act was enacted with an aim to bring about a radical change in the power sector, to create a conducive and more liberal environment for its growth and development, mainly by making it free from government intervention. For example- mandatory constitution of SERCs, creation of the Appellate Tribunal for Electricity (“APTEL”) along with a provision to make further appeal to the SC, limiting the Appellate body’s powers over the Regulators and lastly, fixation of the term of office for which a Chairman or Member of the ERC can hold an office so as to avoid arbitrariness.

Powers and Functions

It is also noteworthy to mention that CERC holds quasi-judicial powers similar to that of the Civil Court, to the extent that it can-i) summon and enforce attendance of witnesses; ii) examine any witness under oath; iii) receive evidence on affidavits; iv) review its directions, orders, and decisions [9]. Furthermore, functions of this statutory body that are enlisted under Section 79 of the Electricity Act, can be divided into mandatory functions [Section 79(1)] and advisory functions [Section 79(2)]. Its mandatory functions include regulation of tariffs of companies engaged in power generation (public or private), overseeing interstate transmission of power, issuance of licenses, providing information to stakeholders, adjudication of disputes arising between power generating companies and/or transmission licensees, setting standards for quality of service and performing any other function that may be assigned to it under the Act. [10] Some of its functions are advisory in nature and consist of formulation of National Electricity and National Tariff Policies, encouragement of investments in the sector, improving its efficiency and financial revival of the power sector in general. Maintaining transparency while discharging all of these above duties by the Commission is of paramount importance and Section 79(3) of the Act mandates it to do so. [11]

The regulatory authorities have also been empowered to amend or introduce any significant changes into power sector related policies of the government such as Rural Electricity Policy, National Electricity Policy, Tariff Policy, Competitive Bidding Guidelines etc. The regulatory bodies have also been given powers to deal with the most vital aspects of the industry- which are electricity distribution and transmission, both being licensed activities. Further, the SERCs also have a major role to play in granting licenses to vendors/distributors or to extend/suspend/cancel the same, determine the tariffs, vetting the distribution company’s plans to improve and expand their infrastructure, make rules and regulations related to PPAs and bulk power procurement processes etc. [12] This role entrusted to the Regulators is immensely important and empowers them to bring about big changes to the sector.. As per Section 57 of the Electricity Act, the appropriate Commission (ERC) is required to frame regulations mandating certain standard of performance to be delivered by a licensee, failing which he/she shall be liable to pay a penalty. In furtherance of the same, Section 59 also provides that these performance standards shall be monitored at regular intervals through reports submitted to the relevant ERCs.

In case the consumers are dissatisfied with the orders passed by the SERC or CERC, the aggrieved person can approach APTEL by way of an appeal under Section 111 of the Act. The Hon’ble Supreme Court in the landmark decision of West Bengal Regulatory Commission v. CESC [13], observed that this appellate body, established in the year 2005, “was competent to hear appeals against the adjudication officer or the Central and State Electricity Commissions under the Electricity Act, 2003.” [14] It was further observed that any further appeal in the given case must lie before the Supreme Court, based on a substantial question of law only. APTEL consists of a chairperson, who has held the office of a Judge of the Supreme Court or a Chief Justice of a High Court, one judicial member, two technical members who are qualified to handle matters relating to electricity, and one technical member who must be an expert in the field of petroleum and natural gas. [15] In another landmark decision in the case of PTC India v. CERC [16], several companies dealing in power generation and transmission challenged a regulation by the CERC which is entitled to fix a cap on trading margins that could be earned by such companies. The issue at hand was whether APTEL had the jurisdiction to decide the validity of regulations made by CERC. The said question was answered in the negative by the Hon’ble Supreme Court, and it held that APTEL had no jurisdiction to decide upon matters challenging the validity of regulations made by the ERCs as it is made under the authority of delegated legislation.

In a matter dealing with the issue of ‘compensatory tariff’, the Hon’ble Supreme Court has put an end to arbitrary and unbalanced regulatory power and has upheld the importance of contractual obligations along with restricting the impact of power tariffs citing the reason of consumer interest. This was laid down in the case of Energy Watchdog v. CERC [17], wherein the Hon’ble Supreme Court rejected the plea of generators seeking revision in bid out the tariff, citing that if the regulatory commission uses its powers to alter tariffs, it would amount to regulatory overreach. The Court also stated that the commission cannot use its powers to overrule the bidding guidelines.

While much has been disputed and discussed regarding the authority of the regulators in the Indian power sector, the notable decision of the Hon’ble Supreme Court of India in the case of West Bengal Electricity Regulatory Commission (Supra.), remains of paramount importance. The Hon’ble Supreme Court held that technical functions such as determination of tariff should be undertaken by specialized bodies like the CERC and SERCs alone. Further, it has also been held that decisions made by special technical bodies like the regulators and tribunals should not be interfered with merely because a court has appellate powers. A court of appeals has to be watchful while adjudicating disputes arising out of decisions made by such specialized tribunal/commission [18]. The Hon’ble Supreme Court in this judgment emphasized the requirement of constituting a special Appellate Body for dealing with matters of the sector that require special technical know-how and expertise. Therefore, in the present day, the following are the broad functions of the ERCs in India [19]:

  • To regulate tariff of generating companies owned and controlled by the Government
  • To regulate tariff of generating companies other than government-owned generating companies
  • To regulate tariff of a transmission licensee
  • To issue a license to persons to function as transmission licensees
  • To adjudicate upon disputes involving generating companies, or transmission licensees
  • To levy fees
  • To specify Grid Code and Grid Standards
  • To specify and enforce standards concerning quality, continuity and reliability of service by licensees
  • To fix the trading margin in trading of electricity

The above enumerated functions only provide a broad idea about the expanse of the power of regulators (Central or State) in the power sector. No doubt the regulatory power has to be exercised by the Central or State Regulator to achieve the objectives of the Electricity Act, which amongst other things provides for promoting private sector participation and also safeguarding consumer interest. Now it is nobody’s guess that striking a balance between consumer interest and interest of the private sector (corporates) is a herculean, if not impossible, task. By far the regulators have fared well if measured on a scale of striking the balance, this is evident because the sector after 17 years is still attracting all-around private sector participation.  

Loopholes and Challenges in the Regime

While the reforms in the power sector deserve accolades, the present day scenario also demands further reforms. One of the most important pain points in the Indian power sector today is the accumulation of dues on the DISCOMS for the purchase of power from the generators. The DISCOMs in various states have not been making payments to the generators citing financial difficulty. DISCOMS today are running at a cumulative loss of ₹3.5 lakh crores, the sector is knee-deep in debts as regards outstanding amounts payable to generators are concerned (₹ 88,000 crores). [20]

There are disputes pertaining to non-payment, late payment surcharge and carrying cost as a result between various entities pending across the regulatory jurisdiction in India. [21] The DISCOMs raise invoices to the consumers and being the revenue-neutral entities, the DISCOMs ideally should be making timely payments to the generators. The distribution tariff of the DISCOMs is determined after considering all aspects. Therefore, the non-payment of dues by the DISCOMs is an issue that highlights the lacunae in the sector. A mechanism needs to be devised to combat the challenges which have arisen leading to non-payment of dues for the supply of power. The resolution of these disputes is of primary importance to restore the sectoral sanctity and ensure growth.

Another pertinent problem is seen in the various scenarios where entities seek relief from the regulator in terms of the Change in Law or Force Majeure provision of their contracts. Broadly, Force Majeure and Change in Law events are unforeseen and unprecedented events that have the propensity to hamper the contractually agreed-upon terms and obligations. Oftentimes, notifications are issued by the Government when an event of such nature occurs, to consider projects affected by such events eligible for relief. The project developer also approaches the regulator in the aftermath for consequential reliefs in terms of the contract, which is approved by the regulator also after due scrutiny. However, despite the government advisory/direction/notification and principle settled by the regulator the issues do not seem to come to an end. The DISCOMs constantly object to the claims of the power-producing entity/power developer. This is a clear reflection of the fact that the DISCOMs are not in a position to make payments owing to their financial constraints. [22] The project developer as a result, is unable to commission its project within the scheduled time as per the contract and becomes subject to the payment of LD, invocation of Bank Guarantee, or termination of the contract itself. Thus, it can be seen that these events can gravely affect the project cost and ultimately have an adverse effect on the project developer. As a result, the market becomes non-conducive for investments and puts the potential investor under apprehension. 

Conclusion and Way Forward

A mismanaged energy sector is at the heart of India’s financial woes. Is it all to be blamed on the Regulatory regime? The answer would be no. However, a sensibly crafted regulatory framework and its efficient implementation will work in fulfilling the long-term interests of the sector. It is evident that there exist some challenging aspects in the regulatory sector. These pain points have the propensity to hinder the growth and development of the country’s infrastructure by creating a divide between the policymakers, regulators and stakeholders. Therefore, these issues must be addressed and a holistic approach must be adopted to ensure uniform sectoral growth.

Firstly, the lack of regulatory coherence between the government and the regulator as well as among the regulators needs to be addressed. The government today is disinterested in the regulator and continues to take major sectoral decisions without taking into account the regulator’s input. Further, the lack of uniformity between the approach adopted among various regulators also forms a challenge. In the power sector there are multiple instances when the CERC adopts one principle regarding issue and proceeds based on the same, while the State regulators move in entirely different directions involving the very same issue.

Another key challenge gripping the industry is the lack of enforceable implementation of the regulations framed by the regulators. Albeit the regulator frames the regulations concerning the various aspects of the sector. However, the implementation of the said regulations remains largely unchecked. An appropriate example of this issue can be seen in the renewable energy sector. It is known that renewable energy is the need of the hour. The regulations (Grid Codes both central and state) provide for renewable power generators to be afforded must run status. However, this is not appropriately implemented by the implementing agencies/authorities. There are instances when there is unchecked curtailment, and even the Load Despatch Centres do not adhere to the principles laid down in the regulations. [23] As a result, the generator does not get paid for the full quantum of power generated and the projects run at a risk of becoming insolvent. The issue of non-compliance exists even with respect to judicial decisions. It can be seen from the regulatory set up in the Indian power sector. Despite the Hon’ble Supreme Court’s verdict in the case of State of Gujarat &Ors. v. UUWA &Ors [24], to ensure the appointment of a judicial member in the regulatory bodies, till date there are regulatory commissions which do not consist of a judicial member. Technical experts and bureaucrats who have limited knowledge of the legal principles are therefore unable to adjudicate the disputes to the best possible outcome. As a result, despite the legal principles being embedded in the statute, and the regulator being the creature of the statute, the implementation is hindered.

The accountability of ERCs has become a debated issue lately, and it would be wise to comprehensively identify all the relevant factors and design a performance index, which shall be released on an annual basis. [25] Apart from this, in order to eradicate corruption, the selection procedure for such offices must be broadened and also made more transparent by justifying reasons for not selecting a particular candidate for a particular position. It is also advised that acts of non-compliance by the state-run utilities could be made sufficiently penalised.

The communication gap between the government and the regulators needs to be addressed. Many times, the policy framework formulated by the government does not correlate to the real picture of the regulatory setup. This could be one of the reasons why despite the policy framework being issued by the government, the regulators do not immediately consider the said policy framework as having been implemented. The dearth of regulatory autonomy furthers this problem to a greater degree. When the government does not ease its control over various entities, there is hardly anything for the regulator to regulate because ultimately the government ends up making the decisions that have a sector-wide impact. The dispute regarding the reduction of the PPA tariff for solar and wind projects in the State of Andhra Pradesh is an apt example for this kind of a situation. [26] An excellent example of easing government control leading to beneficial results for the sector is the creation of the High Power Committee with respect to the thermal power plants in the State of Gujarat. While the government acting as State ensured that an asset is not put to waste and is utilized, it also left enough room for the regulator to ensure checks and balances to make sure that the approach being taken is in consonance with the Electricity Act.

Next, the differential treatment of the Public Sector Undertakings (PSUs) and the Private Sector also enlarges the challenges being faced by the regulatory set up in India. The private players are placed on a higher pedestal to prove their case in comparison to the PSUs. This, therefore, also creates an apprehension for potential investors from entering the Indian market and ultimately is detrimental for the sector and the economy as a whole.

Lastly, it needs to be pointed out that the Indian power sector suffers from a lack of economic insight and certainty. For instance, various Power Purchase Agreements provide for relief available to the developer in case of a Change in Law event. The developer raises invoices based on the said provision, which is then disputed by the procurer, mostly unnecessarily. However, oftentimes when the dispute is being adjudicated upon, the regulator despite deciding in favour of the developer does not allow the carrying cost/interest to the regulator. As a result, loss is incurred by the developer which is detrimental not only for the developer but also to the economy. It is imperative for the regulators also to understand that economic consideration cannot be ignored while interpreting the law especially in light of a long time taken in deciding a dispute finally, as has also been laid down by the Hon’ble Supreme Court of India in the case of Shivashakti Sugars Limited v. Shree Renuka Sugar Limited & Ors [27].

Therefore, the regulatory regime in the Indian electricity sector needs to develop a detailed mechanism with effective implementation in order to combat the above challenges. Only then can there be economic as well as infrastructural growth in the country. 

About the Author

Ms Parichita Chowdhury is a Senior Associate at HSA Advocates.

Ananya Vatsa is a 4th year student at the Maharashtra National Law University, Nagpur and is an Associate Editor at IJPIEL.

Editorial Team

Managing Editor: Naman Anand

Editor in Chief: Akanksha Goel and Aakaansha Arya

Senior Editor: Gaurang Mandavkar

Associate Editor: Ananya Vatsa

Junior Editor: Muskaan Aggarwal

Preferred Method of Citation 

Parichita Chowdhury and Ananya Vatsa, “Indian Electricity Industry: An Overview of the Prevailing Regulatory Regime” (IJPIEL, 3 June 2021)

<https://ijpiel.com/index.php/2021/06/03/indian-electricity-industry-an-overview-of-the-prevailing-regulatory-regime/?et_fb=1&PageSpeed=off>

Endnotes

[1] Kirti Singh, Electricity Act and Its Implementation in India, Energy Law and Policy in India NLSIU Book Series-2, 49 (2016).

[2] Id.

[3] AIR 1964 SC 178.

[4] D. Narsimha Rao & Subhashish Gupta, Regulatory Framework for Infrastructure, INRM Policy Brief No. 8 ADB, at pg 2, (2006).

[5] Manish Yadav, Regulation in Electricity Sector and Protection of Consumer Rights: A Critical Analysis, Contemporary Law Review Vol. 1, 50-73, 50 (2017).

[6] Supra note 4.

[7] CENTRAL ELECTRICITY REGULATORY COMMISSION, http://www.cercind.gov.in/ (last visited May 3, 2021).

[8] Meenakshi Prasad & Aprurv Parashari, The Electricity Act, 2003- Liberalizing the Power Sector, Energy Law and Policy in India NLSIU Book Series-2, 37 (2016).

[9] Press note, The Mandate of CERC (Oct 30, 1999), http://www.cercind.org/presscondel.htm (last visited May 20, 2021).

[10] Functions (Mandate), CENTRAL ELECTRICITY REGULATORY COMMISSION, http://www.cercind.gov.in/Function.html, (last visited May 20, 2021).

[11] Id.

[12] RV Shahi, Power reforms: Evaluate Regulators’ Performance, Financial Express, (Mar. 23, 2020), https://www.financialexpress.com/opinion/power-reforms-evaluate-regulators-performance/1906261/.

[13] (2002) 8 SCC 715.

[14] Appellate Tribunal for Electricity, https://aptel.gov.in/about-us(last visited May 3, 2021).

[15] Id.

[16] (2009) 5 SCC 466.

[17] (2017) 14 SCC 80.

[18] Id.

[19] STATE ELECTRICITY REGULATORY COMMISSIONS, http://www.cercind.gov.in/serc.html, (last visited May 3, 2021).

[20] See Supra note 12.

[21] Surya P. Sethi, Rescue Package for Power Discoms: Continuing With Mismanagement, EPW Vol. 9 No. 4 pp. 18 (Jan 25, 2014).

[22] Debjoy Sengupta, Discoms suffering severe financial stress, Economic Times (Dec 11, 2019), https://economictimes.indiatimes.com/markets/stocks/news/discoms-suffering-severe-financial-stress-ind-ra/articleshow/72478754.cms?from=mdr (last visited on May 21, 2021).

[23] Northern Regional Load Despatch Centre (NRLDC), https://nrldc.in/ (last visited on May 20, 2021).

[24] (2018) 6 SCC 21.

[25] Supra note 12.

[26] Anjana Parikh, Solar and wind PPAs with Tariffs set by SERC in Andhra Pradesh Will not be Revisited, Mercom (Dec 2, 2019), https://mercomindia.com/solar-wind-ppa-serc-andhra-pradesh/ (last visited May 21, 2021).

[27] (2017) 7 SCC 729.