Sectoral Overview and

Enabling Framework

In Unit 1, you have acquired an overall view of the power sector in our country.
You have learnt about the key issues and challenges facing the power
distribution sector. In this Unit, you will study about the legislative measures
that have been taken by our government to address these challenges. In
particular, we discuss the Energy Conservation Act, 2001, which was
formulated to sensitize the consumer on the benefits of efficient use of energy
and energy conservation, and the mandatory compliance requirements.

Next, we present the salient features of the Electricity Act, 2003, which is a
comprehensive piece of legislation for the power sector. This Act has helped
to change the power scenario in our country significantly. Therefore, you must
know the provisions of the Act that impact the power distribution sector and
understand their implications. We also discuss the National Electricity Policy
and National Tariff Policy, which have been notified by the Government of
India as per the requirement of the Electricity Act, 2003. The complete
versions of these documents are available on the website of the Ministry of
Power (www.powermin.nic.in). Therefore, we shall not reproduce the
documents here. Rather, we bring forth their important features and
implications that you should be aware of, to do your job better.

Our country has a vast potential of energy saving. It is estimated that

measures for energy conservation and improving energy efficiency have the
potential for creating an equivalent capacity of a minimum of 25000 MW. The
Government of India enacted the Energy Conservation Act for redeeming this
potential and it came into force with effect from 1st March, 2002.

The Act provides the legal framework, institutional arrangement and a

regulatory mechanism at the Central and State level to embark upon the
energy efficiency drive in the country (Fig. 2.1).

REGULATORY MECHANISM
INSTITUTIONAL
ARRANGEMENT
LEGAL FRAMEWORK

Fig. 2.1: Ambit of the Energy Conservation Act

You will be studying about energy conservation in Unit 1 of the Course

BEE-002. We present here a brief background to help you understand the
38 need for this Act.
Background of Energy Conservation Act, 2001 Acts and Policies:
The Salient
Features
As a thumb rule, the energy needs of a country are about 1.5 times its GDP or
the economic growth rate. India’s projected growth rate up to the year 2012 is
about 8%. This necessitates commensurate needs of power. You will study in
Unit 1 of the Course BEE-002 that India’s coal reserves could last for about
200 years, but about 73% coal cannot be used because of its high ash
content. Our known oil and natural gas reserves are meagre and may last for
only 20 years or so. Our oil imports are already very high and dependence on
further imports is bound to affect our economy and energy security.

This scenario warrants a firm thrust on

Improving energy efficiencies in new generation capacities, supply

side, demand side and end-user side; and
Lowering the energy intensity in our economy.

You will learn about energy efficiency and energy intensity in Unit 1 of the
Course BEE-02. We now describe the major features of this Act.

2.2.1 Important Features of the Act

Setting up of the Bureau of Energy Efficiency

The Bureau of Energy Efficiency has been established with effect from
1st March, 2002 under the provisions of the Energy Conservation Act,
2001. It is responsible for the implementation of policies and programmes
related to energy. It also coordinates the implementation of energy
conservation activities. The mission of the Bureau is to institutionalize
energy efficiency services, enable delivery mechanisms in the country and
provide leadership to energy efficiency in all sectors of economy. Its
primary objective is to reduce energy intensity in the Indian economy.

The role of the Bureau of Energy Efficiency is to:

• prepare standards and labels of appliances and equipment;

• develop a list of designated consumers;
• specify certification and accreditation procedures;
• prepare building codes;
• maintain Central EC fund;
• undertake promotional activities in coordination with centre and state
level agencies;
• develop Energy Service Companies (ESCOs);
• transform the market for energy efficiency; and
• create awareness through a variety of measures including clearing
house.

For performing the role assigned to it, the Bureau is supposed to

• coordinate with designated consumers, designated agencies and other

agencies;
39
Sectoral Overview and • recognize and utilize the existing resources and infrastructure;
Enabling Framework
• exercise powers as assigned to it, including recommending to the
Central Government the norms for processes and energy consumption
standards; and
• take steps to prescribe guidelines.

The thrust areas of BEE are shown in Fig. 2.2.

Demand Side Management Energy Conservation in Building Codes

Manuals and Codes Indian Industry

Standards and Labelling Certification and Accreditation

Research Programmes School Education

Delivery Mechanism of Energy Services

Energy Efficiency in Buildings and Units

Fig. 2.2: Thrust Areas of the Bureau of Energy Efficiency

Standards and Labelling

Standards and Labelling (S & L) has been identified as a key activity for
improvement in energy efficiency. The S & L programme, when in place
would ensure that only energy efficient equipment and appliances would
be made available to the consumers.

The main provisions of the Act on Standards and Labelling are to:

• evolve minimum energy consumption and performance standards for

notified equipment and appliances;
• prohibit manufacture, sale or purchase or import of such equipment or
appliance, which does not conform to the energy consumption
standards;
• introduce a mandatory labelling scheme for notified equipment
appliances to enable consumers to make informed choices; and
• disseminate information on the benefits of energy conservation and
efficient energy use to consumers.

The equipments to be covered initially under the S&L programme are

household refrigerators, air-conditioners, water heaters, electric motors,
agriculture pump sets, electric lamps and fixtures, industrial fans and
40 blowers, and air-compressors.
 Designated Consumers Acts and Policies:
The Salient
The Act provides the list of designated consumers, which includes the Features
energy intensive industries, Railways, Port Trust, Transport Sector, Power
Stations, Transmission & Distribution Companies and Commercial
buildings or establishments. The government notifies the designated
consumers.

The main provisions of the Act on designated consumers are as follows:

• The designated consumer should get an energy audit conducted by

an accredited energy auditor. (Energy audit is explained in Unit 3 of
the Course BEE-002.)

• Energy managers are required to be appointed or designated by the

designated consumers. They should have passed the Certification
examination arranged by the Bureau.

• Designated consumers would comply with norms and standards of

energy consumption as prescribed by the GOI.

Fig. 2.3: Examples of “Designated Consumers” as per the Energy Conservation Act

Certification of Energy Managers and Accreditation of Energy

Auditing Firms

One of the important provisions in the Act is to create a cadre of

professionally qualified energy managers and auditors with expertise
in policy analysis, project management, financing and implementation of
energy efficiency projects through a Certification and Accreditation
programme. BEE has designed training modules, and is conducting a
National level examination for certification of energy managers and energy
auditors.

Energy Conservation Building Codes

Energy Conservation Building Codes encompass the norms and standards

of energy consumption expressed in terms of per square metre of the area
wherein energy is used.
41
Sectoral Overview and The main provisions of the Act on Energy Conservation Building Codes are
Enabling Framework
as follows:

• The BEE would prepare guidelines for Energy Conservation Building

Codes (ECBC);

• ECBC would be notified to suit local climate conditions or other

compelling factors by the respective states for commercial buildings
constructed after the rules relating to energy conservation building
codes have been notified. In addition, these buildings should have a
connected load of 500 kW or contract demand of 600 kVA and above.

• Energy audit of specific designated commercial building consumers

would also be prescribed. By energy audit, we mean verification,
monitoring and analysis of energy use including submission of
technical report containing recommendations for improving energy
efficiency with cost benefit analysis and an action plan to reduce
energy consumption.

Central Energy Conservation Fund

This fund is to be set up at the Centre to develop the delivery mechanism

for large-scale adoption of energy efficiency services such as performance
contracting and promotion of Energy Service Companies (ESCOs). The
fund is expected to give a thrust to R & D and demonstration in order to
boost market penetration of efficient equipment and appliances. It would
support the creation of facilities for testing and development and to
promote consumer awareness.

Role of Central and State Governments

The following roles of Central and State Governments are envisaged in the
Act:

The Central Government will

• notify rules and regulations under various provisions of the Act;

• specify norms for processes and energy consumption standards for
any equipment/appliances which consume, generate, transmit or
supply energy;
• specify equipment or appliances to be covered by this Act;
• prohibit manufacture or sale, purchase or import of equipment or
appliance, till such appliance or equipment conforms to energy
consumption standards;
• ensure direct display of such particulars on label on equipment or on
appliance and specify the manner in which it is to be displayed;
• alter the list of Energy Intensive Industries;
• establish and prescribe such energy consumption norms and
standards for designated consumers, as it deems necessary;
• provide initial financial assistance to BEE and EC fund; and
42
 • coordinate with various State Governments for notification, Acts and Policies:
The Salient
enforcement, penalties and adjudication. Features

For further details, you may like to refer to Section 14 of the Act.

Each State Government will

• amend the energy conservation building codes to suit the regional and
local climatic conditions;
• designate a state level agency to coordinate, regulate and enforce
provisions of the Act;
• constitute a State Energy Conservation Fund for promotion of energy
efficiency.

For further details, you may like to consult Section 15 of the Act.

Enforcement through Self-Regulation

The following ways of self-regulation have been envisaged:

• The certification of energy consumption norms and standards of

production process by the Accredited Energy Auditors is a way to
enforce effective energy efficiency in Designated Consumers.

• For energy performance and standards, manufacturer' s declared

values would be checked in Accredited Laboratories by drawing
samples from the market. Any manufacturer or consumer or consumer
association can challenge the values of other manufacturers and bring
it to the notice of BEE.

Penalties and Adjudication

Failure to comply with the provision of clauses (c), (d), (h), (i), (k), (l), (n),
(r), or (s) of Section 14 or clause (b), (c) or (h) of Section 15, will invite
penalty.

• Penalty for each offence under the Act would be Rs.10,000/- for each
failure and additional Rs.1,000/- for each day in case of continuing
failures.

• The initial phase of 5 years would be promotional to facilitate the

creation of the infrastructure for implementation of Act. No penalties
would be effective during this phase.

• The power to adjudicate has been vested with State Electricity

Regulatory Commission (SERC), which shall appoint any one of its
members to be an adjudicating officer for holding an enquiry for the
purpose of imposing any penalty.

You may like to pause here and reflect on the provisions of the Energy
Conservation Act. Attempt the following SAQ.

43
Sectoral Overview and
Enabling Framework ! "

Suggest ways in which your utility could help in implementing various

provisions of the Energy Conservation Act, 2001 to meet its objectives.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………

2.2.2 Impact of Implementing the Act

Many steps have been taken by BEE after the enactment of the Act. We
describe below a few examples. You will read about some more examples and
case studies in Units 3 and 4 of the Course BEE-002.

Energy Efficiency in Buildings and Establishments

How effective is the
legislative route in Energy audit studies conducted in several office buildings, hotels and
meeting the hospitals indicate an energy saving potential of 20-30%. The potential is
challenges being largely untapped, partly due to lack of an effective delivery mechanism for
faced by the power energy efficiency. Government buildings by themselves constitute a very large
sector? How can target market. The Government of India is committed to set an example by
you and the public implementing the provisions of this Act in all its establishments as a first
help in this? initiative. To begin with, the Bureau conducted an energy audit in the
Rashtrapati Bhawan, Parliament House, South Block, North Block, Shram
Shakti Bhawan, AIIMS, Safdarjung Hospital, Delhi Airport, Sanchar Bhawan,
and Rail Bhawan. BEE has identified a savings potential of 23 to 46 per cent
in these nine buildings.

Energy Conservation Award

The Ministry of Power launched the National Energy Conservation Awards in

1991 to accord national recognition to industrial units for their efforts in
reducing energy consumption. For example, in 2002, a total of 174 industrial
units belonging to various industries such as automobile, aluminium, cement,
chemicals, ceramics, chlor-alkali, edible oil/vanaspati, fertilizers, glass,
integrated steel, mini-steel, paper and pulp, petrochemicals, refractory,
refineries, sugar and textile plants, etc. responded to the Awards scheme.

These units have been able to collectively save 641million kWh of electrical
energy, which is equivalent to the energy generated from a 122 MW thermal
power station at a Plant Load Factor of 60%. The participating units have
also saved 1.7 lakh kilolitres of furnace oil, 7.4 lakh metric tonnes of coal
and 3588 lakh cubic meters of gas per year. In monetary terms these units
have been able to save Rs. 594 crores per year and the investment of
Rs. 691 crores was recovered in 14 months time period.
44
We now present the case study of the initiatives taken by the Maharashtra Acts and Policies:
The Salient
State Electricity Board. Features

Energy Conservation Initiative of the Maharashtra State Electricity Board at

Prakashgadh Building, Mumbai, India

! #$ # "%! !

% ! $ ! "% #&' ! ! !
! " #$%& ! '
!

! ! ' ( '
% ! ' ! (
' " )
(!% ! )
! ! ! * !
* + !
'
,

* "
!
-( * ! '
( *
* !
&./

* ( # %!
$ # #&" ! / 01 !
! % ! !
! !
! " + '" !
"! #, '" !
"!
#- ! 2 +
! !

. ) , " '
& ! # &'

! ,0 3
! 4 % 5 .
6 63 * + !
7 8 ! 9
!

&' # ! ) , % . /"

0!" ' ! !
7% 8 :'4 78 ; : < 78 ;
.= > >93> 79>> 8 96?7
9 8
.= @ > A9A 7
9>A 8 >937
963 8
.= 7 ! 8 6 93>76A 8 9??7? 8
' ! 1 *122* 21

So far you have studied about the Energy Conservation Act, 2001. You may
like to review what you have learnt before studying further.
45
Sectoral Overview and
Enabling Framework ' )% $ 3 &!
'!

Suggest ways in which your utility could embark on energy conservation

efforts within the organisation.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………

* ( *
We begin by setting the historical context of the Act. This will help you
appreciate its provisions and the desired impact.

2.3.1 Evolution of the Institutional Framework

We present the chronological description of the evolution of various
legislations related to the electricity sector. Of course, we mention only the
milestones.

• 1910, Electricity Act: This was the first comprehensive legislation on the
subject of electricity in India. It provided the basic legal framework for the
power supply industry in India. It provided for grant of licenses by the State
Governments for supply of electricity in specified geographical areas.

• 1948, Electricity Supply Act: The development of the sector was carried
out through Five Year Plans. The first two Plans laid emphasis on hydro-
power. Electricity was enlisted in the concurrent list of the Constitution of
India, i.e., both the Centre and the State had the right to legislate on the
subject. This Act aimed to ensure coordinated development of electricity in
India on regional basis and provided for creation of State Electricity
Boards (SEBs) with overall responsibility of generation, transmission and
distribution within the state.

• 1966-67: Regional Electricity Boards were formed to take care of interstate

imbalances.

• 1975: National Thermal Power Corporation (NTPC) and National Hydro

Power Corporation (NHPC) were set up in the Central Sector.

• 1991: Regional Load Despatch Centres (RLDCs) were formed to operate

the Power Systems in the region. With the liberalization of the economy,
private participation in the form of independent generating companies was
permitted in the power sector. (Note that private participation in generation
was already permitted under the 1910 Act.)

• 1992: Power Grid Corporation was formed to facilitate the formation of the
National Grid.

• 1998, Electricity Regulatory Commission Act: Central Electricity

46 Regulatory Commission (CERC) and State Electricity Regulatory
 Commissions (SERCs) were formed for regulating the electricity sector. Acts and Policies:
The Salient
Prior to the setting up of Regulatory Commissions, the Electricity Boards Features
and the State Governments were directly concerned with fixation of tariff.
Very often this was a populist exercise where those in power were more
concerned with the impact on voters while fixing the tariff. Such populist
decisions year after year proved suicidal for the financial health of the
Electricity Boards. With the setting up of the State Regulatory
Commissions, the situation has undergone a dramatic change. Tariff
fixation is now with the State Regulatory Commissions and it is beyond the
jurisdiction of the State Governments.

The Regulatory Commissions have a wide mandate to improve the Power

Sector in a variety of ways. They are supposed to

monitor and curb T&D losses;

lay down the standards of performance for distribution licensees;
adjudicate disputes between the stakeholders;
gradually reduce the cross-subsidies and advise the State
Governments from time to time on Power Sector issues;
grant licenses as well as for fix tariffs; and
develop the power market.

The Commissions are free to fix their own procedure for transactions of
business and in doing so are guided by the provisions laid down under
Section 61 of the Electricity Act, 2003 as well as the National Electricity
Policy and the National Tariff Policy. All proceedings before the
Commissions are deemed to be judicial proceedings within the meaning of
Section 193 and 228 of IPC and the Commissions are deemed to be a
Civil Court for the purpose of Sections 345 and 346 of the Criminal
Procedure Code.

• 2003, Electricity Act: The primary objective of this Act is to introduce

genuine competition between various generating companies, so as to
reduce the cost of generated power, increase efficiencies and pass on the
benefit to the consumer in the long run. It encompasses many
considerations (Fig. 2.4).

Meeting the social objectives.

Economic allocation of resources.

Earning a fare rate of return on assets.

Ability to absorb market fluctuations.

Encourage conservation.

Fig. 2.4: Considerations Encompassed by the Electricity Act, 2003 47

Sectoral Overview and
Enabling Framework GOALS OF THE ELECTRICITY ACT, 2003

• Consolidating the laws relating to generation, transmission,

distribution, trading and use of electricity;
• Promoting competition;
• Protecting the interest of consumers and ensuring supply of
electricity to all areas;
• Rationalizing electricity tariff;
• Ensuring transparency in policies regarding subsidies; and
• Promoting efficient and environmentally benign policies, and
taking care of related matters through the constitution of the
Central Electricity Authority, Regulatory Commissions and the
Appellate Tribunal.

We now describe the salient features of the Act.

2.3.2 Salient Features of the Electricity Act, 2003

The enactment of the Electricity Act (EA), 2003 on 10th June, 2003 may be
regarded as one of the most important events in the Indian power sector. This
Act was brought into force to reform the power sector and infuse dynamism
into it. The situation prior to the enactment of the Act was that SEBs could not
mobilize the requisite resources and private investors could invest only
through the SEBs. The earlier legal framework was amended to facilitate
private participation. SEB monopoly restricted competition and efficiency and
there was inadequate concern for the consumer. This Act has changed the
situation radically as you will now learn.

Electricity as an Industry

This Act has declared Electricity as an Industry and all streams of the
electricity sector as individual profit centres. It provides freedom to
generate, freedom to sell and freedom to procure. Under this Act, power
sourcing is no more a single buyer model. The Act stipulates a greater role
for the private sector. There could be multiple licensees in distribution
and also a parallel network by different distribution licensees
servicing the same area. Trading is permitted as a distinct activity. Tariff
has to be rationalized and cross-subsidies have to be reduced over a
period of time. A multi-year tariff framework has been introduced. SERC
has been made mandatory and it has the power for granting licenses as
Fig. 2.5: Electricity − An well as for tariff fixation.
Industry
Transmission

The transmission of electricity is handled by Central and State

Transmission utilities (CTU and STU), which have 51% Government
equity. CTU and STUs will only be carriers and not engage in trading.
They will:

48
 • plan, coordinate and develop transmission networks; Acts and Policies:
The Salient
• provide non-discriminatory open access to Generation companies Features
(Gencos), licensees and consumers on payment of wheeling and
cross-subsidy surcharge;
• engage in right of way for convergence technologies for optimal
Open access in
utilization of assets, with prior permission of Regulatory Commissions. transmission means
freedom to the
Distribution licensee to procure
power from any
Open access in distribution is to be introduced in phases. There is no source. The
separate trading licence for distribution licensee. Distribution licensee has expression “Open
to provide non-discriminatory open access of its network to consumers access” has been
defined in the Act to
where allowed by ERC. Cross subsidy surcharge has to be at the current mean “Non
level of subsidy and has to be phased out gradually. Licensees are discriminatory
permitted to conduct business through another entity within its own provision for the use
of transmission lines
territory. or distribution
system or
Such open access is being provided on payment of wheeling and cross associated facilities
subsidy charges to encourage multiplicity, competition and entry of market with such lines or
forces. system by any
licensee or
This means that the consumer has a choice to decide his/her supplier. consumer or as
person engaged in
However, this can be practically utilized only by the bulk consumers, as generation in
individual customer may not benefit from this. In case multiple distribution accordance with the
licensees operate in the same area, the consumer has the option to regulations specified
by the appropriate
choose his/her distribution licensee. This is yet to happen, and depends on
Commission”.
the Regulatory approvals.

DISTRIBUTOR AS GENERATOR

Any distributor can

• become a generator;
• engage in right of way for convergence technologies for optimal
utilization of assets, with prior ERC permission;
• maintain separate account for such businesses; and
• pass part of such earnings for reducing wheeling charges.

You may now like to attempt an SAQ to review what you have studied so far.
Fig. 2.6: Distributor
also a
* ! !
4& ! ! % $ 5 Generator

How has the distribution scenario changed after the enactment of the
Electricity Act, 2003?
………………………………………………………………………………..…….
……………………………………………………………………………..……….
………………………………………………………………………………………
………………………………………………………………………………………
49
Sectoral Overview and Supply
Enabling Framework
The function of supply was earlier segregated between bulk and retail. It
has now been integrated. There is no need for license for generation and
supply within notified rural and remote areas. Stand alone systems have
been allowed for generation and distribution of power (Fig.2.7).
Decentralized management of supply and distribution has been permitted
through panchayats, consumer associations, co-operatives and
franchisees.

Trading

Trading has been defined to mean the activity of purchase of electricity for
Fig. 2.7: Windmills as
resale thereof. It is being recognized as a distinct licensed activity with the
Stand alone
Systems for safeguard that the Regulatory Commissions are being authorized to fix
Power ceilings on trading margins, if necessary. ERCs may specify technical and
Generation capital adequacy and creditworthiness thresholds for traders. Important
and
Distribution features of power trading are:

• distribution licensees and Gencos can engage in trading;

• CTU, STU, SLDC, RLDC and NLDC cannot engage in trading; and
• ERCs are authorized to fix caps/ceilings on trading margins.

Distribution
Licensees

Gencos

CTU, STU, CTU, STU,

SLDC, RLDC SLDC, RLDC
and NLDC and NLDC

Fig. 2.8: Trading allowed only between Distribution Licensees and Gencos

The price is not regulated for direct commercial relationship between the
consumer and the generator or trader, but trading margin is presently
capped @ 4 Paise/kWh. However, the wheeling and subsidy surcharges
are regulated.

Tariff Determination

The tariff is fixed under Chapter VII of the Act. Tariff determination has
become transparent and is insulated from the political pressures. ERCs
have been authorized to set terms and conditions for tariff. They are to be
guided by factors that encourage competition, efficiency, economical use
of resources, commercial principles, rewards in efficient performance,
multi-year tariff (where tariff is set for a few years ahead), etc. Under the
50 multi-year tariff regime, utilities are expected to plan sales and investment
3 to 5 years ahead. Multi-year tariff regime should provide for tariff path, Acts and Policies:
The Salient
revenue stream and investment plans of the utilities. Features
ERCs shall determine tariffs for supply by Gencos to Discoms, for
transmission, for wheeling, and for retail sale. They are empowered to fix
margins and caps (ceilings floors) for trading and can adopt mechanisms
of determining tariff through bidding. Tariff will not be amended in a period
of less than a year.

Table 2.1: Role of CERC and SERC in Tariff Setting

CERC SERC

• To set:
− Generation tariff for central
owned generating companies.
− Generation tariff for Companies
supplying power to more than
one state.
− Transmission tariff for
interstate transmission of
power.
• To set:
− Transmission tariff within the
State.
− Retail distribution tariff within
the State.
• Determine and notify tariff for
State Genco with State Govt.
• Clear all new PPAs.

Note: Generation and transmission • Regulate purchase of power.

companies will adopt such principles Note: Tariff progressively reflects
as to earn adequate return. cost of supply at an improving level
of efficiency.

Guidelines for ERCs: The Regulatory Commission is concerned with the

generation, transmission and distribution companies operating on
commercial lines. In fixing the tariff, the concerned Regulatory
Commission is mandated to:

• encourage competition and efficiency;

• safeguard the interest of the consumers and at the same time ensure
recovery of the cost of electricity in a reasonable manner;
• encourage generation and use of renewable source of energy;
• examine the factors that would encourage efficiency and economical
use of resources; and
• ensure that the businesses of generation, transmission and distribution
are conducted on commercial principles.

The Regulatory Commission after receiving petition for tariff should give
wide publicity to the petition before the tariff fixation and invite public
objections to the tariff proposals, if any. Under Section 65 of the Electricity
Act, 2003, if the Government requires any additional subsidy beyond that
provided by the Commission to any consumer or a class of consumers, it
has to pay the amount in advance to compensate the power Company
affected by the grant of subsidy. In other words, the Governments cannot 51
Sectoral Overview and make empty promises to please any category of consumers. It has to
Enabling Framework
provide extra funds, in the form of subsidy to the power company, in case
it wishes to be extra-generous, to that category of consumers.

Subsidy − Cross-Subsidy

The Act makes it mandatory for State Governments to provide subsidy in

advance to the SERC, if it is to be given to the consumers on its direction.
If subsidy is not provided in advance, the direction of the State
Government is not operative. Phasing out cross-subsidies in tariff has to
be undertaken in a progressive manner.

In a non-discriminatory open access of transmission and distribution

systems, there will be a payment of surcharge till cross-subsidies are
eliminated.

Restructuring

Option is vested with State Governments to continue with SEBs which will
then be treated as Distribution Licensees and the STU owning the
generating assets. There is a provision for one-year transition to existing
licensees. State Governments are empowered to defer application of the
Act for a maximum period of six months.

Cross Holdings

Gencos are free to undertake Distribution Business and Distribution

Licensees are free to undertake Generation Business.

Theft and Other Offences

Electricity theft is the most problematic area in the power sector. The
Electricity Act, 2003 lays stringent penalties for theft of electricity. It makes
the offence culpable under Indian Penal Code. There can be
imprisonment of up to a period of 3 years or fine or both. The
penalties are for direct theft as well as for meter tampering and for
fraudulent extraction of energy.

If the consumer is making unauthorized use of electricity, the inspecting

officer can provisionally assess her/him under Section 126 of the Electricity
Fig. 2.9: Power Theft: Act. The provisional assessment order has to be served to the consumer
A Punishable
Offence
so as to give an opportunity of hearing for filing objections, if any. If the
assessed amount is deposited by the consumer s/he shall not be
subjected to any liability or any action by any authority whatsoever.

In case the inspecting officer detects unauthorized use of electricity, it will

be presumed under Section 126(5) that such unauthorized use of
electricity was continuing for a period of three months immediately
preceding the date of inspection in case of domestic and agricultural
service. For other category of services, the unauthorised use shall be
deemed to be made for a period of six months preceding the date of
inspection.

52
Unless this charge is rebutted by the consumer concerned, the Acts and Policies:
The Salient
assessment under this Section will be made at a rate equal to one and a- Features
half times the tariff rates applicable for relevant category of service.

Unauthorized use of electricity (Fig. 2.10) means the use of electricity by

• by any artificial means, or

• by means not authorized by a person or authority or licensee
concerned, or
• through a tampered meter, or
• for the purpose other than for which the usage of electricity was
authorized.

Fig.2.10: Examples of Unauthorized Use of Electricity

Thus as per section 126 of the Electricity Act, 2003 an appeal can be made
within 30 days of the order of the Appellate Authority. The consumer has
to deposit an amount equal to one-third of the assessed amount while filing
the appeal. The Appellate Authority shall make a decision after hearing
both the parties and this order will be final.

Disconnection of Supply

Under Section 56 of the Electricity Act, if any person neglects/fails to pay

electricity dues, the Power Company after giving notice for not less than 15
days may cut off the supply of electricity besides filing a civil suit. The
supply of electricity shall not be cut off if such person deposits under
protest an amount equal to the sum claimed from her/him or the electricity
53
Sectoral Overview and charges due from her/him for each month calculated on the basis of
Enabling Framework
average charge of electricity paid by her/him during the preceding six
months, whichever is less. This will be applicable till such time as the
dispute between her/him and the Power Company is disposed of. Under
Section 56(2) it has been laid down that no amount shall be recoverable
from a consumer after a period of two years from the date when the
amount became first due unless such amount has been shown
continuously to be recoverable as arrears.

The Act also provides speedy trial of offences under theft of electricity
through constitution of Special Courts by the State Governments. The
single judge of such special courts will be appointed with the concurrence
of the High Courts. These courts have the powers of Court of Session. The
states of West Bengal and Andhra Pradesh have passed Anti-theft Laws
for such offences.

An Appellate Tribunal has been created over the Commissions for

speedy dispute resolution. It is supposed to adjudicate appeals against
orders of the adjudicating authority and ERCs in a time bound manner.
Appeals regarding the orders of the Tribunal can be taken to the Supreme
Court.

Appellate Tribunal

Any person aggrieved by the decision of the Central Regulatory

Commission or State Regulatory Commission may file an appeal before
the Appellate Tribunal within 45 days of the passing of the concerned
order. Before filing an appeal, the aggrieved party must deposit the
penalty amount imposed by the Regulatory Commission concerned. The
objective of providing this appellate mechanism first at the level of the
Appellate Tribunal and then at the level of Supreme Court, is that the
disputes are not unnecessarily dragged in the Courts, through civil
litigation or writs. Under Section 145, disputes cannot be raised before
Civil Courts.

In appropriate cases, the Appellate Tribunal can waive this provision if the
deposit of penalty is likely to cause undue hardship to any person. Under
Section 120 of the Electricity Act, 2003, the Appellate Tribunal shall not be
bound by the procedure laid down by the Code of Civil Procedure but shall
be guided by principles of natural justice and it can regulate its own
procedure.

Any person aggrieved by a decision of the Tribunal may file an appeal

before the Supreme Court within 60 days from the date of the order.

Constitution of Central Electricity Authority

CEA continues to remain the main technical advisor of the Central /State
Government and Regulatory Commissions. The CEA also has to specify
the technical standards as well as the safety standards for connectivity
with the grid, which a person intending to setup a generating station has to
comply with.
54
 Acts and Policies:
6. !! ) * The Salient
Features

Recall the challenges facing the power sector about which you have
studied in Unit 1. How can the provisions of the Electricity Act, 2003 help in
achieving them?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………

We now discuss the National Electricity Policy, which is an outcome of the

Electricity Act, 2003.

6 ( ( . (

The National Electricity Policy is a major policy instrument having the force
of law under the Electricity Act, 2003. The Central and State Electricity
Regulatory Commissions are required to follow the policy to discharge their
respective functions. Similarly, the Central Electricity Authority (CEA) is
required to prepare a National Electricity Plan in accordance with the National
Electricity Policy. The policy aims at accelerated development of the power
sector, providing supply of electricity to all areas and protecting interests of
consumers and other stakeholders. This has to be done keeping in view the
availability of energy resources, technology available to exploit these
resources, economics of generation using different resources, and energy
security issues.

OBJECTIVES OF NEP

• Access to Electricity for all households in the next five years.

• Availability of Power to be ensured to meet the demand by 2012.
Energy and peaking shortages to be overcome and adequate spinning
reserve to be available.
• Supply of Reliable and Quality Power of specified standards in an
efficient manner and at reasonable rates.
• Per Capita Availability of Electricity to be increased to over 1000
units by 2012.
• Minimum Consumption of 1 unit per household per day as a merit
good by year 2012.
• Financial Turnaround and Commercial Viability of Electricity
Sector.
• Protection of Consumers’ Interests.

55
Sectoral Overview and We now briefly discuss some salient features of the policy.
Enabling Framework
2.4.1 Salient Features of NEP
Access to electricity: The policy not only envisages access to electricity for
all but it also emphasizes that all consumers, particularly those who are ready
to pay a tariff which reflects efficient costs have the right to get uninterrupted
24 hour supply of power.

Fig. 2.11: No More Power Breakdowns!

Targeted subsidies: The Policy recognizes the need for ensuring recovery of
cost of service; the cost of electricity supplied and related O&M expenses from
consumers to make the power sector sustainable. The existing cross-
subsidies for other categories of consumers need to be reduced progressively
and gradually. This is necessary for achieving the targeted expansion in
access to electricity to all the households and for ensuring the commercial
viability of the utilities.

However, NEP provides that the consumers below poverty line, who
consume below a specified level (about 30 units per month), will receive
special support in terms of cross-subsidized tariffs. Such tariffs will be at
least 50% of the overall cost of supply. The State Governments would have
discretion to give subsidy to any other category of consumers in accordance
with the provisions of the Act for which they will have to compensate the
power utilities through the State budget.

Overcoming power shortages: NEP aims at meeting both energy and peak
demand fully by 2012 along with creating 5% spinning reserves at national
level. The policy emphasizes full development of the feasible hydro-potential,
which is a clean and renewable source of energy. Harnessing the hydro-
potential will also facilitate economic development of our hilly and North-
eastern states which have a large hydro-power resource base. NEP
emphasizes the need of debt financing of longer tenor for hydro projects to
make these projects more viable economically.

The National Electricity Policy realizes that our country will have to depend on
thermal generation to a large extent for meeting future electricity demand even
after developing the feasible hydro potential. While the choice of fuel would be
based on the economics of generation and supply of electricity, coal would
56 necessarily continue to remain the primary fuel in view of the energy security
requirements. Natural gas could also be promoted as fuel for power Acts and Policies:
The Salient
generation, depending upon their availability at reasonable prices. Features
NEP emphasizes the need for harnessing the surplus capacity available from
captive generation plants through the grid for overcoming power shortages.
This objective is to be achieved through appropriate commercial arrangements
between distribution licensees and the captive generators. You have learnt in
Unit 1 that substantial captive generation capacity has been established over
the years and there is reasonable surplus available from this source which
needs to be tapped.

Transmission: The policy emphasizes that adequate and timely investment

along with efficient and coordinated operation is necessary for developing a
robust and integrated power system in the country. There is a need to
augment transmission capacity in view of the massive increase planned in
generation and also for facilitating development of power markets. NEP
visualises that the transmission capacity should be planned and built
according to international standards and practices and should cater to both the
redundancy levels and margins.

Under the directives of NEP, a national transmission tariff framework will be

implemented by CERC for facilitating cost-effective transmission of power
across the regions. The tariff mechanism should incorporate distance,
direction and the quantum of flow of electricity, and maintain consistency in
the transmission pricing framework in inter-state and intra-state systems.
Further, the Regulatory Commissions are mandated by NEP to facilitate non-
discriminatory open access and determine transmission charges in the given
time frame for availing such access. Necessary modernization of the load
despatch facilities would be undertaken in a time bound manner to achieve
this objective.

Distribution: This has been recognized as the most critical segment of

the electricity business. NEP calls for proper restructuring of distribution
utilities for achieving efficiency gains in distribution. It lays special
emphasis on time bound reduction of transmission and distribution
losses and advocates promotion of competition aimed at consumer
benefits.

Multi-Year Tariff (MYT), which has been provided in the Electricity Act, 2003,
would be an important structural incentive in minimizing risks for utilities and
consumers, promoting efficiency and facilitating rapid reduction of system
losses.

Role of ERCs: The National Electricity Policy is one of the key instruments for
providing policy guidance to the Electricity Regulatory Commissions in
discharge of their functions and to the Central Electricity Authority for
preparation of the National Electricity Plan.

The Regulatory Commissions have been mandated to regulate utilities on the

basis of pre-determined indices on the quality of power supply. Such
parameters could be frequency and duration of interruption, time for
restoration of supply, percentage defective meters and waiting list of new
57
Sectoral Overview and connections. NEP envisages drawing up a road-map for declaration of
Enabling Framework
Reliability Index (RI) of supply of power to consumers for all cities and towns
and also for rural areas. The data of RI will be compiled by CEA for
publication. This is expected to set up benchmarks for improvement and bring
in competition.

SERCs would be undertaking segregation of technical and commercial losses

through energy audits. Energy accounting and publishing the results of such
accounting has been made mandatory with a deadline of March, 2007. The
SERCs would also specify the standards for reliability and quality of supply so
as to bring these in line with international practices by the year 2012.

Financing the power sector projects: Massive investment is needed for the
targeted expansion of the sector. It has been estimated at Rs. 9 lakh crores in
the next 10 years. Since power is the most critical infrastructure, public sector
investments both at the central level and state level have to be stepped up.
Public sector investments may not be adequate for meeting the total
investment required. Therefore, the policy envisages that a sizeable part of
investment would need to be brought in from the private sector. Public
investment would be focused on public service obligations like increasing
access to electricity and supply to small and marginal farmers.

To make the sector viable and also attractive for fresh investments, the policy
emphasizes the need of ensuring that the generating companies, transmission
and distribution licensees receive payments due to them. For bringing in larger
private sector investments, NEP calls for taking steps such as

encouraging competition in different segments;

procurement of power through competitive bidding; and
special mechanisms for encouraging private sector investments in
transmission.

NEP also envisages that some part of new generating capacities, about 15%,
may be sold outside through long term power purchase agreements for
encouraging competition.

Energy conservation: NEP envisages a voluntary approach initially for

promoting energy conservation with emphasis on labelling of appliances.
Gradually as awareness increases, a more regulatory approach for setting
standards would be followed. The agricultural pump sets, motors and drive
systems and lighting technology have been identified as key areas for
higher energy efficiency. NEP aims at promoting Energy Conservation
Companies for effective implementation of energy conservation measures.

Non-conventional sources of energy: The policy seeks full development of

hydro-potential. Exploitation of non-conventional energy sources such as
small hydro, solar, bio-mass and wind for additional power generation capacity
is also envisaged. Development of National Grid is an important feature of the
Policy. The policy emphasizes the need to reduce the capital cost of the
projects based on such sources of energy and undertaking promotional
58 measures for the development of these technologies. In accordance with the
provisions of the Act, SERCs have been required to specify a minimum Acts and Policies:
The Salient
percentage of power to be purchased by distribution licensees from such Features
sources at the earliest. Such purchase is envisaged through competitive
bidding process allowing an appropriate price differential as compared to
conventional sources.

Planned and coordinated development: The CEA would prepare the

National Electricity Plan after carefully carrying out the demand forecast in
consultation with stakeholders and experts. This would serve as a good
reference document for prospective generating companies, transmission
utilities and distribution licensees.

Rural electrification: The National Electricity Policy lays down the approach
for developing Rural Electrification distribution backbone and village
electrification to achieve the target of completing household electrification of
What more needs to
the next five years. The policy also envisages financial support in terms of
be included in the
capital subsidy to states and special preference to Dalit Bastis for rural
National Electricity
electrification. Under the Policy, the Central Government has taken measures
Policy to meet the
for setting standards and specifications for equipment and technologies,
national goal of
evolving standard operating procedures for project formulation, execution,
providing good
monitoring and evaluation, capacity building in states, SEBs/Utilities, initiating
quality power to all?
R&D Programme for upgrading technology, remote metering and efficient
equipments based on the recommendations of Technical Committees of
experts in the power sector and financial sector.

You can summarise below the thrust areas of NEP by attempting the following
exercise.

7 %& ) .

Use the words given in the box to fill in the blank spaces in the following
statements about the thrust areas of NEP.

THRUST AREAS OF NEP

• Developing -------------------- electrification with special preference

to the downtrodden;
• Full development of ----------- potential;
• Development of --------------------------- sources of energy;
• Progressive reduction in -----------------------------;
• Time-bound reduction in ------------------ and distribution losses;
• -----------access to distribution initially for -------- customers
• Regulatory commissions to specify expected -------------------;
• Development of ------------------------Grid.
Hydro, bulk, non-conventional, transmission, National, cross-
subsidies, open, village, standards

59
Sectoral Overview and
Enabling Framework 7 ( 00. (

The Central Government notified the National Tariff Policy on January 6, 2006,
for the power sector in line with the Section 3 of the EA, 2003. With the
announcement of the National Tariff Policy, there is greater clarity on the
broad principles to be followed for tariff determination. The Central Electricity
Regulatory Commission and State Electricity Regulatory Commissions shall
be guided by the tariff policy in fixing tariffs for generation, transmission and
distribution. It is important to mention that this policy does not curb the role of
Regulators. It only sets broad guidelines for them and gives them enough
room and independence to operate within these parameters. The Policy firmly
establishes and separates the domain of the Government and Regulator. It
moves the CERC centre stage and makes it responsible for evolving
consistent procedures and practices in tariff setting; it also makes the process
more transparent for Regulators.

The Regulatory Commissions would put a system of independent scrutiny of

financial and technical data submitted by the licensee. They have also been
called upon to encourage suitable local area based incentive and disincentive
schemes for the staff of the utility linked to reduction in losses. Third party
verification of energy audit results are to be used to impose area-specific
surcharge for larger losses. Greater transparency and nurturing consumer
groups will be the key feature of regulatory processes.

The objectives of the National Tariff Policy are to:

ensure availability of electricity to consumers at reasonable and

competitive rates;
ensure financial viability of the sector and attract investment;
promote transparency, consistency and predictability in regulatory
approaches across jurisdictions and minimize perceptions of regulatory
risks; and
promote competition, efficiency in operations and improvement in quality of
supply.

We present, in brief, an analysis of the National Tariff Policy and its

implications for power distribution utilities.

The policy emphasizes on deciding the rate of return, depreciation, and other
issues in tariff fixation and attracting investment in the power sector. This has
to be done by lowering the “regulatory risk” and introducing clear-cut tariff
setting principles and philosophies.

Cross-subsidy: The policy provides clarity on determination of cross-subsidy

and additional surcharges for open access to consumers and lays down a
timeframe for rationalization of electricity tariffs and reduction of cross-
subsidies. It also lays down the formula for computation of cross-subsidies.
Consumers below the poverty line and consuming a small quantity of
electricity shall continue to receive special support through cross-subsidised
60 tariffs. To give a choice of supply to the consumers, the tariff policy
enunciates a facilitative framework for calculating cross-subsidy surcharge. It Acts and Policies:
The Salient
also lays down a mechanism for arranging backup supply for such consumers. Features
Multi-year tariff: The multi-year tariff (MYT) framework is to be adopted for
any tariffs to be determined from April 1, 2006 along with incentives and
disincentives for better performance. The move towards multi-year tariffs also
includes regulatory certainty. An investor can now understand with reasonable The CDM (Clean
certainty the future course of action and direction of tariffs and therefore make Development
better investment decisions. Gains from efficient operations are to be shared Mechanism) is a
with consumers. Continued and proven inefficiency must be controlled and system that would
give industrialised
penalized.
countries credit for
Competition: The tariff policy bolsters competition by making it mandatory for financing
technologies in
a distribution licensee to procure power through competitive bidding by
developing countries
promoting captive power, open access and encouraging multiple players. The aimed at reducing
policy stipulates that the Return on Investment should be at par with other emissions. It
sectors and that tariffs should be based on norms and achievements. presents an
Incentives should be provided to motivate investors to be efficient. opportunity to make
real greenhouse gas
Non-conventional energy: The policy promotes non-conventional energy emission reductions,
and co-generation sources of energy by specifying a minimum percentage of and provides a
off take of such energy. The developers of the project are to be given mechanism for
technology transfer to
adequate incentive to avail of the benefits of the Clean Development
promote sustainable
Mechanism (CDM). The cost of the project will also allow reasonable cost of
development in
setting up coal washeries, coal beneficiation system and ash handling and developing countries.
disposal systems.

Service standards: The forum of regulators (constituted by the central

government for consistency in regulation in the area of distribution) will decide
the basic framework of service standards so that the standards regarding
quality, continuity and reliability of service can be enforced. Licensees failing
to meet this standard will face penalties.

Agricultural users: The tariffs for agricultural use are to be fixed so as to

address concerns about sustainable use of ground water resources. The
provision of free electricity is not desirable as it encourages wasteful
consumption of electricity and in most of the cases, depletion of the water
table. To promote energy efficiency, time-differentiated tariffs are to be put in
place within one year for large consumers of 1 MW and above.

Other features: For projects whose tariff is determined through performance-

based cost of service regulation, the benefit of reduced tariff after full
depreciation of assets is to be made available to the consumers. Similarly, for
avoiding front loading of tariff, debt of longer tenor and adoption of
mechanisms like take-out financing are to be considered. Restructuring of
debt is to be done keeping in view the interest of consumers. Any additional
capital investment for renovation and modernization is to be linked with pre-
determined efficiency gains or for sustaining high level performance.

To improve grid discipline, the availability-based tariff system is to be

extended to the state level. This will also facilitate integration of captive
generation plants with the grid.
61
Sectoral Overview and With this discussion on Tariff policy, we end this unit and summarise its
Enabling Framework contents.

2 88

• The Energy Conservation Act, 2001, provides the legal framework,

institutional arrangement and a regulatory mechanism at the Central
and State level to embark upon the energy efficiency drive in the country.
The major features of this Act include setting up of the Bureau of Energy
Efficiency, evolving minimum energy consumption and performance
standards and labelling criteria for notified equipment and appliances;
identifying designated consumers for compliance with its provisions,
creating a cadre of professionally qualified energy managers and auditors,
specifying Energy Conservation Building Codes, setting up a Central
Energy Conservation Fund and promoting Energy Service Companies
(ESCOs). The Act spells out the penalty for failure to comply with its
provisions.

• The Electricity Act, 2003 has declared Electricity as an Industry and all
streams of the Electricity sector as individual profit centres. It provides
freedom to generate, freedom to sell and freedom to procure electricity.
Under this Act, power sourcing is no more a single buyer model. The Act
stipulates a greater role for the private sector. There could be multiple
licensees in distribution and also a parallel network by different
distribution licensees servicing the same area. Trading is permitted
as a distinct activity. Tariff has to be rationalized and cross subsidies have
to be eliminated over a period of time. A multi-year tariff framework has
been introduced. SERC has been made mandatory and it has the power
for granting licenses as well as for tariff fixation.

• The National Electricity Policy is a major policy instrument having the

force of law under the Electricity Act 2003. The Central as well as State
Electricity Regulatory Commissions are required to follow the policy to
discharge their functions. Similarly, the Central Electricity Authority (CEA)
is required to prepare a National Electricity Plan in accordance with the
National Electricity Policy. The Policy aims at accelerated development of
the power sector, providing supply of electricity to all areas and protecting
interests of consumers and other stake-holders. It emphasizes phasing out
of the existing cross subsidies, augmenting transmission capacity,
facilitating non-discriminatory open access, restructuring of distribution
utilities for achieving efficiency gains in distribution and time bound
reduction in transmission and distribution losses. It envisages a
greater role of the private sector in funding the sector and envisages
encouraging competition in different segments, procurement of power
through competitive bidding, special mechanisms for encouraging private
sector investments in transmission.

• The National Tariff Policy sets broad guidelines for the Regulators for
fixing tariffs for Generation, Transmission and Distribution. Its objectives
are to ensure availability of electricity to consumers at reasonable and
62 competitive rates, ensure financial viability of the sector and attract
 investment, promote transparency, consistency and predictability in Acts and Policies:
The Salient
regulatory approaches across jurisdictions and minimize perceptions of Features
regulatory risks and promote competition, efficiency in operations and
improvement in the quality of supply.

9 8 (

1. Discuss how the provisions of the Energy Conservation Act, 2001 can be
implemented by your utility to meet the twin objectives of energy
conservation and improving its fiscal performance.

2. Outline the aims and objectives of the Electricity Act, 2003. In what sense
is it different from the Electricity Acts preceding it?

3. Discuss the salient features of the Electricity Act, 2003. What are their
implications for the power distribution sector?

4. How does the National Electricity Policy help in realising the aims and
objectives of Electricity Act, 2003?

5. What are the stipulations of the National Tariff Policy? How would the
policy help in augmenting the financial resources of the power utilities?

6. Discuss the ways in which your power distribution utility could benefit from
these Acts and policies to improve its performance.

63