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Electricity Act 2003

The Electricity Act, 2003 replaced the Electric Supply Act of 1948 and the ERC Act of 1998. The objective of the new Act was to consolidate the laws relating to generation, transmission, distribution, trading and use of electricity and for taking measures conducive to the development of the electricity industry. It would promote competition, protect the interest of consumers and the supply of electricity to all areas, rationalise electricity tariff, ensure transparent policies regarding subsidies, promote efficient and environmentally benign policies, as well as the constitution of the Central Electricity Authority, Regulatory Commissions and establishment of an appellate tribunal and for matters connected therewith and incidental thereto

The salient features of the Act are :

  • State Government to unbundle the sector, with transmission and system operations made independent of other businesses in the sector, viz., generation, distribution, and trading.
  • License for generation and techno-economic clearance not required, except for large hydro-generation projects.
  • Captive generation capacity to have open access to the transmission system and not subject to regulations for its pricing. The definition of captive generators liberalised to include any capacity set up by an association of persons.
  • All others - transmission, distribution, and trading require licence from the regulators (CERC or SERCs) depending upon the area of their operation.
  • Independent regulators to regulate the sector, including the awarding and revoking of licences, setting of tariff consistent with National Electricity Policy, defining and enforcing performance standards and quality of service, and setting grid standards.
  • Creation of regulatory funds at the central and state levels accountable to Parliament and the legislature respectively.
  • Regulators to reduce cross subsidies and move towards allowing open access to a class of consumers in a phased manner.
  • Multiple distribution licensees allowed.
  • State Government to pay subsidy in advance. And tariffs to revert back to levels determined by the ERC, if the subsidy is not paid.
  • Stringent measures for theft and unauthorized use of electricity including creation of Special Courts for dealing with such cases quickly.
  • Insist on 100 per cent metering within two years of enactment.
  • Appointment of an ombudsman and creation of a Consumer Grievance Redressal Forum for consumer interest protection.
  • Establish an Appellate Tribunal to fast-track the appeal process on rulings of ERCs with Supreme Court being the final arbiter.
  • CEA to be the body for techno-economic clearances of large hydro-projects, for planning (National Plans) and for advice and definition of technical standards.

The aim of the Act was to promote competition through competitive generation, captive generation with open access, inter-state and intra-state trading, and competition in distribution through open access and/or multiple licensees. Besides the above, other key aspects such as metering, universal access, independent regulations, theft control, reduction in cross subsidies were brought into the regulatory domain for improving the operational and financial performances of the entities in distribution and other parts of the sector.

 


The Central Government, under the Electricity Act 2003, has been vested with several important roles. They are related to constitution of the apex regulatory body, load dispatch centres at national and regional levels and in laying out National Electricity and Tariff Policy. They include :

  • Formulation of National Electricity Plan and Tariff Policy in consultation with State Governments and the CEA (Section 3) and to review/revise them periodically.
  • Formulation of National Policy on stand alone systems for rural areas including those based on renewable and non-conventional sources of energy (Section 4).
  • Formulation of National Policy on rural electrification and local electricity distribution in consultation with state governments and state regulatory commissions (Section 5).
  • Endeavouring, along with state governments, to provide electricity to rural areas and households (Section 6).
  • Establishment of National and Regional Load Dispatch centres (Section 26(1) and 27(1)).
  • To notify a government company as Central Transmission Utility and to vest part of it to any company as a transmission licensee (Section 38).
  • Appointment of Members and Chairperson of the CEA (Section 70(2) and Section 70(4), their terms and condition of service (70(15)), their continuation (70(6)) and the power to give directions to the CEA (Section 73 and 75).
  • Appointment of Members and Chairperson of the CERC (Section 76(6)) on the recommendation of Selection Committee and the terms and condition of their employment. Approval of number of employees of the CERC and their terms and conditions of employment (Section 89, 91(2), 91(3)). Establishment of CERC fund for expenses of CERC and specifying the manner of applying the fund in consultation with CAG (Section 99).
  • Appointment of Members and Chairperson of the Appellate Tribunal (Section 113) on the recommendation of Selection Committee and Chief Justice of India respectively and the terms and condition of their employment (Section 115). Approval of number of employees of the Appellate Tribunal and their terms and conditions of employment (Section 119).

Besides these, some of the other important roles and responsibilities of the Central Government, envisaged in the act, are-

  • Setting the limit of capital expenditure for hydro-generating stations/projects above for which concurrence of CEA is required (Section 8(1)).
  • Directing Generation Companies in extraordinary circumstances such as threat to security (Section 11(1)).
  • Demarcation of regions for transmission (Section 25).
  • Directions to RLDCs for stable transmission of electricity (Section 37).
  • Make available grants and loans available to CERC after due appropriation made by the Parliament (Section 98).
  • Direction to CERC in matters of policy involving public interest (Section 107).
  • Appointment of a Chief Electricity Inspector (Section 162) who is empowered as being equal to a civil court to conduct inquiry on accidents and to ensure safety (Section 161).
  • Constitution of a Coordination Forum of CERC, CEA and entities involved in inter-state transmission of electricity for coordinated and smooth development of the sector (Section 166(1)), Constitution of Forum of Regulators consisting of Chair, CERC and Chair, SERCs (Section 166(2)).

The state governments, under the Electricity Act 2003, have been vested with several critical roles. Historically, electricity distribution has been the preserve of the State Government and hence their role is extremely important as the revenue for the sector as a whole and the commercial viability of the sector is critically dependent on the support extended and role played by the State Governments. One of the most important roles envisaged in the Act for the State Government is covered in part XIII of the act under "Reorganization of Board". Under Sections 131 to 134, the State Government is required to restructure the existing State Electricity Board into a State Transmission Utility, Generating Companies, Transmission and Distribution Licensees. It is also expected to constitute the SERC and Special Courts for theft cases. Some of the other roles and responsibilities of the State Government envisaged in the Electricity Act are :

Providing inputs to the Central Government on the National Electricity Policy and Tariff Policy (Section 3(1) & 3(3)).

  • Endeavouring, along with the Central Government, to provide electricity to rural areas and households (Section 6).
  • Providing inputs to the CEA and ensuring co-ordination for optimal utilization of river resources in case of hydro-generation stations and multi-purpose projects (Section 8).
  • Directing Generation Companies in extraordinary circumstances such as threat to security (Section 11(1)).
  • Establishment of State Load Dispatch centre (Section 31).
  • Directions to SLDC for stable transmission of electricity (Section 37).
  • Grant of subsidy to any set of consumers should it decide so but only if it pays in the manner specified by the SERC , notwithstanding directions under section 108 (Section 65).
  • Making rules and procedures for carrying out works by the licensees (Section 67(2) & 68).
  • Constitute SERC or a Joint Commission with other states and appoint Chairperson and Members of the SERC on the recommendation of a selection Committee (Section 82 &83) and the terms and condition of their employment. Approval of number of employees of the SERC and their terms and conditions of employment (Section 89, 91(2), 91(3)).Establishment of SERC fund for expenses of SERC and specifying the manner of applying the fund in consultation with CAG (Section 103).
  • Make available grants and loans to SERC after due appropriation made by the Legislature (Section 102).
  • Direction to the SERC in matters of policy involving public interest (Section 108).
  • Designating Assessing Officer for detection of unauthorized use of electricity (Section 126).
  • Authorizing any officer for powers to detect, search, seize and act in cases of theft of electricity (Section 135(2)).
  • To appoint Special Courts for speedy trial of cases related to theft and unauthorized use of electricity and other offences specified under sections 135-140 & 150 (Section 153).
  • Appointment of an Electricity Inspector (Section 162) who is empowered to conduct inquiry on accidents and to ensure safety (Section 161).
  • Constitution of a Coordination Forum of SERC and entities involved in the sector within the state for coordinated and smooth development of the sector (Section 166(3)).
  • Constitution of a Committee in each district for electrification, quality of supply, energy efficiency and conservation (Section 166(4)).

The Central Electricity Regulatory Commission (CERC), as the apex regulatory body, under the Electricity Act 2003, has been vested with several critical roles as an independent regulator in a sector, which is envisaged as open for private participation in the Electricity Act 2003. With the reforms undertaken by several States in the nineties, the need for an independent regulator was felt in the sector for the first time and those states created their own regulatory bodies with enactment of state level laws. Later, a central statute was enacted in 1998 which allowed a common legal framework for regulation in the sector and resulted in creation of CERC, whose jurisdiction was limited to the entities covering more than one state. The Electricity Act 2003, as a comprehensive statute, replaced the earlier act and clarified and extended role of CERC. The main functions spelt out in the Section 79 of the Act, for the CERC are :

  • To regulate the tariffs of Central Government owned generating companies.
  • To regulate the tariffs of generating companies supplying to more than one state.
  • To regulate inter-state transmission and to determine inter-state transmission tariffs.
  • To issue licence to traders and transmission licensees for inter-state operations.
  • To adjudicate disputes involving generating companies and transmission licensee on the above matters and to refer disputes for arbitration.
  • To specify Grid Code in sync with Grid Standards.
  • To specify standards of quality, continuity and reliability of service to be provided by licensees.
  • To fix the trading margin in case of inter-state trading if necessary.
  • To fix the fee and levy charges for the above functions and to perform them in a transparent manner within the framework of National Electricity Policy, Plan and Tariff Policy.
  • To advise the Central Government on National Electricity and Tariff Policy and on promoting investment, competition, efficiency and economy in the sector.
    Besides these, some of the important roles and responsibilities of the CERC envisaged in the Electricity Act and spelt out in other sections, are:
  • Final adjudication of availability of transmission capacity with Central Transmission Utility for open access for Captive Generation Plants (Section 9(2)).
  • Granting licence to an entity for transmission, and trading of electricity without which no one is allowed to undertake these activities (Section 12-15) save the entities exempt in Section 13 & 14.
  • Specifying the terms and conditions of a licence, revising them and revoking a licence if public interest so requires (Section 16-24).
  • Resolving dispute on directions given by RLDCs (Section 29(5).
  • To allow the use of inter-state transmission lines owned and operated by one licensee by another subject to surplus capacity and payment of charges to be specified by the CERC (Section 35, 36).
  • Specifying requirements for inter-state trading licence and terms and conditions (Section 52)
  • Specifying the manner in which default on metering, as specified by the CEA, has to be made good by the entity responsible for default in its jurisdiction (Section 55(3)).
  • To specify the standards of performance for protecting consumer interest for various class of consumers and licensees, to collect information on the same and to levy penalty in case of violation (Section 57, 58 & 59).
  • To direct licensees and other entities in case of likely abuse of dominant position for inhibiting competition (Section 60).
  • Determination of tariffs in line with National Electricity Policy with the objectives of- recovery of cost of supply, commercial principles, encouraging efficiency and rewarding efficiency gains, multi-year tariff principles, promoting co-generation and from renewable sources of energy, and phased elimination of cross-subsidies (Section 61).
  • Unless tariffs are determined by the bidding process according to guidelines issued by the Central Government (Section 63), CERC to determine the tariff for generating company supplying to a distribution licensee (including max. and min. price for short-term contracts), transmission, and to collect such details as may be required from the entities (Section 62). To issue tariff orders on applications made within 120 days after public hearings (Section 64).
  • To promote development of market and trading as may be specified by the Central Government through National Policy (Section 66).
  • Creation of a Central Advisory Committee headed by Chair, CERC for advising the CERC on matter of policy, quality of service, compliance by licensees and requirements of licensees, protection of consumer interest, performance standards etc (Section 80 & 81).
  • Power to enforce as a Civil Court (Section 94-96) on calling persons, public record, accepting affidavits, evidence collection, examination of witness etc.
  • Maintenance of accounts of CERC fund as specified by the Central Government in consultation with CAG, getting them certified by the CAG and submitting it to the Government for tabling the same in the Parliament (Section 100).
  • Preparing annual report of its activities and submitting it to the Central Government (Section 101).
  • Preparing budget for the ensuing year and forwarding it to the Government (Section 106).
  • To direct any person as investigating officer to investigate the affairs of any entity in its jurisdiction should it be satisfied that the entity has not complied with the act or the regulations, to consider the report of the officer and to suggest remedial action or to cancel licence or to order ceasing generation after giving opportunity to the entity (Section 128-130).
  • Power to impose penalty of up to Rs. 1 lakh for each contravention of act or regulations by any person after giving due opportunity to be heard (Section 142).
  • Appointment of any of its members as an adjudicating officer who will have power to summon and enforce the attendance of any person for facilitating inquiry (section 143).

In the Electricity Act 2003, the appellate tribunal is the apex judicial body envisaged to appeal against any decision of any adjudicating officer or the regulatory commission. Appeals against the appellate tribunal's order can be made within 60 days in the Supreme Court (Section 125). The powers of the appellate tribunal under the Act are specified as under :

  • To entertain any appeal made by an aggrieved party, to call for records of proceedings by any order against which appeal has been filed, and to issue an order on the appeal within 180 days (Section 111).
  • The tribunal has the power of a civil court and its orders are executable as decree of a civil court. However, the tribunal would not be governed by the code of civil procedure, 1908 but by principles of natural justice. The proceedings of the tribunal would be considered judicial proceedings (Section 120).
  • The chairperson of the tribunal shall exercise general power of superintendence over ERCs (Section 121).

The Central Electricity Authority (CEA), historically, has been an apex level body assisting the Ministry of Power at the central level for planning and policy formulation. It has been also an agency involved in development of capability and technology at the national level and for coordination across states wherever required such as for transmission planning etc. Earlier, CEA was also responsible for techno-economic clearance of all generation projects. This role was taken away from CEA prior to enactment of the act save for Hydro generation projects. Some of the important roles and responsibilities of the CEA envisaged in the Electricity Act are :

  • Preparation and revision of National Electricity Plans every five years in accordance with National Electricity Policy (Section 3(4) & 3(5)) after taking inputs from entities in the sector and the public.
  • Concurrence to any scheme submitted for hydro-generating station, entailing capital expenditure above a certain sum, keeping in mind the best possible development of river resources in consultation with central and state governments, design and safety norms (Section 8).
  • To prepare Grid Standards, which specify technical standards of operation and maintenance of transmission lines to be complied by all transmission licensees (Section 34).
  • To specify in consultation with the State Government, suitable measures for safety of public, property and injury, fixing standards and specifications (Section 53).
  • To specify the meters required for supply (Section 55(1)) and to specify metering requirements for licensees and generating companies, wherever required (Section 55(2)).
  • To advise the Central Government on National Electricity Policy and to formulate plans and to coordinate with planning agencies for optimum development of the sector with a view to provide affordable and reliable electricity (Section 73(a))
  • To specify technical standards, safety requirements, Grid Standard, condition for installation of meters and to promote and assist in timely completion of projects and schemes in the sector (Section 73 (b)-73(f)).
  • To collect (Section 74) and disseminate information related to the sector, to advise entities in the sector, to develop capability and to promote research in the sector (Section 73(g)-(o)).

The State Electricity Regulatory Commissions (SERCs), as the state level regulatory bodies, under the Electricity Act 2003, has been vested with several critical roles as an independent regulator. As mentioned earlier, some of the SERCs were created by the states, which initiated private participation in the sector. With the Electricity Act 2003, the role of SERCs has been clarified in the comprehensive statute, replacing the state level acts and the earlier act enacted in 1998. The main functions spelt out in the Section 86 of the Act, for the SERCs are-

  • To determine the tariffs of generation, supply, transmission and wheeling of electricity whether bulk or retail within the state except for determination of wheeling (and surcharge thereon, if any) for open access category consumers.
  • ulate electricity purchase and procurement process of the distribution licensees, including the price at which electricity would be procured.
  • To facilitate intra-state transmission and wheeling of electricity.
  • To issue licence to distribution licensees, traders and transmission licensees for intra-state operations.
  • To promote cogeneration and generation from renewable sources of energy.
  • To adjudicate disputes involving generating companies and the licensees and to refer disputes for arbitration.
  • To specify State Grid Code consistent with Grid Code specified by the CERC.
  • To specify standards of quality, continuity and reliability of service to be provided by licensees.
  • To fix the trading margin in case of intra-state trading, if necessary.
  • To fix the fee and levy charges for the above functions and to perform there in a transparent manner within the framework of National Electricity Policy, Plan and Tariff Policy.
  • To advise the State Government on restructuring of the sector and on promoting investment, competition, efficiency and economy in the sector and matters referred to by the Government. Besides these, some of the important roles and responsibilities of the SERCs envisaged in the Electricity Act and spelt out in other sections, are as follows:
  • Final adjudication of availability of transmission capacity with the State Transmission Utility for open access for Captive Generation Plants (Section 9(2)).
  • Granting licence to an entity for transmission, distribution and trading of electricity without which no one is allowed to undertake these activities (Section 12-15) save the entities exempt in Section 13 &14.
  • Specifying the terms and conditions of a licence, revising them and revoking a licence if public interest so requires (Section 16-24).
  • Facilitating and promoting transmission, wheeling and inter-connection arrangements for economic and efficient transmission and supply (Section 30).
  • Resolving dispute on directions given by SLDC (Section 33(4)).
  • To allow the use of intra-state transmission lines owned and operated by one licensee by another subject to surplus capacity and payment of charges to be specified by the SERC (Section 35, 36).
  • To introduce open access in phases considering cross subsidies and by imposing a surcharge for open access even if subsidies are not eliminated (Section 42(2)). In an amendment in 2007, the cross-subsidies to be "eliminated" was removed from Sections 38-40 and 42. In an amendment to the Act in December 2003, the SERCs are expected to provide open access to consumers having more than 1 MW peak supply of electricity within 5 years.
  • To impose a surcharge on wheeling charges to recover fixed charges for a distribution licensee of the area when open access (to receive supply from other sources) has been allowed for some consumers (Section 42(4)).
  • To specify the period within which the distribution licensee has to provide connection in case more than one month is required for licensee (Section 43(1)).
  • To fix the charges of electricity supplied by the distribution licensee (Section 45).
  • To fix the charges for recovering expenses incurred in and to fix a reasonable security and interest thereon for supplying electricity for a new connection (Section 46 & 47)).
  • To specify an Electric Supply Code covering recovery of electricity charges, disconnection conditions, restoration terms and conditions, tampering, billing period, entry for the licensee personnel for disconnection, replacement and maintenance of electric lines, meters and equipment (Section 50).
  • To allow licensee to use its assets for other businesses for better utilization (Section 51).
  • To extend the period of supplying electricity with meters beyond two years (Section 55(1)).
  • Specifying requirements for trading licence and terms and conditions (Section 52)
  • Specifying the manner in which default on metering has to be made good by the entity responsible for default in its jurisdiction (Section 55(3)).
  • To specify the standards of performance for protecting consumer interest for various class of consumers and licensees, to collect information on the same and to levy penalty in case of violation (Section 57, 58 & 59).
  • To direct licensees and other entities in case of likely abuse of dominant position for inhibiting competition (Section 60).
  • Determination of tariffs in line with National Electricity Policy and using methodology specified by the CERC with the objectives of- recovery of cost of supply, commercial principles, encouraging efficiency and rewarding efficiency gains, multi-year tariff principles, promoting co-generation and from renewable sources of energy, and phased reduction and eventual elimination of cross-subsidies (Section 61). The word elimination was later removed through an amendment to the Act.
  • Unless tariffs are determined by the bidding process according to guidelines issued by the Central Government (Section 63), SERCs to determine the tariff for generating company supplying to a distribution licensee (including max. and min. price for short-term contracts), transmission, wheeling and retail sale and to collect such details as may be required from the entities (Section 62). To issue tariff orders on applications made within 120 days after public hearings (Section 64).
  • To specify the manner in which the State Government's decision to grant subsidies to any consumer(s) has to be paid for by the Government (Section 65).
  • To promote development of market and trading as may be specified by the Central Government through National Policy (Section 66).
  • Creation of a State Advisory Committee headed by the Chair, SERC for advising the SERC on matters of policy, quality of service, compliance by licensees and requirements of licensees, protection of consumer interest, performance standards etc (Section 88 & 89).
  • Power to enforce as a Civil Court (Section 94-96) on calling persons, public record, accepting affidavits, evidence collection and seizure, examination of witness etc.
  • Maintenance of accounts of SERC fund as specified by the State Government in consultation with CAG, getting them certified by the CAG and submitting it to the Government for tabling the same in the Legislature (Section 104).
  • Preparing annual report of its activities and submitting it to the State Government (Section 105).
  • Preparing budget for the ensuing year and forwarding it to the Government (Section 106).
  • To direct any person as investigating officer to investigate the affairs of any entity in its jurisdiction should it be satisfied that the entity has not complied with the act or the regulations, to consider the report of the officer and to suggest remedial action or to cancel licence or to order ceasing generation after giving opportunity to the entity (Section 128-130).
  • Power to impose penalty of up to Rs. 1 lakh for each contravention of act or regulations by any person after giving due opportunity to be heard (Section 142).
  • Appointment of any of its members as an adjudicating officer who will have power to summon and enforce the attendance of any person for facilitating inquiry (section 143).

One of the conditions and a critical element for introducing competition in the sector at generation or distribution/supply streams is the separation of transmission and dispatch from the other sub-sectors. The Electricity Act 2003 provides for both separation of transmission as well as dispatch from generation and distribution. These two functions have to be based on efficient operation of the system without any commercial interest of their own to provide a level-playing field to competing generators on the supply side and competing distributors/suppliers on the demand side of the electricity sector. The Electricity Act envisages a Central Transmission Utility (CTU) operating inter-state transmission network and a state-specific State Transmission Utility (STU) operating intra-state transmission network. These entities have to be owned by the Government. Some of the roles and responsibilities envisaged for the CTU in the Act are as follows: to undertake transmission through inter-state system, to coordinate and plan with state-level (state governments, STUs, generating companies, regional committees, licensees) and central-level entities (central government, CEA) for development of an efficient and economical network and to provide non-discriminatory open access to any licensee or generating company (or consumer, if allowed open access) on payment of charges determined by the CERC (Section 38(2)). Similar to the CTU, some of the roles envisaged for the STUs in the Act are: to undertake transmission through intra-state system, to coordinate and plan with state-level (state governments, generating companies, regional committees, licensees) and central-level entities (CTU, CEA) for development of an efficient and economical network and to provide non-discriminatory open access to any licensee or generating company (or consumer, if allowed open access) on payment of charges determined by the SERC (Section 39(2)). Any other transmission licensee also has to perform the same role as that of CTU or STUs (Section 40).


The Electricity Act 2003 separates transmission and dispatch from generation and distribution. To coordinate the dispatches at various levels at three distinct levels reflecting the topology of transmission networks, a three-tier coordinated dispatch organization structure is envisaged. These are – National Load Dispatch Centre (NLDC), Regional Load Dispatch Centres (RLDCs), and State Load Dispatch Centres (SLDCs). These entities have to be owned by the Government according to the Act. The roles and responsibilities envisaged for RLDCs are :

  • Ensuring integrated operation of power in their respective regions in compliance with Grid Code and the methodology specified by CERC for optimum scheduling and dispatch (Section 28(1) and 28(2)).
  • Being responsible for scheduling and dispatch in accordance with contracts with licensees and generating companies, for monitoring grid operations, for real-time operations, for supervision and control of the system and for keeping account of quantity of electricity transmitted through the regional grid for which it may collect fees determined by the CERC(Section 28(3) and 28(4)).
  • Directing the entities in the sector for ensuring stability of grid through SLDCs for compliance (Section 29). Similar to RLDCs, the roles and responsibilities envisaged for SLDCs are:
  • Ensuring integrated operation of the power in the state for optimum scheduling and dispatch (Section 32(1).
  • Being responsible for scheduling and dispatch in accordance with contracts with licensees and generating companies, for monitoring grid operations, for real-time operations, for supervision and control of the system and for keeping account of quantity of electricity transmitted through the state grid for which it may collect fees determined by the SERC(Section 32(2) and 32(3)).
  • Directing the entities in the sector for ensuring stability of grid for compliance (Section 33).

The Electricity Act together with various policies and guidelines issued by the Central Government provide the framework for development of the sector and to continue reform measures which have been initiated in last decade or so.


In order to facilitate investments in generation capacity, the Electricity Act has freed generation from any licensing requirement or from obtaining any formal approval specifically for setting up generation capacities except in case of large hydro projects, which would use water resources of rivers. The National Electricity Policy and the National Plan lay emphasis on the need to add capacity for making electricity accessible to all and to alleviate energy shortages in the country. The Tariff Policy provides for setting returns on investment in the sector (including generation) which is similar to what the private sector can get in other sectors adjusted for risks. All these measures and other initiatives such as procurement guidelines, UMPP and development of hydro-potential etc. are aimed at adding adequate capacities in the sector including from the private sector in competition with public sector. Besides addition of capacities to meet the demand of a growing economy, it is even more important to utilize the existing capacities optimally.


In the Electricity Act 2003, trading has been defined as "purchase of power for resale thereof". The act under Section 12 requires anyone interested in trading to obtain a licence. Distribution companies are exempt from this requirement under Section 14. Under Sections 38, 39 and 41, CTU/STUs and transmission licensees are not allowed to trade in electricity. By implication, any trader in the sector can either be an explicit trading licensee or a distribution licensee. Section 79 and 86 of the Act empower the CERC and SERCs respectively to regulate the trading margin if they deem it necessary. Based on the provisions in the Act, the CERC defined the terms and conditions for inter-state trading licence, and also put in place the trading margins for inter-state trade.


The Electricity Act, under Section 42, clearly spells out phased introduction of open access for consumers and reduction in cross-subsidies by SERCs. In a subsequent amendment, the deadline for declaring open access for consumers having load of more than 1 MW has been fixed as January 2009. Though SERCs are allowed to fix a cross-subsidy surcharge, yet the National Electricity Policy emphasizes the need for not fixing the surcharge at a level where the competition envisaged through open access in the Act becomes meaningless. Clearly, the open access of wires to be used by certain category of consumers has been seen in the Act and in the policy as a way of introducing the competition among generators and suppliers (distribution licensees).


Section 9 of the Electricity Act clearly allows any captive generation plant to either construct dedicated transmission lines or to avail open access to existing transmission lines subject to availability of adequate transmission capacity as decided by the CTU and STU. In case of any dispute, the concerned ERC has to adjudicate whether adequate transmission capacity exists or not. The Act also liberalises the definition of captive generation as capacity created by an entity, or a co-operative or an association of persons for self-use. The objective of the Act was to create competitive pressure so that the utilities do not load such consumers (industrial) with high cross-subsidies and arm-twist them for the use of network in case they required to. These objectives were set in a context where large number of industrial users in power-intensive or power-critical industries had already created captive capacities to avoid high cross-subsidy built-in tariffs and to improve the quality of supply to their units. Most of these were located close to the unit which even if sub-optimal from the point of cost of generation, avoided use of network. Most of these also were hooked on to the network for using and injecting power from and into the grid. Typically, the terms of injecting power were not favourable as they did not have any bargaining power vis-à-vis the utility.


Under Section 14 of the Act, licences can be given to two or more entities for supplying electricity in the same geographic area. The National Electricity Policy states that the smallest unit of area could be an urban area defined by municipal council /corporation or a revenue district. With the smallest area so defined, there should have been much interest in getting into distribution.


Starting with realisation in mid-1990s that the distribution side is the weakest link in the sector with AT&C losses of more than 40 per cent, one of the major objectives of the reforms has been to reduce these losses so that overall viability of the sector can be improved for attracting investments. It is obvious that without adequate revenues coming from the end consumers either the state would have to continue investing in the sector or would have to be ready to provide guarantees to the private sector for them to create capacities upstream. On the distribution side, it was realized that the problems were two-fold- (i) high unaccounted for energy (commercial losses), and (ii) high technical losses due to poor state of the distribution system and lack of resources and organizational weaknesses. To address these, in early 2000s, the APDRP – a programme of the central government which was in the nature of performance budget- was created. Essentially the programme made available funds to SEBs /DISCOMs to improve the technical aspects of their distribution network, meter extensively the same, and improve consumer values. Linked to the disbursal were targets for reduction in T&D and AT&C losses, raising revenue per unit of input and such other defined measures. MOUs were again signed even at the circle level and the central government set up professionals to monitor the progress at the circle level. States could hope to win large grants if they showed substantial improvements.

In the Electricity Act 2003 too, under section 55(1), it is clearly mandated that "No licensee shall supply electricity, after the expiry of two years from the appointed date, except through installation of a correct meter in accordance with regulations to be made by the CEA". Similarly, the Electricity Policy clearly states that while reorganizing the SEB, distribution utilities so created should not be burdened with past liabilities and need to have a clear road map to restore the viability of distribution utility by reducing losses. Clearly, the need for reducing distribution losses- both commercial and technical – has been the cornerstone of the objective of any reform initiative in the sector. The elements envisaged are also amply clear - 100% metering, energy accounting and identification of feeders and consumers (where losses are high), incentivising and facilitating measures to control theft and losses at various levels.


Section 65 of the Act provides for the State Government to pay promptly and in a manner specified by SERC, any subsidy declared for any consumer or class of consumers to the distribution licensee. Even though Section 108 provides powers to the State Government to give directions to the utility, yet Section 65 explicitly states that notwithstanding any such direction under Section 108, the State Government has to pay subsidy according to the ruling of SERC. The Electricity Policy, in addition to emphasising the need to make advance payment to the utilities as per Section 65 of the Act, also mentions that each category of consumer should also pay at least 50% of the cost of supply.


Wherever competition in generation or supply has been envisaged and attempted in the sector, it has been with the recognition that the transmission network and "wires" should be available to all the competitors on a non-discriminatory basis. For this purpose, the sector needs to be unbundled with transmission and system operations separated from other activities in the sector. The Electricity Act 2003 and reforms in India have also recognized this by structurally unbundling the sector with independent CTU/STUs as transmission utilities and NLDC/RLDCs/SLDCs as system operators. For any kind of competition to emerge at the wholesale level, the transmission network has to be owned and managed by player(s), who have no commercial interest in the competitive market. The same is true for distribution network for competition at the consumer level. The network operator cannot exercise any kind of bias vis-à-vis buyers and sellers. His behaviour has to governed by the need for energy balance, system reliability, assurance of control (and other similar objectives) being met on real time basis. Subject to these objectives and constraints, any commercial outcome should be as good as any other for the system operator. Any such ISO requires complete control over the network and should be able to issue binding instructions to dispatchable entities (generators and loads) even though it may have no commercial interest. Without independent transmission and system operator, it is not possible to have effective competition in the sector as it is well-known that the system operator and transmission can easily affect the outcomes and distort the competition in favour of the competitor whom it colludes with. In the Act and the policies this aspect has been kept in mind. For example, the National Electricity Policy states that CTU/STUs/RLDCs/SLDCs need to provide all intending users information on the transmission capacity and load flow studies. Nonetheless, these intentions have not translated themselves into effectively independent transmission utilities or load dispatch centres.


The Electricity Act 2003 puts onerous responsibilities on the ERCs for regulating the sector. Their role and functioning as per the Act needs to be facilitated by the central and state Governments by making rules, policies and by creating institutions which would enable promotion of competition, improvement in operational and commercial viability of the sector and in protection of consumer interests. Of course, the Governments have the power to issue directions in the public interest to the players in the sector but these are meant to be exercised as an exception rather than as a rule. World over, the regulators rely typically on three instruments- (i) power to grant and revoke licence, (ii) financial rewards and penalties for desirable and undesirable behaviour respectively, and (iii) changing the extent and intensity of competition through entry and exit barriers. These have been provided for in the Electricity Act as well. Independence of regulators is ensured by the enforcement support of the state through law, through means of financial independence and through terms and conditions for appointment as a regulator including constraints on subsequent employment. These have also been provided for in the Act. Among the instruments available to a regulator, the most potent is the enforcement support offered by the state similar to what is available to courts in any modern state.


As per Section 57 of the Electricity Act, 2003, the SERCs require to specify standards of performance of a licensee after consultation with such licensee and the persons likely to be affected. Failure to meet such standards makes the licensee liable to pay compensation to the affected person as may be determined by the appropriate Commission. The concerned licensees shall be given reasonable opportunity of being heard before the determination of compensation and the compensation so determined shall be paid by the concerned licensee within 90 days.


As per Section 166, Coordination forums at the Centre and in the States, Forum of Regulators and District Level Committees are required to be established, for smooth and coordinated development of the power system in the country. Central-level coordination forum is to be constituted by the Central Government and would consist of Chairperson and Members of Central Commission, Chairperson of CEA, representatives of generating companies and inter-state transmission companies. The state-level coordination forum is to be constituted by the State Government and would consist of the Chairperson and Members of the State Commission, representatives of intra-state generating companies, transmission and distribution licensees.


The State Governments under the provisions of Section 153 are required to constitute Special Courts. The area or areas of jurisdiction of the Special Courts are to be specified in the notification constituting such Courts. These courts are to try the offences referred to in Sections 135 to 139. These courts are established to ensure quick disposal of offences by the established procedure.


The provisions under Section 42 also require every distribution licensee to establish a consumer grievance redressal forum. Appeal against the forum shall lie before the Electricity Ombudsman to be appointed or designated by the SERC. The Electricity Ombudsman is required to settle the grievances of the consumer within the specified time and in a specified manner. These rights of consumer to seek relief are without prejudice to the rights he normally has as a consumer. This is a significant measure towards protection of consumer rights.

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