Delicensing distribution: Lessons from Mumbai

The MERC also mandated a network roll-out plan for Tata Power to invest and install distribution systems wherever Reliance did not have their existing system and/or the existing system was not adequate and/or required to be augmented.

By Pramod Deo & Arijit Maitra
The power ministry has circulated a draft ‘Electricity Amendment Bill’, proposing amendments to the Electricity Act to omit the word ‘distribution licensee’ to enable more competition in power distribution. Power minister RK Singh claims that delicensing the electricity distribution sector will put an end to what the economists consider as natural monopolies. He added that the move will induce competition in electricity distribution and empower consumers to switch networks, but will not disrupt the existing licensees.

Mumbai was the first city in India to pioneer unintended ‘competition’ in the distribution segment in the suburbs. This was the result of the Supreme Court judgment dated July 8, 2008. We plan to examine this singularity to look into whether did this step facilitate improvement in electricity distribution, governance and choice to the consumers or not?

Mumbai metropolis is divided administratively for historical reasons into (1) the island city: commencing from Colaba to Mahim Creek; and (2) the suburbs: Bandra to Dahisar and Mankhurd on the western side, and Mira Bhayandar on the eastern side. In 2002-03, when there was an impasse between Reliance Energy (RInfra-D) and Tata Power (TPC) on the issue of allowing the Tatas to distribute electricity in the common area of supply in the suburbs—where both were the distributors—the matter went up from the Maharashtra Electricity Regulatory Commission (MERC) to the Supreme Court via the Appellate Tribunal For Electricity. It was decided by the highest court in its judgment (Tata Power Co Ltd Vs Reliance Energy Ltd & Ors) that the legacy licence of Tata Power issued during the British regime could be interpreted to mean that there was no restriction on Tata Power to supply in retail.

In other words, Tata Power’s licences do not restrict them to supply only in bulk to other distribution licensees, for example (a) Tata Power has been supplying power in bulk to Brihanmumbai Electric Supply & Transport Undertaking (BEST)—a municipal utility for both power and transport—for enabling it to supply retail power in the island city of Mumbai, and similarly was also supplying to BSES Ltd (the predecessor of RInfra-D) in bulk, and (b) the Tatas were supplying in bulk to large consumers such as the textile mills that have vanished to be replaced by shopping complexes, malls, commercial offices and residential condominiums in the island city and bulk users like L&T and the Mahindras in the suburbs.

Based on the Supreme Court’s guidance in the 2008 order: “The concept of wheeling has been introduced in the 2003 Act to enable distribution licensees who are yet to install their distribution line to supply electricity directly to retail consumers, subject to payment of surcharge in addition to the charges for wheeling as the State Commission may determine…” the MERC after a lot of litigation formulated a protocol in 2011 for switchover of consumers from Reliance Energy to Tata Power for supply at a lesser cost. The commission observed that out of the total consumer base of 1.59 lakh consumers who have ‘migrated’ from RInfra-D to TPC-D till June 30, 2011, only 5,031 consumers are connected on the TPC-D network, while the remaining 1.54 lakh consumers continue to be connected to the RInfra-D network.

Given this background, the applicability of the cross-subsidy surcharge for the above groups and the rationale for the same will be as follows:

—Group 1: Consumers continuing with RInfra-D will not have to pay the cross-subsidy surcharge, since they continue to be consumers of RInfra-D, both for wires as well as for supply, and are paying the extant cross-subsidy through their tariff.

—Group 2: Consumers switching over will have to pay the cross-subsidy surcharge since they continue to be consumers of RInfra-D for wires, and cross-subsidy surcharge has to be levied to meet the requirements of the current level of cross-subsidy.

—Group 3: Consumers connecting to Tata’s network will not have to pay the cross-subsidy surcharge, since they are no longer consumers of RInfra-D, either for wires or for supply, and charges can be levied by a licensee only on a ‘consumer’.

The MERC also mandated a network roll-out plan for Tata Power to invest and install distribution systems wherever Reliance did not have their existing system and/or the existing system was not adequate and/or required to be augmented. The switchover and changeover protocol that the MERC introduced way back in 2009 continues to be a work-in-progress since it is mired in litigation. There are many lessons for the proposed amendment exercise.

Coming to the other side of Mumbai, i.e. the island city, there is an inconclusive impasse between BEST and Tata Power.

The municipal utility is not allowing Tata Power to (i) fully distribute electricity in retail, and (ii) to install and lay down its distribution network. The protection in Section 42(3) of the current 2003 Act to BEST being a local authority from letting consumers have open access to its wire network to get power supply from alternate sources requires to be amended in such a way that there is no embargo for the other distribution licensees to use the wires and network belonging to BEST, for the ultimate benefit of choice and competition to consumers. The proposed amendment misses this point.

Deo is former chairman, CERC, and Maitra is a legal expert (regulatory matters)

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