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Inhouse credit: Editor: Feba Nisha
Last updated: 21/10/2021
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Synopsis: Electricity Laws are put in place to regulate the science behind the generation, transmission and distribution of energy. This article introduces the reader to the science and law behind electricity generation, transmission and distribution.
The objective and the paradox
Electricity is a quintessential factor in the economic growth of the country and affects all domains of life. The demand for electricity is enormous and growing exponentially. It has evolved from being a luxury to a necessity. Being an essential aspect of every individual’s life, the generation, transmission and distribution of the electricity is regulated by the Government and regulated under the Electricity Act, 2003 (‘the Act’).
Unfortunately, there is an alarming and widening gap between the supply and demand of electricity in India. The Central and the State governments are unable to produce the requisite number of units of electricity for the want of funds; the budgetary resources are incapable of meeting the monetary demands for production of electricity on a large scale. Hence, it is the need of the hour to attract private investment in the production of energy by providing appropriate return on investment.
Though the energy production is regulated by the government, the private players will enter the field only after analysing the economics of it and higher the return on investment, larger the number of private entities producing and supplying power. However, it is the duty of the government to ensure that the energy is being supplied to the ultimate consumers at a reasonable rate.
National Electricity Policy, 2005 (NEP) clearly elucidates that the primary objective of the government is two-fold; supply of electricity and ensuring reasonable rates. However, there is an inverse relationship between these two objectives - if the objective of adequate supply is given prominence, the other objective of supply at reasonable rates suffers. It is therefore essential for the regulatory authorities to strike an appropriate balance between the two.
The basic structure
The system for regulating the production, supply and distribution of electricity comprises of Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC). CERC and SERC derive their validity from and work within the ambit of the Act and are empowered to frame their own regulations for the purpose of determining tariff, subject to the provision of the Act and NEP. The Act requires the SERC regulations to be guided by the CERC regulations.
The SERCs are entrusted with the responsibility of regulating the purchase, sale and distribution of electricity within the respective States and the CERC regulates the inter-State purchase, sale and distribution of electricity.
The basic structure of the energy set up in India consists of three major sectors - generation, transmission and distribution. The production of the energy is open for all the interested private entities, who are often lured with incentives and tempting return on equity to generate energy from both the renewable and non-renewable sources.
The transmission and distribution entities are the government-owned companies, working on the licenses granted by CERC and SERCs and are strictly guided by the conditions stipulated in such licenses. The power generated is evacuated from its source and transmitted to the grid of distribution companies by the transmission companies. The distribution companies maintain the necessary infrastructure to receive power from various contracted generation companies and distribute the same to the end customers like residents, various industries, commercial establishments, farmers, etc.
The tariff of the generation, transmission and distribution companies is determined by the CERC and SERCs every year, having regard to all the relevant factors such as the capital cost, working capital, operation and maintenance cost, debt equity ratio, depreciation of assets, interest on debt and the return on equity of a project.
The distribution companies enter into Power Purchase Agreements (PPAs) with the generation companies to purchase agreed quantum of power and agreements with the transmission companies to bear the cost of transmitting the power, both at tariffs determined by the SERC. The SERC will arrive at the tariff of the distribution companies by adding the power purchase cost, transmission cost, the cost of the distribution companies in distributing the power and their profits. The tariff of the distribution companies, therefore, will include the costs and profits of the companies from all three sectors and is the final tariff offered to the end customers.
The tariff of the distribution companies is guided by the economic factors under the watch of the SERC sans any kind of subsidy in order to maintain the financial health of the companies involved in generation, transmission and distribution of electricity. However, subsidized tariff are offered for agricultural and residential needs, but, such subsidies are not borne by the governments or the companies involved in the generation of electricity; they are borne by High Tension (HT) customers such as manufacturing industries who consume the majority of power. Such HT customers are charged in excess of the normal tariff to the extent it is required for meeting the subsidized rates for farmers and residents. This phenomenon under the Act is known as Cross Subsidy Surcharge.
In addition to the above-stated modus of movement of energy from its source to the end consumers, the Act also provides for an alternative arrangement, known as ‘Open Access’. Under this, the generation companies directly sell the power to end consumers at a mutually agreed tariff, bypassing the tariff of transmission companies and the distribution companies. The end consumers under the Open Access system will be required to bear the Open Access charges (as determined by the SERC) such as wheeling and banking charges for usage of the transmission and distribution systems. This arrangement will promote competition between the distribution companies and the generation companies to attract the end consumers and will result in better efficiency and optimal utilization of resources.
Legal Scope under the Energy law
The SERC and CERC have two-fold functions -
The disputes adjudicated by SERC and CERC can be categorized into tariff-related disputes and contractual disputes. While the tariff-related disputes pertain to decision on various factors involved in tariff, the contractual dispute stem out of the terms of PPAs and other agreements such as wheeling and banking agreements entered into between the distribution companies and generation companies.
Any person aggrieved by any order of CERC or SERC is entitled to appeal against the order before the Appellate Tribunal for Electricity and an appeal from there lies before the Supreme Court.
The lawyers play a major role in representing the generation, transmission and distribution companies before the SERC and CERC as the disputes involve technicalities of electricity as well as numerous legal issues. lawyers are required to have a certain degree of knowledge of energy science, subjective to the case.
Energy law is not a subject included in the syllabus of a law school in India and is unknown and barely tested field of law. However, it holds a huge potential for a lucrative career for interested and abled lawyers, considering the limited number of lawyers in this field and the huge financial stakes involved in every dispute.
DISCLAIMER: The information provided in this article is for educational purposes only. The same cannot be construed as legal advice.
Precinct Legal, Bangalore
Shahbaaz Hussain leads the corporate practice of the firm Precinct Legal. He worked in a leading law firm at Bangalore for a period of two years, before he co-founded Precinct Legal. Shahbaaz is experienced in the field of private equity, investment banking, corporate restructuring and M&A.
Mr. Hussain graduated from Symbiosis Law School, Pune in B.B.A., LL.B and also holds a diploma in ‘Mergers and Acquisitions’. He completed one extra semester at Leibniz University, Germany, where he penned his thesis on ‘Anti-predatory Pricing Laws: A comparison between India and Europe’.
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