Authored by Abhishek Nath Tripathi and Vedant Kumar, Sarthak Advocates & Solicitors.

Farmers have completed 60 days of their protest on the Delhi borders. However, the deadlock between the government and the farmers is far from over. The protesting farmers have rejected the proposal to suspend the three controversial agriculture laws for 18 months. During the impasse, the protesting farmers were able to convince the government to put the Electricity (Amendment) Bill, 2020 (bill), into abeyance. This will disappoint many who have been eagerly waiting for the second phase of electricity reforms.

The farmers are mainly aggrieved by the proposal to substitute a direct benefit transfer (DBT) for subsidies. Concerns have also been raised around the privatization of distribution companies (discoms). The political nature of electricity as a public good makes it necessary to negotiate the reform issues around it as a political, as well as an economic matter. Most policy makers agree that one of the principal reasons for discom distress has been the inability of discoms to recover the costs of supply through tariffs. It may also be argued that tariffs are high due to high transmission and distribution losses, which is partially a euphemism for electricity theft. Electricity tariffs have for years been weighted against industrial and commercial consumers, who have had to subsidize domestic and rural consumers. With the arrival of open access and captive generation, many industrial and commercial consumers, who have been otherwise forced to purchase power at significantly higher costs from the discoms, are either purchasing power directly through the open access route, or are setting up captive generation units. This has put the discoms under further stress as industrial and commercial consumers are the principal sources of revenue for the discoms and make up the deficit in the cost of supply to rural and domestic consumers. This has often forced many discoms and electricity regulators to discourage open access and captive generation to save discoms from further economic stress. This in turn has had the effect of discouraging the installation of new generation capacity.

Proposals in the bill in effect transfer the burden of subsidy from the balance sheets of the discoms to those of state governments by mandating the removal of cross-subsidies. State governments are expected to meet subsidy costs from their own funds. This raises challenges both for the government as well as for consumers. First, most state governments are themselves distressed, and the proposal comes at a time when government finances are also impacted by covid-19. This has caused alarm. Second, consumers fear that while they will be forced to pay higher tariffs to discoms, DBT may take longer to arrive in their bank accounts due to bureaucratic hurdles or a shortage of funds. Third, there is the worry that consumers may refuse to pay bills even though they receive DBT. Discoms may find it difficult to disconnect power supplies for default in payment of bills, particularly if there is widespread default, given the likely political fallout.

There is a perception that the privatization of distribution will lead to an increase in tariffs. Private enterprises will pursue recovery whereas state-owned discoms may dither. A lack of political control over privately owned discoms heightens anxiety. Given the existing regulatory control of tariffs, more efficient, privately owned discoms may deliver an overall lowering of tariffs in the long run, as has been the case in places like Delhi. However, more needs to be done to spread this message among rural consumers.

Some of the proposals in the bill have raised legitimate concerns over the centralization of power in the government. Historically, state governments have exercised control over the distribution and supply of electricity. It may be argued that as electricity appears in the concurrent list of the constitution, parliament is empowered to legislate on it. However, the political consequences of the supply of power, or lack of it fall on state governments. The centralization of power in the central government is a theme that fuels the perception of the farm laws. This may be the reason why the bill has become ammunition for the farmers’ protests. For the time being, it seems that the government is willing to sacrifice the legislation for the sake of peace.

Abhishek Tripathi is the managing partner and Vedant Kumar is an associate at Sarthak Advocates & Solicitors.

Published at India Business Law Journal.