Last week, Union power minister M. Veerappa Moily announced that the government would finalize a draft model state electricity distribution responsibility Bill in the next one year. States will need to pass this legislation to access the debt restructuring package formulated by the Union government for the power sector, which is reeling under losses to the tune of Rs.2.45 trillion, where debt servicing accounts for between 20-50% of these losses.
Will this legislative mechanism prove a sufficiently strong deterrent against states succumbing to populist measures, reversing the gains from the restructuring? Besides, the financial sacrifice by the lenders in the debt package is not small.
There is no doubt that legal fetters will help restrain states from profligacy that hurts the power sector. It will exert pressure on state governments to raise tariffs, install meters for agricultural consumers, make a distinction between rural and urban consumers and charge the latter a premium. These measures can restore the financial health of the power sector.
It will, however, be naïve to believe that the political class will not, or cannot, sidestep what exists on the statute book.
If anything, the power sector stands testimony to this behaviour. Electricity laws, dating back to independence, stipulated the need for state utilities to earn a 3% rate of return. However, this was never followed. If anything, they were blatantly violated, with the ruling party providing free power to farmers and abetting theft of electricity.
Any secular trend in reform activity in the country has been stirred by political sobriety resulting from fear of complete breakdown of the power sector. Towards the turn of the century, it was the Enron debacle. States witnessed Maharashtra’s inability to pay for power from a plant that was conceived and erected without deliberating about its merits and demerits.
Over a decade later, this year, state distribution companies were entering a state of seizure—banks were refusing to lend working capital money. Only this event triggered tariff revisions across 22 states, an unprecedented development.
Hence, the present reform euphoria is entirely misplaced. That said, the experience from the only restructuring package in the past—involving the settlement of central power utilities dues owed to the states—is instructive. In the event of default by the states, the utilities could access the state government’s account with the Reserve Bank of India. Not surprising, there was no incidence of default.
The Union government needs to design this Bill carefully, giving little or no leeway to state governments to escape responsible behaviour.
Will a new electricity law inject responsible behaviour in India’s errant states?