The Electricity Act 2003 governs India’s generation, distribution, transmission, trading, and use of electricity. It was enacted to bring about reforms in the power sector and promote competition, efficiency, and sustainability in the electricity industry.
Section 62 and Section 63 of this act are related to electricity tariffs. These are the most critical sections as they represent India’s intention to move away from a controlled economy and switch to a market-centric economy.
To understand more about these sections, we have to go back in history and check the timeline.
When India gained independence in 1947, the then Prime Minister Pandit Jawaharlal Nehru heavily invested in the public sector. He had no choice as the private sector was not mature. NTPC (National Thermal Power Corporation), NHPC (National Hydroelectric Power Corporation), SJVN (Satluj Jal Vidyut Nigam) and DVC (Damodar Valley Corporation) are a few examples of public sector power-generating companies.
In 1991, privatisation and disinvestment started under the regime of P. V. Narasimha Rao and Dr Manmohan Singh. NTPC, NHPC, DVC, SJVN and the majority of public sector companies were registered on the Bombay Stock Exchange and National Stock Exchange. NTPC, NHPC, SJVN and DVC were no longer short forms. They were meaningless names. The companies started doing something else than what they were expected to do at the time of set-up.
CERC and Sections 62, 63
CERC (Central Electricity Regulatory Commission) is a regulatory agency that controls state-owned power-generating companies.
CERC via section 62 and the MYT( Multi Year Tariff) mechanism, controls how power-generating companies run their business. CERC decides everything for a power generating company — capital cost, capacity charges, energy charges, annual fixed cost and electricity tariff.
Section 63 is about the determination of tariffs through the bidding process. Section 63 allows power-generating company management to decide on capital costs, capacity charges, energy charges, annual fixed costs and electricity tariffs. If their electricity tariff is competitive, they will get business.
It is around 20 years since the Electricity Act 2003. CERC is still clinging to section 62. The company controls the power-generating companies via section 62 and MYT. MYT document Tariff Regulation 2019-2024 has already been published. Now CERC is working on the Tariff Regulation 2024-2029 document. CERC is in no mood to switch to section 63.
NTPC, NHPC, DVC, SJVN etc. are registered on the stock exchange. However, the majority stake is still with the government. Bureaucrats run these companies not entrepreneurs.
It will take another 20 years to switch to section 63 for the following reasons:
- CERC neither has historical data for benchmarking nor are CERC bureaucrats answerable to anyone for their decisions. They will lose this privilege if we switch to section 63.
- The government wants to push renewable energy such as solar and wind. These technologies will survive only through government subsidiaries. Switching to section 63 will make life difficult for solar and wind power plant technologies.
Please think twice before you buy stocks of public sector power companies for the following reasons:
- Bureaucrats run these companies not entrepreneurs
- Company performance is heavily dependent on government policies, which can change abruptly.