Government plans Ordinance to ensure power pacts are honoured

New Delhi: The Centre plans to take a major initiative in the power sector with an ordinance to ensure sanctity of contracts, restrict cross-subsidisation of consumers and force utilities to pay their bills on time, a move that can go a long way in making electricity generation and distribution attractive for investors.

The planned ordinance would also deal with crucial issues of independence of electricity regulators and quick finalisation of tariffs based on costs – measures that were originally planned as amendments to the Electricity Act of 2003. States have been opposing these amendments for the past 3-4 years.

“The Centre is working at bringing fairness, transparency and supporting the investment climate in the power sector. The industry requires consistency in policy and delivery, lack of which is affecting the power sector,” a senior government official said.


The plan comes at a time of investor uncertainty about contracts and delayed payments by state distribution companies. “The ordinance proposes to ensure the sanctity of power contracts and that the discoms pay in time. The discoms should function on commercial principles and the states should disburse the subsidies on time. It also proposes to ensure that the regulators are truly independent to be able to enforce that payments are made by parties in time. The electricity tariffs should be made cost-reflective and there should not be unfair cross subsidy between industry and the agricultural consumers,” the senior government official said. Power secretary Sanjiv Sahay declined comment.

The ordinance is likely by the end of the month and will have to converted into legislation within six months. An industry expert said the precarious financial condition of power distribution companies and generating companies calls for immediate action by the Central government. The proposed ordinance seeks to empower state regulatory commissions to uphold the sanctity of all contracts executed between power producers and distribution companies.

The proposal comes after the new governments in Andhra Pradesh and Maharashtra refused to honour power purchase agreements, leaving investors jittery. Power minister RK Singh and top officials of his ministries have been asking Andhra Pradesh to refrain from renegotiating renewable power contracts to avoid sending wrong signals to domestic and global investment communities.

After the proposed amendment, the parties to power contracts will not be allowed to stop supplying or taking electricity even in case of a dispute, till the time it is settled.

As per government data, discoms’ dues to power generators stand at Rs 81,426 crore, of which Rs 62,045 crore is overdue. According to a joint study released by Assocham and Crisil in September this year, the gross bad loans of banks are expected to come down marginally to Rs 9.1lakh crore by the end of the fiscal and power sector accounted for the largest proportion.

The ordinance also proposes to address delays in tariff adoption by state and central electricity regulators. As per the proposal, tariffs determined through transparent bidding process have to be adopted by the concerned regulators in two months. If this is not done, the power producers or the distribution companies will have the right to appeal to the Appellate Tribunal for Electricity to get tariff adopted within two months.

The ordinance also proposes to set up a separate dispute resolution court to resolve issues between distribution companies and electricity generating companies in a time-bound manner. The court, with powers similar to the Appellate Tribunal for Electricity, is proposed to have an independent member from the private sector besides a chairperson and a technical member.