Awakening of the Power Dragon: Section 11

- Harry Dhaul, Director General, IPPAI

- Tarunima Sen, Senior Associate, IPPAI

Electricity does not move, it can’t travel and therefore, cannot really be transported over
distance. No human being has seen, smelt, and touched an electron ever. Electricity markets
are virtual markets based on accounting standards, assumptions, market principles and trust.

So imagine and visualize, if you can, that electricity generated at point one is consumed across
a distance at point two. But is it? There is no way of proving it, and there are millions of
options and combinations where electricity in a network could have been consumed elsewhere
by others. Therefore, markets are based primarily on the principle of trust and in a sense, good
faith. And are thus, very sensitive and need nurturing by the policy makers and regulators to
ensure continued confidence in this vital activity.

The Electricity Act 2003 visualizes non discriminatory open access as one of the foundations of
the new idea for India’s power sector reforms. There is, however, a section in the act which
gives the state government the power to intervene and give direction to generating companies
in ‘extraordinary circumstances’; Section 11 “The appropriate Government may specify that a
generating company shall, in extraordinary circumstances, operate and maintain any
generating station in accordance with the direction of that Government” which in normal
interpretation could mean asking generating station to back down or increase generation in the
interest of security of the state grid.

However, it has been noticed that certain States are misusing this section to force IPP’s and
merchant power plants and in some cases surplus from Captives to sell to them under duress at
suppressed prices and then to sell the power to consumers and customers outside the state at
exuberant rates, thereby, collecting huge surplus revenues for themselves. The Electricity Act
2003 did not visualize such massive profiteering by state owned entities and the misuse of this
section.

The Constitution of India the “Article 301, which grants to all citizens “Freedom of trade,
commerce and intercourse” (Part XIII Trade, Commerce and Intercourse within the Territory
of India). This clearly indicates that one can sell his ‘commodity’ (goods) in any area within the
national boundary. ‘Power’ or ‘Electricity’ is a recognized commodity by the Supreme Court.
Therefore going by the above statements, electricity or power is a freely tradable commodity
in India.
However, by invoking Section 11 in their State, power producers across the country have been
restricted to trade and therefore it has caused a great loss of faith and credibility in the power
market system.

Section 11 violates a power producer’s fundamental right to trade. It also over looks Section 66
of Electricity Act of 2003 saying: “the appropriate commission shall endeavor to promote the
development of a market (including trading) in power in such a manner as may be specified
and shall be guided by National Electricity Policy referred to in Section 3 in this regard”.

The impact of denial of Open Access will influence future and further investments in the power
sector, keeping in view the extraordinary, unconstitutional power the errant governments have
exercised in themselves and which is contrary to the nature of the market principles. Denying
open access has brought in uncertainty into the Power Market besides putting a question mark
on sanctity of contract, resulting in a slowing down of private investments in this critical
infrastructure sector, and all this while the country continues to reel in darkness.

The recent trends and judgments in the courts as well as policy decisions taken by state
entities has put into question the holisticity and robustness of the Indian Energy Market. It has
also created uncertainty and a deterrent in the case of PPP in infrastructure. This is ironic as
the Planning Commission has recently been asked to constitute a special commission in ways
and means to encourage private investments in infrastructure sectors.

Short term knee jerk steps to fight the immediate shortage of electricity during seasonal
mismatches particularly in the summer months by evoking Section 11 are actually deterring
investors from stepping up their investments in the Power Sector. What could have been a
unique market opportunity is being wasted simply because of market distortion through
interference of free market principle.

Short term knew jerk reaction lead to long term collapses. This needs intervention by policy
makers at the highest level.

The authors can be contacted at harrydhaul@gmail.com and tarunimasen@ippaimail.org