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Overview (May 2003) - International Law Office

International Law Office

Energy & Natural Resources - India

Overview (May 2003)

May 27 2003

Mining Law
Electricity Law


Mining Law

Legislative framework
India enjoys a variety of mineral resources due to its diverse geological strata. Of the 89 minerals produced in the country, four are fuel minerals, 11 are metallic, 52 are non-metallic and 22 are minor minerals. In addition, India is the world's main producer of mica blocks and splittings, and is a major producer of coal, lignite, barites, chromite, iron ore, bauxite and manganese.

Prior to liberalization in 1991, mining was restricted mostly to government and public sector undertakings. The National Mineral Policy 1993 introduced several measures to facilitate private participation in the mining industry. The policy, which does not apply to fuel minerals, highlights the following:

  • offshore mineral exploration;
  • the development of proper inventories and links between mineral exploitation and the development of the mineral industry;
  • preference to members of indigenous tribes in the development of scheduled areas;
  • protection of forests and the environment; and
  • enforcement of mining plans for the adoption of proper mining methods and optimal utilization of minerals.

The Mines and Minerals (Development and Regulation) Act 1957 and the Mines Act 1952 are the main statutes regarding the regulation and development of minerals other than petroleum and natural gas. The prospecting, exploration and reconnaissance of minerals and the operation of mines are primarily governed by:

  • the Mines and Minerals (Development and Regulation) Act;
  • the Mineral Concession Rules 1960;
  • the Metalliferrous Mines Regulations 1961; and
  • the Mineral Conservation and Development Rules 1988.

The Mines and Minerals (Development and Regulation) Act, which also lays down the royalties payable for each mineral under concession agreements.

The Mines Act 1952 and the Mines Rules 1955 govern health, safety and working conditions for miners.

Other key legislation relating to mining includes:

  • the Mines Creche Rules 1966;
  • the Mines Rescue Rules 1985;
  • the Mining Leases (Modification of Terms) Rules 1956;
  • the Payment of Wages (Mines) Rules 1956;
  • the Mines Vocational Training Rules 1966;
  • the Contract Labour (Regulation and Abolition) Act 1970;
  • the Granite Conservation and Development Rules 1999;
  • the Offshore Areas Mineral (Development and Regulation) Act 2002;
  • the Coal Bearing Areas (Acquisition and Development) Act 1957;
  • the Coking Coal Mines (Nationalization) Act 1972;
  • the Coal Mines (Nationalization) Act 1973;
  • the Coal Mines (Conservation and Development) Act 1974;
  • the Coal Mines Regulations 1957;
  • the Coking Coal Mines (Emergency Provisions) Act 1971;
  • the Coal Mines (Takeover of Management) Act 1973;
  • the Forest (Conservation) Act 1980;
  • the Forest (Conservation) Rules 1981;
  • the Environment (Protection) Act 1986;
  • the Environment (Protection) Rules 1986;
  • the Air (Prevention and Control of Pollution) Act 1981;
  • the Indian Explosives Act 1884; and
  • the Water (Prevention and Control of Pollution) Act 1974.

Accompanying notifications, regulations and rules also apply, as does legislation relating to labour benefits and contract labour.

Coal
All coal mines were nationalized in 1972 and 1973. Accordingly, coal mines can be owned and operated only by the central government or corporations owned by it. A 1976 amendment to the Coal Mines (Nationalization) Act 1973 permits captive mining by private companies engaged in the production of iron and steel, as well as sub-leasing of coal mining to private parties in isolated areas that are not amenable to economic development and do not require rail transportation.

A 1993 amendment permits captive coal mining for private participation in the power sector and allows for the washing of mined coal. Coal mining for cement production was permitted by a notification of March 15 1996. In addition, private companies with coal mining permits may undertake mining operations through an associated company formed with the sole objective of mining coal and providing it on an exclusive basis from the captive coal block to the end-user company. However, the end-user company must have at least 26% equity ownership in the associated company at all times, or both entities must be subsidiaries of a common holding company that has 26% equity shares in them.

The government's new integrated coal policy provides for domestic companies to undertake (i) coal mining operations in new coal blocks without the existing restriction of captive consumption, and (ii) coal reserve exploration. However, the necessary amendments to the Coal Act have yet to be made.

Principal rules and regulations
The Mineral Concession Rules 1960 outline the procedures and conditions for obtaining reconnaissance permits, prospecting licences and mining leases. The rules apply to all minerals other than atomic minerals.

The Mineral Conservation and Development Rules 1988 outline the measures to be taken for scientific mining and environmental conservation. These rules do not apply to coal, lignite, stowing sand, petroleum, natural gas, atomic minerals or minor minerals.

The Metalliferrous Mines Regulations 1961, enacted under the Mines and Minerals (Development and Regulation) Act 1957, also apply to all mines other than coal or oil mines, and lay down detailed provisions relating to:

  • mining operations;
  • eligibility criteria for, and duties and responsibilities of, personnel working in mines; and
  • approval of and adherence to mining plans; and
  • working conditions in mines.

Ownership of minerals
All minerals within the boundary of a state belong to that state. The central government owns all minerals in the sea bed within the territorial waters of India or its exclusive economic zone.

Mineral concessions
The exploration, prospecting or mining of any mineral requires a permit, licence or lease from the state government. The state government must seek central government approval where a permit, licence or lease relates to coal, lignite or atomic minerals. Such concessions can be obtained only by an Indian national or a company incorporated in India.

A reconnaissance permit is necessary for the preliminary prospecting of a mineral through regional, aerial, geophysical or geochemical surveys, or geological mapping. Permits are non-renewable and are granted for three years for a maximum area of 5,000km² (square kilometres), to be relinquished progressively (after two years, the area must be reduced to 1,000km² or 50% of the area granted (whichever is less), while at the end of the third year, the relevant area must be reduced to 25km²). A maximum area of 10,000km² may be granted per state to an individual under two or more permits. However, an individual may obtain permits throughout various states.

A reconnaissance permit holder enjoys a preferential right with regard to the granting of a prospecting licence over the area of land for which the reconnaissance permit has been granted.

A prospecting licence is granted for operations relating to the exploration and verification of mineral deposits. Licences are available for any mineral or group of associated minerals for a maximum period of three years (renewable for up to five years). They are granted for a maximum area of 25km² and this limit can be exceeded only with central government permission. However, an individual may obtain licences within various state limits. A licensee enjoys a preferential right with regard to the granting of a mining lease over the area of land for which the licence was granted.

A mining lease is granted for undertaking mining operations relating to any mineral. Leases for all minerals are granted and renewed by the state government. State governments require central government approval in respect of coal, lignite and atomic minerals. Leases are granted for between 20 and 30 years, over a maximum area of 10km². The area restriction may be relaxed with the central government's prior approval. A mining lease can be renewed for a 20-year period. Initial renewals are virtually automatic for a lessee using the mineral in his or her own industry, provided that all documentation is submitted and certain other requirements are met. A further 20-year renewal may be granted at the state government's discretion

Time limits
The state government must give its decision regarding a mineral concession application within six months for reconnaissance permits, nine months for prospecting licences and 12 months for mining leases. Justification must be provided for any delays.

Mining plan
Mining plans must be submitted and approved by the central or state government before a mining lease is granted. Any subsequent modifications or amendments also require approval. The state government may approve mining plans for open-cast mining of certain specified non-metallic or industrial minerals.

A 2002 amendment to the Mineral Concession Rules requires that approval be given within 90 days from receipt of application. Previously, no timeframe was prescribed. In cases where modifications are suggested by the government, the timeframe will be calculated from the date when the revised mining plan was submitted for approval. The rules require that all mining operations be conducted in accordance with the duly approved mining plan. The lease holder must review the mining plan and obtain government approval for the proposed mining schedule every five years.

Commencement of concessions
Once the state government has given its decision to grant a mineral concession to an applicant, the mineral concession must be executed within three months in the case of reconnaissance permits and prospecting licences, and within six months in the case of mining leases. The concession period commences only upon execution of the permit, licence or lease.

Surface rights
The surface rights applicable to mining leases depend on the nature of the land. Surface rights in respect of government land that falls within the mining lease area are granted in the mining lease, although a formal mine working permission must subsequently be obtained from the collector of that area. In the case of privately owned lands, the lessee can acquire the land either by private negotiations or by invoking a land acquisition process, whereby mining surface rights are acquired for the period of the lease and any subsequent renewals. Again, a mine working permission is required.

Restricted areas
The use of forest land for non-forest related purposes is restricted even where the land is privately owned. Development activities, including mining in certain specified areas (eg, coastal areas and areas of ecological importance), are not permitted. In respect of other restricted areas central government approval is required, as is that of the designated authorities. Usually, the granting of mineral concessions in forest areas has associated conditions relating to forestation, re-forestation and conservation. Mining for key minerals in areas exceeding five hectares requires prior environmental clearance from the central government pursuant to the submission of an environmental impact assessment report.

Transfers
No lessee of a mining lease may transfer any interest (whether directly or indirectly) to any other person without the prior permission of the state or central government. A 'transfer' includes a mortgage, encumbrance, sale or security interest.

Stamp duty
Lessees must pay stamp duty on mining leases. Stamp duty is calculated at the rates specified under the Indian Stamp Act 1899, as modified by the relevant state government. The rates are normally a percentage of the average royalty payable to the state government during the term of the mining lease.

Environmental and other issues
The conduct of mining operations requires environmental approvals regarding air and water emissions and other legislation relating to the use, storage and transportation of explosives and the disposal of hazardous waste and other materials arising out of or in relation to the mining activity.

The use of contract labour is not permitted in certain mines.

Offshore Areas Mineral (Development and Regulation) Act 2002
India is a party to the UN Convention on the Law of the Sea 1982, which allows coastal states to explore and exploit the natural resources of their continental shelves. The Offshore Areas Mineral (Development and Regulation) Act 2002 was passed on January 31 2003 and governs the development and regulation of mineral resources in India's territorial waters, continental shelves, exclusive economic zones and other maritime zones. The act will be brought into effect in several phases.

Minerals covered by the act include atomic minerals listed in the Atomic Energy Act 1962, but not mineral oils which are defined to include natural gas, petroleum and related hydrocarbons. The new act regulates reconnaissance operations (ie, preliminary geoscientific surveys), exploration activities and production operations.

For these activities, a reconnaissance permit, exploration licence or production lease is required.

Permits, licences or leases are granted under the act for a stipulated period. Production leases may be granted for 30 years with a renewal period of 20 years subject to compliance by the lessee with the approved works programme. The area over which a lease is granted is limited to a block of 15 minutes' latitude by 15 minutes' longitude. Larger areas may be granted on a discretionary basis. The aforementioned rights can be granted only to an Indian national or a company incorporated or registered under the Companies Act 1956. Other conditions that must be satisfied include:

  • the submission of a works programme;
  • possession of the requisite technical ability and financial resources; and
  • a clean record regarding previous licences and eligibility.

A lessee must pay royalties to the central government for any mineral removed or consumed from the area covered under the lease, at the rates specified in the act. Lessees whose operations extend beyond 200 nautical miles from the baseline from which the breadth of the territorial sea is measured must also pay the fee payable by the central government to the International Seabed Authority under Article 82 of the UN convention.

The act empowers central government to introduce rules that address concerns relating to the pollution of offshore environments and the protection of marine life. Holders of operating rights are liable for any pollution or damage that results from activities in their designated offshore areas.

Under the act, central government must notify the areas for which mineral concessions are to be granted. According to a central government press release of March 3 2003, no proposals have yet been received for deep-sea sand mining.

Foreign direct investment
The domestic mining sector was opened up to foreign investment in 1993. Currently, the permitted limits for foreign investment in the mining sector are (i) 74% foreign equity for the exploration and mining of diamonds and precious stones, and (ii) 100% foreign equity for the exploration and mining of gold, silver and minerals other than:

  • diamonds;
  • precious stones;
  • coal;
  • lignite;
  • atomic minerals; and
  • petroleum and related hydrocarbons, metallurgy and processing.

Generally, automatic investment is allowed if the foreign investor does not have an existing or previous venture in India in the same (or an allied) field. Otherwise, central government’s prior approval is required. For the mining sector, this approval is not required if 100% subsidiaries are being established by the foreign investor who claims not to have an existing joint venture for the same area and/or the mineral in question.

The limits on foreign investment for coal and lignite are as follows:

  • 100% for setting up or operating power projects and mines for captive consumption;
  • 100% for setting up processing plants (although coal mining and/or sales of washed or sized coal from the processing plant is prohibited);
  • 74% for exploration or mining for captive consumption (in industries other than power projects that require the use of coal); and
  • up to 50% automatically. Investment in a public sector undertaking beyond 49% requires central government approval.

New developments
Pursuant to the Finance Act 2003, enterprises engaged in the cutting and polishing of precious and semi-precious stones in India are entitled to tax holidays subject to certain conditions specified in the Income Tax Act, 1961. All profits derived from cutting and polishing are exempt from income tax for specified periods.

In addition, the state ministers of mining and geology have declared that the rules framed under the Mines and Minerals (Development and Regulation) Act should incorporate provisions relating to minimum area for mining leases, mine closure plans and the rehabilitation of mined-out areas.

Electricity Law

Electricity is included at Entry 38 in the concurrent list of the Seventh Schedule to the Constitution. Both central and state governments have jurisdiction over it, although states exercise their powers subject to those of central government.

Prior to 1991, electricity generation, transmission and distribution were reserved mainly for the public sector. Reform of the sector soon became imperative as a result of the private sector's losses, restrictive policies and inability to meet targets.

Executive bodies
Previously, the Ministry of Energy, which, comprised of the departments of power, coal and alternative energy sources was responsible for planning, policy formation and implementation with regard to the power sector.

The Ministry of Power began functioning independently on July 2 1992. Its prime responsibilities include:

  • formulating the sector's general policy;
  • overseeing certain hydropower and thermal power generation and transmission matters;
  • implementing the Electricity Act and the Electricity (Supply) Act 1948;
  • administering the Central Electricity Authority and the Central Electricity Regulatory Commission;
  • undertaking research and development, and offering technical assistance to the aforementioned bodies;
  • overseeing rural electrification and power schemes;
  • overseeing matters relating to central generators, transmitters and power financing; and
  • addressing all matters concerning energy conservation and energy efficiency as they pertain to the power sector.

Regulatory framework
The relevant legislative framework comprises three statutes and accompanying regulations, namely:

  • the Electricity Act 1910;
  • the Electricity (Supply) Act 1948; and
  • the Electricity Regulatory Commissions Act 1998.

Various legal regimes apply to generating projects depending on the primary fuel used.

Electricity Act 1910
The Electricity Act 1910 amended the law relating to the supply and use of electrical energy as was earlier contained in the Electricity Act 1903, providing a framework for the transmission, supply and use of electricity. It also provides for (i) private participation through the granting of licences for the distribution and supply of electricity, and (ii) the establishment of generating stations. Supply and distribution is subject to the prescribed licensing requirements.

Central transmission utility
The Power Grid Corporation of India Limited is the country's designated central transmission utility. Its functions are to:

  • transmit electricity through the inter-state transmission system;
  • plan and coordinate the inter-state transmission system with the state transmission utilities, central and state governments, generating companies, regional electricity boards, the Central Electricity Authority and licensees;
  • make recommendations regarding the issuance of transmission licences for inter-state transmission; and
  • supervise and exercise control over the inter-state transmission system.

Unless otherwise specified by the central government, the central transmission utility is also entrusted with operating the regional load dispatch centres. It is subject to the directions and regulations of the Central Electricity Regulatory Commission, pursuant to the Electricity Regulatory Commissions Act 1998. The utility's approval is required before applying to the Central Electricity Regulatory Commission for an inter-state transmission licence.

State transmission utilities
The Electricity Act requires the state governments to designate a government company or the state electricity board as the state transmission utility, the functions of which include:

  • undertaking the transmission of electricity within the state;
  • planning and coordinating the inter-state transmission system with the central transmission utility, state governments, generating companies, regional electricity boards, the Central Electricity Authority, and distribution and transmission licensees;
  • supervising and exercising control over the inter-state transmission system; and
  • complying (and ensuring compliance) with the directions of the central transmission utility regarding integrated grid and power system operations.

The state transmission utility's approval is required before applying to the state electricity regulatory commission for an intra-state transmission licence.

Electricity (Supply) Act 1948
The Electricity (Supply) Act provides for the rationalization of electricity supply and production. Regulatory authorities have been established at central, state and regional levels to govern electricity generation, transmission and distribution.

The act introduced the Central Electricity Authority and provides for the constitution of state electricity boards. In addition, it outlines the functions of the state boards and the framework for their constitution, financial performance and accounting methods.

Central Electricity Authority
The Central Electricity Authority is entrusted with conducting techno-economic appraisals of project reports concerning the establishment of generating stations and the granting of techno-economic clearances. Prior to the establishment of the Central Electricity Regulatory Commission, the Central Electricity Authority was also responsible for establishing guidelines for the determination of tariffs for the sale of electricity by independent power producers to state electricity boards or individuals/entities.

Pursuant to the Ministry of Power's notification of January 9 1997 (revised on June 2 1999), schemes involving capital expenditure in excess of the following limits must be submitted to the Central Electricity Authority for approval:

  • Rs50 billion for thermal plants selected through competitive bidding processes and complying with Notification SO 251(E) of March 30 1992 (amended by Notification SO 410(E) of May 23 1997);
  • Rs10 billion for other thermal plants selected through competitive bidding processes;
  • Rs200 billion for a plant supplying electricity to more than one state, where the scheme was approved by central government (or a body authorized by it) and is not owned by central or state government;
  • Rs25 billion in relation to schemes for generating stations prepared by a generating company, whose tariff for the sale of electricity was set by the Central Electricity Regulatory Commission or a state electricity regulatory commission;
  • Rs10 billion for hydel plants;
  • Rs5 billion for the renovation and modernization of existing plants; and
  • Rs2 billion for all other schemes.

State electricity boards
The Electricity (Supply) Act 1948 requires states governments to establish state electricity boards with extensive powers not only to generate, transmit and supply electricity, but also to regulate the activities of other licensees, generating companies and stations within the state. The key duties of state electricity boards include:

  • arranging, in coordination with generating companies operating within the state, for the supply, transmission and distribution of electricity that may be required within the state in an efficient and economic manner, with particular reference to those areas which are not being supplied (or are being supplied inadequately);
  • supplying electricity to a licensee or any other individual/entity who requires it;
  • exercising control in relation to the generation, distribution and utilization of electricity within the states as provided under the Electricity (Supply) Act 1948;
  • preparing and carrying out schemes for transmission, distribution and promotion of the use of electricity within the state; and
  • operating generating stations under its control in coordination with the generating companies operating within the state and with the government or state electricity board.

The state electricity board is deemed to be a licensee for the purposes of electricity transmission and distribution, and does not require a separate licence under the provisions of the Electricity Act.

Electricity Regulatory Commissions Act 1998
The Electricity Regulatory Commissions Act was enacted to rationalize tariffs. While the act provides for the establishment of the Central Electricity Regulatory Commission, state governments may exercise discretion with regard to establishing state electricity regulatory commissions.

Central Electricity Regulatory Commission
The main functions of the Central Electricity Regulatory Commission include:

  • regulating the tariffs of generating companies that are owned or controlled by the central government;
  • regulating the tariffs of other generating companies that enter into or set up composite schemes for the generation and sale of electricity in more than one state;
  • regulating inter-state transmission (including the tariffs of transmission utilities);
  • promoting competition, efficiency and economy in the activities of the electricity industry;
  • aiding and advising central government in the formulation of tariff policies to facilitate the mobilization of adequate resources; and
  • arbitrating or adjudicating disputes involving generating companies or transmission utilities with regard to matters connected with the tariffs of generating companies and transmission utilities that fall within its jurisdiction.

State electricity regulatory commissions
The main functions of the state commissions include:

  • determining tariffs for wholesale, bulk, grid and retail electricity;
  • determining tariffs for the use of transmission facilities; and
  • regulating the purchase of power and the procurement of transmission and distribution utilities within the state.

Subject to state government approval, they may also:

  • regulate investment approvals concerning the generation, transmission, distribution and supply of electricity to entities operating within the state;
  • issue licences for transmission, bulk supply, distribution or supply of electricity, and determine the conditions of such licences;
  • prescribe and enforce safety standards;
  • adjudicate disputes between generating companies and utilities, and refer them to arbitration where necessary; and
  • develop policies and procedures for appropriate environmental regulations.

The following states have established commissions:

  • Andhra Pradesh;
  • Assam;
  • Delhi;
  • Gujarat;
  • Haryana;
  • Himachal Pradesh;
  • Karnataka;
  • Kerala;
  • Madhya Pradesh;
  • Maharashtra;
  • Orissa;
  • Punjab;
  • Rajasthan;
  • Tamilnadu;
  • Uttar Pradesh; and
  • West Bengal.

Private participation
The Electricity Act and the Electricity (Supply) Act 1948 provide for three types of private participant in the electricity sector:

  • generating companies under the Electricity (Supply) Act 1948;
  • transmission licensees under the Electricity Act; and
  • distribution licensees under the Electricity Act.

Generating companies
A 'generating company' is defined under the Electricity (Supply) Act as a company registered under the Companies Act 1956 that has among its objectives the establishment, operation and maintenance of generating stations. It is not necessary for a generating company to carry out all of these activities.

The act exempts generating companies from the requirement to obtain a licence under the Electricity Act or state government approval for carrying out any activities, although certain provisions of the Electricity Act are applicable to generating companies. Consequently, generating companies are mainly governed by the provisions of the Electricity (Supply) Act and the Electricity Regulatory Commissions Act 1998.

A generating company may enter into a contract for the sale of electricity with the state electricity board of the state in which its generating station is located or with any individual/entity, subject to state government approval.

Transmission licences
The amended Electricity Act outlines the procedure for granting and overseeing the issuance of transmission licences. Two types of transmission licences are provided for under the act, namely inter-state licences iand intra-state licences.

The provisions regarding the granting of inter-state transmission licences mandate the establishment of central and state transmission utilities. Prior approval from the central transmission utility is necessary before an application may be made for an inter-state transmission licence.

The Electricity Act provides that until a state electricity regulatory commission is established, the state government may grant an intra-state transmission licence to any individual/entity. Thereafter, authority passes to the commission. The licensee may then construct, maintain and operate any intra-state transmission system under the direction, control and supervision of the state transmission utility. Prior approval of the state transmission utility is necessary before an application may be made for an intra-state transmission licence.

Private sector participation in transmission
On January 31 2000 the Ministry of Power issued guidelines for private sector participation in transmission services. Accordingly, private sector participation may be effected through: (i) an independent, private transmission company in which the private entity may hold a 100% equity stake, or (ii) a joint venture company in which the central or state transmission utility holds at least a 26% stake. The guidelines set out the procedure to be adopted in both situations and cite specific issues to be addressed when entering into the implementation and transmission service agreements.

Distribution licensees
Under the Electricity Act, state governments may grant any individual/entity a licence to supply energy in a specified area and to lay down electrical supply lines for transmission.

The procedure for awarding a distribution licence is as follows:

  • The applicant must apply to the relevant state government;
  • The applicant must publish a notice of intent and invite public comment;
  • The state government decides whether to issue a licence once all objections received within three months of publication of the notice have been considered;
  • If the area for which the licence is sought covers the whole or part of an aerodrome, fortress, dockyard or government defence camp or building, then the state government must check whether the central government has any objection to the granting of a licence; and
  • The state government must record any objection from a local authority and its opinion on the objection.

The state government may then grant the licence, subject to such terms and conditions as it deems fit. It may also grant a licence for the same area and for a similar purpose to another individual/entity. The licensee is required to supply electricity to the entire community within the area at their request, on a non-discriminatory basis.

In consultation with the state electricity board, the state government may revoke a licence if this is considered to be within the public interest. A licence may also be revoked if:

  • the licensee fails to comply with the provisions of the Electricity Act;
  • the licensee is in breach of any terms of the licence;
  • the licensee fails to make a deposit or provide any other security required under the terms of the licence;
  • the financial position of the licensee is unsatisfactory; or
  • the licensee fails to comply with the directions of the state government regarding the supply of electricity to any establishment that is used or intended to be used for the maintenance of essential supplies and services.

Tariff regulations
Domestic power tariffs have been subject to regulation under the Electricity Act, the Electricity (Supply) Act, guidelines issued by the Central Electricity Authority and the Electricity Regulatory Commissions Act 1998, which aims to provide a framework for tariff regulation. The provisions of the Electricity Regulatory Commissions Act 1998 have an overriding effect on any inconsistent provisions, except those of the Consumer Protection Act 1986, the Atomic Energy Act 1962 and the Railways Act 1989.

Prior to the enactment of the Electricity Regulatory Commissions Act 1998, three sets of norms governed the determination of tariffs:

  • those specified by Schedule 6 of the Electricity (Supply) Act for transmission and distribution licensees under the Electricity Act;
  • those under the Electricity (Supply) Act for determining tariffs for the state electricity boards; and
  • those determined by the central government under the provisions of the Electricity (Supply) Act for tariffs for generating companies.

In addition, separate norms specified tariffs for the central transmission utility.

The provisions of the Electricity (Supply) Act require that tariffs for the sale of electricity by generating companies to state electricity boards be determined according to the operation and PLF norms laid down by the Central Electricity Authority, as well as rates of depreciation and reasonable returns and other factors determined by the central government. To date, tariff orders have been issued by the state electricity regulatory commissions of all the aforementioned states except Assam, Kerala, Punjab and Tamilnadu. Consequently, tariffs under existing power purchase agreements are open to re-examination by the Central Electricity Regulatory Commission or the state electricity regulatory commission. An important case in point is the tariff under the power purchase agreement entered into between Maharashtra State Electricity Board and Dabhol Power Company. The ensuing Godbole Committee Report recommended that the tariff under this agreement be redefined. Accordingly, the Maharashtra Electricity Regulatory Commission now proposes to lower the tariff.

Tariffs for mega power projects are to be regulated by the Central Electricity Regulatory Commission since such projects supply power to more than one state.

Tariff notification
In exercising its powers under the Electricity (Supply) Act, the central government issued its Tariff Notification on March 30 1992, specifying the factors in accordance with which tariffs for the sale of electricity by generating companies to state electricity boards and individuals/entities are to be determined. The Electricity Regulatory Commissions Act 1998 altered the norms governing the determination of tariffs. The Central Electricity Regulatory Commission and state electricity regulatory commission were vested with the authority to determine the factors on the basis of which tariffs would be set. The Tariff Notification covers three types of power project:

  • thermal power generating stations;
  • hydro-electricity generating stations; and
  • thermal generating stations awarded through competitive bidding.

Thermal power generating stations
The Tariff Notification specifies a two-part tariff. The first part comprises variable energy charges, covering fuel costs for primary and secondary fuel recoverable for each kilowatt-hour of energy supplied, taking into account fluctuations in fuel prices. The second part comprises annual fixed charges, which are made up of:

  • interest on loan capital;
  • depreciation;
  • operation and maintenance expenses (excluding fuel);
  • taxes on income reckoned as expenses;
  • return on equity; and
  • interest on working capital.

The Tariff Notification provides that full fixed charges are recoverable at a generation level of 6,000 hours per kilowatt per year. It also provides that payment of fixed charges below this level shall be on a pro rata basis. Regarding generation above this level, additional incentives payable cannot exceed 0.7% of the subscribed and paid-up capital for each percentage point increase in the plant load factor above the norm.

Hydro-electricity generating stations
The Tariff Notification provides for a two-part tariff for the sale of electricity from hydro-power generating stations. This comprises incentives, deemed generation, an annual capacity charge and an energy charge, which is made up of:

  • operation and maintenance expenses;
  • tax on expenses;
  • returns on equity;
  • levies on water charges; and
  • interest on working capital at a normative level of generation.

Thermal generating stations awarded through competitive bidding
The Tariff Notification prescribes a two-part tariff for the sale of electricity from thermal generating stations. This comprises variable charges covering the fuel cost for each kilowatt hour of energy, incentives that are made available for the first five years of plant operation (limited to 2% of the fixed charged component of the first year's tariff) and certain annual fixed charges.

Mega power projects
Projects with a capacity of 1,000 megawatts (MW) or more that supply power to more than one state are categorized as mega power projects. Guidelines in this regard were issued by the Ministry of Power on November 10 1995. To date, 19 projects have been identified as mega power projects, of which 14 are public sector projects and five private. The guidelines provide for:

  • exemption from customs duty for imports of capital equipment for such projects;
  • a 10-year income tax holiday for such projects in any 10-year block within the first 15 years; and
  • exemption from sales tax and local levies for supplies to these projects.

States wishing to benefit from electricity generated from mega power projects must establish a state electricity regulatory commission with full powers to fix tariffs as envisaged under the Electricity Regulatory Commissions Act.

Cogeneration and captive power plants
Cogeneration plants
The central government announced its policy for co-generation power plants on November 6 1996. A 'cogeneration' facility is defined as one that produces two or more forms of energy simultaneously. Under government policy, industries with cogeneration potential may bypass the competitive bidding process when developing power generating facilities.

Captive plants
The central government has advised states to establish comprehensive captive power generation policies. A draft policy prepared by the Central Electricity Authority has been distributed, and allows for:

  • the establishment of hydro and cogeneration captive plants;
  • the establishment of captive plants where the state/state electricity board is unable to supply the requisite power;
  • the establishment of captive plants by units in special economic zones and industries;
  • the production by coal, liquid fuel and gas-based plants of up to 200% of the industry's requirements and sale of the surplus power to state electricity boards;
  • the setting of tariffs through mutual agreement between the industry and state electricity boards; and
  • third-party sales, provided that the state electricity board agrees.

Electricity Bill 2001
The Electricity Bill 2001 was introduced in Parliament in August 2001. The bill has now been passed by Parliament and is awaiting presidential assent. The salient features of the bill are summarized below.

The bill seeks to replace existing electricity laws, facilitate power sector reforms and abolish the need for each state to enact its own electricity reforms. The bill also seeks to rationalize tariff structures, promote captive power plants and the reform of state electricity boards, and liberalize power generation from licensing requirements. Though unbundling of state electricity boards will not be mandatory, a legal framework for splitting them into smaller entities dealing with generation, transmission and distribution is envisaged.

The electricity sector is to be overhauled to enable it to function on a purely commercial basis. All cross-subsidies are to be phased out progressively and converted into subsidies where necessary. The state's role will be limited to regulating the sector and providing subsidies.

Significantly, the bill seeks to treat electricity as a freely tradable commodity with a view to promoting competition and reducing the cost of electricity supplies and services for consumers.

Transmission, distribution and trading licences will be valid for 25 years (unless revoked earlier on specific grounds in public interest). No provision is made for renewal.

Generation
Electricity generation (except in the case of hydro-generating stations) is to be exempted from licensing requirements.

Moreover, it will no longer be necessary to seek techno-economic clearance from the Central Electricity Authority. Only certain minimum technical standards laid down by the Central Electricity Authority must be met. Currently, any project above a certain size requires techno-economic clearance.

Transmission and distribution
Transmission and distribution will be subject to licensing requirements. In a marked deviation from the electricity laws, the bill proposes to rationalize the tariff policy by phasing out cross-subsidization and differential pricing for general, industrial and farm consumers. The bill also seeks to provide open access to bulk consumers on payment of a surcharge in addition to wheeling charges until cross-subsidization is phased out.

Electricity regulatory commissions (central, state or joint) may grant licences to more than one entity for transmission or distribution within the same area. However, the extent of the area is unclear.

Any acquisition (by purchase, takeover or otherwise) of a licensee's utility, or a merger of utilities, will require the prior approval of the electricity regulatory commission. Similarly, any assignment of a licence by sale, lease, exchange or otherwise will also be subject to prior approval.

Trading
Power trading is permitted under the bill, subject to requirements that may be imposed on licensed electricity traders by the appropriate authority.

Foreign investment
Up to 100% foreign direct investment is allowed in generation, transmission and distribution projects, except in the case of atomic reactor power plants.


For further information on this topic please contact Bahram N Vakil, Anu Iyer, Upendra Joshi or Aditya Shroff at CZB & Partners by telephone (+91 22 5639 6880) or by fax (+91 22 5639 6888) or by email (bahram.n.vakil@czbpartners.com, anu.iyer@czbpartners.com, upendra.joshi@czbpartners.com or aditya.shroff@czbpartners.com).



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