Explainer: Why an Adani application for a licence set off a major electricity strike in Maharashtra

Wednesday saw several parts of Maharashtra being plagued by long power outages as employees of Maharashtra State Electricity Distribution Company Limited began a strike that they had planned to continue for 72 hours. Their grievance: the possibility that Adani Electricity Limited could get electricity distribution rights in areas currently served by the state company.

In November, Adani Electricity Navi Mumbai Limited, part of the Adani Group founded by billionaire Gautam Adani, approached the Maharashtra Electricity Regulatory Commission, seeking a distribution license for the “entire geographically contiguous area comprising of Mulund, Bhandup, part of Thane District, Navi-Mumbai, Panvel, Kharghar, Taloja and Uran”.

The state-owned Maharashtra State Electricity Distribution Company Limited currently has exclusive electricity distribution rights in these areas, close to Mumbai, home to several commercial and industrial establishments.

Its employees want Adani’s application to be cancelled because they fear it would lead to losses to the state-owned company.

“The areas they want a license for is the main source of revenue for our company,” said Krushan Bhoir, general secretary of Maharashtra State Electricity Workers’ Federation. “If Adani gets a distribution license here, our state-owned company will collapse.”

Adani Electricity Navi Mumbai Limited declined to comment, saying the matter was pending with the regulator.

Early on Wednesday, Bhoir said over 120,000 workers and engineers represented by 31 unions were part of the stir. “Several areas in Maharashtra are out of power already because of our strike,” he said. By afternoon, the state government had persuaded the unions to call off the strike, reassuring them that it did not support privatisation of the state electricity company and that it would oppose the parallel license when it comes up for hearing at the commission.

Conditions for a ‘parallel license’

Adani Electricity Limited has applied for a “parallel license” to service these areas in the Mumbai region.

The Electricity Act of 2002 – the policy framework that governs India’s electricity sector – allows for such “parallel” distribution licenses in order to increase competition and offer more choices to consumers.

However, the protesting unions claim that Adani Electricity’s application to the regulator is in violation of the law as the company does not yet have an existing infrastructure of wires, cables and substations and the likes required to physically transmit power from the grid to the end-consumer.

“The condition for granting a parallel license is that the company must have its own infrastructure,” said Sanjay Thakur, the general secretary of the Subordinate Engineers’ Association, one of the 31 outfits that participated in the protest. “In the areas where they have filed the new application, they have no infrastructure.”

The Act stipulates that “it shall be the duty of a distribution licensee to develop and maintain an efficient, co-ordinated and economical distribution system in his area of supply”.

According to the rules, the licensee is supposed to pay 30% equity towards the cost of infrastructure investment. ​​A regulatory approval secures an annual assured return of 16% on the equity.

To add to that, distribution licensees operate under a “cost plus” framework – allowing for a mark-up to be added to the final tariff – which ensures guaranteed return on the investment.

In its application to the regulator, Adani Electricity has said the “network roll out in the entire area would take approximately 5 years”.

This, critics say, assumes the use of the Maharashtra State Electricity Distribution Company Limited’s assets by Adani Electricity, laying the ground for the state-owned company to be privatised.

Who gets the ‘cream’?

The other concern among state electricity workers is that Adani Electricity’s gradual infrastructure roll-out plan betrayed its intention of “cherry-picking customers”. “They will take all our cream customers,” said Thakur.

Bhoir of the workers’ federation said the areas under consideration for the parallel license hosted more than 3,000 “high tension” consumers. “These are the customers that give us our main revenue – high-consuming industries and factories,” he explained.

According to Thakur, the areas Adani Electricity wants a parallel license for account for around 34% of the state company’s power sale in terms of quantum, contributing to over 50% of the its revenue. “Our analysis shows that a parallel license could lead to loss of cross-subsidy revenue of over Rs 2,500 crore,” said Thakur.

High-consuming customers in India pay a premium that cross-subsidies smaller household accounts.

“If Adani takes away the premium consumers, the state distribution company will be forced to increase the tariff of the common customers to save their balance sheets,” said Shailendra Dubey, president of the All India Power Engineers’ Forum that is backing the protests.

A new amendment

The state power employees’ apprehensions seem to have been made more pronounced by the fact that an amendment to the Electricity Act is currently being examined by a Parliamentary Standing Committee. Among other provisions, the amended Act allows for “deemed” distribution licenses. The proposed draft states, “If the Appropriate Commission fails to grant the license or reject the application, as the case may be, within the time so provided, the applicant shall be deemed to have been granted the license.”

“This seems to have been done to favour private players like Adani,” said Thakur of the engineers’ association.

The need for more clarity

Observers say that the regulatory framework surrounding parallel licenses need to be ironed out before licenses are granted. Prayas Energy Group, a non-profit organisation based in Pune, which tracks the energy sector, in its submission to the regulator in response to Adani Electricity’s petition, called for more clarity. It said at stake was “significant cost burden and investment lock-ins [which] will be passed onto consumers in the cost plus framework”.

“As the first application of its kind for such a large area, this matter is bound to become a precedent for other such applications in the state,” it pointed out.

While parallel licenses are in place in parts of suburban and South Mumbai, the specifics are slightly different. For one, Maharashtra State Electricity Distribution Company Limited has no presence in those areas.

In suburban Mumbai, for instance, it is Adani Electricity and Tata Power Company that have licenses to operate. This arrangement flows from a rather specific 2008 Supreme Court order that took into account the fact that Tatas had a license for the whole city dating back to colonial times.

Choice or duplication?

Regardless, some believe that Adani’s proposed entry into power transmission in other parts of Maharashtra was a welcome development. “The law allows for it and competition is always good for consumers,” said Pratap Hodage, who heads a state power consumers’ association.

Not everyone, though, is as sanguine.

“Parallel licensing was introduced in the Electricity Act because there were large areas where there was no network at all,” said energy policy researcher Saumya Vaishnava. “So the idea was if you have one supplier in an area already, but there are vast swathes there where there is still no network, the other licensee could come in and develop those parts.”

But in the current context, where the area under question was already well served, parallel licenses will lead to duplication, said Vaishnava.

This has implications for the larger public because infrastructure costs usually get socialised among all consumers in an area. “There needs to be more clarity on how the apportion of the network costs among different consumers will happen and if smaller consumers will be protected,” said an energy policy expert who requested not to be identified.