I. Introduction

As of 2025, India is the fastest growing economy in the world, growing at a GDP rate of 7.8% as of now (in Q1 of FY 2025-26). As rapid industrialization, globalisation and growth is increasing, India is being seen as a dominant player on the geo-political stage with significant exponential growth in all sectors like Manufacturing, construction, agriculture, etc. However, the Power production sector is facing a conflicting situation in itself. How? Let us dive deeper.

The Indian power sector is divided into three main segments: Generation (making power), Transmission (moving power long distances), and Distribution (delivering and selling power to homes and businesses). Some famous examples of these Generation and Transmission companies include: Adani Power, Tata Power and Power Grid Corporation of India. Over the past few years, these renewable energy spaces have seen rapid investment and strong returns. While the third segment, i.e. Distribution, has accumulated huge losses over the years ranging from Rs. 6.5 Lakh Crores to 7.5 Lakh Crores1, these massive, systemic losses have been a vital liability in dragging down the entire sector.

The DISCOM, in India is the prime customer of these large Generation & Distribution companies. The power production sector itself is generally doing well and is attracting massive investment. However, its main customer, the DISCOM, is deep in debt, which has been creating a huge "counterparty risk" the risk that your customer (the DISCOM) won't be able to pay you for the electricity you produced.

Let us understand it's situation better.

The DISCOM is trapped between a gap of ACS (Average Cost of Supply) and ARR (Average Revenue Realised) costs. In simple terms, an ACS is the sum of the actual cost of buying a unit of power from a generator and delivering it the customer. On the other hand, an ARR is the actual price that the DISCOM collects from its customers. Thus, when the ACS is greater than the ARR, the DISCOM might start to incur losses because of the gap in both the costs.

II. Regulatory Asset as an accounting Mechanism

To deal with this, the idea of Regulatory Assets (RA) emerged as an accounting mechanism to tackle the gap between the two costs. How does it work? Instead of forcing a large rate hike in one year, the regulatory body defers the recovery of that money to future years, in order to preserve consumer interests. However, what happened was that, the idea of Regulatory Assets (RAs) failed so badly in its implementation, because what was intended as a temporary, shock-absorbing accounting tool became a permanent, crippling liability that masked deep-seated operational and political failures, leading to massive financial distress across the power distribution sector.

III. How can this new amendment bill (draft) be effective in solving this backlog and debt?

The bill makes it mandatory for regulatory commissions (SERCs) to set tariffs that reflect the actual cost of supply (meaning ACS = ARR). This is known as a Cost Reflective Tariff. This concept is highly emphasised in the case in BSES Rajdhani Power Ltd. & Anr. vs. Union of India and Ors2. In this case, it was highlighted that Section 61 of the Electricity Act, 20033, guides the Commission to ensure the "recovery of the cost of electricity in a reasonable manner". Also most importantly, the Act mandates that the tariff progressively reflects the cost of supply of electricity and also, reduces cross-subsidies in the manner specified by the Appropriate Commission. This case is considered vital in prompting the Ministry of Power (MoP) to issue the new draft amendments.

IV. The problem of Unpaid Subsidies and Distorted Prices

Cross-subsidies (making industries pay extremely high rates to fund cheap power for farmers/households) make Indian factories uncompetitive in global arena and tends to create market distortion. Furthermore, state governments often delay or fail to pay the promised subsidy amounts to DISCOMs. This issue of Unpaid Subsidies and Distorted Prices in the Indian power sector is the one of most significant structural flaw, directly causing the chronic financial losses of DISCOMs and severely impacting the national economy.

The Bill proposes a phased elimination of cross-subsidies for key economic drivers like Manufacturing Enterprises, Railways, and Metro Railways within five years. Subsidies for vulnerable groups (farmers, poor households) are protected but must be made transparent and budgeted. The amendment directs the State governments to compensate DISCOMs through direct, budgeted transfers (often aiming for Direct Benefit Transfer - DBT) instead of hiding the cost through high industrial tariffs.

This lowers the electricity cost for industries, boosting their competitiveness, and forces states to be transparent about the actual cost of their welfare schemes.

Let us dive deeper into the most significant issues that the Distribution field faces.

In most areas DISCOMs are local monopolies. With no competition, they have little incentive to reduce power theft, improve service quality, or invest in better infrastructure, leading to high Aggregate Technical & Commercial (AT&C) losses.

V. How does the new bill tackle this situation?

The Bill allows multiple distribution licensees (government or private) to operate in the same area. Consumers will eventually get the choice to select their power supplier. New entrants can use the existing poles and wires by paying regulated "usage/wheeling charges," avoiding wasteful duplication of infrastructure.

Thus, Competition is expected to drive down costs through efficiency, improve service quality (quicker connections, accurate billing), and reduce power theft.

Another important point that the Bill highlights when read deeply is that, the Draft Electricity (Amendment) Bill, addresses the problem of slow clean energy adoption primarily by strengthening the demand side for renewables, which is crucial for achieving India's target of 500 GW of non-fossil fuel capacity by 20304. Many articles and scholarly works have missed out this portion. This is a crucial pointer as the amendment is crucial in recognising to achieve a set sustainable goal.

VI. Opinion

In our opinion these were the most important underlying issues that the Bill addresses and navigates a way to solve. Now let us take a quick look on the other changes brought in by this amendment.

  • Mandates Universal Service Obligation (USO)for all licensees, ensuring non-discriminatory access and supply to all consumers.
  • It also enables SERCs to make Distribution licensees free from USO, in consultation with State Governments, for large consumers eligible for Open Access (>1 MW).
  • Establishes an Electricity Councilfor Centre-State policy coordination and consensus-building.
  • Empowers State Electricity Regulatory Commissions (SERCs) to enforce standards, penalise non-compliance, and determine tariffs suo moto if applications are delayed.
  • Strengthens obligations for non-fossil energy procurement,with penalties for non-compliance.
  • Promotes power market development, including new instruments and trading platforms.

VII. Conclusion

Thus, the Draft Electricity (Amendment) Bill, 2025, is undoubtedly a bold and comprehensive piece of legislation, but its success is purely dependent on implementation, which is already a historical challenge in India's power sector. While the Bill is designed to be a definitive fix, mandating competition, cost-reflective tariffs, and clean energy goals it remains, for now, a document of intent.

Mandating cost-reflective tariffs directly challenges state governments, who face severe political pressure to keep power prices low for voters. This also has historically been another reason for the failure of past reform packages.

Furthermore, implementing multiple distribution licensees requires robust regulatory oversight by the State Electricity Regulatory Commissions (SERCs) to manage complex infrastructure sharing (wheeling charges) and prevent profitable urban areas from being treated indifferently, while ensuring quality service for rural, high-loss areas under the Universal Service Obligation (USO).

Ultimately, the Bill is a necessary foundation, but overcoming deep-seated political resistance, improving the capacity of state regulators, and ensuring the financial discipline of state governments will be the true tests of its effectiveness in a diverse and politically complex country like India.

Footnotes

1 Ani. (2024, December 21). Electricity distribution companies continue to remain a burden on state finances: RBI. The Economic Times. https://economictimes.indiatimes.com/news/economy/finance/electricity-distribution-companies-continue-to-remain-a-burden-on-state-finances-rbi/articleshow/116527254.cms?from=mdr

2. BSES Rajdhani Power Ltd. & Anr. v. Union of India and Ors., 2025 INSC 937.

3. The Electricity Act, No. 36 of 2003.

4. 500GW nonfossil fuel target | Government of India | Ministry of Power. (n.d.). https://powermin.gov.in/en/content/500gw-nonfossil-fuel-target

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Rahul Dahiya
Legitpro Law
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