India: Infrastructure And Energy Sector: Recent Regulatory And Policy Initiatives

Last Updated: 24 October 2016
Article by DSK Legal

In order to give impetus to growth in the infrastructure and energy sector, the Government of India has initiated several changes in the regulatory and policy framework governing the sector during the last financial year. We have in this article discussed the key reforms initiated in the previous financial year.

POWER SECTOR

National Tariff Policy

The amendments in the National Tariff Policy approved by the Cabinet in January are one of the key reforms. As per the official release, "the objective of the amendments is to ensure the 4 Es of Electricity for all, Efficiency to ensure affordable tariffs, Environment for a sustainable future, Ease of doing business to attract investments and Ensure financial viability." The revised tariff policy lays emphasis on the renewable energy production. New coal/lignite projects will have to set up a renewable energy project equivalent to 10% of the generating capacity. The power generated from such renewable energy projects will be allowed to be bundled together with thermal power

for the purpose of determination of tariff and onward sale. Further, the purchase of solar power under Renewable Purchase Obligations (RPO) are proposed to be increased to 8% from the existing 3%, by the year 2019. Further to streamline procurement of renewable energy by Distribution Companies (Discoms), the Central Government is planning to standardize the bidding framework. Inter-state transmission of renewable power will be exempt from transmission charges.

The Government has made procurement of 100% power produced from all the Waste-to-Energy plants in the State by the Discoms mandatory. The Central Electricity Regulatory Commission will determine tariff for composite scheme where more than 10% power is sold outside the State. To avoid taxation ambiguity, any change in domestic duties, levies, cess and taxes in competitive bid projects shall be allowed as pass through cost. The cost of imported coal/e-auction coal for competitively bid power projects will also be allowed as pass through on case to case basis. The State Governments will have to bid out Intra-State Transmission projects exceeding a monetary threshold, which shall be decided by the State Regulator. The cross subsidy surcharge formula has been revised to balance interest of open access consumers and Discoms. It has been envisaged that revision of tariff will be undertaken periodically (monthly / quarterly) which will ensure reduction of the burden on consumer.

UDAY Scheme

The Ujwal Discom Assurance Yojana (UDAY) Scheme aims at operational and financial revival of the state – owned power Discoms including the combined generation, transmission and distribution undertakings. The Scheme seeks to empower Discoms with the opportunity to break even in the next 2-3 years through four initiatives i.e. improving operational efficiencies of Discoms, reduction of cost of power; reduction in interest cost for Discoms and enforcing financial discipline on Discoms through alignment with State finances. 16 states have agreed to join the scheme with ten states having already signed the agreement with the Central Government, latest being Uttarakhand.

PSDF Subsidy Scheme

The Ministry of Power framed a scheme to provide support to stranded gas based power plants and the domestic gas power plants operating at marginal capacity. The scheme has been aimed at providing temporary relief to gas based power plants who are reeling under financial pressure due to non-availability of domestic gas as a result of fall of production in KG basin DG-6 project and high prices of imported gas. The scheme has been sanctioned for two years (2015-17) and the support under the scheme is being provided in the form supply of re-gasified imported liquid natural gas (RLNG), payment of a subsidy from the Power System Development Fund (PSDF) of the Ministry of Power and by various fiscal waivers by the Central and State Government. For each phase, the Ministry conducts auction of the subsidy required from the PSDF on reverse bidding methodology to allocate the available quantity of gas to the power plants. The Ministry has already successfully concluded three phases of the auction under the scheme.

Electricity Amendment Bill, 2015

The bill was drafted with many reforms including splitting of the distribution licence

into separate carriage and content licences. The bill was tabled in Lok Sabha in December, 2014 and later on referred to a standing committee of Parliament. It has been reported that the revised Bill will be reintroduced in Parliament soon.

OIL & GAS

New Hydrocarbon Exploration and Licensing Policy

The Central Government has approved a new Hydrocarbon Exploration and Licensing Policy (HELP) which will replace the existing licensing policies of New Exploration and Licensing Policy (NELP) and Coal Bed Methane (CBM) Policy. The HELP policy has been designed keeping in mind increasing disputes under the previous policies and recent developments in the sector. The HELP provides for a uniform license for exploration and production of all forms of hydrocarbons, an open acreage policy, an easy to administer revenue sharing model replacing existing model of profit share and marketing and pricing freedom for the crude oil and natural gas produced by the concessionaires.

So far, the exploration licenses for different hydrocarbons were granted separately under separate policy regimes for conventional oil and gas, CBM, shale oil and gas and gas hydrates. Therefore, a concessionaire of an oil field could not extract CBM discovered by it without obtaining a separate licence, which used to increase costs and involved uncertainty of winning that licence. A uniform licence will mean that a concessionaire can extract any kind of hydrocarbon from the field granted to it. It will enable the contractor to explore conventional as well as unconventional oil and gas resources including CBM, shale gas/oil, tight gas and gas hydrates under a single license.

Open acreage policy will give freedom to private participants to come up with a proposal of exploration and development of the fields not identified by the Government. Under the existing system, a private participant can bid for only the fields which are put on auction by the Government. Under the new system, a private participant may request the Government for exploration of any block not already covered by exploration licence. Based on the request of a private participant, the Government may put such blocks on auction.

The revenue sharing model aims at reduction of disputes on recovery of cost and determination of profit. Under the existing Production Sharing Contracts (PSCs) under NELP, the concessionaires were required to share profits. So the Government did not get its share till the profit was made, other than royalties and cesses. The determination of profit required the cost to be accounted for and checked by the Government. The exaggeration of expenses and correctness of the cost used to become contentious. This process of approval and determination had become a major reason for delays and several times led to disputes between the Government and the concessionaires. Therefore the old system of 'profit share' has been replaced with the 'revenue share', which will not require the Government to inquire into the cost to get its share. Further, the Government will start to receive its share from the very first day of the start of the commercial production.

It is expected that the HELP will enhance transparency and reduce administrative discretion.

Policy for extension of PSCs of discovered small and medium sized fields

This policy which has been approved recently, aims at enabling the concessionaires to plan their future investment which will help in optimal exploitation of discovered hydrocarbon for long terms. For extension of PSCs, a contractor is required to make an application to Ministry of Petroleum and Natural Gas (MoPNG) at least 2 years before the expiry date but not more than 6 years in advance. The extension will be subject to changed fiscal parameters. The Government's share of profit for the extended period will be 10% higher than the existing share. The royalties and cess will be payable at prevailing rates and not at concessional rates. For extension of the PSCs, the contractor should be able to demonstrate the availability of balance recoverable reserves through a third party reserves audit report. The extension of these PSCs would be considered for a maximum term of 10 years or remaining economic life of the field, whichever is less. The MoPNG will consider the application based on recommendation of the Director – General of Hydrocarbons (DGH). The DGH is expected to make its recommendation within a period of 6 months and the Government will take a decision within a period of 3 months from receipt of DGH's recommendation.

PORTS

The Government is contemplating corporatization of the major ports. In this regard, a new bill is being proposed i.e. Major Port Authorities Bill, 2015 to replace the existing Major Port Trusts Act, 1963. Currently, major ports function under a trust structure with a Board of Trustees. The Board of Trustees will be replaced by a corporate body of Port Authority constituted under the new legislation. The new legislation will apply to all major ports of the Central Government i.e. the ports of Chennai, Cochin, Jawaharlal Nehru Port, Kandla, Kolkata, Mumbai, New Mangalore, Mormugao, Paradip, VO Chidambaranar and Visakhapatnam. The bill makes detailed provisions for constitution of management of the Port Authority and its functioning. Under the existing framework, the tariff are based on scale of rates sanctioned by the Tariff Authority for Major Ports. Under the new legislation, each port will have freedom to decide its own tariffs.

HIGHWAYS

In the end of March, National Highway Authority of India (NHAI) has notified a new hybrid annuity model to tackle lack of interest in development of highways under BOT (Toll) models. Under the new model, the life cycle cost (Net Present Value of the quoted project cost and Net Present Value of the Operations and Maintenance (O&M) cost for operation period) will be the bid parameter for selection of the concessionaire. NHAI will pay 40% of the project cost in five equal installments during the project construction. The concessionaire will have to initially bear the balance 60% of the project cost through a combination of equity and debt, which will be paid by the NHAI in semi-annual installments after the completion of the project construction along with an interest at Bank Base Rate plus 3%. The concessionaire will carry out O&M for the concession period for the fees quoted as part of the bid. The concession period has been fixed at construction period plus 15 years. However, the toll collection will be responsibility of the NHAI.

The Cabinet has also approved one time fund infusion by NHAI to revive and physically complete languishing BOT projects. NHAI will provide bridge funding at Bank Base Rate plus 2%. The funding provided will have a first charge on the toll receivables of these projects. For this bridge financing, only projects which have achieved at 50% physical completion will be eligible.

To free up existing investment and promote new investment, the Government has also allowed 100% divestment of equity after two years of construction completion for all BOT projects which were granted before 2009. However, the said divestment will require prior approval of NHAI. The proceeds of such divestment can be utilized by the promoters for completion of other highway projects, power projects or to retire their debt to financial institutions in any other infrastructure project.

PENDING REFORMS

While the Government is keen on delivering on reforms, key legislations like Land Acquisition Amendment Bill, Electricity Amendment Bill, etc. are still pending. The Land Acquisition Amendment Bill has faced stiff resistance form the opposition parties and therefore, the Government has already dropped the plan to amend the same and asked the States to take lead in this. Land Acquisition as a subject – matter of legislation falls in concurrent list of the Seventh Schedule of the Constitution of India and therefore, the State Legislatures can also amend the same with approval of the Central Government. The restriction on transfer of captive mines introduced by the Mines and Minerals (Development and Regulation) Amendment Act, 2015 has become roadblock in merger and acquisitions activity in the power sectors and steel sectors. To overcome this, the Government has introduced the Mines and Minerals (Development and Regulation) Amendment Bill, 2016 which is pending in Parliament.

Change in the economic circumstances have led to various disputes between the Government and the concessionaire. This has also forced the concessionaire who had bid aggressively to reconsider their projects' economic considerations. Therefore, in this year's budget, the Government has announced a legal framework for dispute resolution for the sector and a separate policy for re-negotiations of Public Private Partnership (PPP) projects and public utility projects.

The Government must keep the momentum with respect to reforms going to bolster the infrastructure and energy sector.

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.

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