Govts invoking crisis clause in Electricity Act hurts private players. Start storing instead

Under Section 11 of the Electricity Act, the government can force a generation company to operate and maintain a station as per its requirements.

18 October, 2023
The Print

This year has seen unprecedented power demand in India. Scorching summers and delayed monsoons have meant that people have been using more electricity than ever before. Take the case of Karnataka. The state has been facing a shortfall of approximately 1,500-2,000 MW of power, and has had to devise mechanisms to find power elsewhere. As a consequence, citing public interest, the Karnataka government invoked Section 11 of the Electricity Act on 14 October. Private generation companies are now forced to supply power to the state discom. Karnataka is not the first state to take such an action, nor is it the first time it has taken such an action. The situation once again reminds us that our priority should be to plan for the inevitable increase in demand. Resorting to “public interest” as a tool for crisis management is not sustainable.

Better procedure for Section 11

Under Section 11 of the Electricity Act, the government can force a generation company to operate and maintain a station as per its requirements. When the government does this, it is required to compensate the generation company for the adverse financial impact. One can imagine that such a diktat can disrupt the plans of private sector producers, and make private parties reluctant to invest, or ask for a higher rate of return. Fundamentally, such an action impinges on the rights of other private parties. This power should, therefore, be used sparingly.

The Electricity Act does specify that the government can do this only under “extraordinary circumstances”. The Act defines ‘extraordinary circumstances’ as circumstances arising out of threat to security of the State, public order or a natural calamity or such other circumstances arising in the public interest. The Act leaves it to the discretion of the government to decide what is public interest and whether a particular circumstance is in public interest. The idea of public interest is not new in India, and has been used often to allow the state to take decisions that may go against legitimate private interests.

While the government is required to compensate private generators for the loss that they incur, it is quite possible that there may be little agreement on what a fair compensation should be. The Electricity Act is sufficiently vague on how such compensation should be arrived at. In 2015, the government of Karnataka had invoked Section 11 owing to shortage of power, and fixed a provisional tariff of Rs 5.08 per unit. The Electricity Commission decided in 2016 that the generators should be compensated at the rate of Rs 4.67 per unit. The Karnataka Electricity Regulatory Commission rejected the petition of the private parties for the higher tariff. Lack of clarity in the determination of compensation leads to disputes, taking away significant time and resources of parties that may be better spent in augmenting physical and human productivity. The state distribution companies are known for not paying generators on time in normal circumstances. Why should we expect that timely compensation will ensure in crisis times? Because Section 11 impinges on the rights of private parties, these powers are meant to be exercised as an exception rather than the rule.

This is best done if the law requires the government to follow a process where it is not enough to demonstrate the difficulty of the present situation. While the Karnataka shortage of power is real, and inability to meet power demand will lead to serious difficulties, this should not be sufficient to invoke Section 11.

In light of these challenges, it is crucial to consider the government’s new hydro and coal allocation norms that aim to enhance power production capacity and address the ongoing shortages effectively.

The government should be required to do two other assessments: that of the relative costs and benefits of a specific action, and whether the decision was carried out transparently and with adherence to due process. The government should also be asked to justify that all other options to resolve the problem have been exhausted in the short-run, and that it has designed policy measures that will ensure that it will be better prepared to deal with shortages in the future. At present, these considerations are orthogonal to the invoking of Section 11.

Solving for shortages

This has been a year of a surge in demand for power across the country. In August, the country saw a power shortage of over 4 per cent of the peak demand. Coal plants across the country have been operating at full capacity using imported coal, also because of government diktat. It is likely that next year will be no different. We may have to gear ourselves for crisis mode during summer months year after year. This begs the question – why is it that our chances of finding ourselves in a similar position are so high?

There may be several reasons – from the lack of additional coal supplies, to the mismanagement of existing ones. While renewable power is able to meet day time shortages, the shortage in thermal power exposes us to shortages in the night time. As Jonathan Kay has argued, generation companies in India have lacked the resources or the incentives to take proactive measures to avoid blackouts. In addition, our policy environment has not been able to create a market for storage, or for trading of power. The resolution of our power crisis requires an understanding of why these markets have not taken off. The true interests of the Indian public may lie in that understanding.

India’s KYC process is a privacy nightmare. FATF has given legal sanctity to mass surveillance

The extent of data collected at onboarding and once again at the time of updates to KYC goes beyond just verification and could potentially be used for “profiling” the customer.

04 October, 2023
The Print

We’ve all been irritated at having to show an address proof to get anything done. Technology promises to solve all problems, but the Know-Your-Customer regime remains resilient. After the 9/11 attacks on the World Trade Centre in the United States, it was felt that if the authorities followed the money, they could curb and control money laundering and terrorism financing. The Financial Action Task Force required tracking all money flows and identifying each participant in the chain. How well does tracking cash flows through the formal financial system work? While the world ponders this question, India should move towards a risk-based KYC regime.

Does it work?

How well has “following the money” worked in fighting terrorism? Peter Neuman, professor of Security Studies at Kings College London, has argued that small terror attacks do not require large sums of money. Even when they do, “trading in oil, antiquities and works of art, kidnappings and ransoms, extortion, and human trafficking” seem the preferred channels—most of which do not interact with the global financial system. In any case, the challenge is to identify and thwart money flows before an event—the chance of this is like finding a needle in a haystack. In fact, the more difficult it is to access the global system, the more money will be driven underground.

The cost of this, however, is paid by private institutions and citizens. Whether it is something as simple as opening an account or transacting through it, customers need to jump through multiple hoops. If one lives in a blacklisted country, receiving remittances for food and shelter through formal channels becomes a challenge. Financial institutions also come under the scanner, they must make sure all money flows are checked and all customers are verified. They incur expenditures for maintaining detailed records and accessing them when asked for by regulators. Such records would exist regardless of the requirements, but they’d be tailored as per the needs of the institution, not the regulator.

A recent survey of global banks found that a review costs between $1,501 and $3,500 – if a bank is onboarding 10,000 new clients every year, the cost of KYC alone can run into millions of dollars. As a paper by Ronald Pol, an anti-money laundering researcher, shows, FATF-based intervention has less than 0.1 per cent impact on criminal finances. Compliance costs exceed recovered illegal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalised more than criminal enterprises. The world of underground finance may thrive even with legitimate businesses that want to escape the complexity of the formal financial system. The global system needs to take stock of the costs and benefits of the current system. Osama bin Laden is long gone. But we seem to be stuck on the high-cost arrangement of society forever.

Surveillance state

Less talked about are the costs of surveillance. Researchers Rishab Bailey, Vrinda Bhandari and Trishee Goyal suggest that the FATF framework does not balance the competing interests of law enforcement and civil liberties. It places greater emphasis on the flow of information to combat terrorism or money laundering over the privacy interests of customers. As a result, governments have been able to get access to detailed identity information about their citizens and their financial transactions. It is almost as if the FATF has given legal sanctity to mass surveillance.

Understanding the implications of these surveillance practices is crucial, especially in light of the evolving data protection laws that aim to safeguard individual privacy rights.

Many will argue that they have nothing to hide, and hence, what is the problem if financial institutions and, consequently the government have access to their data? The argument is fallacious because it equates privacy with secrecy. It also underestimates how seemingly unrelated actions can be put together to create a complete individual profile without the person’s consent. Eventually, how governments can use (often misuse) this is a function of the strength of data protection laws and the independence of the judiciary.

Risk-based KYC

If KYC’s compliance and surveillance costs are high everywhere, one can be assured that India will adopt the most convoluted form possible. The requirements of the Indian KYC in the banking sector are higher than those imposed by the FATF. Banks collect all manner of data from all customers. The extent of data collected at onboarding and once again at the time of updates to KYC goes beyond just verification and could potentially be used for “profiling” the customer. It gives little pause to the actual probability of a particular customer being involved in money laundering/terrorism finance, or to how collecting as much information as one can help law enforcement. The ease with which one can open a bank account in the US or buy a SIM card in the UK even as a tourist is unimaginable in India.

The FATF does make allowances for countries to adopt a risk-based approach. That is, governments can create their framework to identify the risks they face and take appropriate measures based on their assessment. Banks need to consider various factors to assess their risk, including what their scale is, what the target market is, what customer category they are serving, transaction size of the customers. Why have banks in India not yet been able to adopt a responsive risk-based approach to their KYC? One of the core areas of reform for the financial sector in India will be establishing risk-based and proportionate data collection measures consistent with the FATF.