Can parallel licensing in India change power distribution?

Parallel licensing allows two or more electricity distribution companies to operate within the same geographical area. Also known as parallel distribution licensing, it enables multiple distribution licensees to serve an area instead of relying on a single electricity distributor. This means a new distributor can enter the market while the existing one continues operating.

Under Section 14 of the Electricity Act, 2003, an eligible applicant cannot be denied a distribution license solely because another licensee already operates in that area, provided all licensing requirements are met. Under current law, each parallel licensee must distribute electricity through its own distribution system.

Under parallel licensing in India, another eligible distribution licensee can receive approval to operate within an area already served by an existing distributor. Both remain regulated, but each is responsible for meeting the obligations attached to its license.

Here is what the model means in practice -

More than one distributor can serve the same area

Section 14 of the Electricity Act, 2003, allows licenses to be granted to two or more persons for electricity distribution within the same area. An eligible applicant cannot be refused only because another distribution licensee is already operating there.

Each licensee currently requires its own distribution system

Under the law currently in force, parallel licensees distribute electricity through their own distribution systems. A new entrant may therefore need to invest in lines, substations and other network infrastructure instead of simply using the incumbent distributor’s network.

The license covers a defined geographical area

The Central Government’s 2022 rules provide that the minimum area for a parallel distribution license is generally an entire Municipal Corporation or three adjoining revenue districts, unless the appropriate government notifies a smaller area.

Regulation continues even when competition increases

Parallel licensing does not create an unregulated electricity market. The relevant State Electricity Regulatory Commission, or SERC, continues to oversee the license, tariffs, service requirements, and other regulatory obligations.

So, the model introduces competition between distributors while keeping electricity distribution within a regulated framework.

Section 14 of the Electricity Act, 2003, allows the Appropriate Commission to grant a distribution license to any “person”. Under the Act, that can include a company, body corporate, association, or body of individuals, whether incorporated or not, as well as an artificial juridical person. State regulations and application formats may further specify the organizational forms that can apply.

Approval, however, depends on much more than the applicant’s legal form.

Financial capacity

The parallel licensing guidelines require applicants to demonstrate adequate financial strength. The regulator assesses the required distribution network investment based on factors such as the area of supply and service obligations.

The applicant, along with its promoters where applicable, must then show resources for equity equal to 30% of the assessed investment, based on net worth and internally generated resources over the preceding three years, after excluding other committed investments.

Operational readiness

Distribution involves far more than obtaining permission to sell electricity. The applicant must be capable of establishing and operating the proposed distribution business and meeting the obligations associated with the license.

State application formats can seek detailed information on the proposed supply area, distribution network, power sourcing, investment requirements, and rollout plans. Maharashtra’s format, for example, requires technical and financial details along with an indicative five-year investment and network rollout plan.

Compliance and conduct

Financial strength alone is not enough. The 2005 rules also require the applicant to satisfy the Commission regarding prescribed code-of-conduct conditions. These include checks relating to specified findings of guilt or disqualification under certain corporate, tax, securities, excise, and customs provisions, as well as whether a license has been suspended or revoked within the preceding three years. Additional conditions apply when the applicant is a company.

The parallel licensing process is regulator-led, and the exact filing requirements differ between states. The Electricity Act, however, lays down the basic route that an application must follow.

1.  File the application - Apply to the relevant State Electricity Regulatory Commission in its prescribed form and pay the applicable fee.

2.  Submit the supporting plans - Depending on the Commission’s regulations, this can include the proposed supply area, technical details, financial capability, investment plan, and network rollout plan.

3. Publish the application notice - Section 15 of the Electricity Act requires the applicant to publish notice of its application within seven days in the prescribed manner.

4. Invite objections - Interested parties can raise objections. Under section 15, objections must be received within 30 days from publication of the notice.

5. Undergo regulatory scrutiny - The Commission may seek additional information and consider the application, stakeholder objections, and other relevant material before taking a decision.

6. Receive the license decision - The Electricity Act states that the commission should, as far as practicable, issue or reject the license within 90 days of receiving the application. A license ordinarily remains in force for 25 years, unless revoked earlier.

There is no single nationwide checklist of parallel licensing documents required. Section 15 allows the relevant Commission to determine the application form and manner, so requirements can vary across states.

Depending on the SERC (State Electricity Regulatory Commission), supporting information may include -

1.  Business identity - Incorporation or registration details, constitutional documents, ownership information, and management profiles.

2.  Financial evidence - Audited annual reports, bank references, funding arrangements, and evidence supporting financial capacity.

3. Technical credentials - Relevant experience, staffing details, and proposed technical or operating arrangements.

4. Area and network plans - Maps showing the proposed supply area, existing infrastructure, and facilities to be developed.

5.  Business projections - Demand, sales, costs, revenues, investment, and network rollout forecasts. For example, Maharashtra’s form seeks five-year projections.

6.  Regulatory compliance: Proof of the application fee and supporting information demonstrating compliance with the central government’s additional requirements.