The Statement of Objects and Reasons of the Electricity Act, 2003, admits that the performance of the State Electricity Boards had deteriorated, including the fact that the Board’s were unable to determine tariff in an independent manner. The Indian Parliament recognized that cross subsidy had reached unsustainable levels and that it was necessary to distance State Governments interference on tariff matters.
To provide a remedy, a new legislative policy was designed. The Electricity Act, 2003, is a reform-legislation. It encouraged private sector participation. It sought to move the regulatory responsibilities from the State Governments to the Regulatory Commissions. As a comprehensive legislation, it introduced new concepts like power trading and open access. The Parliament announced that its new legislation “has progressive features and endeavours to strike the right balance given the current reality of the power sector in India.”
One of the main features of the Electricity Act, 2003, is the de-licensing of generation of electricity; and that captive generation became freely permissible. Open access in transmission was introduced at the very outset, while the Regulatory Commissions were required to introduce distribution of open access in a phased manner. Power trading was recognized as a distinct activity. The tariff for sale of electricity by a generating company to a consumer or trader was unregulated. The law recognized the need for decentralized management of distribution in rural areas, through Panchayats, users association, cooperatives, etc.