The Electricity Act, 2003: A Comprehensive Overview
THE ELECTRICITY ACT 2003
Purpose and Key Features
The Electricity Act, 2003, replaced previous legislation to reform the Indian power sector. Its main objectives include:
- Separating tariff determination from State Electricity Boards
- Reducing government subsidies and promoting self-sustainability
- Encouraging private participation and competition
Licensing
Power generation generally doesn’t require a license, except for large hydro-power projects. However, licenses are mandatory for:
- Transmission of electricity
- Distribution of electricity
- Trading in electricity
Key authorities under the Act are:
- Central Electricity Authority (CEA)
- Central Electricity Regulatory Commission (CERC)
- State Electricity Regulatory Commissions (SERCs)
Tariffs
Commissions determine tariffs considering consumer interests, cost recovery, and reasonable returns on investment. Regulations 2004 and 2009 provide guidelines for tariff determination.
ACCOUNTING PRACTICES
Security Deposits
Distribution licensees can collect security deposits from consumers as per Section 47 of the Act. The deposit amount covers various charges and earns interest at the bank rate or higher. Different states may have varying norms for security deposits.
Capital Service Line Contributions
State Commissions prescribe norms for service line contribution cum development (SLD) charges. Accounting practices for SLD charges may include:
- Recognizing as a liability and later as income over the asset’s life
- Accounting as a non-refundable reserve
- Treating as a capital reserve and transferring a proportionate amount to income over the asset’s life
- Reducing the cost of the fixed asset
Grants under APDRP
The Accelerated Power Development and Reforms Programme (APDRP) aims to improve power distribution infrastructure and reduce losses. Grants received under APDRP are treated as capital receipts and accounted for as capital reserves. A proportionate amount is transferred to the income statement to match depreciation on the acquired assets.
Depreciation
Depreciation for tariff determination and accounting purposes follows rates prescribed by the CERC, which may differ from rates under the Companies Act or Income Tax Act. Two methods are allowed: Straight Line Method (SLM) and Optimised Depreciated Replacement Cost (ODRC) method.
CO-OPERATIVE SOCIETIES
Bye-Laws
Bye-laws govern the internal management of co-operative societies and must be consistent with the Co-operative Societies Act. They cover aspects such as membership, funds, and profit distribution.
Definitions and Key Concepts
The Act defines key terms like ‘Society’, ‘Working Capital’, and ‘Reserve Fund’. Societies can raise funds through various means, including entrance fees, shares, loans, and donations.
Reserve Fund
Societies must transfer 25% of their profits to the Reserve Fund, which can be used for business purposes or investments. The fund also includes entrance fees, transfer fees, premiums, and donations.
Other Funds and Utilization
Societies may create additional funds for repairs, maintenance, major repairs, sinking fund, and education and training. These funds have specific purposes and utilization guidelines.
CO-OPERATIVE HOUSING SOCIETIES
Definition and Objectives
Housing societies provide members with plots, houses, or flats and common amenities. Their main objectives include obtaining conveyance, managing property, raising funds, and providing recreational activities.
Classification
Housing societies are classified as Tenant Ownership, Tenant Co-partnership, or Others. The classification impacts the society’s balance sheet and the rights and responsibilities of members.
ACCOUNTING FOR INVESTMENTS
Investments in Debentures
Fixed income securities like debentures earn a fixed rate of interest. Accounting treatment considers factors such as interest accrual, payment dates, and transfer dates.
Investments in Equity Shares
Variable income securities like equity shares have uncertain returns. Dividend income is accounted for based on the date of acquisition and declaration.
MUTUAL FUNDS
Advantages
Mutual funds offer professional management, diversification, convenience, return potential, low costs, and liquidity.
Disadvantages
Mutual funds carry risks, including potential underperformance and loss of principal. Costs, unethical practices, and lock-in periods are also potential drawbacks.