India’s Power Reform Bill has received the approval of a panel of federal ministers and will now go to the cabinet for consideration, according to comments made to Reuters by a government official. The bill contains radical changes aimed at liberalizing the sector and breaking up the bankrupt state utilities.

The new electricity bill proposes to cut red tape, push for private investment in transmission and distribution, cut back on subsidies and allow states to tailor the reforms for their specific needs, the official said.

The Reuters report quotes a power ministry official as saying that the new law would be introduced during parliament’s monsoon session that ends on August 31.

It would provide one comprehensive legislation to replace three outdated laws – the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948, and the Electricity Regulatory Commissions Act 1998.

The new law will allow firms to set up power plants without seeking the approval of the Central Electricity Authority, but transmission firms would need a licence, the official said. It will also provide a legal framework to split monolithic state electricity boards into smaller firms dealing with generation, transmission or distribution, but this would not be compulsory, he said.

The state power boards, which have a monopoly in power distribution in almost every part of India, are likely to report combined losses of $5.1bn this year because of large-scale theft and free or subsidized supplies of power.

He said the new bill would end the practice of charging high tariffs to industrial users to subsidize farmers. It will allow subsidies only if states provide for it from their own budget.

India produces about 100 000 MW of power, which is 12 per cent less than demand.

The federal power ministry wants to double the capacity by 2012, but analysts say this needs an investment of $200 bn including large contributions from domestic and foreign firms. Government officials said they expected the new electricity bill to pave the way for increased investment after a decade-old attempt to woo private firms failed.

India began its power sector reforms in the early 1990s by inviting foreign firms to set up plants. US firm, Enron Corp. took the lead by investing in a $2.9bn project – India’s largest direct foreign investment – at Dabhol, south of Bombay along India’s west coast. But it became embroiled in a payment dispute with a utility and said recently that it wanted to sell its 65 per cent stake in the Dabhol Power Co.

India’s utility reforms were pioneered by the eastern state of Orissa, which split its electricity board and gave equity in a generating company and a distribution firm to AES Corp. But AES also got mired in a payment schedule and said it might sell its stake in the distribution firm.

Several other foreign firms also reviewed their plans to invest in India. These include Cogentrix, which walked out of a project to build a 1000 MW plant in southern India last October, and Electricit�e France, which scrapped plans to take a 15 per cent stake in a project in western India.