Regulatory assets are created when state electricity regulatory commissions accept that the tariffs don’t cover discoms’ purchase cost but don’t raise rates
The Power Ministry has taken two decisions which have a bearing on viability of the beleaguered power distribution companies (discoms). It has (i) warned state electricity regulatory commissions (SERCs) against creating a pile of ‘regulatory assets’; and (ii) proposed a pool of efficient thermal power units more than 25 years old to act as a balancing source for the increasing share of renewable energy in the electricity grid.
Mostly owned and controlled by state governments, discoms purchase power from public sector undertakings (PSUs) such as the National Thermal Power Corporation (NTPC) and independent power producers (IPPs) under long-term contracts or power purchase agreements (PPAs) up to 25 years—covering nearly 95 per cent of power generated in the country.
Under instruction from the top political brass in the state, discoms sell a major slice of electricity to some preferred consumers, viz., poor households (PHHs) and farmers, either at a fraction of the cost of purchase, wheeling, and distribution, or even free. On the units sold to these target groups, they incur colossal under-recovery. This is aggravated by aggregate technical and commercial (AT&C) losses – most of it is plain theft.
To offset the losses, discoms charge high tariffs on supplies to industries besides non-poor HHs (NPHHs). The irony is despite this cross-subsidization, a big slice of the losses remains uncovered. As a result, discoms are in the red. This is despite the Centre implementing four financial restructuring packages (FRPs) in 2002, 2012, 2015 and 2021 – a sophisticated nomenclature for condoning the loans discoms took to fund their accumulated losses.
Regulatory assets are created when SERCs accept that the tariffs don’t cover discoms’ power purchase cost, but don’t raise rates to the desired level or defers the hike, mostly under pressure from state governments. The gap between the cost of purchase and the revenue generated from sale at tariffs (albeit unrevised) for supplied power, is then booked by discom as receivable and classified as RA.
Over the years, the RAs have proliferated. According to government statistics, these were Rs 88,720 crore as on June 30, 2022. The very idea of creating RA is flawed. Once the SERC has accepted that in view of increase in the cost of electricity purchase, transmission and distribution, the tariff has to be raised then it should be done. But the commission doesn’t; it doesn’t even specify as to when this would be done. Yet, it allows the discom to book it as a receivable. This is anomalous as until such time the increase in tariff is approved and notified, the resultant extra revenue can’t be treated as an asset (read: receivable).
The anomaly gives rise to a multitude of problems. First, faced with shortfall in revenue vis-à-vis the cost and resultant cash flow problem, discoms are forced to borrow funds from banks and other lenders which leads to additional interest burden thereby aggravating their losses. This also makes bank loans susceptible to becoming non-performing assets (NPAs) as the extra revenue against which these loans are taken is not certain as the underlying tariff hike isn’t approved.
Second, the discoms leverage the ambiguous classification (neither outright rejection of a claim for tariff hike nor approval) to present claims to the SERC which the latter is unwilling to accept. This has led to a scenario whereby substantial claims are bogged down in legal disputes at the appeal level or in higher courts. As a result, the actual RAs could be much higher even exceeding the Rs 100,000 crore mark—against Rs 88,720 crore as per government data.
Third, having failed in their endeavour to allow tariff to reflect costs and leaving things on an uncertain trajectory (albeit by creating RAs), the regulatory commissions often allow a surcharge to be levied (for instance, in Delhi, there is eight per cent surcharge) which results in arbitrary increase in cost to the consumers.
The Electricity Act and the revised tariff policy clearly say that “tariffs must reflect costs and regulatory assets should not be created”. Yet, RAs continue to proliferate. In this backdrop, one wonders whether the missive sent by the Power Ministry to the SERCs (November 11, 2022) will prompt them to go for course correction.
As for the second move of the Union, states have been petitioning the power ministry to exit costlier PPAs with central generating units after a period of 25 years as they have access to plentiful renewable power at cheaper rate and even spot market offering low tariffs. Early this year, the ministry agreed to this demand but now intends to hook discoms to those very plants under a different garb.
It proposes to create a pool of such plants (albeit efficient thermal). If a discom needs to relinquish a PPA with a 25-year-old power unit, it will be allowed to do so, but will be allotted a comparative quantity at an average cost from the pool. The allocation will be in line with the cumulative generation capacity of the pool.
In April/May 2022, the ministry had directed all IPPs based on domestic coal to import at least 10 per cent of their requirement, besides asking all imported coal-based plants to operate and generate power at their full capacity. Concurrently, it allowed ‘pass-through’ of the higher cost due to use of expensive imported coal under the PPAs.
We have a peculiar regime. While, on one hand, powers that be let everything happen (pass through of fuel cost, guaranteed return to generators, inefficiencies in wheeling and distribution, etc.) that results in increasing cost of power purchase by discoms, on the other, they don’t let the latter charge even bare minimum tariff from a big chunk of consumers viz. farmers and PHHs. This is the root cause behind the yawning gap between the cost and revenue.
Under the Ujwal Discom Assurance Yojana (UDAY) launched in November 2015, the Centre had promised that AT&C losses of discoms will reduce from 20.7 per cent during 2015-16 to 15 per cent by 2018-19 and the gap between revenue and cost to decline from 0.59 per unit during 2015-16 to ‘zero’ by 2018-19. Against these targets, during 2019-20, AT&C losses were 18.9 per cent, while the revenue gap was at a high of 0.42 per unit. But the current AT&C losses at 25 per cent are even higher than in 2015-16.
As a result, discoms are in dire straits. As of March 31, 2022, they had piled up a mammoth debt of over Rs 600,000 crore. They also owe about Rs 130,000 crore to IPPs and other generators. Even as the Center exhorts SERCs to increase tariff to bridge the gap between revenue and cost, industries/businesses are the only class from whom they could charge more as political brass in states won’t let them touch farmers and households. But, tariffs on supplies to industries already being exorbitant (in Delhi, it is Rs 16 per unit), even this won’t be possible. No wonder then, we have RAs – the elephant in the room.
(The author is a policy analyst)
https://www.dailypioneer.com/2022/columnists/regulatory-assets-are-elephant-in-the-room.html
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