12 July 2019: The National Demoratic Alliance (NDA) government wants state power regulators to ensure regular tariff revision, and put an end to creating the so called regulatory assets, as it seeks to enforce financial discipline on state electricity distribution companies (discoms).
The move seeks to address the ongoing crisis in discoms due to poor financial health, which has led to delayed payment to generation utilities.
A regulatory asset is created when the regulator accepts certain expenditures, but does not factor them in while determining present tariff. The expenditures are adjusted with future tariffs and, in the interim, are accounted for as regulatory assets.
The union power secretary Ajay Kumar Bhalla has written to the Appellate Tribunal for Electricity (Aptel) chairperson Justice Manjula Chellur requesting the enforcement of its previous order of November 2011. The Aptel order issued to the state electricity regulators pertained to “ensuring regular and timely revision of tariffs, including regular truing up of tariffs,” and “non creation of fresh regulatory assets, allowing carrying cost of the past regulatory assets”. Discoms have been the weakest link in the electricity value chain.
“Distribution sector is a crucial element of the entire electricity value-chain. Sustainability of the Power Sector is critically dependent on the sustainability and growth of Distribution sector. lt has been observed that the Regulatory Assets of the State Discoms have increased considerably during recent years despite the directions issued by APTEL that no fresh Regulatory Assets were to be created by the State Commissions. This has resulted in financial stress in the sector, impacting sustainability of the electricity sector,” said the communication dated 25 June reviewed by Mint.
“No system in the world can take these kind of losses,” said a senior government official requesting anonymity.
Discoms have so far been the weakest link in the electricity value chain. Poor payment records of state-owned discoms have not only adversely affected power generation companies, but have also contributed to stress in the banking sector. The power sector is reeling under bad loans worth about ₹1 trillion, with around 66 gigawatts (GW) facing various degrees of financial stress.
“May I request you to kindly look into the matter and issue suitable orders for enforcement of the directions as identified by APTEL in the order dated 11.11.2011 in OP 01 01 of 2011 and may also seek compliance by all the states through Forum of Regulators,” the letter stated.
A power ministry spokesperson declined comment.
The communication also comes in the backdrop of the government’s plan to expedite the separation of the “carriage and content operations” of discoms, letting people and companies in India buy electricity from a firm of their choice. A power sector package, comprising a new tariff policy and structural reforms, is also in the offing, finance minister Nirmala Sitharaman said in her maiden budget speech on Friday.
“Government of lndia has taken several initiatives to address the problem of Distribution sector. UDAY scheme was launched by Govt of lndia in the year 2015 to improve financial health of Discoms. We have recently achieved the target of ‘100% village electrification and almost 100% house hold electrification. Now, assuring 24×7 quality and reliable power to consumers is the next milestone. This will require robust and financially sound Distribution sector in place,” the letter said.
The new government is trying to step up its efforts to supply 24×7 power to all. As of September 2015, the total debt of all state-owned discoms was around Rs2.45 trillion, with Rs0.8 trillion serviced by the states. Also, the annual discom losses in FY16, FY17 and FY18 were funded through borrowings.
In an attempt to ensure timely payments by states to electricity generation utilities, the government has also made it mandatory for state discoms to offer letters of credit as part of the payment security mechanisms in power purchase agreements.
Accordingly, the National Load Dispatch Centre and Regional Load Dispatch Centres have been directed by the power ministry to “dispatch power only after it is intimated by the generating company and distribution companies that a letter of credit for the desired quantum of power has been opened and copies made available to the concerned generating company.” The provisions take effect from 1 August.