Why in News:The Supreme Court directed State Electricity Regulatory Commissions (SERCs) and DISCOMs to clear existing regulatory assets within four years, cap new ones at 3% of Annual Revenue Requirement (ARR), and ensure transparent recovery roadmaps with audits.
Introduction
- The Supreme Court recently directed State Electricity Regulatory Commissions (SERCs) and Distribution Companies (DISCOMs) to liquidate existing regulatory assets within four years and cap new ones at 3% of Annual Revenue Requirement (ARR).
- This ruling highlights long-standing financial stress in India’s power distribution sector, which remains the weakest link in the electricity value chain.
What are Regulatory Assets?
- Regulatory assets = Deferred revenue gap that DISCOMs are entitled to recover later.
- Arise due to difference between:
- Average Cost of Supply (ACS): cost incurred to supply 1 unit of electricity.
- Annual Revenue Requirement (ARR): revenue actually recovered via tariffs + subsidies.
- Example: If ACS = ₹7.20/unit and ARR = ₹7.00/unit, gap = ₹0.20/unit. For 10 billion units supplied → shortfall of ₹2,000 crore. Instead of hiking tariffs suddenly, SERCs allow the shortfall to be booked as a regulatory asset.
Why Do Regulatory Assets Arise?
- Non-cost-reflective tariffs – Political reluctance to raise tariffs.
- Delayed subsidies – State governments defer subsidy reimbursements.
- Volatile fuel costs – Sudden hike in coal/gas/power purchase costs.
- Inefficiencies – Technical losses, power theft, weak billing/collection.
- Policy populism – Free power schemes for agriculture and certain households.
Regulatory Assets in Practice
- Punjab (2003–05): First documented use, revenue gap of ₹487.10 crore partly converted into regulatory asset.
- Delhi: BSES Rajdhani (₹36,057 crore), BSES Yamuna (₹22,040 crore), TPDDL (₹8,227 crore).
- Tamil Nadu: FY 2021–22 regulatory assets of ₹89,375 crore – reflecting systemic problem.
Impact on Consumers
- Short-term relief: Tariffs remain stable initially.
- Long-term burden: Deferred recovery → steeper tariff hikes later.
- Consumers pay not only the gap but also interest (carrying cost).
- Example: In Delhi, recovery of existing assets could mean additional ₹5.5/unit burden if done immediately.
Impact on DISCOMs
- Cash Flow Crisis – Current revenue fails to meet costs.
- Delayed Payments – Power generators remain unpaid, straining supply chain.
- Increased Borrowings – To bridge gaps, leading to rising debt.
- Reduced Investment Capacity – Little money left for grid modernisation, renewable integration, or consumer service improvements.
- Vicious Cycle – Financial distress → operational inefficiencies → further financial distress.
Do Regulatory Assets Prevent Grid Modernisation?
Yes. Large regulatory assets tie up DISCOM finances, leaving little room for:
- Grid digitalisation and smart metering.
- Renewable energy integration (requiring balancing infrastructure).
- Consumer-centric reforms like time-of-day tariffs, better reliability, and improved service delivery.
Supreme Court’s Directions
1. Clear existing regulatory assets in 4 years.
2. Clear new regulatory assets in 3 years.
3. Cap regulatory assets at 3% of ARR.
4. Transparent roadmaps for recovery.
5. Intensive audits of DISCOMs failing to recover assets.
Way Forward
Tariff Rationalisation
- Align tariffs with cost of supply.
- Use direct benefit transfers (DBT) for subsidies to protect vulnerable groups.
Timely Subsidy Releases
- State governments must disburse subsidies promptly to prevent revenue gaps.
Automatic Fuel Cost Adjustment
- Introduce mechanisms like Fuel and Power Purchase Cost Adjustment (FPPCA) to automatically adjust tariffs with input costs.
Regular True-Up Exercises
- Annual reconciliation of projected vs actual costs to avoid backlogs.
Strengthen SERC Oversight
- Ensure regulatory assets remain exceptional, not recurring.
- Enforce financial discipline through audits, caps, and penalties.
Improve DISCOM Efficiency
- Reduce Aggregate Technical & Commercial (AT&C) losses.
- Enhance billing and collection efficiency with smart meters.
- Integrate renewables through better forecasting and scheduling.
Conclusion
Bridging the ACS-ARR gap through cost-reflective tariffs, targeted subsidies, efficient operations, and transparent regulation is essential. Only then can India’s electricity distribution sector support grid modernisation, renewable integration, and the goal of affordable, reliable, and sustainable power for all.
UPSC Relevance
GS Paper III – Economy & Infrastructure
Infrastructure: Energy sector – Power distribution reforms, DISCOM finances.
Mains Practice Question
Q.“Regulatory assets in the power sector are meant as temporary tools but have become chronic liabilities. Critically examine the implications for DISCOM finances, consumers, and energy transition in light of the recent Supreme Court directive.”