Decoding the SC order on regulatory assets

Basics

• DISCOMs (Distribution Companies):
  State-run/private companies responsible for last-mile electricity distribution to consumers.
• Annual Revenue Requirement (ARR):
  • Total revenue DISCOMs are allowed to recover through tariffs + government subsidies.
  • Reflects approved expenditure (power purchase, O&M, interest, depreciation, return on equity).
• Average Cost of Supply (ACS):
  • Actual cost incurred by DISCOMs to supply one unit of electricity to consumers.
  • Includes cost of buying power, transmission, distribution losses, etc.
• ACS-ARR Gap:
  • If ACS > ARR, DISCOM makes a loss per unit supplied.
  • Causes financial stress since revenue ≠ cost.
• Regulatory Asset (RA):
  • Mechanism to defer recovery of revenue gap.
  • SERCs allow DISCOMs to record unrecovered costs as “regulatory assets” instead of immediately increasing tariffs.
  • Costs deferred for recovery in future years (with interest).

Relevance:

• GS II (Polity & Governance – Role of Judiciary in enforcing financial discipline)
• GS III (Economy – Infrastructure: Power sector, Distribution reforms, Subsidy management, Tariff rationalisation)

Supreme Court Order (2025)

• Existing regulatory assets to be cleared within 4 years.
• New regulatory assets must be liquidated within 3 years.
• Cap: RA ≤ 3% of a DISCOM’s ARR.
• Transparent recovery roadmaps to be prepared by SERCs.
• Intensive audits for DISCOMs failing to recover assets.

Why ACS-ARR Gap Persists?

• Non-cost reflective tariffs: Populist policies keep tariffs artificially low.
• Delayed subsidies: States delay subsidy transfers for agriculture/BPL households.
• Rising input costs: Sudden hikes in coal/gas prices increase power purchase costs.
• Technical & commercial losses: Theft, billing inefficiencies, high AT&C losses.

Impact of Regulatory Assets

• Short-term benefit: Tariffs don’t rise sharply, consumers shielded temporarily.
• Long-term burden: Deferred costs accumulate → future tariff shocks.
• Carrying cost (interest): Consumers ultimately pay higher than original gap.
• Cash flow stress: DISCOMs can’t pay power generators on time → risk of load shedding.
• Debt trap: DISCOMs borrow to bridge gap → rising liabilities.
• Modernisation impact: Funds locked in unrecovered costs → less investment in smart grids, renewable integration, and consumer services.

Examples

• Punjab (2003-04): First RA created (₹487 crore gap, ₹150 crore deferred).
• Delhi (2024-25):
  • BSES Rajdhani: ₹36,057 crore RA.
  • BSES Yamuna: ₹22,040 crore RA.
  • Tata Power Delhi: ₹8,226 crore gap.
• Tamil Nadu (2021-22): ₹89,375 crore RA → systemic stress.

Consumer Impact

• Example: Delhi DISCOMs need to recover ₹16,580 crore annually within 4 years.
• With 30 billion units consumed annually, tariff hike ≈ ₹5.5/unit if immediate recovery attempted.
• Hence RAs are used, but deferred hikes become steeper over time.

Way Forward

1. Tariff Rationalisation:
   1. Tariffs must reflect actual cost.
   2. Targeted subsidies for vulnerable consumers (DBT model).
2. Timely Subsidy Payments:
   1. States should release subsidies on time → prevent revenue gap.
3. Automatic Cost Pass-through:
   1. Mechanisms like Fuel & Power Purchase Cost Adjustment (FPPCA) allow quick tariff revision with fuel cost changes.
4. Annual True-up Exercises:
   1. Regular reconciliation of projected vs. actual costs to avoid backlog.
5. Financial Discipline:
   1. SERCs must enforce strict RA caps.
   2. DISCOMs must cut AT&C losses and improve billing efficiency.
6. Grid Modernisation Financing:
   1. Ring-fence funds for grid upgrades, smart meters, and renewable integration separate from RA recovery.
7. Judicial Oversight:
   1. SC’s intervention acts as a disciplinary push for States, regulators, and DISCOMs.