Council on Energy, Environment and Water Integrated | International | Independent
India’s Supreme Court recently delivered a judgment that could transform the fortunes of the troubled power sector. It has directed all states and Union Territories to clear so-called “regulated assets”—deferred electricity dues that have long strained the finances of many power distribution companies (discoms)—within four years. The Court also urged the State Electricity Regulatory Commission (SERCs) to ensure that electricity tariffs reflect actual costs, while cautioning against both the unchecked accumulation of dues and sudden, excessive hikes in prices.
Why does the judgment matter? And how would it affect discoms and consumers?
Electricity tariffs in India are determined by the State Electricity Regulatory Commission (SERCs). Normally, the tariffs are designed to cover the costs and revenue needs of discoms. However, in exceptional situations—such as when raising tariffs immediately would cause a burden on consumers—SERCs can defer part of the amount owed to discoms. This deferred amount is recorded as a ‘regulatory asset’, which means the discoms are allowed to recover that revenue later, through future tariff hikes or other mechanisms. However, overuse and abuse of this provision, due to ‘regulatory capture and failure’, are hurting power consumers in many states.
As of March 2023, discoms in four states (Tamil Nadu, Rajasthan, Delhi, Maharashtra and Kerala) alone had accumulated ~INR 1.6 lakh crore in regulatory assets. Discoms in Tamil Nadu and Rajasthan account for 57 and 30 per cent of this total, respectively. It is not a mere coincidence that discoms in these states are also reeling under the pressure of high accumulated losses (~INR 2.5 lakh crore) and borrowings (~INR 2.7 lakh crore) cumulatively.
Trapped in the vicious cycle of high borrowings, carrying costs (at 10-11 per cent interest rate), and lack of cost-reflective tariffs, combined with operational inefficiencies, many discoms find it difficult to provide a reliable and quality power supply. Moreover, consumers have to eventually pay these high carrying costs. As per an independent analysis by the Council on Energy, Environment and Water (CEEW), consumers in Rajasthan paid nearly INR 50,000 crore between FY 2010-11 and FY 2022-23 as interest on INR 48,000 crore worth of regulatory assets. If these assets are not liquidated, a typical domestic consumer with a monthly bill of INR 1,000, would have to perpetually pay an interest of INR 100 every month. This issue can be addressed within 7-8 years if the same consumers were charged INR 50 more every month (to recover principal along with the interest).
State/discoms' responses to addressing the regulatory asset problem have varied in ambition and effectiveness. The Tamil Nadu government has submitted that it will roll out a government-funded amortisation to avoid a tariff shock for consumers, which may come in conflict with the state's plan to consolidate fiscal deficit. Rajasthan discoms twice submitted a dissipation plan, which awaits final permission from the SERC. Delhi discoms took a further step and filed a petition with the Supreme Court challenging Delhi ERC’s tariff determination that created/continued regulatory assets.
First, all concerned SERCs must proactively call for and roll out plans to dissipate the regulatory assets. As an example, Rajasthan discoms have already submitted the dissipation plan. The Rajasthan regulator must accept it urgently, setting an example for other regulators and discoms. In doing so, SERC must ensure discoms’ accountability and transparency in regulatory asset recovery. This can be done by showing the applicable surcharge separately in consumers' electricity bills and the discoms’ billing database.
Second, SERCs and discoms must leverage the renewable energy opportunity while crafting the dissipation plans. The rising share of cheaper renewables in the power generation mix will help lower power purchase cost, and create space to accommodate regulatory surcharges. The recent RE plus storage tenders will provide power at conservative competitive rates of INR 3.80-3.94/kWh. On similar lines, the Rajasthan discoms have proposed a combination of a regulatory surcharge and a fuel cost adjustment charge with a ceiling of INR 1 per kWh.
Third, the Indian government should introduce amendments to the Electricity Act to address the issues of 'regulatory failure' and ‘regulatory capture’ as highlighted by the Court. The Court observed that ‘decisions taken by the Commissions often have not inspired confidence in independence and autonomy’. These symptoms of regulatory failure require fixing the root causes, which include government interference and capacity gaps. It is critical that we restore the independence and effectiveness of our electricity regulators by introducing robust provisions for their appointment, service conditions and capacity building.
Responding to this judicial nudge will free up INR 1.6 lakh crore of public and private capital, help restore discom credit worthiness, and, critically, shield consumers—households and industries alike—from an endless treadmill of paying unwarranted interest costs. With the court’s clarion call, regulators and discoms have no excuse for delay.
Prateek Aggarwal is a Programme Lead and Shalu Agrawal is a Director of Programmes at the Council on Energy, Environment and Water (CEEW). Send your comments to prateek.aggarwal@ceew.in.
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