Understanding Regulatory Assets And Why They Matter To Power Sector

Highlights :

  • A regulatory asset is prohibited under the law except under ‘exceptional circumstances
  • RAs are created when state regulators defer costs incurred by them to be recovered through future hikes in electricity tariffs

The Union government last year pulled up all State Electricity Regulatory Commissions (SERCs) and the Joint Electricity Regulatory commission (JERC) relating to creating prohibited ‘regulatory assets’, and required them to come up with concrete plans for these assets’ liquidation. The centre also pressed the commissions to not approve any more dues as regulatory assets in the future. These ‘assets’ are anything but that, and expect to hear a lot more about them in the coming period as the central government seeks more financial discipline from discoms at a time of rising power costs.

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NITI Aayog has also,  with RMI (Rocky Mountain Institute) India, warned way back in 2021 that the magnitude of regulatory assets could create a tariff shock in the future. Let us dive into the issue briefly and understand the significance of regulatory assets for the financial condition of discoms and power generation companies.

What are Regulatory Assets?

Regulatory assets come into existence when SERCs acknowledge that the tariffs imposed on electricity consumers do not adequately cover the power purchase costs of distribution companies (discoms). However, instead of increasing the tariffs to the necessary level, or postponing the hike, often due to state government pressure, SERCs permit the discoms to record the shortfall between the purchase cost and revenue generated from power sales at the existing tariffs as receivables. These receivables are then classified as Regulatory Assets (RAs).

As per government data, RAs of distribution companies (discoms) have cumulatively risen to Rs 88,720 crore as of June 30. However, many believe that this may just be the tip of the iceberg as the government data logs only the amount recognised by state regulators, and not the claimed amount by discoms. The actual amount could be over Rs 1 lakh crore. Among states, Rajasthan topped the list of states with the highest regulatory assets of over Rs 45,000 crore. West Bengal (Rs 19,580 crore), Tamil Nadu (Rs 10,336 crore), Delhi (Rs 8,954 crore), Kerala (Rs 5,472 crore) and Maharashtra (Rs 4,580 crore) followed.

A Problem

There is an issue with the basic concept of Regulatory Assets. The SERC acknowledges the need to increase electricity tariffs due to rising costs but doesn’t provide a timeline for implementation. However, it allows discoms to record the potential increase as a receivable, which is problematic since it can’t be considered an asset until the tariff hike is officially approved and announced. Influenced by the respective state governments, SERCs have simply resisted or delayed, or as we see right now, been left with not enough the members required to take these decisions.

Generally, the political pressure pushes discoms to sell a huge chunk of electricity to some preferred consumers, viz., poor households and farmers, either at a fraction of the cost of purchase, wheeling, and distribution or even free. This leads to under-recoveries, further  aggravated by technical and commercial (AT&C) losses including important thefts. The distortion is complete when discoms charge high tariffs on supplies to industries and non-poor households to make up for the shortfalls, although not completely, as we can see.

However, despite this cross-subsidization, losses largely remain uncovered, rendering discoms burdened. A vicious circle of piling losses and rising debt for the discoms is manifested in payment delays, failure to invest in network maintainance and other essential activities.


Government’s Stance

That makes it quite a case for the government wanting to eliminate these ‘assets’. The Centre implemented four financial restructuring packages (FRPs) in 2002, 2012, 2015, and 2021. FRPs were meant to condone the loans discoms took to fund their accumulated losses. 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.

States have requested the power ministry to terminate expensive power purchase agreements (PPAs) with central generating units after 25 years, citing abundant renewable power at lower rates and affordable tariffs in the spot market. The ministry accepted this request earlier but now plans to connect discoms to the same plants in a different way – a pool of efficient thermal power units acting as a balancing source for the increasing share of renewable energy in the electricity grid.

With or Without RAs, What Do Cumulative Losses by Discoms Look Like?

When considering cumulative income losses with regulatory assets, the losses are calculated by subtracting the total revenue earned by the discoms from the total costs incurred, including the regulatory assets. In other words, the regulatory assets are treated as revenue and are added to the revenue earned by the discoms. The resulting figure represents the total losses incurred by the discoms, including the regulatory assets. On the other hand, when considering cumulative income losses without regulatory assets, the losses are calculated by subtracting the total revenue earned by the discoms from the total costs incurred, excluding the regulatory assets. In other words, the regulatory assets are not treated as a form of revenue and are not included in the calculation. The resulting figure represents the total losses incurred by the discoms, without considering the future revenue stream from regulatory assets.

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Junaid Shah

Junaid holds a Master of Engineering degree in Construction & Management. Being a civil engineering postgraduate and using his technical prowess, he has channeled his passion for writing in the environmental niche.