Rule changes that will make discoms solvent, won't raise political heat

Power ministry will allow distribution companies to raise tariffs without waiting for regulators' approval

Dues electricity distribution companies (discoms) owe to their states is reducing, giving them space to raise consumers' power bill when fuel prices rise. Dues are now at almost Rs 50,000 crore, halving from levels at the same time last year.

To help things, the union power ministry has offered them a leeway. Discoms can adjust their power tariffs for fuel costs, which mostly arise from imported coal, without having to wait for the state regulators' approval. The offer has a rider: discoms have to adjust tariffs within 90 days of the ministry publishing its regulations, or they have to wait out the year.

India allows changes in retail price of electricity only once a year, resulting in haggling between state electricity regulators and discoms. The power ministry proposes to bring clarity in the sector by changing the rules under the Electricity Act. The changes in Fuel and Power Purchase Adjustment Surcharge (FPPAS) say that if fuel costs rise then using a simple formula discoms can change tariffs and inform a regulator they have done so.

The changes are not dramatic, so are unlikely to become a political hot potato, especially in an election year. When state regulators issue orders to revise electricity tariffs, political parties notice them. A change in prices by the discoms is unlikely to impact political fortunes though. A power ministry official said the crisis could well be used for structural changes in the discoms including rationalisation of staff.

A larger dimension of this rule change is that it can keep down the huge overhang of unpaid electricity dues hobbling the power sector. Despite reforms and the setting up of regulators since 1998, the sector’s financial condition has not improved. Expensive imported coal is a massive pressure on the struggling sector.

The power ministry estimates that for the first half of FY24 India will need 392 million tonnes of coal, opening up a 24-million tonne gap to be filled by imports. “If coal import dependency were to increase from 7 percent to 9 percent in FY2024, cost of power purchased for the discoms on an overall basis is estimated to increase by 6 to 7 paisa per unit,” said a note written by Sabyasachi Majumdar, senior vice president and group head at Icra Research.

The impact on discoms would mean an additional Rs 100 per month family expenditure for one using an average of 400 units, rather steep.

Cutting into state regulators

The changes in FPPAS will eclipse the remit of state-level regulators. Generation companies, when their coal bill goes up, raise the price of power they sell. Discoms that sell power to final consumers are hamstrung in such a situation. While they have the right to raise prices, they have to take approval from regulatory commissions. In a process called 'true up', discoms have to demonstrate that the price at which they obtain the power has gone up and there is no scope to absorb the same by steps like reducing costs or improving efficiency. “Usually a change in variable cost, like that of fuel, is seen more sympathetically by the regulator than a rise in the capital cost," said Somit Dasgupta, a former member of the Central Electricity Authority.

State electricity commissions often comprise people who have political affiliations and are reluctant to allow discoms to increase prices. Tamil Nadu didn’t raise power prices for almost a decade till the DMK government was forced to do so: at one go it permitted a 40 per cent increase in rates.

Under new rules in the Electricity Act, discoms have the right to approach the regulator and get prices revised within 90 days of regulations being published. The regulator has to decide within 120 days extendable to 150 days. If the permission does not come through, it shall be deemed to have been given.  

The 90-day rule spells out what happens if a discom fails to compute and charge the FPPAS within the timeline, except in case of any force majeure condition. If it doesn’t then a discom will have to carry the impact of the higher cost on its balance sheet, and most probably forfeit. The prod was necessary as the Icra note points out by saying: “Historically, the implementation of such cost adjustment mechanisms has been less than satisfactory across most states except Gujarat leading to significant delay in recovery of variation in power purchase costs”.

Regulators can tell discoms that they have not got all papers needed to grant approval. A decision on approval can then be extended and as most discoms are owned by state governments, it will be difficult for them to allege dilatory tactics.

Data shows that many regulators, especially in eastern states, are often late in making decisions and allow raises smaller than those asked for by the discoms.

The power ministry’s rule changes have surprised observers. “This should have been issued by the CERC”, said a source aware of the sector, referring to the Central Electricity Regulatory Commission.

The changes, despite criticism, could finally fix the Indian power sector’s trouble. They disengage regulators from price fluctuations beyond the control of the generation companies, like those on imported coal. They will free states from offering subsidies to discoms, but which they are often unable to provide from their weak purses.