SaurEnergy Explains-Regulatory Assets And Why They Matter To Power Sector

By Junaid Shah/ Updated On Tue, Feb 28th, 2023

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

SaurEnergy Explains-Regulatory Assets And Why They Matter To Power Sector

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.

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).

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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.

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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.