Order of the Supreme Court regarding Regulatory Assets of DISCOM

What are regulatory assets?

Regulatory assets represent the unrecoverable revenue shortfall caused by the disparity between the average cost of supply (ACS), the costs a DISCOM incurs to provide one unit of electricity to consumers, and the Annual Revenue Requirement (ARR).

ARR is the income gathered by the DISCOM through consumer rates and subsidy funds from the government.

Rather than promptly increasing tariffs, regulators permit DISCOMs to postpone these deficits and recoup them from consumers at a future time.

Although this avoids abrupt tariff increases, it accumulates concealed debts that weigh down both consumers and DISCOMs gradually.

What Was the Ruling of the Supreme Court?

Eliminating Existing Assets: The Court ordered the removal of current regulatory assets within four years and the sale of any new assets in three years.

Capped Limits: The court recommended limiting the regulatory asset to 3% of a DISCOM’s Annual Revenue Requirement (ARR).

Recovery Plan: Directed regulators to establish clear recovery roadmaps and carry out thorough audits of DISCOMs that are failing to recuperate these assets.

Causes of the ACS–ARR Discrepancy

Restricted tariffs: Electricity rates are maintained under expenses for social or political motives.

Late government assistance: Financial support intended for farmers or at-risk families is not provided promptly.

Variable input expenses: Instability in coal and fuel prices increases production costs.

Technical and commercial losses: Revenue disparities are exacerbated by power theft, inaccurate billing, and transmission inefficiencies.

Insufficient adjustments to cost-reflective tariffs: Tariffs are not frequently updated to align with increasing supply expenses.

Impacts of regulatory assets

For Buyers:

In the near term, they gain from consistent rates.

Nevertheless, postponing recovery results in sharper increases in tariffs later, frequently accompanied by additional interest.

For DISCOMs:

Accumulated regulatory assets exacerbate cash-flow issues, hindering the ability to compensate generators. This necessitates more borrowing, raising financial pressure.

How Can the ACS–ARR Discrepancy Be Closed?

Cost-reflective pricing: Regulators should establish prices that mirror real supply expenses, along with specific subsidies for at-risk populations.

Prompt distribution of subsidies: State governments must guarantee prompt payment.

Fuel cost adjustment system: Tariff changes should be automatically implemented when input expenses increase.

Yearly 'true-up' assessments: Regulators need to align estimated and real costs each year to prevent accumulations.

Enhanced efficiency: Investments in intelligent meters, improved billing systems, and stricter enforcement against theft can minimize losses.

What are the leading practices worldwide?

RAB Model (Regulated Asset Base): Utilities can recoup their investments in regulated assets via tariffs, earning a regulated rate of return on the asset base, thereby guaranteeing long-term revenue stability.

RIIO Model (Revenue = Incentives + Innovation + Outputs): Connects utility earnings to asset investment and specific output metrics, such as reliability, customer service, and reduction of carbon emissions, fostering enhanced accountability and performance motivation.