India’s power distribution sector faces a severe financial challenge, primarily due to an accumulation of ‘regulatory assets’ (RA). These assets, which represent legitimate costs incurred by power distribution companies (discoms) but not recovered in a timely manner, have swelled to an alarming ₹3 lakh crore nationwide. A recent analysis by the ratings firm ICRA Ltd. highlights that a significant portion of this burden is concentrated in a few key states: Tamil Nadu, Uttar Pradesh, and Rajasthan.
Vikram V., Vice-President and Co-Group Head at ICRA Ltd., explained that regulatory assets essentially reflect the deferred recovery of operational expenses by discoms. His firm’s estimates, derived from tariff orders issued by State Electricity Regulatory Commissions (SERCs), show that Maharashtra, Delhi, West Bengal, and Karnataka are also substantial contributors to this elevated national RA figure.
In a crucial intervention, the Supreme Court has issued comprehensive directives to all SERCs. These mandates require the liquidation of all existing (legacy) regulatory assets within a four-year timeframe. Furthermore, the court has imposed a strict cap on the creation of new RAs, limiting them to a maximum of 3% of the Annual Revenue Requirement (ARR). To ensure compliance and enforce accountability, the Appellate Tribunal for Electricity (APTEL) has been tasked with monitoring the implementation of these directives.
Specifically, the Tamil Nadu Electricity Regulatory Commission (TNERC) has reported that the state’s power utilities were saddled with ₹83,000 crore in regulatory assets as of April 1, 2024. In response, the Tamil Nadu government has initiated a restructuring plan for the Tamil Nadu Generation and Distribution Corporation Limited (Tangedco), bifurcating it into three new entities: the Tamil Nadu Power Generation Corporation Limited (TNPGCL), the Tamil Nadu Green Energy Corporation Limited (TNGECL), and the Tamil Nadu Power Distribution Corporation Limited (TNPDCL).
This restructuring involves a careful segregation and transfer of Tangedco’s assets and liabilities. The state government has approved a final transfer scheme, allocating 27% to TNPGCL, 2% to TNGECL, and a substantial 71% to TNPDCL. As part of a mid-term review (MTR) petition filed before TNERC, it has been proposed that the regulatory assets as of March 31, 2022, be distributed as follows: TNPGCL will bear ₹22,110.16 crore, TNGECL ₹1,851.71 crore, and TNPDCL ₹59,038.14 crore. Following TNERC’s approval, a detailed roadmap for liquidating these regulatory assets will be developed in collaboration with the state government and TNPDCL.
TNERC has acknowledged the Supreme Court’s order and has engaged with the Tamil Nadu government to devise a strategy for addressing the issue. However, Mr. Vikram of ICRA cautioned that the actual implementation of the Supreme Court’s directive will likely necessitate steep tariff hikes across the affected states. Such increases would undeniably require robust support from the respective state governments to be effectively carried out, potentially impacting millions of consumers.
ICRA further estimates that, beyond the required average tariff hike of 4.5% for discoms to bridge the Average Cost of Supply – Average Revenue Realized (ACS-ARR) gap and reduce Aggregate Technical and Commercial (AT&C) losses below 15%, an additional significant tariff hike will be necessary to liquidate these accumulated regulatory assets. Given these challenges, ICRA maintains a ‘Negative’ outlook on the power distribution segment, citing ongoing weak operating efficiencies, insufficient tariff revisions, and persistently high debt levels.
Amidst these concerns, Tamil Nadu Electricity Minister S. S. Sivasankar recently highlighted the state’s efforts to improve its discoms’ performance. He noted that AT&C losses, which stood at 18.73% in 2017–18, have been successfully reduced to 10.73% by 2024–25. Furthermore, the ACS-ARR gap has narrowed significantly to just ₹0.04 per unit, and payable days have been brought down from 146 to 49. The Minister also advocated for a new, comprehensive debt restructuring scheme for discoms, emphasizing the need for joint participation from both the Union and State Governments to address the sector’s financial woes effectively.