Regulatory assets of DISCOMs
Why in news?
The Supreme Court has recently mandated that DISCOMs and State Electricity Regulatory Commissions clear the existing regulatory assets within four years and liquidate any new regulatory assets within three years.
About regulatory assets
- Regulatory assets are deferred costs representing the revenue gap between the Average Cost of Supply (ACS) and the Annual Revenue Requirement (ARR) of a DISCOM.
- The ACS is the actual cost incurred by a DISCOM to supply one unit of electricity, including power purchase, transmission, and distribution costs.
- The ARR is the total revenue a DISCOM is authorized to recover through tariffs and government subsidies.
- When ACS exceeds ARR, DISCOMs incur losses per unit supplied, creating a shortfall.
- This shortfall is recorded as regulatory assets instead of being charged immediately to consumers, to avoid sudden tariff hikes.
- Regulatory assets are recoverable in the future, usually through higher tariffs, often with interest.
- Common reasons for the ACS-ARR gap include non-cost reflective tariffs (political reasons for low tariffs), delayed subsidy payments by states, fuel price volatility, and operational inefficiencies like transmission losses.
- Regulatory assets help to prevent immediate tariff shocks to consumers but lead to a deferred burden with eventual steep hikes and interest costs.
- Regulatory assets create a financial burden on DISCOMs, affecting their ability to pay power generators timely, invest in grid modernization, and increasing their debt levels.
- States like Tamil Nadu and Delhi have reported huge regulatory asset liabilities running into tens of thousands of crores of rupees due to persistent ACS-ARR gaps.
