Regulatory Assets in India's Electricity Sector

The Supreme Court has issued directives to State Electricity Regulatory Commissions (SERCs) and distribution companies (DISCOMs) to clear existing regulatory assets within four years and liquidate new assets within three years. It also suggested capping the regulatory asset at 3% of a DISCOM’s Annual Revenue Requirement (ARR) and encouraged a transparent recovery process with audits for persistent issues.

Understanding Regulatory Assets

• Regulatory assets represent the unrecovered revenue gap between the average cost of supply (ACS) and the ARR.
• If ACS exceeds ARR, DISCOMs incur losses on electricity sales, leading to regulatory assets.
• Example: A DISCOM with an ACS of Rs 7.20/unit and an ARR of Rs 7.00/unit faces a Rs 0.20/unit shortfall. Supplying 10 billion units results in a Rs 2,000 crore deficit.
• SERCs allow this gap to be recorded as a deferred cost, recoverable in the future, usually with interest.

Reasons for Regulatory Assets

• Non-cost reflective tariffs.
• Delayed subsidies for agriculture or low-income households.
• Sudden fuel price increases.

Case Studies and Examples

• Punjab SERC documented a Rs 487.10 crore revenue gap, converting Rs 150 crore into a regulatory asset for recovery over two years.
• Delhi ERC's orders revealed regulatory assets of Rs 36,057 crore for BSES Rajdhani and Rs 22,040 crore for BSES Yamuna.
• Tamil Nadu reported Rs 89,375 crore in regulatory assets for FY 2021-2022.

Impact on Consumers and DISCOMs

• Immediate tariff increases are avoided, but consumers face higher future costs due to interest on deferred assets.
• Cash flow pressures for DISCOMs affect timely payments to power generators and overall sector efficiency.
• DISCOMs often resort to borrowing, increasing debt burdens and limiting investments in grid modernization.

Solutions for Regulatory Asset Management

• Align tariffs with costs and use targeted subsidies for vulnerable consumers.
• Ensure timely release of subsidies by state governments.
• Implement automatic fuel cost adjustment mechanisms.
• Conduct regular annual true-ups to prevent backlog accumulation.
• Regulatory commissions should enforce limits, transparency, and clear recovery timelines.

International Models and Innovative Frameworks

• The Regulated Asset Base (RAB) model allows utilities to recover investments with regulated returns, providing revenue certainty.
• The UK’s RIIO framework links revenues to investments and output parameters, enhancing accountability and incentives.
• Adopting such models in India requires transparent asset valuation and efficiency target enforcement.

Conclusion

Regulatory assets reflect the broader challenges in India’s electricity sector, involving affordability, subsidy dependence, and cost recovery. The Supreme Court’s intervention calls for coordinated action and financial discipline across stakeholders to ensure sustainable and affordable electricity.

Rishu Garg is a Senior Policy Specialist at the Centre for Study of Science, Technology and Policy (CSTEP).