Any measures taken to reform the country’s power sector has mostly been overshadowed by Centre-State politics. So what has changed now? Though the power struggle continues, what has changed is the firmness with which reforms are being implemented particularly to boost the health of ailing State distribution companies (DISCOMs), which are seen as the weakest link in the whole growth story.

Recently, the Union Power Ministry put in place additional measures, such as streamlining the process of accounting, reporting, billing and payment of subsidy by States to the DISCOMs, to improve the financial health of these entities.

As Ashok Khurana, Director General, Association of Power Producers, puts it, “Earlier there was no legal sanctity to Aggregate Technical and Commercial (AT&C) reduction trajectory agreed to by the DISCOMs in any national scheme or programme. Therefore, these remain only as intent with no enforcing mechanism.”

But now these latest set of rules provide legal backing to the agreed trajectory and put the onus on State Electricity Regulatory Commissions (SERCs) to ensure compliance and in case of non-adherence, punitive action too has been provided, he said.

Further, the rules also lay down elaborate procedure to ensure the payment of subsidy as assured at the time of tariff finalisation, he pointed out, adding that these rules will ensure financial sustainability of DISCOMS.

Theoretically, AT&C (Aggregate Technical & Commercial) loss is calculated as the difference between the energy input in the distribution network and revenue collected for the same.

According to the Ministry, the measures come in the wake of the need for a framework for sustainability of the sector and the fact that improper and non-transparent accounting as well as non-payment or delayed payment of subsidy announced by the States is one of the reasons for financial distress of DISCOMs.

What do the rules mandate?

The rules mandate that a quarterly report shall be submitted by the distribution licensee within 30 days from the end date of the respective quarter and the State Commission shall examine the report, and issue it within 30 days of submission of the quarterly report. The Ministry adds that: “The report will, inter alia, cover the findings regarding raising of demands for subsidy based on accounts of the energy consumed by the subsidised categories; and the subsidy payable to these categories as announced by State Government and the actual payment of subsidy. This is in accordance with section 65 of the Electricity Act.”

Provision has been made that if subsidy accounting and the raising of bills for subsidy is not found in accordance with the Act or rules or regulations issued thereunder, the State Commission shall take appropriate action against those responsible for non-compliance as per provisions of the Act.

Under the framework for sustainability, in order to define a definite and reasonable goal for reduction of AT&C loss, it is prescribed that the loss reduction trajectory would be approved by the State Commissions for tariff determination in accordance with the trajectory agreed by the respective State Governments and approved by the Central Government under any national scheme or programme, or otherwise. The trajectory for both collection and billing efficiency, for distribution licensee have to be determined by the State Commission, accordingly.

In order to ensure the recovery of full costs incurred by the distribution licensee in distributing electricity, it has been prescribed that all prudent costs of power procurement, done in a transparent manner, would be taken into account, while approving the tariff. Similarly, all the prudent costs incurred by the distribution licensee for creating the assets for development and maintenance of distribution system would be accounted for subject to fulfilment of prescribed conditions.

It is also provided that gains or losses accrued to distribution licensee due to deviation from approved AT&C loss reduction trajectory would be shared between the distribution licensee and consumers.

For establishing norms for operation and maintenance of the distribution system, Central Electricity Authority has been mandated to issue guidelines.

Reasonable Return on Equity (RoE) is one of the major factors required to ensure investment in the sector. The rule provides that the RoE by the State Commission would be aligned with the RoE specified by the CERC in its tariff regulations for the relevant period, with appropriate modification taking into account the risks involved in distribution business.

According to experts, the latest decision basically highlights the inadequate measures to identify the gaps in Annual Revenue Requirement (ARR) filings by the DISCOMs. These filings fail to accurately represent the actual cost and revenue disparities, leading to financial imbalances and the accumulation of regulatory assets each year. As a consequence, there is a frequent need to submit and approve numerous cost ‘true-up’ — that is, the process of adjusting a financial account or transaction to reflect the actual, correct, or expected amount — petitions.

Therefore, to address this critical issue, the central authorities are taking action to impose more rigorous and direct accountability measures on DISCOMs and State regulators.

The primary objective is to improve the methodology of ARR filings, bridge the gap between costs and revenues, ensure more effective cash flow management, and reduce reliance on cost true-up petitions. If these proposed stringent measures are earnestly implemented, they have the potential to bring about a revolutionary transformation in the power sector.

There is no argument that it is a positive measure, but as Vikram V, Sector Head and Vice President, Corporate Ratings, ICRA, points out, “the implementation again depends on how SERCs take it up.”

Clearly, the Union Government has tried to fix accountability, but there is still one per cent chance that States may not accept. Therefore, there is a need of constant dialogue between all stakeholders to ensure the measures are implemented in their true spirit.