Case Study of Regulatory Asset build

up in Delhi and the best possible way for

its amortizationA presentation by,

Amit KumarNPTI

MBA 14th Batch

What is a regulatory asset? By definition, regulatory assets include previously-incurred losses that are in the

nature of deferred expenditure and that can be recovered from consumers in future provided allowed by regulatory authorities. It is also can be termed as the revenue gaps which have been carried over by utility companies over a period of time.

For fear of a consumer backlash and/or to avoid the required retail tariff increases, the revenue recovery although recognized, is deferred for the future.

Accumulated RAs have a considerable impact across 15 distribution utilities, more serious & essentially confined to about 8 States in India.

This effects the ability of the distribution utilities to raise commercial debt in the market, as their balance sheets get compromised on account of building up its RAs.

Lack of fresh investments for improving the network and the service standards, result in poor Quality of service for the customer as highlighted by recent instances of outages and power cuts by several discoms.

National Tariff Policy in view of regulatory assetsThe facility of a regulatory asset has been adopted by some Regulatory Commissions in

the past to limit tariff impact in a particular year. This should be done only as exception, and subject to the following guidelines: The circumstances should be clearly defined through regulations, and should only

include natural causes or force majeure conditions. Under business as usual conditions, the opening balances of uncovered gap must be covered through transition financing arrangement or capital restructuring;

Carrying cost of Regulatory Asset should be allowed to the utilities; Recovery of Regulatory Asset should be time-bound and within a period not

exceeding three years at the most and preferably within control period; The use of the facility of Regulatory Asset should not be repetitive. In cases where regulatory asset is proposed to be adopted, it should be ensured that

the return on equity should not become unreasonably low in any year so that the capability of the licensee to borrow is not adversely affected.

Situation in New Delhi The three private Discoms namely Tata Power Delhi Distribution Ltd, BSES Rajdhani

Pvt. Ltd. and BSES Yamuna Pvt. Ltd have a massive regulatory asset of around 16,000-20,000 crores.

The State Govt. also pulled the plug on financial aid from 2003 onwards leaving the Discoms on their own.

Rising fuel costs and lack of cost reflective tariffs have worsened the situation. The DERC has disallowed tariff hikes and costs to the Discoms on multiple occasions.

Since 2003 the power purchase costs have spiked by up to 300% but the consumer tariffs have only increased by up to 90%.

Delhi Discoms are tied up in costly Power Purchase Agreements with inefficient State and Central generating stations with no exit clause. As a result, the Discoms are forced to buy ‘costly’ power from these stations without any alternatives.

Regulatory Assets of Delhi Discoms

 

FY 2013-14

FY 2014-15

FY 2015-16 (Surplus Projected)

Total Regulatory assets till date

BRPL 5105.28 407.05 78.27 5434.06BYPL 3051.19 173.25 174.84 3049.6TPDDL 3351.48 268.84 326.11 3294.21      Total 11777.87*As approved by DERC

Regulatory asset build up and its impact Current tariff rates don’t cover current costs.

DISCOMS claim that the actual RA buildup is around Rs. 22,000 Crs. Only Rs. 10,000 worth of regulatory asset is recognized till date.

Particulars Amount (In Cr.)RA recognized by DERC upto FY 12-13

9,811

ATE judgments yet to be implemented

5,824

Revenue gap during FY 13-14 4,030Carrying cost till FY 14-15 3,015Total revenue gap upto FY 2015-16

22,680

Regulatory assets in different states

StatesTotal regulatory assets till date (In Rs. Crs)

Tamil Nadu 24,642Rajasthan 36,039.89Odisha 3,450.06Uttar Pradesh 20,261.1West Bengal 8,895.32Jharkhand 6,154.65* This data has been sourced from the tariff orders of various SERC’s

Causes behind the build up of regulatory assets Costly long term PPA’s Non cost reflective tariffs. Inadequate PPAC formula. Loss on account of sale of surplus power. Issues with the State electricity regulatory commissions. Inadequate carrying cost rates. Inadequate surcharge rate of 8% levied from consumers. Absence of any clear plan to amortize the regulatory assets. Difference between subsides booked and subsidy realized.

Costly long term PPA’s Delhi discoms are tied up with the PPA’s which

were signed during the tenure of DVB. Many of the generating stations in the existing

PPA have outlived there useful life and thus have become highly inefficient.

In addition to the above, Delhi Discoms are burdened with costly gas based plants such as Bawana, GT and Pragati which are showing unprecedented high costs on account of limited availability of gas for the past 2-3 years.

Use of foreign coal by generators. Retail Supply Tariff has changed from Rs

4.3/unit to Rs 7.18/unit, thereby showing an increase of about 70%.

On the other hand Bulk supply tariff has shown an increase of 162.67% in the period of 2007-08 t0 2014-15 i.e Rs 2.09/unit to Rs. 5.49/unit.

Dadri Gas

BTPS Anta Auraiya Gas Turbine

Dulhasti Hydro

0

0.5

1

1.5

2

2.5

3

3.5

1.5 1.61.3 1.3

1.7

0.8

2.3

3.2

2.4 2.3

3 2.9

Change in Variable Cost

2007-08 2014-15

Rs/K

wh

Barriers in the reduction of high cost power PPA is legal Document enforceable by Law. No Exit Clause in PPAs No off-takers for costly power for reallocation by

MoP, GoI. Limitations in Backing Down of Plants- 70% to 75%. Forced scheduling of Gencos by SLDC due to

Transmission constraints. Loss on Sale of Surplus Power.

Power Purchase cost from various sources

Pragati 3-Bawana Aravali Jhajjar Dulhasti Sewa-2 Gas Turbine Dhauliganga Dadri gas0

1

2

3

4

5

6

7

8Power Purchase Cost from various sources

Power Purchase Cost Current Market price Power Exchange UI rate

Rat

e in

Rs/

Uni

t

Non-cost reflective tariffs Over the years Delhi Discoms have proposed tariff hikes in consecutive tariff petitions

in order to cover for the spiking PPAC charges. DERC did approve some of the hikes but not fully and from December 2014, no tariff hike was granted.

  FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16Particulars Propose

d TariffApproved Tariff

Proposed Tariff

Approved Tariff

Proposed Tariff

Approved Tariff

Proposed Tariff

Approved Tariff

Above 66/33 kV level

6.20 4.71 6.27 4.92 6.57 5.61 6.31 5.61

At 11kv level

6.27 4.76 6.34 5.02 6.64 5.72 6.38 5.72

At LT level 8.04 5.69 7.87 5.88 8.19 6.65 7.90 6.65

Difference between Bulk supply tariff and Retail Supply tariff

*We can see that the bulk power cost has increased by 142.73% while retail tariff has gone up by only 74.11% leading to a huge mismatch of costs.

Bulk Supply Tariff Retail Supply Tariff012345678

2.41

4.25

2.68

4.343.43

4.344.3 4.375.38 4.95.37

6.225.36

7.065.85

7.4

Differences between Bulk Supply Tariff and Retail Supply Tariff

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Years

Tariff

Rat

es (R

s/uni

t)

Inadequate PPAC formula Discoms in Delhi have been asking for a change in the PPAC formula, as the existing

formula does not takes into account the variations in term of short term power purchase transactions.

A PPAC surcharge is levied from the consumers to compensate the utilities for the fluctuations in fuel rates, transmission charges etc.

This cost is funded by the Discoms alone and is purely revenue gap which will attract at least two years of carrying cost.

A consultant, appointed by GoNCTD to look into the matters related to the operational issues of Delhi Discoms, has suggested a change in the PPAC formula which will reflect the changes in the fuel cost on a monthly basis.

It said that the existing formula used by DERC, does not recognize cost on account of arrears payable to the GENCOS or TRANSCOS. This formula also does not covers losses on account of sale of surplus power.

In FY 2015-16 DERC allowed the Discoms to levy PPAC surcharge from the consumers for the remaining three quarters, but this order lapsed in March 2016 due to delay in filing of tariff petitions.

Losses on account of sale of surplus power DERC has fixed a base rate of Rs. 4/unit for the sale of surplus power. However the Discoms have been unable to dispose off surplus power at such rate as the power

exchange rates and UI rates are much lower compared to the base rate. DERC has said that the Discoms (especially BYPL), instead of making serious efforts to sell

power in power exchanges or get into banking transactions with other states, have sold much of their power in UI exchanges.

The UI rates are very low compared to other rates, which has led to substantial losses for the Discoms.

It has been alleged that the discoms are buying 'excess' power and selling it at a low price, thereby booking huge losses which leads to unwarranted tariff burden on consumers.

DERC must be realistic while fixing the base rate for the sale of surplus power, while DISCOMS must put an all out effort to sell surplus power at the best rates possible.

The demand projection of New Delhi is also highly unpredictable, leading to confusion while buying power. It is very difficult to clearly determine the load curve for Delhi.

Electricity rates Rs/unitUI rate 1.78Average power purchase rate 3.78IEX rate 2.31

Inadequate carrying cost A carrying cost is the rate of interest allowed on the regulatory asset

being carried over to the subsequent fiscal years. It is comprised of two components, return on equity and return on

debt. RoE is 16% , while the cost of debt should be on par with the SBI PLR

rate. However, DERC allows change in the cost of debt, only when the

deviation in the SBI PLR is more than 1%. Due to this, the DISCOMS are not able to get proper returns as per

market scenarios. Disallowance of adequate carrying costs has artificially discounted the

revenue gap by 182 crore. Formula for calculating the carrying cost rate= (70 x PLR rate +

30 x RoE Rate)

Comparison between SBI PLR rates and DERC approved rates

FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 150

2

4

6

8

10

12

14

16

12.69 12.7911.78 12.26

14.4 14.61 14.58 14.05

10.9 11.38 11.33 11.6412.45

9.54 9.34 9.27

Comparison between SBI PLR rates and the cost on debt allowed by DERCSBI PLR Rates (%) Cost of Debt allowed by DERC (%)

Inadequate surcharge rate From 2012, DERC allowed the Discoms to levy 8% surcharge rate from

the consumers in Delhi. This surcharge was to be charged against the total payable amount, mentioned in the electricity bill.

This surcharge rate is supposed to compensate the Discoms for the carrying cost being charged on the regulatory assets.

This surcharge rate needs continuous revision every year in order to compensate the Discoms for the losses incurred on account of power purchase.

While the carrying costs are decided at the rates of 14-15% p.a. it is strange that the surcharge rate allowed is merely 8%.

Hon’ble ATE judgment dated 01/01/2011 clearly mandates that the rate of carrying cost should be fixed at such rate so that the Discoms can not only recover the carrying cost on the RA for the current year but also it should be able to recover 1/3rd of the principle amount.

Sample electricity bill showing surcharge rate

Absence of any clear plan to amortize the regulatory assets

Discoms have repeatedly asked DERC to provide a clear roadmap for the amortization of regulatory assets.

Delhi discoms are private entities which makes them non-eligible for the benefits from financial assistance plans such as FRP 2012 and UDAY.

The discoms cite their inability to pay the power purchase bills due to huge financial stress. The primary losers is the general public of New Delhi who are constantly under the threat of intermittent load shedding and impending blackouts.

The amount of regulatory assets has risen to such alarming levels that every electricity consumer in Delhi owes the Discoms around Rs. 20,000.

The Delhi Govt. withdrew the financial support in 2003 which was meant for the aiding the discoms.

Apart from 8% surcharge rate, there is no other provision from DERC to liquidate the regulatory assets.

Delay in filing of tariff petitions and issuance of tariff orders Timely filing of tariff petitions and timely issuance of tariff

orders help in saving of costly capital. Until March 2016, none of the Delhi Discoms have filed their

tariff petitions for 2016-17. The reason being stated is that DERC has failed to come up

with new MYT regulations for 2016-17, due to which the Discoms are hesitant to file tariff petitions.

Due to this delay, Delhi Discoms won’t be able to levy fuel surcharge from consumers which was allowed last year by DERC.

The Delhi Electricity Regulatory Commission (DERC) had allowed power discoms to levy PPAC surcharge following a directive from the Appellate Tribunal for Electricity (APTEL) since June 15, 2015.

Measures taken up by other states to liquidate regulatory assets

1. Tamil Nadu : Subsidy Package of Rs. 6879.33 and Govt. takeover of the revenue gap

2. Rajasthan : Tariff hike in 2014-15 and Govt. approval to join UDAY scheme.

3. Jharkhand : Joined UDAY scheme in January 2016 to mitigate losses of around Rs. 7353 crores

4. Odisha : Has regulatory assets worth Rs 3,450 crores and is considering joining UDAY scheme via it’s bulk power purchaser GRIDCO.

5. Haryana : Tariff hikes in 2014-15 and 2015-16 and the state Govt. will take over a total debt of around Rs. 25,000 crores under the UDAY scheme.

International Practices-Brazil Low amounts of rainfall resulted in a severe shortage of

electricity in 2000-01, as the country depends on hydroelectric power for more than 70% of its electricity needs.

This led the Govt. to resort to power rationing and systematic blackouts all over the country.

However due to these power rationing measures, the power producers and other electrical utilities faced huge financial losses.

In order to reimburse the utilities for their losses, Govt. introduced several surcharges and tariff increases in electricity rates.

These surcharges and tariff increments were set for a period of 7-8 years and it was assumed that the utilities would recover their costs in this period (till 2008).

International Practices-Canada Any losses incurred to the utilities on account

of uncontrollable costs are recovered from the consumers in the form of rate riders.

These rate riders are allowed on a regular basis and hence the problem of regulatory assets is nullified.

A rate rider is a temporary credit or charge that is added to the bill on behalf of the electricity or gas distributor. A rate rider collects or refunds the difference between actual and estimated costs for delivering energy.

Electricity and gas distribution companies in Canada use rate riders to adjust any differences between the actual cost and the approved rate for providing service. in India become as pro-active as those in Canada, then the utilities won’t be saddled with ever increasing debts and deferred costs.

Conclusion Cost reflective tariffs are a must for covering losses on account of fuel price change. Annual tariff revisions must be done to prevent the regulatory assets from further build-up. 8% surcharge, which is levied from consumers, needs further increment. The amount of surcharge

is not enough to meet the carrying costs for the regulatory assets. DERC must take a view of this issue and solve it.

The carrying cost which is allowed by the commission on the regulatory assets needs to be updated regularly as per current SBI PLR rates.

Need for revising costly PPAs and surrendering the allocation from costly and inefficient plants. However, surrendering costly power all at once is not a feasible solution as it will leave a number of power plants stranded due to lack of customers. Instead the surrendering should be done in a phase-wise manner, so that the Govt. can reallocate those power plants to other interested buyers.

Discoms must make a serious effort towards sale of surplus power via banking and power exchanges. They must deter from dumping surplus power via UI channel as much as possible.

DERC should come up with an amicable solution to amortize the regulatory assets. The longer this process is delayed, the higher stress the companies will face financially.

Recommendations Govt. reimburses the consumer to compensate for the

impact of tariff hikes LPG subsidy reimbursement model can also be tried for the consumers in Delhi. Since Delhi has a

high literacy rate and maximum people have bank accounts too, this plan can be implemented without much hassle.

Govt. should target consumers with low income or such consumers who will be hit hard most due to tariff hikes. These people could be provided with subsidy directly in their bank accounts. If not fully, then the consumers could be partially reimbursed (say ~60-70%) for the hike in the tariff rates.

Industrial consumers, consumers with high consumption and those consumers whose income is good enough to bear the brunt of tariff shocks, should be exempted from the subsidy scheme.

Also subsidy could be provided to those consumers also who manage to bring their consumption rates below a certain limit. Subsidy rates for these people could be different from what is being provided to low income consumers.

This scheme could be a win-win scenario for both consumers and Discoms as consumers will be fully or partially saved from tariff shock and Discoms would be compensated for their losses.

This scheme could be implemented in a time frame of 4-5 years and tariff also should be increased gradually in this period. Also the suggestions proposed in previous slide should also be implemented along with this plan (minus the loans from PFC & REC). This will help in not putting the whole burden on the Govt. and letting the Discoms share the responsibility too.

Recommendations Loan from Power Finance Corp. or any other Govt. financing institution Loan can be provided by any of the above given financial bodies. A time period of 7-8 years should be set as a target to amortize the regulatory assets. Interest rate on loans should be less than prevailing market rates, say around 10%. The loan component can cover around 50-60% of the regulatory assets. Delhi Govt. or the Central Govt. can take guarantee for 50% of the loan amount. 2 years of moratorium period can be provided on the loan. After the moratorium period, discoms can start paying back the loan along with interest. For the remaining half of regulatory assets, the following measures could be taken:

- Increment of fixed charges which is to be levied from every consumers. As new MYT regulations are coming up, so this provision could be made in the MYT order.- Very moderate tariff hikes in this time period. (~ Rs. 1-1.5/unit)- Benefits from the reduced Bulk supply rates due to falling fuel prices to be utilized for this purpose.- Adequate revision in surcharge rate is required every year (10-12%).- Funds released after conclusion of pending APTEL judgment (Rs. 5,824 Cr as claimed by BSES) could be diverted towards towards this purpose. Speedy completion of pending APTEL judgments.

For this method to work, DERC and the discoms must ensure that there are no future revenue gaps and regular tariff revisions should happen.

Recommendations Discoms get approval from the Govt. to join the UDAY scheme As per current norms a private utility is not eligible to join UDAY scheme. Delhi Discoms being private companies thereby cannot join UDAY, and they are on the

verge of missing out on a good opportunity to solve their financial woes.  Under the UDAY Scheme two steps could be taken: - Issuance of tax free bonds repayable in 10 years for 50% of regulatory assets (approx.

Rs. 12,500 Cr) - Arrange loan for 25% of regulatory assets at Base lending rate. The impact on tariff due

to issuance of Tax-free bonds at lower rate of interest of 8% per annum would be:Scenario Impact on tariff (Rs./unit)Tax-free bonds repayable from 10th year onwards

0.50

Benchmark Prime lending rate

0.25

Recommendations (Contd…) Our Hon’ble Power minister has recently stated that his ministry is looking into making a case for private utilities to join the UDAY. But those companies will not get any financial benefits from UDAY scheme. Instead they will stand to benefit from the operational grants and schemes covered under the UDAY scheme which are as follows: Reduction in fuel cost through coal swapping. Time bound loss reduction trajectory. Although it must be noted that Delhi discoms have

done a commendable job at bringing down the loss levels in these years. This scheme also provides for quarterly fuel cost adjustment. Annual tariff revisions has been highly recommended in the UDAY scheme. Grants for the strengthening of distribution network and infrastructure will be covered

under the IPDS scheme. Compulsory smart metering and AMR infrastructure to reduce losses. Funds will be

granted under the IPDS scheme. IT enablement of distribution system. Recently Ministry of Power has agreed to fund the project for removal of old wires and

replacing them with new underground cables in the area of Old Delhi region. This will be covered under the IPDS scheme.

Bibliography

Energy.economictimes.com BYPL Tariff orders 2010-11 to 2015-16. Financialexpress.com Tariff orders of Haryana, Rajasthan, Jharkhand, Orissa and Tamil

Nadu. PFC reports on financial status of discoms. Report on the problem of regulatory assets by Forum of Regulators.

THE END