The Supreme Court of India issued a landmark judgment in August 2025 on regulatory assets (RAs) in the electricity sector. The court laid down clear guidelines for their creation and amortisation. RAs have long been a challenge for electricity distribution companies (discoms), affecting their financial health and tariff structures.
About Regulatory Assets (RAs)
Regulatory assets arise when discoms cannot fully meet their liabilities. This often happens because tariffs set by regulatory commissions are lower than the actual cost of supply. To cover the shortfall, discoms borrow from the market. The cost of borrowing is added to future tariffs as RAs. Despite the name, RAs are liabilities, not assets. They burden discoms with debt and cash flow issues, affecting their financial stability.
Causes Behind Creation of RAs
Artificially low tariffs are a major cause. Governments and consumers prefer low tariffs to avoid price hikes. However, other factors contribute too. These include delayed subsidy payments by governments, unpaid dues by government departments, and delays in filing tariff petitions. These factors create revenue shortfalls for discoms, forcing them to borrow and create RAs.
Tariff Determination Process and Its Flaws
Discoms submit tariff petitions annually, projecting revenue and expenses. Regulators are expected to finalise tariffs by April 1 each year. However, there is a tendency to underestimate expenses and overestimate revenue. This leads to revenue gaps and forces discoms to create RAs to cover the deficit. Such practices undermine the financial health of discoms.
Magnitude of Regulatory Assets in India
RAs are in some states. Tamil Nadu leads with Rs 89,000 crore, followed by Rajasthan (Rs 47,000 crore), Delhi (Rs 27,000 crore), Kerala (Rs 7,100 crore), and Chhattisgarh (Rs 2,900 crore). Nationally, the total RA burden is about Rs 1.7 lakh crore. This large debt hampers discom operations and deters investment in the power sector.
Supreme Court Directives on Amortisation
The court ordered all existing RAs to be amortised within four years starting 2024. New RAs, if created, must be amortised within three years. The Appellate Tribunal for Electricity will supervise this process. Regulators must conduct thorough audits of discoms to prevent unchecked RA growth. These steps aim to restore financial discipline in the sector.
Policy Background and Regulatory Framework
The Tariff Policy of 2006 first acknowledged the need to contain RA growth and recommended amortisation within three years. The 2016 policy extended this to seven years. The Electricity (Amendment) Rules 2024 set strict norms – tariffs must be cost-reflective, and RA creation should not exceed 3% of aggregate revenue requirements. These guidelines echo the Supreme Court’s recent orders.
Challenges and Solutions for Delhi Discoms
Delhi’s discoms are unique as joint ventures with private participation. Equity infusion risks upsetting partner balances. Interest-free loans or grants are politically difficult. Delhi discoms owe sums to the government-owned Indraprastha Power Generation Company Limited (IPGCL). The Delhi government could consider waiving accrued interest or providing limited subsidies to raise tariffs temporarily. A mix of these measures may help amortise RAs and clean the balance sheet.
Implications for the Power Sector
Eliminating RAs is critical to reviving discom finances. It will improve investor confidence and enable better service delivery. Cost-reflective tariffs will ensure sustainability but require political will. The Supreme Court’s intervention sets a firm timeline and accountability measures, pushing the sector towards financial health and operational efficiency.
Questions for UPSC:
- Point out the role of regulatory commissions in ensuring financial sustainability of electricity distribution companies in India.
- Critically analyse the impact of artificially low electricity tariffs on the power sector and consumer welfare with suitable examples.
- Estimate the challenges faced by public-private partnership models in the power distribution sector and suggest measures to overcome them.
- What are regulatory assets in the energy sector? How do they affect fiscal management and what policy measures can be adopted to control them?
