The Supreme Court’s directive to clear legacy power sector dues in four years instead of seven could finally push state regulators to act. In a conversation with CNBC-TV18’s Latha Venkatesh, former power secretary Pradeep Kumar Pujari, Alok Kumar, Director General of the All India Discoms Association, and Nikhil Nigania, Director & Senior Analyst at Bernstein, discussed what the move means for regulators, power distribution companies (DISCOMs) and investors.The court has directed state electricity regulators to raise tariffs in line with actual power costs and clear accumulated past dues, known as regulatory assets, within four years. The order follows a case filed by Delhi’s power distribution companies seeking recovery of ₹27,200 crore from the Delhi Electricity Regulatory Commission (DERC).Industry representatives see the ruling as a mix of “carrot and stick” with the stick coming from the court and the Appellate Tribunal for Electricity, and the carrot from central schemes like the Revamped Distribution Sector Scheme (RDSS) that link funding to financial discipline.
Pujari called it a long-overdue move that should compel state electricity regulatory commissions to create clear repayment timelines, something existing laws already require but have rarely enforced.Kumar said that while the problem is concentrated in states like Tamil Nadu, Madhya Pradesh and Rajasthan, the ruling could encourage stricter compliance nationwide. He also argued for including private distribution companies in government schemes, as their consumers face tariff hikes without access to grants.These are edited excerpts of the interview.Q: Since you have worn both hats as Power Secretary and as Chairman of the CERC, do you think this moves the needle a bit? There have been several national tariff policies which have told the SERCs to do exactly this – liquidate the past dues in three years, seven years, whatever. Nothing has moved them. Will the Supreme Court order move the needle, at least for Delhi?Pradeep Kumar Pujari: What the Supreme Court has said is already there in the various statutes – a 3% limit on the liquidation of the regulatory assets. And when regulatory assets are to be created, they are supposed to be created only under exceptional circumstances.Now, the issue is that not only the statute, but also the various letters that have been issued by the ministry have asked the regulator to take necessary steps. Unfortunately, when the regulatory assets were created, at the same time, the regulator should have included a roadmap and the timeframe during which these regulatory assets were supposed to be liquidated. Unfortunately, this has not happened.So I’m happy about this direction that has come from the Supreme Court, and I’m sure that the various state regulators who have to take necessary action will now take action to liquidate these regulatory assets within the time that has been stipulated by the regulator. The rule and the policy say that the old regulatory or legacy regulatory assets are supposed to be liquidated within seven years. However, the Supreme Court has now put a new timeline of four years, so they need to be regulated. I’m sure that all the regulators will comply with this direction.Q: It is a large number. The DERC itself has to pay ₹27,000 crore in terms of legacy assets. Their annual amount is much smaller – it’s like ₹20,000 crore or thereabouts. How are they going to clear this backlog? And it is to all SERCs. So if you go to a state like Tamil Nadu, which is a huge offender, their accumulated dues are ₹89,000 crore, and in any given year, their annual revenue amount is only ₹91,000 crore. This doesn’t look even feasible. What’s your sense?Alok Kumar: I will add to what Mr. Pujari has said. The Supreme Court has very clearly said it’s a regulatory failure, and the regulators are prepared to work under dictation. So that is the sorry state of affairs. But there are some silver linings. If you see the new scheme that the Government of India has floated – the Revamped Distribution Sector Scheme (RDSS) – it has one pre-qualification which participants have to meet every year: no new regulatory asset should be created, and past assets have been liquidated. If you read the order carefully, except for Madhya Pradesh (MP), Rajasthan and Tamil Nadu, this is not a very widespread problem in the country. There are some states where the regulatory failure has been very prominent.But I’m happy to see, if you leave the case of Delhi for a moment, the four states which have given their affidavit, they said that they have not created any significant regulatory assets post 2020. That means this carrot-and-stick approach by the Government of India is working. Number one.Also Read | Economists urge reforms and targeted support as India faces GDP hit from US tariffs
Number two, DERC also wrote a letter to the Government of Delhi saying that they should take it up so that private sector DISCOMs should be able to participate in the Government of India schemes. What happens now is that, in my view, the Government of India has normally been excluding the private sector DISCOMs from schemes like RDSS and even others. That is not right because the consumers in those companies face tariff hikes. After all, grants are not given. So, there is also an administrative view that needs to be changed – under regulatory oversight, the private DISCOMs should also be made fully eligible for participating in government schemes.Third, I’ll say there has been a lot of debate on why the Minister of Power has come and made rules. Now I am very happy that most of the rules which were made when I was in the ministry have been welcomed by the Supreme Court. And they said there is nothing clearer than tariff policy. Now the issue is that we need the stick from APTEL and the Supreme Court, and the carrot from the Government of India to see that these things don’t happen.Past dues are huge, and I feel that Tamil Nadu has been giving a lot of support to the DISCOMs from its budget. Part of it has to come from the budget. Not all of it can be passed on to tariffs, and some parts will come from tariff rises.Most important is that, going forward, the DERC has to give up this approach of giving only 8% Deficit Recovery Surcharge (DRS) for recovery of capital as well as interest, whereas the carrying cost is also more than 8%. So DERC should correct at least its future stance.The DRS is called the Deficit Recovery Surcharge, which DERC has been allowing. But 8% is a laughable rate – carrying cost is more than 8%, and you expect to recover everything at 8%. That’s all I have to say.Q: Nikhil, do you think we are going to see more money flow through? If not all the 2.3 trillion rupees of past dues, will something flow through to the power sector?Nikhil Nigania: As Mr. Alok Kumar said, it’s a carrot-and-stick approach – the stick being the Supreme Court and the APTEL, and the carrot being schemes like RDSS by the central government. So, a big positive step in the right direction for the broader power sector. In terms of cash flow, if it does, it doesn’t impact the P&L of these distribution companies – it impacts the cash flow, which itself is a big benefit. The most immediate beneficiaries would be power distribution companies in Delhi, assuming that’s where the case originated. There are three – one is Tata Power Delhi Distribution, the other two are owned by Reliance Infrastructure. We don’t cover these names, but they are the ones who stand to gain the most. And beyond that, if we expand it to other parts of the country, then CESC is another one which has regulatory assets, although not all of them might be approved. So those are the large ones, I would say, that are the immediate beneficiaries.Also Read | India hopeful of trade negotiations with US in next 21 days, say sourcesQ: Just to finish this argument for the moment, do you think there will be more tariffs, or will state governments have to contribute, as Mr Alok Kumar said, Tamil Nadu has been doing? Their losses and dues are huge. Do you think state governments will be forced to take this order seriously, or are they likely to risk being in contempt of court?Pradeep Kumar Pujari: One thing is very clear that the Supreme Court has rightly recognised that this has to be done in partnership. Both the state and the regulator have to work out a solution. As you understand, the structure is such that the regulator is supposed to determine a cost-reflective tariff. Now, how much of that is to be passed on to the consumer is where the state government can intervene. If they do intervene, the scheme is very clear – the gap must be covered through a subsidy.Now, suppose the legacy regulatory assets have to be cleared. Depending on how much this impacts consumers, the specific state government will look at the local context and consumer mix, assess the position of the DISCOMs, and consider whether there is an affordability issue. The state government will then decide how much will be passed on to consumers and how much will be covered through a subsidy.So, I don’t think there will be a general rule or uniform approach. My understanding is that every state government will take a state-specific approach, looking at two or three major factors: the financial health of the DISCOMs, the consumer mix, the present tariff of the commercial and industrial (C&I) sector compared to the domestic sector, and the state government’s financial position. Considering all this, the state government will decide. That’s my take – there will be no one-size-fits-all approach. The Supreme Court has made it clear that both the state government and the regulator have to work it out.Q: Let me give our stock market viewers some valuable insights from our panel. Mr Alokumar, I saw your excellent piece in Mint about how grid capacity has fallen short because of waivers given to renewable energy. Briefly, can you tell our viewers which part of the power ecosystem looks most profitable today? Where is the demand-supply gap – is it in transformer makers, electricity construction companies, DISCOMs, power generators, or renewables? Which is the best sector now?Alok Kumar: I’d say the best sector is transmission because it is an essential component, a natural monopoly, and their dues are mostly paid. You can’t operate without transmission, so I’d recommend investing in transmission first.Watch the interview in the accompanying videoCatch all the latest updates from the stock market here
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