Tariff Policy has prescribed guidelines for allowing the facility of regulatory assets

Regulatory asset, as a concept, is gaining greater currency in the power sector.

Last week, the Karnataka Electricity Regulatory Commission (KERC) organised a public hearing in Bangalore on a review petition filed by the State Government, raising a host of issues including regulatory assets.

[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.]

In its petition, the Karnataka Government had submitted that the Commission, in the tariff order given in November 2009, ought to have treated as a regulatory asset the amount of Rs. 2,575 crore that had arisen due to truing-up exercise. This amount should have been considered for recovery by way of tariff in the future tariff orders over a period.

Losses of TNEB

A couple of weeks ago, the Tamil Nadu Electricity Regulatory Commission (TNERC), in its tariff order, disallowed the request of Tamil Nadu Electricity Board (TNEB) for regarding as a regulatory asset the accumulated losses suffered between 2003-04 and 2008-09 to the tune of about Rs. 16,775 crore.

However, the TNERC allowed regulatory assets to be created as it projected that the Board or its successor-entities were likely to suffer an accumulated loss of about Rs. 17,460 crore during the next three years, including the current financial year. “Since a huge gap [of Rs. 7,905.04 crore] exists [for the current financial year] even after the proposed tariff hike, the Commission has no choice but to treat the remaining portion as regulatory assets.” The value of assets would increase in the next two years as the trend of revenue gap increased, the TNERC stated in its tariff order.

Unmet gap

Even in the case of Karnataka, the KERC, in its tariff order of November 2009, did not accept the request of electricity supplying companies for regarding the unmet gap as regulatory assets.

In Maharashtra, the issue has been a subject of debate for several years. In February 2004, the Mumbai High Court, on an appeal preferred by the erstwhile Maharashtra State Electricity Board, directed the Maharashtra ERC to allow the creation of regulatory asset as a one-time exercise.

The Forum of Regulators has also been discussing the topic. The request for the creation of regulatory assets should be allowed only in rarest of the rare cases, according to Pramod Deo, chairperson of the Forum.

The predominant view among several senior regulators points to the position articulated in the Tariff Policy of 2006.

The creation of regulatory assets should be carried out as an exception. It should be allowed only when power distribution utilities suffer losses on account of factors beyond their control. Again, it should not be repetitive.

Guidelines

The Policy has prescribed guidelines for allowing the facility of regulatory assets. One of the guidelines is that 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.

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.

Would the acceptance of the concept of regulatory assets lead to a “steep increase” in tariff in future years in Tamil Nadu as the revenue recoverable would be around Rs. 17,460 crore?

S. Kabilan, TNERC chief, replies that the Commission would use its discretion and it would not force a “sharp hike” on power consumers of the State.

In the context of the State, the purchase of costly power from the open market is a major reason for the widening revenue gap.

A chairperson of a power regulatory commission feels that when truing-up of accounts is carried out after a long gap, the creation of a regulatory asset may be inevitable. Under such circumstances, the State Electricity Regulatory Commission (SERC) concerned has to take a view whether the revenue gap is small enough to be factored in the tariff or it can be converted into regulatory assets.

The SERCs have to ensure that they do not inflict tariff shocks on consumers.

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