Regulatory liabilities, not assets

IN A FEW STATES THEY ARE PLAGUING DISCOMS, WHICH NEED TO BEGIN OPERATIONS ON A CLEAN STATE

- SOMIT DASGUPTA

IN A LANDMARK judgment delivered on August 6, the apex court has ordered clear-cut guidelines on the creation and amortisation of regulatory assets (RAs).

What are RAs? When an electricity distribution company (discom) is unable to meet its full liabilities, which could be on account of various reasons, the electricity commission allows it to borrow the deficit amount from the market and the cost of this borrowing is included as one of the components while calculating the retail tariff.

Most of the times, the discoms are unable to finance their own expenditure because the retail tariff determined by the regulatory commissions are lower than what it should be. Keeping tariffs artificially low and allowing RAs to be created is something that is preferred by the government and of course the consumers, since no one appreciates a tariff hike. The discoms, however, are the losers, because by resorting to borrowing, their balance sheet loses its sheen and there are problems of cash flow. The term RA is thus a misnomer, as it is no asset in the real sense of the term, but actually a liability which every discom dreads. Artificially low tariffs are not the only reason why a discom cannot fund its activities. There are other reasons as well. For example, government departments not paying their electricity dues, the government withholding the subsidy it had promised to reimburse the discoms for offering a lower tariff to a certain class of consumers, tariff petitions not being filed at all or being filed late, etc.