A significant reduction in the Power Purchase Adjustment Cost levied by Delhi power companies have raised eyebrows due to their timing and magnitude
On December 26, 2024, the Delhi Electricity Regulatory Commission (DERC) announced a reduction in the Power Purchase Adjustment Cost (PPAC) imposed by the three power distribution companies (discoms) in Delhi: BSES Rajdhani Power Limited (BRPL), BSES Yamuna Power Limited (BYPL), and Tata Power Delhi Distribution Limited (TPDDL). The reductions, ranging from 50 per cent to 60 per cent, require scrutiny.
What is PPAC?
To understand this and its implication for the electricity bills of Delhiites, let us capture some basics. The discoms are expected to sell electricity to the consumers at tariffs - duly approved by the DERC - that are set such that the revenue generated from sale at these tariffs fully covers the power purchase cost plus the cost of wheeling and distribution. The requirement is mandatory under the Electricity Act, of 2003. But, this is rarely complied with.Under a highly complex regime, the tariff charged from households (HHs) consuming up to 200 units a month is Rs 3 per unit which is just about half of the average cost leading to an under-recovery of Rs 3 per unit. Including levies adding to 44.6 per cent, the shortfall comes to Rs 4.3 per unit. For HHs consuming between 201 and 400 units, the tariff is Rs 4.5 per unit implying an under-recovery of Rs 1.5 per unit. Including the levies, this comes to Rs 2.2 per unit. These under-recoveries are cross-subsidised by charging more from industries and businesses for which the tariff can go up to a high of Rs 18 per unit.
The irony is that despite charging exorbitant rates from industries and businesses, a good slice of under-recoveries from HHs consuming less than 400 units a month remains uncovered. Additionally, the Delhi government doesn’t want the latter to even pay the small tariff of Rs 3 per unit (courtesy, of Kejriwal’s freebies). Discoms are told not to raise any bill on HHs consuming up to 200 units even as HHs consuming up to 400 units get a rebate of 50 per cent of the bill amount subject to a cap of Rs 800 per month. Though the government promises to reimburse them for these subsidies from the state budget, this promise is held more in breach.
This increases discoms’ losses which are compounded by large-scale power theft. The discoms have no control over the tariff chargeable from majority of consumers (read: those having consumption less than 400 units a month). They are also helpless when it comes to reining in theft as power thieves have the blessings of their political bosses. Discoms have flexibility only about fixing tariffs on supplies to industries and businesses besides HHs consuming more than 400 units. But, there is a limit to which they can charge more from these consumers. The result is: the total revenue generated from the sale of electricity can never reach a level that will fully cover the cost of the power purchase cost and the cost of wheeling and distribution.
The problem is germane to most of the discoms where the States take recourse to indiscriminate power freebies and permit large-scale theft (Delhi is on top of the list). To lend them a helping hand, the Ministry of Power (MoP) issued an order on November 9, 2021, that allowed discoms to impose a surcharge known as PPAC. Levied as a percentage of the ‘total energy cost and fixed charge component’ of the electricity bill, PPAC is meant to compensate them for variations in the fuel and power procurement cost.
The discoms are allowed to revise this surcharge every quarter. In the case of BYPL, the ongoing PPAC applicable till December 20, 2024, was 32.27 per cent. On this, based on changes in the cost of power purchase during the second quarter ending September 30, 2024, of the current FY, the DERC allowed the discom to recover an additional 5.85 per cent for the three months from December 21, 2024, to March 20, 2025.
As a result, the existing PPAC (before the announcement on December 26, 2024) for BYPL was 38.12 per cent. Making a similar calculation, the regulator fixed PPAC for BRPL at 35.83 per cent and for TPDDL at 36.33 per cent. Following the DERC’s ‘unexpected’ announcement on December 26, 2024, the PPAC will reduce to 13.62 per cent for BYPL – a reduction of around 65 per cent; 18.19 per cent for BRPL – a reduction of more than 50 per cent, and 20.52 per cent for TPDDL – a cut of 45 per cent. It defies logic.
Having hiked PPAC to 38.12 per cent including 5.85 per cent sanctioned in December 2024 - based on data for the quarter ending September 30, 2024, what is this new/extraordinary development that prompted the regulator to bring the surcharge down by almost 2/3rd? It is absurd to believe that power purchase costs would have decreased by that much. In any case, revisions in tariff/PPAC are made based on available data with a time lag and that is Qr ending September 30, 2024, which was already captured in the extant figure of 38.12 per cent.
This gives credence to the possibility that the steep reduction in PPAC has been made with an eye on the impending elections in Delhi; and that the decision could be reversed ‘surreptitiously’ after the elections are over. There is another compelling reason to believe that this relief (albeit substantial) will be temporary and deceptive.
This has to do with the existence of the so-called regulatory assets (RAs) in the balance sheets of discoms currently at a mammoth Rs 27,200 crore. RAs are created when the DERC accept that the tariffs don’t cover discus purchase costs but don’t raise rates.
The shortfall in revenue at unrevised tariff and the cost is booked by discom as receivable and classified as RA. The Electricity Act (2003) and the National Power Tariff Policy (NPTP) strictly prohibit RAs. These documents emphatically say “tariffs must reflect costs and regulatory assets should not be created”. In December 2022, the MoP even warned against creating a pile of RAs. Yet, RAs have proliferated. These stand at a monumental level despite the discoms imposing PPAC currently at 38.12 per cent (BYPL) as also levying a surcharge of eight per cent – an ad hoc arrangement intended to Take care of the RAs, which are duly permitted by the regulator. With huge RAs piled up in their books, discoms are leaving no stone unturned in recovering the money say by getting sanction of a steep hike in tariff to make up for the entire cumulative deficit in revenue.
Indeed, the matter had gone right up to the Supreme Court (SC) which in an order given in early 2023 had directed the DERC to let discoms recover their RAs. If the DERC were to act upon it, this could lead to a 100 per cent hike in tariff. So, it decided to contest that order. At present, the matter is in the court.
To conclude, the discoms perennially face huge under-recoveries due to subsidies given to the majority of consumers, power theft and their inefficiencies and irregularities leading to inflated costs.
This loss can’t be covered even by making ‘paying’ consumers viz. industries, businesses, and HHs at the higher end pay more. Unless there is political will to tackle these fundamental maladies, Delhiites won’t get any respite from high electricity bills.
(The writer is a policy analyst; views are personal)
