The Vicious Cycle of 'Regulatory Assets': A Challenge to India's Power Sector
UPSC Relevance
Prelims: Indian Economy (Infrastructure - Energy/Power Sector, Fiscal Policy - Subsidies, Regulatory Bodies - SERCs).
Mains:
General Studies Paper 3 (Economy/Infrastructure): Infrastructure: Energy; Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Investment models. The financial health of electricity distribution companies (DISCOMs) is a core and recurring topic in GS3.
Key Highlights from the News
Supreme Court ordered DISCOMs to settle their accumulated "Regulatory Assets" within a specified time.
What is a Regulatory Asset?: It's the gap between the actual cost of supplying one unit of electricity (Average Cost of Supply - ACS) and the revenue received by the company through tariffs and subsidies (Annual Revenue Requirement - ARR).
To avoid sudden tariff hikes, this loss is a "paper asset" given by regulatory commissions, to be recovered from consumers with interest in the future.
The main reasons for this widening gap are politically motivated tariff increases and untimely release of government subsidies.
Rising Regulatory Assets lead DISCOMs into severe financial crises (cash flow pressures) and hinder innovation and investment in the power sector.
Although consumers temporarily benefit from lower rates, they will have to pay higher tariffs with interest in the future.
The article suggests solutions like cost-reflective tariffs, timely release of subsidies, and strict intervention by regulatory commissions.
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