In a significant development, the Ministry of Power (MoP) has issued new rules allowing automatic pass-through of costs upon occurrence of a change in law event. The automatic pass-through will be computed based on the suitable formula approved by the regulatory commission. The pass-through in costs and tariff will later be verified by the commissions. Efficient cost recovery involves cost pass-through from gencos to discoms, and subsequently to the end-consumer. Notably, power purchase agreements (PPAs) contractually recognise fuel cost as pass-through and some states already have a formula for fuel surcharge adjustment. However, up until now, these costs were not passed through automatically and required the approval of the state power regulator which resulted in delays.
Details of the rules
The MoP has notified the Electricity (Timely Recovery of Costs Due to Change in Law) Rules, 2021. As per these rules, on the occurrence of a change in law event, the monthly tariff or charges will be adjusted and recovered to compensate the affected party. The rules provide the formula to calculate adjustment in the monthly tariff due to the impact of change in law. The amount of the impact of change in law to be adjusted/recovered will be calculated where the agreement lays down any formula, in accordance with such formula; or where the agreement does not lay down any formula, in accordance with the formula given in the new rules.
The genco/transco which intends to adjust/recover the costs due to change in law, will give a three weeks prior notice (to the other party) about the proposed impact in the tariff/charges. It will furnish the computation of impact in tariff/charges to be adjusted and recovered, within 30 days of the occurrence of change in law or on the expiry of three weeks from issue of the notice, whichever is later. The recovery of the proposed impact in tariff/charges will start from the next billing cycle. The impact of change in law to be adjusted and recovered may be computed as one-time or monthly charges or on per unit basis or a combination thereof and will be recovered in the monthly bill as part of the tariff.
The generating company or transmission licensee will, within thirty days of the coming into effect of the recovery of impact of change in law, furnish all relevant documents along with the details of calculation to the appropriate commission for adjustment of the amount of the impact in the monthly tariff or charges. The commission will verify the calculation and adjust the amount of the impact in the monthly tariff or charges within sixty days from the date of receipt of the relevant documents. After the adjustment of the amount of the impact in the monthly tariff or charges, the generating company or transmission licensee will adjust the monthly tariff or charges annually based on actual amount recovered, to ensure that the payment to the affected party is not more than the yearly annuity amount.
The power sector has been witnessing issues relating to availability of fuel, mainly coal and gas, for power plants. Besides, there have been incidents of a sudden spike in the price of coal and gas in the international markets. In order to ensure that the power sector does not face any constraints in maintaining assured power supply, timely recovery of cost by all stakeholders in the value chain is necessary. This involves two steps – cost pass-through by generating companies to distribution companies and cost pass-through from distribution companies to the consumer. Due to the lack of a robust mechanism for timely automatic pass-through of fuel cost and transportation cost, generating companies often face constraints in maintaining stock of fuel during such periods, which may affect the power supply scenario. Besides, distribution companies face revenue constraints as the corresponding pass-through of cost is not done regularly and in time in the retail tariff. Notably, various states already have a formula for fuel surcharge adjustment which is being used for pass-through in case of a change in law event. However, this is not an automatic pass-through and there remains a need for approval of the state commission which leads to delays.
Net, net, the new rules for automatic pass-through for change in law events are expected to cut delays and avoid lengthy litigation traditionally seen in the process of vetting of cost escalations. The automatic pass-through will improve the liquidity position of gencos and stabilise their cash flows. The new rules are also expected to result in less working capital requirement by discoms, leading to lesser cost of power for consumers. The new rules are expected to go a long in improving cost recovery in the power sector as well as investor sentiment, which depends upon timely payment to a large extent.