Average tariff hike of 4.5% along with reduction in AT&C losses needed to revive discoms: ICRA

New Delhi [india], September 16 (ANI): An average tariff hike of 4.5 per cent coupled with a reduction in aggregate technical and commercial (AT&C) losses below 15 per cent is essential to eliminate the gap between the average cost of supply (ACS) and average revenue realisation (ARR) for power distribution companies (discoms), rating agency ICRA noted on Tuesday.

According to ICRA, the all-India ACS-ARR gap stood at 46 paise per unit in FY2024, which is causing stress for the distribution segment. While tariff orders for FY2026 have been issued in 23 out of the 28 states, the median tariff hike was limited to just 1.9 per cent.

The rating agency flagged that the regulatory assets (RA) of seven major state discoms remain elevated at around Rs 3 lakh crore. Regulatory asset incurs when revenue from tariffs doesn't cover discoms costs and the regulator allows it to be deferred and recovered over time when rate increases.

These include Tamil Nadu, Uttar Pradesh, Rajasthan, Maharashtra, Delhi, West Bengal and Karnataka, with the first three accounting for the bulk. The Supreme Court has recently directed discoms to liquidate all RAs within four years and capped the creation of new RAs at three per cent of the ARR. The apex court has also mandated that the Appellate Tribunal for Electricity (APTEL) monitor the process to ensure accountability.

Girishkumar Kadam, Senior Vice President & Group Head, Corporate Ratings, ICRA, says steep tariff hikes are needed to comply with the apex court order.

"Complying with the SC directive would thus necessitate steep tariff hikes across these states, which would in turn require state government support for effective implementation. Apart from improvement in operating efficiencies, regulatory reforms to ensure timely issuance of tariff orders with cost reflective tariffs remain critical to achieve a sustainable improvement in discom finances going forward." noted Kadam.

The discoms continues to face financial challenges owing to inadequate tariff hikes, increasing regulatory assets, high AT&C losses, and a sharp rise in debt levels. Gross debt of state-owned discoms increased to Rs 7.4 trillion as of March 2024, compared with Rs 6.6 trillion in March 2023. Such levels are unsustainable given current revenue flows, and subsidy dependence is projected to rise further to Rs 2.2 trillion in FY2026.

ICRA said the rationalisation of GST rates on coal from five per cent to 18 per cent, along with the removal of compensation cess of Rs 400 per tonne is likely to bring some relief. This could reduce generation costs for coal-based plants, which supply more than 70 per cent of India's electricity. ICRA notes that it will translate into a 12 paise per unit reduction in the discoms cost of supply.

The agency said sustained improvement in AT&C losses, timely pass-through of cost variations through tariffs, and timely liquidation of past RAs are essential for financial turnaround of state discoms. (ANI)