Distribution companies (discoms) are the cornerstone of the electricity supply chain. As monopoly retail suppliers, they are responsible for operating and maintaining the state-wide distribution network and ensuring reliable supply quality at affordable prices for all consumers. Despite their importance, most Indian state discoms have long been financially stressed, operationally inefficient, and loss-making.

While Odisha’s first attempt failed, Delhi has demonstrated significant improvements in operational efficiency and supply quality. …However, the financial health of Delhi’s distribution sector continues to be a cause of concern.

So far, only Odisha and Delhi have opted for distribution privatisation as a reform measure to improve the discom’s financial health. While Odisha’s first attempt failed[1], Delhi has demonstrated significant improvements in operational efficiency and supply quality. For example, the aggregate technical and commercial (AT&C) losses in Delhi today are less than 6.5%, down from over 45%-60% at the time of privatisation. This is a remarkable achievement, considering that all-India average AT&C losses are still at 15%. The Delhi government’s power department website claims that the reform exercise has been a ‘great success’ and is a ‘showcase model’ for other states to follow. However, the financial health of Delhi’s distribution sector continues to be a cause of concern. Given this background, we examine the financial situation of Delhi’s discoms and draw lessons about the role of the regulatory commission in shaping these outcomes.

1.     A brief overview of Delhi’s distribution sector

In 2002, the Delhi Vidyut Board (DVB), a vertically integrated state-owned electricity supply agency, was unbundled into separate companies dealing with generation, transmission, and distribution. The distribution business was privatised, and three new discoms, i.e. BSES Rajdhani Power Limited (BRPL), BSES Yamuna Power Limited (BYPL), and Tata Power Delhi Distribution Limited (TPDDL, earlier NDPL), were formed.[2] The Government of the National Capital Territory of Delhi (GNCTD) holds 49% equity in the three discoms, with the respective private owners holding 51%. This blog only focuses on the three private discoms (BRPL, BYPL, and TPDDL) since they constitute the bulk of Delhi’s distribution sector (around 93%) and are of interest from a structural reform point of view.

As seen from Table 1, the Reliance group-owned discoms (BRPL and BYPL) cater to roughly 70% of the total consumers and 65% of the total sales. The New Delhi Municipal Council (NDMC) also manages distribution business in some areas. The Delhi Electricity Regulatory Commission (DERC) is the state regulator that oversees these entities, regulates all their operations and finances, and sets consumer tariffs. Delhi is a highly urbanised metropolitan area; most sales are to residential and commercial consumer categories. Figure 1 shows the sales mix of each discom. Barring the exception of TPDDL, sales to industrial consumers are 5% or less. As such, there isn’t much scope for cross-subsidisation. The average cost of power purchase is also high.[3] The retail tariff is the same across Delhi.

Table 1: A brief overview of the distribution companies in Delhi FY 2021-22

 Source: (DERC, 2024a), (DERC, 2024b), (DERC, 2024c).

Figure 1: Category-wise energy sales (Actual) for FY 2022-23

Source: (BRPL, 2024), (BYPL, 2024) and (TPDDL, 2024).

2.     Tariff setting and creation of regulatory assets

Under the Electricity Act 2003 (EAct 2003), state Electricity Regulatory Commissions (ERCs) review discom expenditures, approving only prudent costs for recovery through consumer tariffs. While this aims to promote efficient spending, information asymmetries complicate prudence assessments. Moreover, the “cost-plus” regulation model can incentivise inflated capital expenditures, as discoms earn a fixed return (16% post-tax) on equity investments. ERCs must, therefore, balance efficiency with investment needs, as excessive cost disallowances can hurt discom performance. While ERCs hold significant powers, they are also accountable for their decisions. They must undertake a public process for crucial issues such as tariff determination, regulation formulation and license issuance. All regulatory orders must be reasoned and are open to challenge before  Appellate Tribunal for Electricity (APTEL) and the Supreme Court.

When approved costs require significant tariff hikes (e.g., over 12%-15%), ERCs may partially defer cost recovery by creating ‘regulatory assets’. This eases the immediate burden on consumers but shifts it to future consumers. This practice often triggers a cycle of rising losses and debt, delayed generator payments, increased borrowing, and reduced investments in network upgrades. While the creation of regulatory assets is strongly discouraged through policy guidelines (MoP, 2016) (MoP, 2023), the practice continues with reported regulatory assets for all discoms in the country standing at INR 97,000 crores in FY 2023 (PFC, 2024). The figure is likely to be an underestimate due to true-up delays and pending litigation.

In addition to the general problems with regulatory assets, Delhi’s case has a unique feature. Here, the DERC and the discoms disagree on the quantum of the regulatory assets.

In addition to the general problems with regulatory assets, Delhi’s case has a unique feature. Here, the DERC and the discoms disagree on the quantum of the regulatory assets. The discoms refer to such amounts, which, in their opinion, are legitimate but yet to be acknowledged by the DERC as ‘unrecognised regulatory assets’. Figure 2 shows the regulatory assets approved by the DERC till FY 2021-22 and the unrecognised regulatory assets projected discoms till FY 2023. DERC has approved INR 27,200 crore as regulatory assets for the three discoms, but including the unrecognised assets (INR 64,316 crore) brings the total to INR 91,516 crore—indicating that only a third of the claimed assets are recognised by DERC.

Figure 2: Recognised and Unrecognised regulatory assets of Delhi Discoms

Source: (BRPL, 2024) (BYPL, 2024) (TPDDL, 2024)

3.     Where do the unrecognised regulatory assets come from?

Like most Indian states, Delhi, too, has seen cycles of steep tariff increases followed by almost no tariff revision for a few years. Over time, the gap between the Annual Revenue Requirement (ARR) sought by the discoms and approved by the DERC started increasing. Between FY 2009-10 and FY 2021-22, DERC, on average, disallowed 15%-18% of the ARR projected by the discoms. Most disallowances were related to capex, power purchase and operational costs. In some years, the disallowances for the BSES discoms were as high as 30%-40% of the proposed ARR.

…almost all the tariff orders since 2008 have been challenged in one or more fora. Barring a few exceptions, most are yet to achieve finality. …DERC has also challenged some of the APTEL judgements that overruled its decisions and delayed their implementation until there was a Supreme Court ruling. As a result of this litigation, establishing the “final” approved ARR for any given financial year has become incredibly difficult. 

Disallowed costs are ineligible for recovery through tariff. If the discoms have incurred the claimed costs, disallowance can adversely affect their balance sheets, profitability and ability to leverage funds. Unsurprisingly, they contest such regulatory decisions through appeals before the APTEL and the Supreme Court[4].  Table 2 shows that almost all the tariff orders since 2008 have been challenged in one or more fora. Barring a few exceptions, most are yet to achieve finality.

Table 2: Implementation status of DERC’s tariff orders

Source: (BRPL, 2024) (BYPL, 2024) (TPDDL, 2024).

Further, it’s not just the discoms that challenge the DERC orders. DERC has also challenged some of the APTEL judgements that overruled its decisions and delayed their implementation until there was a Supreme Court ruling. As a result of this litigation, establishing the “final” approved ARR for any given financial year has become incredibly difficult. Both discoms and the DERC assume that their contentions will be upheld until the highest authority strikes them down. This legal uncertainty is at the root of Delhi’s unrecognised regulatory assets.

4.     Cost of disputes and implementation delays

…out of the total unrecognised regulatory assets of INR 64,316 crore the principal is INR 22,247 crore or only 35%. The carrying cost is the remaining 65% or INR 42,069 crore. …Further delays will likely lead to more carrying costs. When the litigation eventually ends, the consumer will have to pay all the allowed costs with interest. 

Figure 3 shows that out of the total unrecognised regulatory assets of INR 64,316 crore the principal is INR 22,247 crore or only 35%. The carrying cost is the remaining 65% or INR 42,069 crore. This is a shocking waste of public money. To put the carrying cost amount in perspective, it is around 66% of Delhi’s total budget expenditure in FY 2023 (GNCTD, 2024). Note that this is the status as of FY 2024. Further delays will likely lead to more carrying costs. When the litigation eventually ends, the consumer will have to pay all the allowed costs with interest. Unfortunately, they have little or no say in these matters.

DERC is perhaps the only ERC that has undertaken physical verification of assets created by the discoms through third-party independent audits. While the intent is commendable, the long delay in completing the exercise defeats the purpose.

DERC is perhaps the only ERC that has undertaken physical verification of assets created by the discoms through third-party independent audits. While the intent is commendable, the long delay in completing the exercise defeats the purpose. In May 2024, DERC issued orders to allow provisional relief to the discoms for capital expenditure undertaken from FY 2004-05 to FY 2015-16 (DERC, 2024). This implies a delay of around 8-18 years in approving the capex. Such a delay is hard to justify, especially given the cost it imposes on consumers.

Figure 3: Breakdown of the (Unrecognised) Regulatory assets projected by Discoms till FY 2022-23

Source: Compilation from the latest tariff and true-up petitions (BRPL, 2024) (BYPL, 2024) (TPDDL, 2024).

5.     Disagreement on the rules of the game

Another worrisome aspect is the extent of the disagreements between DERC and the discoms. They disagree not only on the cost claims but also on the regulations for tariff-setting including those for developing business plans.

Another worrisome aspect is the extent of the disagreements between DERC and the discoms. They disagree not only on the cost claims but also on the regulations for tariff-setting including those for developing business plans. Table 3 gives the details of the writs filed by TPDDL in this regard.  If the regulator and the utilities disagree on even the regulatory framework, it is no surprise that they are at loggerheads on cost approvals. Such an adversarial environment goes against the spirit of the adjudicatory process envisaged under the EAct 2003 and erodes institutional credibility.

Table 3: Details of Writs filed by TPDDL challenging DERC’s regulations.

Source: (TPDDL, 2024, p. 13)

6.     Lessons and the way forward

Delhi’s experience shows that deep discord between the regulator and the utilities will ultimately hurt consumers the most. Plus, such endless litigation defeats the purpose of establishing a quasi-judicial regulatory institution tasked with speedily resolving matters transparently, using sound techno-economic reasoning and participatory processes. Remedial steps to limit the financial impacts on consumers of this apparent breakdown of the regulatory process are lacking.

Delhi’s fraught regulatory process and endless litigation should remind us that bringing in the private sector can improve efficiency but maintaining the financial health of the discom remains a challenge. Establishing a transparent and participatory regulatory process with regulators who are responsive to all stakeholders and sensitive to the sector’s needs remains a necessary condition for transforming discoms’ financial health. …Other states such as Uttar Pradesh that are about to undertake structural reforms should heed this crucial lesson from the experience in Delhi.

Additionally, the licenses of the three discoms will expire in March 2029, just four years from now (DERC, 2004). The massive quantum of regulatory assets can pose challenges in designing new frameworks for the next license period. The government and DERC must recognise this and act urgently.

More broadly, given the multitude of challenges faced by Indian state discoms, analysts and policymakers often advocate for privatisation as a solution. In Delhi’s case, it has indeed resulted in an unprecedented improvement in operational efficiency and supply and service quality. However, despite these significant benefits, the problems of under-recoveries of revenue and regulatory assets remain.

Delhi’s fraught regulatory process and endless litigation should remind us that bringing in the private sector can improve efficiency but maintaining the financial health of the discom remains a challenge. Establishing a transparent and participatory regulatory process with regulators who are responsive to all stakeholders and sensitive to the sector’s needs remains a necessary condition for transforming discoms’ financial health. Without this hard work of building and sustaining a robust and credible regulatory institution, just a change in ownership will be insufficient to bring about a financial turnaround. Other states such as Uttar Pradesh that are about to undertake structural reforms should heed this crucial lesson from the experience in Delhi.

References

BRPL. (2024, Nov). BRPL Petition for Truing-up upto FY 2022-23 & ARR for FY 2024-25. Retrieved from https://www.derc.gov.in/sites/default/files/BRPL%20Petition%20for%20True-up%20of%20FY%202022-23%20and%20ARR%20for%20FY%202024-25.zip

BYPL. (2024, Nov). BYPL Petition for Truing-up upto FY 2022-23 & ARR for FY 2024-25. Retrieved from https://www.derc.gov.in/sites/default/files/BYPL%20Petition%20for%20True-up%20of%20FY%202022-23%20and%20ARR%20for%20FY%202024-25.zip

Delhi Government. (n.d.). About Us page. Retrieved from Power Department, Government of NCT of Delhi: https://power.delhi.gov.in/power/about-us

Delhi SLDC. (2024). State Load Despatch Centre, Delhi . Retrieved from Annual report 2023-24: https://www.delhisldc.org/Resources/ANNUAL%20REPORT%202023-24.pdf

DERC. (2004). License issued to utilities BRPL, BYPL and TPDDL. Retrieved from https://www.derc.gov.in/license-issued-to-utilities

DERC. (2024, May). Review of Capitalization and Physical Verification of assets of BSES Yamuna Power Ltd. for the Financial Year 2004-2005 to 2015-16 . Retrieved from https://www.derc.gov.in/sites/default/files/O%20in%20PV_BYPL%20-%2003.0rder5.2024.pdf

DERC. (2024a, July). True Up Order FY 2020-21 for BSES Yamuna Power Limited. Retrieved from https://www.derc.gov.in/sites/default/files/True-up%20of%20FY%202020-21_BYPL.pdf

DERC. (2024b, July). True Up Order FY 2020-21 for BSES Rajdhani Power Limited. . Retrieved from https://www.derc.gov.in/sites/default/files/True-up%20of%20FY%202020-21_BRPL.pdf

DERC. (2024c, July). True Up Order FY 2020-21 for Tata Power Delhi Distribution Limited. Retrieved from https://www.derc.gov.in/sites/default/files/True-up%20of%20FY%202020-21_TPDDL.pdf

GNCTD. (2024, Mar). Government of the National Capital Territory of Delhi (GNCTD) . Retrieved from Budget at a Glance: https://finance.delhi.gov.in/sites/default/files/Finance/generic_multiple_files/budget_at_a_glance_2024-25.pdf

MoP. (2016). National Tariff Policy 2016. Retrieved from http://powermin.gov.in/sites/default/files/webform/notices/Tariff_Policy-Resolution_Dated_28012016.pdf

MoP. (2023, Jul). The Electricity (Third Amendment) Rules, 2023. Retrieved from https://powermin.gov.in/sites/default/files/Electricity_third_Amendment_Rules_alongwith_relevent_previous_amendments.pdf

NDMC. (2022, Nov). True-up Petition for FY 2021-22. Retrieved from https://www.ndmc.gov.in/departments/Departments/Commercial/TrueupPetition2021-22.pdf

NDMC. (2024, Dec). NDMC Electricity II. Retrieved from https://www.ndmc.gov.in/departments/electricity_ii.aspx

PFC. (2024, Apr). Report on Performance of Power Utilities 2022-23 (updated up to April 2024). Retrieved from https://www.pfcindia.com/ensite/DocumentRepository/ckfinder/files/Operations/Performance_Reports_of_State_Power_Utilities/Report%20Database%202022-23%20-%20updated%20up%20to%20April%202024EntityApr.pdf

TPDDL. (2024, Nov). TPDDL Petition for Truing-up upto FY 2022-23 & ARR for FY 2024-25. Retrieved from https://www.derc.gov.in/arr-true-up-myt-petitions