Issue Brief

Approach for the Regulatory Treatment of the UDAY Debt Takeover

Prateek Aggarwal, Tarun Mehta, Chanmeet Singh Syal and Vaibhav Pratap Singh
October 2022 | Power Markets

Suggested Citation: Aggarwal, Prateek, Tarun Mehta, Chanmeet Singh Syal, Vaibhav Pratap Singh. 2022. Approach for the regulatory treatment of the UDAY debt takeover. New Delhi: Council on Energy, Environment and Water.

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Overview

This study is a first of its kind and it reviews and analyses the impact of the regulatory treatment of the Ujwal DISCOM Assurance Yojana (UDAY) debt takeover on distribution companies (discoms) and consumers under two approaches: Approach A examines the regulatory treatment by state electricity regulatory commissions (SERCs) and Approach B looks at treatment based on financial principles.

Discoms from 16 states participated in the Ujwal Discom Assurance Yojana (UDAY) scheme for their financial turnaround and operational efficiency improvement¹. As of 30 September 2015 (the launch date for the UDAY scheme), the total debt of the discoms of 15 states stood at INR 3.7 lakh crore, i.e.~93 per cent of the total debt of discoms in India². Under the UDAY scheme, state governments were to take on over INR 2.3 lakh crore of discoms’ debt (~75 per cent of the INR 3.7 lakh crore debt).

The two approaches for regulatory adjustment provides insights for the Ministry of Power (MoP), Forum of Regulators (FoR), Appellate Tribunal for Electricity (APTEL), distribution companies (discoms), state electricity regulatory commissions (SERCs), state governments, and sectoral experts.

Key Highlights:

State electricity regulatory commissions using certain assumptions and available data, adjusted the UDAY debt takeover against the revenue gap (RG) or regulatory asset (RA) in tariffs and true-up orders (Approach A). This adjustment will impact discoms’ future revenue recovery as captured by the RG or RA.
Our review suggests a disproportionate distribution of the benefits of the UDAY scheme to consumers (in Uttar Pradesh, Madhya Pradesh, Tamil Nadu, and Jharkhand) and discoms (in Rajasthan) in Approach A¹.
The UDAY debt taken over by state governments was converted into grants and equity. In the absence of details on the takeover/conversion of loans against RG or RA, SERCs can adopt the widely accepted financial principles to adjust the grants and equity provided under the UDAY scheme against RG or RA (Approach B).
The Approach B-based regulatory treatment (rooted in financial principles) could result in an improvement in discoms’ financial position cumulatively by INR 58,276 crore in Uttar Pradesh, Madhya Pradesh, Tamil Nadu, and Jharkhand³. This, in turn, would also reduce discoms’ dues to generation companies.
Approach B based regulatory treatment in Rajasthan can provide relief of INR 26,886 crore to electricity consumers in the form of reduction in unfunded revenue gap.
The Approach B methodology strengthens discoms’ balance sheets and further helps augment their investments under the Reformed Distribution Sector (RDS) scheme.
SERCs should consider adopting Approach B for the regulatory treatment of the UDAY debt takeover. This will require discoms, state governments. and SERCs to work together for the timely recovery of accumulated RG or RA via refinancing of regulatory assets, regulatory surcharges and tariff hikes.
State governments in seven states (Andhra Pradesh, Himachal Pradesh, Telangana, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, and Jharkhand) need to convert their discoms’ cumulative debt worth INR 47,672 crore into grants/equity.

The Ministry of Power (MoP), as a signatory to the UDAY Memorandum of Understanding (MoU), should share a guidance note with state governments, discoms, and SERCs to revisit the existing adjustment in Approach A. For all ongoing and future schemes, stakeholders such as MOP, state governments, discoms, and SERCs should work in close coordination during the designing and implementation of such financial schemes.

Notes

¹ Overall, 32 states participated in the UDAY scheme. While 16 states participated to improve discoms’ financial and operational efficiency, the other 16 states participated to improve operational efficiency only.

² Authors’ analysis based on the UDAY MoU for the 15 states that are covered in the study. Jammu and Kashmir has been excluded from our study due to a lack of data in the public domain.

³ Authors’ analysis based on the five states with reliable data