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MoP approves automatic pass-through of costs for change in law events

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, the 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 (a) where the ag­ree­ment lays down any formula, in accordance with such formula; or (b) 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 per unit basis or a combination thereof and will be recovered in the monthly bill as the part of 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.

Background

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 timely 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 payments to a large extent.

 

 

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