The Ministry of Power notified the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 (LPS Rules) on June 3rd, 2022, which has been notified by the Government of India by the powers conferred under Section 176 (1) of the Electricity Act, 2003. These LPS Rules have been gazetted with the effect of nullifying the previous Electricity Rules, i.e., Electricity (Late Payment Surcharge and related matters) Rules, 2021. The said LPS Rules, have been notified inter alia to strengthen the regulatory recovery provisions on the outstanding dues by Generating Companies (GENCO). Further, these LPS Rules also are notified to recover dues from inter-state transmissions licensees (TRANSCOs) and also distribution companies that are dealing with the trade of electricity licensee (DISCOMS) whereas also keeping in mind the financial capabilities of the stakeholders.
This article aims to evaluate the updated legislation on the recovery mechanism of the generating companies, and distribution companies.
Keywords: “Electricity Act”, “Distribution companies”, “Generating Companies”, “Electricity rules”.
There has been major concern about arrears of payment over the years, this concern has also been crucial for all the stakeholders. Various governments have sought to address the issue from period to period, and theLPS Rules can be interpreted as a government initiative to reduce the arrears of payment. In India, GENCO regularly transmits, distributes, or trades electricity to DISCOMs and receives monthly electricity revenue in proportion to the amount of electricity being transmitted, distributed, or traded. Both the parties, i.e., GENCO and DISCOMs hereby have a relationship and role to fulfill and their relationship is governed by the Power Purchase Agreement (PPA) with all of the conditions, quantity, channels, and rate of electricity that shall be traded between the parties.
DISCOMs, which are primarily state-owned, are in charge of power distribution and are required to meet the electrical demand in their service region. Many DISCOMs are currently operating at a loss and are plagued by technical and economical constraints. End-user payment delays and defaults worsen the problem, causing DISCOMs to delay subsequent payments to electricity providers. Significant payment delays, particularly for Renewable Energy (RE) companies (11 months), have lowered their investment returns and debt repayments. As a result, stakeholders are apprehensive about investing in such projects for the long term.
As per the Ministry of Power portal, i.e.,PRAAPTI portal, the current arrears of dues stand at 1,04,265 Crore’s at the start of July 2022, whereas, as per the updated analytics by the portal, 29,892 Crore’s is due at the end of July 2022. Among the government-owned GENCOS,NTPC owes a huge amount of money to the DISCOMS, i.e., Rs. 5,441.95 Crore, which is followed by DVC ranging to 3,885.28 Crore as of June 2022. If the private GENCOs are concerned, DISCOMS which owes the huge arrears due to Adani Power in June is around Rs. 21,682 Crore.
The LPS Rules are associated with Late Payment Surcharges (LPS), which are classified as costs incurred by a DISCOM to a GENCO or power trader for the power acquired from them, or by an operator of an electrical conduction network towards a TRANSCO, for failure to pay monthly payments by the due date.
While the emphasis has certainly transitioned to regular payments, it is still imperative to shed awareness on a few game-changing aspects associated well with LPS Rules. As a result, this article also includes the key definitions and implications associated with LPS Rules below.
- “Agreement” – agreement shall mean and also shall include the following:
(i) Power Purchase Agreement entered upon by the parties, i.e., licensed electricity distributor and the GENCO or a licensed electricity trader; or
(ii) Power Purchase Agreement entered upon by the parties, i.e., licensed electricity distributor and a licensed electricity trader; or
(iii) Transmission Service Agreement entered upon by the parties, i.e., licensed transmitter of power and licensed electricity distributor or any other known end-users of the transmitting system;
(iv) Any other agreement irrespective of the title of the agreement and binding upon the GENCO, transmission licensee, licensed electricity distributor, or any other known end-users of the transmitting system.
- “Base rate of late Payment Surcharge” – shall mean that The State Bank of India’s peripheral cost of funds is largely based on borrowing costs for one year, as applicable on April 1st of the fiscal year in which the period falls, plus 5%, and in the absence of an apparent marginal cost of funds premised borrowing costs, any other configuration that replaces it, as specified by order published in The Gazette.
- “Default Trigger Rate” – shall mean:
(i) In the event of non-clearance of dues, surpassing the one-month mark of the due date or two and half months after the presentation of the invoice by the GENCO, licensed electricity trader, or the licensed transmitter of electricity, as the case may be, whichever shall come late, and
(ii) If the payment security mechanism is not maintained, the next bank business day since the designated payment mechanism is required to be restocked but it is not performed.
- “Due Date” – The date on which the bill for the costs of transmitted power by the GENCO, electricity trader, or energy transmitters furnished by a transmission licensee is due, as specified in the agreement. If the terms are silent on the subject, the bill must be paid within 45 days following the issuing of the bill for the energy, i.e., electricity delivered by the GENCO, electricity trader, electricity transmitter, or transmission licensee. It is also stated that when the due date comes on a banking non-working day, the following preceding day must be considered for this Section and payment.
Some Key Elements of the LPS Rules:
- Late Payment Surcharge (LPS): DISCOMs are obligated to pay the LPS over the outstanding amount after crossing the due date as per the base rate, which is applicable for the default of the first month. After the one-month default, the rate will successively increase by 0.5% for every month in default, which is subject to the maximum cap limit of not more than 3% higher than the Base Rate. Further, it is also clarified that the LPS rate shall not be deemed to be higher than the rate agreed by the parties and stipulated in the PPA.
- Prior information on payment schedule: It has been notified that by July 2, 2022, DISCOMs are hereby provided to communicate in writing to all the GENCO, TRANSCO, or licensee dealing in electricity trading, all the outstanding dues and also mention the number of EMIs in which the outstanding dues shall be paid.
- Priority-wise adjustment of payment: All the payments made by the DISCOMs shall first be adjusted against the LPS and thereafter, towards monthly charges, starting from the longest overdue bills.
- EMI Schedule Structure: The total outstanding debts, inclusive of LPS, up to the date of this communication of LPS Rules will be rescheduled, and the Payment Due Date will be re-determined in the subsequent monthly payment.
Maximum installments allowed for DISCOMs to clear outstanding including LPS
|Outstanding dues amount (Rs. Crore)
|Maximum no. of Installments
|Up to 500
|501 – 1000
|1,001 – 2000
|2001 – 4000
|4001 – 10,000
|Table 1:EMI Schedule
The first EMI payment deadline will be the fifth day of the current month, 45 days following the notice of LPS Rules, and successive EMIs will be due on the fifth day of the following months. If DISCOMs pay the installment on schedule, LPS will not be charged on outstanding dues as of June 3, 2022. However, if an installment is not paid on time, LPS will become applicable on the total outstanding dues on June 3, 2022.
Prayas (Energy Group) coordinator, Ashok Sreenivas, an energy policy research organizationstated that “Through this introduction of LPS Rules, the government is attempting to find a method to ensure that generators receive some financial flow even if they do not receive their dues all at once. At the very same time, it is an attempt to provide distributing companies some leeway in clearing dues while enforcing some type of financial regulation.”
- Payment Security mechanism operationalization: There exists an obligation upon DISCOMs, and other users of the transmissions system to maintain an adequate payment security mechanism, this obligation is unconditional & irrevocable, as per the LPS Rules. The LPS Rules further stipulate that the supply of electricity will only be made or facilitated if an adequate security mechanism is maintained or a proper security deposit is provided. In the absence of the above-mentioned, the GENCOs shall have no right to collect LPS from DISCOMs.
- Mandatory supply obligation: GENCOs are obliged to furnish contractual power to DISCOMs in compliance with the provisions of the agreement reached between the parties, and GENCOs are not permitted to sell contractual power to third parties without prior authorization of the DISCOM, except as otherwise stipulated under the LPS Rules.
- Scheduling obligation: DISCOM is required to notify each GENCO to which it has an agreement for the transmission of electrical power of its timeline for commandeering power for each day at least two hours well before the end of the time for submitting proposals or bids for the day ahead.
- Regulation to access for defaulting entities: In the event of non-payment of the dues by DISCOM, exceeding the period of two and half months after the presentation of the transmission invoices or in the event of default on the payment of installments as per the LPS Rules, the power supply based on short term shall be solely regulated by the LPS Rules. In the event of a continuous default in the payment and after regulation of the short-term supply, or continuous default for three and half months, this action will result in regulation of the long-term access and medium-term access by 10%, with the increasing increase in the regulation by 10% for each month of default.
What do LPS Rules hold for the Stakeholders?
- Effects of the payment security mechanism in effect: Now the GENCOs, TRANSCOs, and licensee traders are now obligated to rationalize and regulate the power transmission to the users of the electricity solely dependent on the maintenance and non-maintenance of the security deposit mechanism. Ministry of Power has linked and provided the right towards seeking LPS, i.e., late purchase surcharge only in the cases, wherein the GENCO is supplying the decided power with the payment security mechanism in the process.
- Power supply arrangement: Now the GENCOs are at the discretion to be to reduce the power supply to the limit of 75% and the remaining balance, i.e., 25%, supply of power shall be sold through power exchanges, given the criteria of non-maintenance and non-payment of the outstanding due by the Default Trigger Date. In the event of further default, GENCOs are at the discretion to sell their full power, i.e., 100% through the power exchanges.
- Pre-requisition of power by DISCOMs: As per the LPS Rules, GENCOs are at liberty to distribute, trade, or sell the required power through power exchange if the intimation of schedules is not provided by the DISCOMs, electricity traders, or transmission licensee. Further, DISCOMs are the obligation to provide compensation to the GENCOs for the non-requisitioned power from the must run-projects, at the applicable PPA tariff rate.
- Consequences in the event of failure by GENCO to supply contract power: Now as per theLPS Rules, GENCOs are at scrutiny, in the event the GENCOs fail to offer the contract power as per the agreement to the DISCOMs, and GENCOs decide to supply the same contracted power to any third party without the prior consent of the contracted party, the said GENCO can be at default, given the fact DISCOM lodge a formal complaint against the said GENCO on the said issue to the load dispatch center concerned. GENCOs will be held liable and shall be debarred from participating in any power exchanges and further, on the discovery of an efficient electricity pricing portal and scheduling of any new short-term contracts from the GENCO for three (3) months starting from the date at which the default has been taken place by the concerned load dispatch center.
- Further, the said period of disbarment is subject to increase in the event of second default, and the said period shall increase to one year for the consecutive defaults by the GENCO. Such debarment of the GENCO shall be without prejudice to the rights of the DISCOM in terms of seeking compensation for the default and loss caused by the GENCO.
- Necessary compliance with the EMI Schedule: The LPS shall be applicable on the entire outstanding amount due as on the date of the notification of the LPS Rules, i.e., 3rd July 2022, if payments are not made on time according to the authorized monthly installment schedules Non-compliance with payment responsibilities, as required by the LPS Rules, will also result in accessibility to the delinquent businesses being restricted.
Given the comprehensive outlook over the LPS Rules, it can be very well construed that the main objective of the LPS Rules is to clear out the outstanding dues from the distribution licensee companies end, however at the same time it can be inferred that whereas at the single hand the focus is on clearing out dues but the LPS Rules also provides an extension over the timeline for the payment of such outstanding dues by the distribution companies to ultimately offer an opportunity to the distribution companies to avoid the LPS, i.e. late purchase surcharge.
It is essential to mention that to achieve the ever-challenging needs of renewable energy all around the progress of the sector is very essential. To achieve the overall progress of the sector only installation or commissioning of the project may not be enough effort, but the sustenance of each installation shall be overlooked closely, and to maintain the progress and viability of the project regular cash-flow plays an essential role.
With the introduction of the new EMI mechanisms for the distribution companies on the payment of the outstanding dues, the LPS Rules have aimed to defer the timelines for the payment of the outstanding dues from the previous dates agreed between the parties, i.e., distribution companies and generating companies, by the power purchase agreement. These delays might have been put-forth before the adjudicatory authorities as such deferment may not be favorable for the generating companies, whose dues are being held up for a long time.
Further, the right to seek LPS with the payment of security mechanism places the generating companies, and trading licensee, in a disadvantageous position, as the generating companies’ rights may be directly affected by the payment security mechanism obligation by the distribution companies.
About the Author
Mr. Avnip Sharma is pursuing LLM from O.P. Jindal Global Law University.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastava & Muskaan Singh
Senior Editor: Aribba Siddique
Associate Editor: Tisa Padhy
Junior Editor: Intisar Aslam
Preferred Method of Citation
Avnip Sharma, “Electricity Rules 2022: A Mechanism to Clear Out Dues” (IJPIEL, 29 July 2022)