Barring DISCOMs With Long Pending Bills to Access Spot Market – Who Will Enforce?

The inordinate delays in distribution companies (DISCOMs) clearing payments have made it difficult for solar and wind energy generators to operate their businesses. Already facing a tough time in the wake of the Covid-19 pandemic, the ever-increasing defaults in payments by DISCOMs have added to their woes.

In October last year, the Ministry of Power proposed reducing late payment surcharges for payment delays to the power generators to provide financial relief to DISCOMs. Many states like PunjabBihar, and Karnataka reduced the late payment surcharge because of the pandemic. This was a big blow to power generators, who also lose out on the interest for the amount delayed.

A Step to Make DISCOMs Fulfill Their Obligations 

Recently, the Ministry of Power issued new regulations for the late payment surcharge, which will be applicable for PPAs and transmission service agreements in which the tariffs have been determined through competitive bidding.

According to the latest notification, a DISCOM with a late payment surcharge outstanding against a bill after the expiry of seven months from the due date will be debarred from procuring power from a power exchange or grant of short-term open access until the bill is paid.

Will this clause compel DISCOMs to clear their dues on time? The late payment charges were introduced to deter DISCOMs from defaulting on their payments, but it is obvious that it has not had the desired effect.

Attorney Aditya K. Singh, an Associate Partner at Link Legal India Law Services, said that the new rule would make DISCOMs more disciplined. But he does not rule out the possibility of DISCOMs challenging the new penal clause.

“I think DISCOMs will consider challenging this particular rule. Andhra Pradesh DISCOMs had challenged the earlier rule put forward by the Ministry of Power requiring the opening of letters of credit,” he said.

Singh said that if this rule remains in the present form, it will bring financial discipline. “This has become the story of most DISCOMs taking a credit period of about 8-12 months for making the overdue payment. Despite the late payment surcharge clause in the PPA, they compel generating companies to waive the late payment surcharge. Initially, the new rule may increase the burden on DISCOMs, but in the longer run, it will be beneficial for the sector.”

He said that the rule should have contained a procedure to be followed in cases of default. “In the absence of an implementation mechanism, this rule will face challenges. Various DISCOMs are in the habit of deferring the payment of late payment surcharge, as there is no deterrent in place. This rule clarifies that payment will be first adjusted toward late payment surcharge and after that toward monthly charges. This should act as a deterrent for DISCOMs against delaying payments.”

Need for More Clarity Over Implementation 

Vinay Kumar Pabba, Founder and CEO of VARP Power, also concurs that the new rule is a significant deterrent.

“It is something like the nuclear option that may never be used. But the rules do not outline the process for implementing this deterrent. Who will keep track of undisputed dues with DISCOMs and invoke this measure to stop DISCOMs from buying power on the exchanges fairly and transparently? As with many things, we get the big picture right but falter on the details.  Will the load despatch centers take ownership of this process, or will the exchanges follow the regulators’ orders? Who will act on behalf of the aggrieved generators? This needs to be clarified,” he said.

“DISCOMs in Telangana, Tamil Nadu, and Andhra Pradesh will be the first to be impacted by these new rules, as dues in these states have already crossed the seven-month threshold.  It would be interesting to see how this measure would be implemented,” he said.

Pabba recalled that the Andhra Pradesh High Court ruled last week that the Ministry of Power had no jurisdiction to enforce PPAs between DISCOMs and developers.

“Hence, directing the grid operators to cut off DISCOMs access to the power market is without authority. The court has said that the Ministry has no right to cut off DISCOMs from the power markets. Though the ruling was in the context of DISCOMs not opening letters of credit, the penalty is the same as in this late payment case. This precedence may handicap the Ministry’s ability to enforce a ban from the markets,” he said.

There are times when the DISCOMs force the generators to waive late payment surcharge liabilities entirely. Most of the time, generators comply as they have little choice considering DISCOMs are monopoly buyers. In some cases, when the generators refuse to toe the line, they end up in the courts.

Despite all the assistance provided by the Center, the DISCOM dues continue to rise. The DISCOMs owed ₹122.49 billion (~$1.65 billion) to renewable energy generators (excluding disputed amounts) in overdue payments as of January 2021. According to MoP’s payment ratification and analysis portal (PRAAPTI), outstanding payments (excluding disputed amounts) to renewable generators in January stood at ₹3.41 billion (~$46.12 million).

“Some of the DISCOMs from Karnataka have dues which range from 7-8 months to more than a year. We appreciate this move, and we fully support it. The Center should also explore other options so that the DISCOMs are obliged to fulfill their obligations. The DISCOMs have to purchase power on a short-term basis from the exchange. Maybe they will not be affected so much by this new directive, and there might be some compulsion for them to avail short-term power. This is a small step, and the Center is giving a positive indication to the generators on long outstanding bills,” said Gaurav Saini, a senior executive with Hero Future Energies.

“We should also take into consideration the financial health of the DISCOMs. This might just put extra pressure on the DISCOMs. The Center and state governments should empower the DISCOMs and help them come out of the current situation,” he said.

Saini pointed out that many DISCOMs have a large number of regulatory assets pending disbursal. In Andhra Pradesh alone, nearly ₹60 billion (~$826.31 million) of regulatory assets are pending. In the past four to five years, the Center has been trying to support the DISCOMs. “But the problem is the implementation part, which is missing in these types of initiatives,” he said.

While the Center’s intentions seem to be well placed, it remains to be seen how far this new directive will go in helping clearance of outstanding dues by the DISCOMs. The power generators have every right to feel aggrieved by the attitude of the DISCOMs in this tough economic environment.

“Until power utilities are made to pay their bills for the power they purchase from generators, investors will continue to deem the sector extremely risky. With each default, delayed payment, and opposition to renewables, DISCOMs are making a great case as to why they are obsolete in their current form and need to be privatized,” said Raj Prabhu, CEO of Mercom Capital Group.