Distribution companies (DISCOMs) in India face challenges in recovering costs for electricity procurement, especially when actual costs deviate from the anticipated ones. A significant part of their expenses is attributed to power procurement, which often exceeds 75% of the total costs. The difference between the approved and actual costs, primarily due to fluctuations in fuel prices, creates financial strain for DISCOMs. To address these deviations, DISCOMs typically impose a fuel surcharge, called the Fuel and Power Purchase Adjustment Surcharge (FPPAS), which helps them recover costs from consumers periodically, either on a monthly or quarterly basis.
The fuel surcharge is added to the regular electricity bill, which includes the fixed and energy charges. This surcharge helps DISCOMs recover the difference between the expected and actual power procurement costs. The surcharge system provides a mechanism to adjust for variations in costs throughout the year, preventing DISCOMs from having to recover the additional costs only at the end of the year, which would require carrying costs. The fuel surcharge system reduces the financial burden on DISCOMs by allowing them to recover costs incrementally, helping to maintain their financial stability.
The Ministry of Power has taken several steps to bring uniformity in the recovery of fuel surcharges across the states. In December 2022, the Ministry introduced amendments to the Electricity (Amendment) Rules 2022, which established a framework for automatic adjustment of FPPAS. The rules laid down specific guidelines for the automatic pass-through of fuel and power purchase cost variations, ensuring that FPPAS adjustments happen monthly. If the surcharge is less than or equal to 5% of the fuel and power purchase adjustment surcharge, the full amount is recoverable. For surcharges exceeding 5%, only a portion is recoverable automatically, while the remaining balance needs approval from the State Commission during true-up.
As of now, many states have adopted these guidelines. Twenty-five states or Union Territories (UTs) have implemented the automatic adjustment of FPPAS charges, and 33 states or UTs have allowed the automatic pass-through mechanism. However, some states, such as Tamil Nadu, Uttar Pradesh, and West Bengal, do not allow automatic adjustments for fuel and power purchase costs.
To further stabilize tariffs and reduce fluctuations, the Ministry of Power proposed an amendment to Rule 14 of the Electricity (Amendment) Rules 2022. One key suggestion was to create an FPPAS Stabilization Fund, which would help smooth out tariff increases caused by variations in fuel prices. Under this proposal, any negative FPPAS from a monthly billing cycle would be carried forward and accumulated in the stabilization fund until it reaches 20% of the monthly tariff revenue. On the other hand, positive FPPAS exceeding 10% would be adjusted using the fund.
Another innovative approach for stabilizing tariff fluctuations comes from Gujarat. The Gujarat Electricity Regulatory Commission (ERC) has adopted the practice of fixing a base fuel surcharge rate, called the Base FPPPA, for consumers at the beginning of the year. This base rate is determined by averaging the surcharge rates from previous years. Any additional amount due to cost deviations is recovered through an incremental surcharge quarterly. This system provides a certain degree of tariff certainty for consumers and helps avoid large price hikes.
Maharashtra has also implemented an innovative approach by creating a Fuel Adjustment Charge (FAC) Stabilization Fund. The state has allowed the accumulation of negative FAC amounts in the fund, which can be used to offset future increases in the fuel surcharge. The FAC fund helps ensure that consumers are not immediately burdened with high tariff hikes due to fuel cost fluctuations. If the accumulated amount in the FAC fund exceeds a certain threshold, it is refunded to the consumers.
Given these models, the Ministry of Power has proposed the creation of a uniform surcharge mechanism. This surcharge would be collected from consumers along with their monthly bills, and any variations in fuel and power purchase costs could be adjusted from this fund. The percentage of surcharge would be based on the historical FPPAS data of the previous years, and the funds collected would be held in a dedicated account, known as the FPPAS Stabilization Fund. This approach aims to reduce tariff shocks for consumers while ensuring that DISCOMs can continue to recover their costs on time.
The implementation of a uniform surcharge mechanism would ensure that both consumers and DISCOMs are protected from sudden tariff changes due to unpredictable fluctuations in fuel prices. By collecting a fixed surcharge in advance, the mechanism would create financial stability for DISCOMs and help avoid working capital issues. Moreover, it would allow for adjustments when actual costs deviate from the projected values, leading to more predictable and stable electricity pricing. This proposal is expected to improve the financial health of DISCOMs while providing consumers with more predictable energy costs.
