New Delhi: Rating agency ICRA has said that eliminating the gap between average cost of supply (ACS) and average revenue realisation (ARR) for state power distribution companies (discoms) will require an all-India average tariff hike of 4.5 percent, along with a reduction in aggregate technical and commercial (AT&C) losses below 15 percent. The agency flagged persistent financial stress in the distribution segment, citing inadequate tariff hikes, mounting regulatory assets, and rising debt burdens.
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ICRA estimated that regulatory assets (RAs) for state discoms remain elevated at around Rs 3 trillion, with Tamil Nadu, Uttar Pradesh, and Rajasthan accounting for the bulk of the burden, followed by Maharashtra, Delhi, West Bengal, and Karnataka. The Supreme Court, in a recent order on petitions concerning Delhi discoms, described the situation as a “systemic regulatory failure” in tariff governance. It directed that legacy RAs be liquidated within four years, capped creation of new RAs at 3 percent of annual revenue requirement (ARR), and tasked the Appellate Tribunal for Electricity (APTEL) with monitoring compliance.
“Complying with the SC directive would necessitate steep tariff hikes across these states, which would in turn require state government support for effective implementation,” said Girishkumar Kadam, Senior Vice President & Group Head, Corporate Ratings, ICRA.
According to ICRA, tariff orders for FY2026 have been issued in 23 of 28 states, though they should have been finalised by March. The median tariff hike at the all-India level is only 1.9 percent for FY2026, compared with 2.1 percent in FY2025, highlighting continued reluctance to align tariffs with cost of supply. Power purchase cost remains the largest contributor to rising ACS.
ICRA noted that the ACS-ARR gap stood at 46 paise per unit in FY2024, with Andhra Pradesh, Madhya Pradesh, Maharashtra, and Telangana among the worst affected. “The implementation of the Fuel and Power Purchase Adjustment Surcharge (FPPAS) mechanism remains important to ensure the timely pass-through of PPC variation to the consumers. However, this remains patchy, with only a few states operationalising the mechanism fully despite its notification in December 2022,” Kadam added.
The gross debt of state-owned discoms increased to Rs 7.4 trillion as of March 2024 from Rs 6.6 trillion a year earlier, reflecting sustained reliance on borrowings. At the same time, subsidy dependence is projected to rise to Rs 2.2 trillion in FY2026, up from Rs 2.1 trillion in FY2025, as higher ACS and new subsidy schemes strain state finances further.
The recent rationalisation of GST on coal—raising the rate from 5 percent to 18 percent while removing the compensation cess of Rs 400 per tonne—is expected to reduce the cost of generation for coal-based power plants. ICRA said this could lower discoms’ cost of supply by around 12 paise per unit, as coal-fired capacity accounts for more than 70 percent of total generation.
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ICRA has maintained a “Negative” outlook on the power distribution segment, citing weak operating efficiencies, inadequate tariff revisions, and high debt levels. The agency said that sustained improvement in AT&C losses, timely pass-through of costs, and liquidation of regulatory assets are essential for a financial turnaround.
