Updated: Jul 11, 2022
(Parveen Arora, Suruchi Kotoky & Tanmay Verma)
On June 3, 2022, the Ministry of Power notified the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 (“LPS Rules”), inter alia to strengthen the regulatory provisions for recovery of outstanding dues of generating companies (“GENCOs”), inter-state transmission licensees (“TRANSCOs”), and electricity trading licensees from distribution companies (“DISCOMs”), bearing in mind the financial implications and stake holder’s ability to pay.
Payment delays in power sector is a major concern for all the stakeholders. From time-to-time, various governments have tried to address the issue, and LPS Rules can be considered as government’s initiative to bring down the outstanding payment balance.
These Rules revolves around the subject of Late Payment Surcharges (“LPS”), which are defined as charges payable by a DISCOM to a GENCO or electricity trading licensee for power procured from it, or by a user of a transmission system to a TRANSCO, on account of delay in payment of monthly charges beyond the due date.
While the focus has been clearly shifted to timely payment, it is still pertinent to throw some light on few game-changing provisions linked with the LPS Rules. Accordingly, we provide below the key definitions and implications linked with LPS Rules.
Extracts from LPS Rules:
1. Late payment surcharge: DISCOMs will be bound to pay LPS on the outstanding amount after the Due Date at the Base Rate, applicable for the first month of default. The rate of LPS for successive months of default will increase by 0.5% for every month of delay, subject to maximum cap of not more than 3% higher than Base Rate and further, LPS shall not be higher than the rate of LPS specified in the agreement between the Parties.
2. Prior intimation of payment schedule: By July 2, 2022, DISCOMs are required to communicate in writing to the GENCO, TRANSCO, or electricity trading licensee, the outstanding dues and the number of EMIs in which the outstanding dues would be paid.
3. Priority wise adjustment of payment: All payments made by a DISCOMs will be first adjusted towards LPS and thereafter, towards monthly charges, starting from the longest overdue bills.
4. EMI schedule structure: The total outstanding dues including LPS up to the date of this notification of LPS Rules shall be re-scheduled and the Due Date of the payment shall also be re-determined in the following monthly instalments.
The first due date for payment of EMI will be the fifth day of immediate month that comes after 45 days from notification of LPS Rules, whereas subsequent EMI shall become due on fifth day of the subsequent months. In the event, DISCOMs makes timely payment of the installment, LPS will not be payable on outstanding dues w.e.f. June 3, 2022. However, in case of delay in payment of installment, LPS will become payable on the entire outstanding dues as on June 3, 2022.
5. Operationalization of payment security mechanism: A DISCOM or other user of transmission system has to maintain unconditional, irrevocable, and adequate payment security mechanism as required under this LPS Rules. Supply of power will only be made if adequate payment security mechanism or advance payment is maintained/made, in the absence of which GENCOs will lose its right to collect LPS from DISCOMs.
6. Mandatory supply obligation: GENCOs are bound to offer the contracted power to DISCOMs as per the terms of agreement signed between the parties and GENCO shall not be allowed to sell contracted power to other parties, without prior consent of the DISCOM, unless agreed otherwise under this LPS Rules.
7. Mandatory scheduling obligations for requisitioning of power: DISCOM shall intimate its schedule for requisitioning power for each day from each GENCO with which it has an agreement for purchase of power at least two hours before the end of the time for placing proposals or bids in the day ahead market for that day.
8. Regulation of access to defaulting entities: In case of non-payment of dues, by DISCOM, even after two and half months after presentation of bill or in case of default in the payment of instalments as per this LPS Rules, the short-term power supply to the defaulting entity shall be regulated entirely as per the process set in LPS Rules. Continuing default after regulation of short-term power supply, or continuing default in non-payment of the for three and a half months, would result in regulation of long-term access and medium-term access by 10%, with progressive increase of 10% for each month of default.
What it means for the stakeholders?
1. Consequences of payment security mechanism operationalization: GENCOs, TRANSCOs, trading licensees are obligated to regulate supply of power depending upon maintenance or non-maintenance of requisite payment security. Ministry of Power has linked right of seeking LPS only in cases, wherein GENCO is supplying power with payment security mechanism in process.
2. Consequences on power supply arrangements: Supply from GENCO’s end is ought to be reduced to 75%, and balance 25% power may be sold through power exchanges, upon non-maintenance and/or non-payment of outstanding dues by the Default Trigger Date. Further, continuance of such default shall entitle GENCO to sell its 100% power through power exchanges.
3. Necessary obligation for pre-requisitioning of power by DISCOMs: GENCOs are given the liberty to sell power at power exchange platforms upon absence of intimation of schedules as per the LPS Rules, for requisitioning of power. Further, DISCOMs will be responsible to pay compensation for non-requisitioned power from must-run project, at applicable PPA tariff rate.
4. Consequences upon GENCO’s failure to supply contracted power: GENCO’s failure to offer the contracted power as per the agreement to a DISCOM, will result in debarment from scheduling of any new short-term contracts from that generating station for a period of 3 (three) months from the date on which the default has been taken cognizance by the concerned load dispatch center. Further, continuing offences attract other penal provisions of the LPS Rules.
5. Necessary compliance of EMI Schedule (refer to the table above): The LPS will be applicable on entire outstanding dues as on the date of notification of LPS Rules, upon delay in payments as per the prescribed monthly installment schedules. Further, non-compliance of payment obligations, as per the requirements of LPS Rules will also result in regulation of access to the defaulting entities.
Concluding remarks and expected legal reverberations:
At outset, it appears that the prime focus of the LPS Rules is to clear up the outstanding dues from distribution company’s end, however it can also be inferred that this is a way to retrospectively extend the timeline for payment of such outstanding dues by distribution companies and to avoid imposition of the LPS.
Needless to mention that to achieve challenging targets of renewable energy, all around progress of the sector is very essential. Only installation or commissioning of the projects may not be sufficient, but sustenance of each project needs to be ensured, and to sustain a project, timely cash flow plays a pivotal role.
By way of introducing the new EMI installment mechanism for payment of outstanding amounts, the LPS Rules have deferred the timelines for payment of outstanding amounts from the dates previously agreed between GENCO and distribution companies vide their agreements, which might come up before adjudicatory body for adjudication as such deferment may not be favorable for such GENCOs, whose dues are pending from a very long time.
Further, the linkage of right to seek LPS with payment security mechanism, puts GENCOs, trading licensees, on a disadvantageous position, as GENCO’s rights may be directly affected by the performance or non-performance of payment security mechanism obligation by distribution companies.