Ensuring Transparency: Industry leaders discuss the new financial accounting rules for discoms

India’s power distribution companies are facing continuous challenges, including financial instability, high AT&C losses and delayed tariff revisions. To address these, the Ministry of Power (MoP) has introduced new financial accounting and disclosure rules to enhance transparency, accountability and operational efficiency. These rules mandate uniform accounting practices; and detailed disclosures on revenues, subsidies, receivables and performance metrics, providing stakeholders with a clearer financial picture. While the changes aim to improve decision-making and investor confidence, experts highlight the need for further steps, such as timely tariff revisions, subsidy standardisation and addressing legacy regulatory assets. Edited excerpts…

How will the new financial accounting rules for discoms impact the sector? Do you think the rules will effectively address the issue of regulatory asset accumulation?

Rajasekhar Devaguptapu

The MoP recently issued new rules mandating enhanced accounting and disclosure practices for electricity discoms. These rules are primarily designed to improve transparency in the financial reporting of discoms, with the broader objective of strengthening the financial health of India’s electricity distribution sector over the long term.

The need for more detailed and standardised reporting has been acknowledged for some time. In 2012, the Forum of Regulators conducted a study that recommended the recognition of regulatory accounts as distinct from statutory accounts, and called for uniform standards in the preparation and presentation of these reports. Subsequently, the MoP introduced amendments to the Electricity Rules in 2023, mandating more granular subsidy accounting while also establishing guidelines aimed at promoting prudent cost management practices.

Now, under these new rules related to disclosure norms, the central government mandates that all discoms should adopt uniform accounting practices. These rules go beyond the requirements of the Indian Accounting Standards, mandating additional disclosures on a range of operational and financial aspects, including revenue from energy sales, the number of consumers, the average cost of supply (ACS) the status of prepaid meters in government offices and cross-subsidy details.

One of the key features of these new rules is the introduction of norms for the provisioning of trade receivables. Trade receivables have been a significant issue in the sector, with PFC data showing consistent growth in receivables year on year. However, it remains unclear whether these receivables can be fully collected, raising concerns about the potentially bad or doubtful trade receivables. The new rules require discoms to make provisions for doubtful trade receivables, providing a more accurate representation of their actual financial standing and better reflecting the true strength of their working capital.

In addition to trade receivables, the rules also focus on providing more granular information about revenue, operations, borrowings and subsidies, along with cross-subsidy data. The disclosure of detailed trade payables, including generation and transmission dues, will improve transparency and cash-flow management across the sector. Also the requirement of disclosing information on bill payments by government departments is expected to improve collection efficiency, reducing losses due to delayed/non-payment.

For the first time, through these rules, comprehensive disclosure of critical data has been mandated. This data was often sought in fragments in the past. This includes information on government liabilities related to unpaid subsidies, the status of prepaid metering in government offices, distribution transformer metering, quarterly audits of financial and energy accounts, the status of tariff petitions, employee statistics, and renewable purchase obligation compliance. These new requirements will provide regulators, policymakers and stakeholders with a clearer and more comprehensive picture of the financial and operational status of discoms.

At a macro level, these new rules represent a significant shift in how the financial health of discoms will be assessed. By improving transparency in financial disclosures, the rules are expected to provide a more accurate understanding of the financial gaps or surpluses within the sector. This, in turn, should lead to better decision-making, more effective policy interventions and greater operational efficiency.

Sonali Gokhale

The MoP’s new financial accounting rules for discoms are a much needed and positive step for the sector, especially with regard to the enhanced disclosures of cross subsidy, consumer-wise tariff subsidy receivables, details of aggregate technical and commercial (AT&C) losses, and tariff order analysis including reasons for disallowances. Hitherto, most of this type of information was only available in the regulatory submissions of discoms in some states, leading to difficulty in accessing it in a timely manner across states as well as in understanding the numbers in the context of audited financial statements. Bringing this level of granularity in disclosures into the audited financial statements will yield more transparency.

While the rules will aid the root cause analysis of discom financial performance, they should be complemented with timely efforts towards improvement of revenue recovery (from consumers and state governments), reduction of costs through efficiency and better planning, and better tariff design frameworks such that the services of discoms to their own consumers, as well as to open access and captive ones, are cost-reflective. Without this, regulatory assets as well as losses may continue to accumulate.

Sachin Gupta

The new financial accounting rules for discoms stipulate the following:

They seek to provide greater transparency for discoms in reporting revenues by disallowing them from creating regulatory assets (RAs) and counting them as income receivables in the future. As per the new rules, only sums which have been provided in the tariff order as recoverable shall be recognised as revenue in financial accounts.

They provide for substantial additional disclosures towards energy sale and expenses. These include inter alia segment-wise sales units, revenues and billing rates; and source-wise power procurement rates–both units purchased and cost incurred.

There are disclosure norms pertaining to the breakup of receivables, as well as to payables and borrowings. The discoms are required to provide details of sums due to lenders as well as actual repayments made.

In addition, there is a requirement of creating provisions on receivables outstanding beyond 90 days. The extent of provision requirement depends on the period for which such sums have been outstanding. Also, the provisioning rate will increase year on year from 2024-25 and 2026-27.

In CARE’s opinion, the new norms will have a significant negative impact on the reported financial numbers of the discoms in the short term. This is because they will have to stop recognising regulatory incomes that have boosted their reported profitability and net worth numbers, which are already very weak for most discoms. In addition, the discoms may have to make large provisions for unrealised, long outstanding debtors (to the extent not provided for already) from the non-government sector. While it is not clear whether these accounting norms will be applicable for RAs booked in the past, should these changes be made applicable retrospectively, it will further impact their financial position. While these changes have no bearing on the cash position of discoms, it may have an adverse impact on their ability to borrow for funding distribution assets.

However, in the medium to long term, these new accounting norms will partly address the issue of regulatory asset accumulation as they will discourage discoms from creating regulatory assets to shore up financial statements. In addition, they will create pressure on all stakeholders, such as state governments, regulators and the discoms themselves, to ensure that truly cost-reflective tariffs are implemented in time.

Tarun Katiyar

The introduction of uniform accounting rules for discoms is a progressive step towards enhancing transparency and improving financial discipline in the sector. By mandating detailed disclosures beyond existing Indian Accounting Standards, the new framework fosters greater accountability, particularly in the reporting of revenue and costs. This initiative aims to provide a clearer financial picture of discoms, facilitating better credit assessments and boosting investor confidence.

With respect to regulatory asset accumulation, the new rules seek to address the long-standing issue of recording such assets as future revenue without obtaining proper regulatory approval. While this measure is a positive step towards streamlining financial reporting, the effective resolution of accumulated regulatory assets will depend on collaboration between discoms, state electricity regulatory commissions and other stakeholders. A clear mechanism for handling legacy regulatory assets will be crucial to avoid financial strain on discoms and ensure a balanced approach to recovery through tariffs.

The new framework underscores the government’s commitment to addressing systemic challenges in the power sector. It holds the potential to strengthen the financial health of discoms while equitably balancing the interests of all stakeholders.

Anil Rawal

The new financial accounting rules introduced by the MoP for discoms will significantly improve transparency in financial disclosures and tackle the longstanding issue of regulatory asset accumulation. Regulatory assets create a cycle of mounting losses and rising debt, leading to severe cash-flow challenges for discoms. According to an MoP report, the regulatory assets of discoms amounted to about Rs 1,600 billion in 2023-24, underscoring the urgent need for solutions such as tariff adjustments or financial support from state governments to address the dues.

The new financial accounting rules require discoms to disclose key financial metrics, including revenue details, power purchase data, AT&C losses and the average cost of supply. The directive also states that only the revenue approved in tariff orders will be recognised. This is a welcome step, as it will prevent financial misreporting and ensure that speculative earnings do not compromise fiscal transparency. These uniform accounting practices are expected to provide financial safeguards for discoms, improve transparency and establish the foundation for a more efficient and sustainable power distribution sector.

Mohammad Saif

The MoP has introduced the Electricity Distribution (Accounts and Additional Disclosure) Rules, 2024, to enhance transparency and accountability within the power distribution sector. These regulations require discoms to adopt standard financial reporting practices, aligning revenue recognition exclusively with approved tariff orders. The rules further mandate detailed disclosures, encompassing power sales, government subsidies, trade receivables and critical operational metrics such as the ACS-average revenue realised gap and AT&C losses.

These rules are expected to bring transformative changes to the power distribution sector, which has traditionally struggled with financial losses. Detailed operational reporting, via financial statements, would not only help in strengthening transparency but also facilitate informed decision-making at the operational, policy and regulatory levels.

What additional measures are necessary to improve the financial health of discoms and also financial accounting practices?

Rajasekhar Devaguptapu

A notable area that remains unaddressed in the new rules is the tariff true-up mechanism. The rules do not currently mandate the disclosure of detailed information on tariff petitions and true-up petitions, including the difference between petitioned and approved tariffs. This omission could be remedied through future amendments, which would provide a clearer understanding of how regulators assess and adjust tariffs over time.

However, the new rules introduced by the MoP are a significant step toward improving financial transparency in India’s electricity distribution sector. By mandating more detailed and standardised disclosures, these rules aim to enhance the accuracy of financial reporting, foster better decision-making and ultimately contribute to the long-term financial sustainability of discoms. While there are areas that still require further attention, such as the tariff true-up process, the new rules represent a major positive shift toward greater accountability and transparency in the sector.

Sonali Gokhale

In the short run, the rules would have been more effective if they had included accounting guidance for regulatory deferral account balances. This inclusion would have encouraged much better understanding and disclosure of regulatory asset accumulation on the part of discoms, and formed part of the draft rules brought out by the MoP in September 2023.

Prayas (Energy Group)’s analysis of the audited financial statements of various discoms shows that there are instances of non-standard application of accounting principles across areas such as regulatory assets, government grants, contingent liabilities and even instances of inconsistent application of accounting standards. Further, many inadequacies in the discoms’ financial statements have been pointed out by statutory auditors in their reports. These observations range from mild accounting impropriety to failure on the part of discoms to provide their annual financial statements, which present a true and fair view of a company’s affairs. Given the Rs 6.77 trillion in aggregate cumulative losses across discoms, it is crucial that efforts are made to standardise accounting practices to account for the unique features of regulated, cost-plus electricity distribution companies.

The Companies Act, 2013, provides for differential treatment for formats of audited annual financial statements for electricity sector companies. The Electricity Act or the rules thereunder do not have differential treatment for presentation formats of annual audited financial statements to account for unique sector characteristics/peculiarities, despite the clear proviso for the same in the Companies Act, 2013. Discoms and other electricity companies use the default general purpose format under the Companies Act, 2013. This itself has contributed to some disclosure gaps and standardised accounting protocol application across various discoms. While the notification of additional disclosure formats is important, it is crucial that the MoP, in close coordination with the Ministry of Corporate Affairs, spear-heads efforts towards standardisation of the entire annual audited financial statements for all electricity sector companies. This will help increase transparency and accountability, not just for discoms but across the electricity sector value chain. The National Financial Reporting Authority could also provide the required technical expertise in accounting and auditing for this effort.

Sachin Gupta

In addition to the change in accounting practices, the following measures need to be put in place to address the financial health of discoms:

Concerted efforts to improve distribution/billing losses by implementing measures such as energy accounting and audits at all levels from 11 KV feeders to distribution transformers, loss reduction measures such as aerial bunch cabling, segregation of agricultural and non-agricultural feeders in rural areas, and implementation of prepaid smart meters.

Recovery of dues from government and local bodies in a timely manner, as these account for a significant chunk of total receivables.

Beefing up the internal audit processes so as to bring the audit and disclosures standards up to those of listed entities in terms of timeliness, etc.

Tarun Katiyar

India’s power sector has made remarkable progress over the past decade, evolving from a power-deficient system to achieving power sufficiency with a total generation capacity of 426,132 MW. This transformation is underscored by the peak power demand surpassing 250 GW earlier this year, driven by rapid economic growth and expanded energy access across the nation. However, ensuring sustained progress requires a multi-pronged approach, addressing financial stability, operational efficiency and infrastructure modernisation.

Timely tariff revisions are crucial for discoms to recover costs and maintain financial health, while reducing AT&C losses remains a key priority for improving operational efficiency and boosting revenue collection. Strategic debt management measures, such as refinancing and restructuring, can ease the financial burden on discoms, helping them navigate fiscal challenges. Furthermore, strengthening corporate governance through transparent decision-making and accountability can enhance the credibility of discoms, making them more attractive to investors. Investments in smart grid technologies offer additional opportunities to optimise operations, minimise losses and improve customer experiences.

Sustained government support, through targeted subsidies and policy reforms, remains essential for bolstering the financial health of discoms. With a strong focus on modernising infrastructure, expanding clean energy adoption and enhancing operational efficiency, India’s power sector is well-positioned to overcome existing challenges. The combined efforts of government initiatives, technological advancements and private sector participation promise a strong foundation for sustained growth, ensuring a greener and more sustainable energy future for India.

Anil Rawal

The financial health of discoms has long been a major concern for the power distribution sector. To improve their financial position, the government needs to implement targeted strategies. First, reducing AT&C losses through the digitalisation of discoms with smart metering can address inefficiencies in metering and billing. Second, timely tariff revisions are essential to ensure alignment between costs and revenues. Third, streamlining subsidy accounting, reporting, billing and payments is vital, as opaque subsidy practices have historically strained discom finances.

There is no one-stop solution to improving discoms’ financial health. Turning loss-making discoms into profitable and investable entities requires a combination of targeted interventions, quick decision-making and sustained efforts over time.

Mohammad Saif

First, timely and cost-reflective tariff revisions are crucial. Delays in tariff updates have historically caused a mismatch between supply costs and revenues, putting significant financial pressure on discoms. Regular and transparent tariff reviews, along with clear cross-subsidisation policies, will help ensure that tariffs reflect the actual cost of electricity, supporting financial stability.

Second, strengthening collection mechanisms is essential. While new rules mandate reporting on receivables, the collection of dues, especially from government departments and large value consumers, needs to be at 100 per cent.

Finally, technology integration through initiatives such as smart metering can help identify, measure and subsequently reduce technical and commercial losses. Real-time consumption data enhances billing accuracy, reduces errors and curtails power theft, thereby improving operational efficiency and reducing AT&C losses.