Late Payment Surcharges for Electricity (With Updated Rules of 2022)

Introduction

One of the bigger problems that players involved in the electricity sector encounter is the untimely or late payment of bills, which reduces the overall efficiency of the power sector. To avoid late payments of bills, parties usually agree upon a ‘Late Payment Surcharge’ (LPS) clause in their Power Purchase Agreement (PPA). The PPA can stipulate the basis for calculation or computation of LPS. The surcharge on delay in payment is computed based on the Prime Lending Rate fixed as per the State Bank Advance Rate (SBAR).

The expression ‘State Bank Advance Rate’ refers to the prime lending rate notified by the State Bank of India (SBI) from time to time, that is applicable per annum for loans with one year maturity, advanced by SBI. It is only in absence of the SBAR that the rate of LPS may be substituted by some other arrangement, via mutual agreement.

The LPS clause can be found in the ‘Billing and Payment’ section of a PPA. An actual LPS clause has been taken for reference.

“In the event of delay in payment of the monthly bill by the procurer beyond its due date month billing, a late payment surcharge shall be payable by the procurer to the seller at the rate of 2% in excess of applicable SBAR per annum, on the amount of outstanding payment, calculated on a day-to-day basis (and compounded with monthly rest) for each date of the delay.”[1]

The object of LPS is to encourage timely payment of charges by the procurer. The Supreme Court has held that rate of LPS would have no impact on the tariff.[2] LPS cannot be equated with carrying cost or actual cost incurred for the supply of power. The procurer has a contractual obligation to make timely payment of the invoices raised by sellers, and upon its inability to do so, a penalty is raised upon the procurer.

The Electricity (Late Payment Surcharge) Rules, 2021 

‘The Electricity (Late Payment Surcharge) Rules, 2021’ is a subservient statute of the Electricity Act, 2003 and was released by the Ministry of Power (MoP) on February 22, 2021. The following guidelines have been established under the 2021 Rules:

These Rules will apply to payments made in accordance with:

(1) Contracts in which tariff is determined in accordance with S.62 of the Act (via Central or State Commissions), such as Power Purchase Agreements (PPAs), Power Supply Agreements (PSA) and Transmission Service Agreements (TSA). 

(2) All PPAs PSAs and TSAs in which the tariff is determined in accordance with S.63 (competitive bidding process) and which become effective after the effective date of these rules.

On any amount still payable after the specified deadline, a late payment surcharge will be assessed at the base rate in effect for the first month of default.

For each subsequent month that a payment is late, the rate of the late payment surcharge will rise by 0.5 percent; however, at no time shall the late payment surcharge exceed a 3 percent premium over the base rate.

All payments by the distribution company towards the generating company, the transmission licensee or the electricity trader will be first utilized towards LPS dues and thereafter, towards monthly dues, staring from the longest overdue bill.  

Furthermore, if a distribution licensee still owes money on a bill seven months after it was due, including Late Payment Surcharge, it will be prohibited from using a power exchange or receiving a short-term open access permit until the debt is settled.[3]

The Electricity (Late Payment Surcharge and Related Matters) Rules, 2022

The MoP (Ministry of Power) has notified the Electricity (Late payment Surcharge and Related Matters) Rules, 2022 on June 3 of this year. Considering the financial ramifications and player’s capacity to pay, it had become necessary to tighten the regulatory framework for recovering debts owed towards the generating businesses, interstate transmission licensees, and electricity trading licensees from the distribution firms.

Key take-aways from the 2022 Rules are mentioned hereinunder[4]:

I. Adjustment towards LPS

All payments made by a discom to a genco or a trading licensee will first be utilised as LPS and thereafter, starting with the monthly bill due for the longest duration. 

II. Liquidation of Outstanding Amount

All due dates will be revised for payment by discom in equivalent monthly instalments of the total outstanding dues, including the late payment premium up to the date of notification of these rules. Following is the table denoting the maximum number of instalments allowed for discoms to clear their arrears including their LPS obligations.

All discom must inform the genco, transmission company, or electricity trader of the total amount of unpaid dues and the number of instalments necessary to pay them off. The information must be sent no later than 30 days after the 2022 regulations take effect.

The first EMI is due on the fifth day of the month that follows the announcement of the LPS Rules by 45 days, while successive EMI are due on the fifth day of the months that follow. LPS won’t be levied on past-due debt starting on June 3, 2022, if DISCOMs pays the amount on schedule. However, if an instalment is not paid on time, LPS will start to be owed on the full amount as of June 3, 2022.

III. Payment Security Mechanism

According to the LPS Rules, discoms and other transmission system users are expected to maintain unconditional and sufficient payment security mechanisms. For gencos to keep their right to collect LPS from discoms, they must maintain or make an acceptable payment security mechanism.

IV. Supply Obligation for Gencos

Unless otherwise agreed upon, gencos are obligated to provide the agreed supply of electricity to discoms in accordance with the conditions of the executed PPA. Gencos will not be permitted to sell the contracted power to third parties without the prior consent of the concerned discom.

V. Requisitioning of Power

At least two hours before the deadline for submitting proposals or bids in the day-ahead market on a given day, discom must inform each genco with which it has a PPA of its timetable for requisitioning electricity for that day. Upon its failure to inform, gencos are authorised to sell the un-requisitioned electricity in the power exchange. The gain from such sale would be adjusted, whereas the liability of payment of fixed charges towards un-requisitioned electricity will remain with the discoms.

VI. Regulation of access to defaulting entities

Short-term power supply to defaulting entities will be completely governed in accordance with LPS Rules in case of non-payment of dues by discom, even two and a half months after presentation of the bill, or in the case of default in the payment of instalments as per this LPS Rules.

Continued non-payment of the for three and a half months or continued default after short-term power supply regulation would result in a 10% regulation of long-term access and medium-term access, with a progressive increase of 10% for each month of default.

The Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 as notified on June 3rd can be found by clicking here.

Conclusion

India has aspired to become a country with net zero emissions by the year 2070. Further, India also aspired to be a producer of 500MW of power by the year-end 2030. Meaning, the entire electricity sector must progress to meet the difficult goals of renewable energy. Only installing or licensing the projects might not be enough. All projects need to be sustained. For a project to be sustained, timely cash flow is essential.

The LPS Rules have delayed the timelines for payment of outstanding amounts from the dates previously agreed upon between genco and discom.

As regards the discoms, this step has been taken to ensure that distributing companies make a detailed investigation of their books of accounts to understand their total outstanding amounts. Then they have to inform the gencos or transmission licenses regarding how many instalments would be required by them to clear the dues. This has also given them time to make amends to the existing structure and formulate a new structure of operation in accordance with the 2022 Rules.

However, such deferral may not be favourable for gencos whose dues are outstanding from a very long time. Such gencos may approach the adjudicatory body for adjudication. Furthermore, relationship between the right to seek LPS and the payment security mechanism harms the gencos and trading licensees. This is because genco’s rights may be negatively impacted by the fulfilment or non-fulfilment of distribution businesses’ payment security mechanism obligations.

[1] (2022) 4 SCC 657

[2] Ibid 1

[3] https://www.teamleaseregtech.com/updates/article/12887/electricity-late-payment-surcharge-rules-2021/

[4] https://www.scconline.com/blog/post/2022/06/04/electricity-late-payment-surcharge-and-related-matters-rules-2022/