Draft – KSERC (Terms and Conditions for Determination of Tariff) (Third Amendment) Regulations, 2025 – EQ

Summary:

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### **1. Regulatory Context**

* Issued by the Kerala State Electricity Regulatory Commission (KSERC) under Sections 61 and 181 of the Electricity Act, 2003.
* Proposed as the **Third Amendment** to the Tariff Regulations, 2021, following earlier amendments in 2023 and 2024.
* Applicable for the ongoing **Control Period 2022–2027**.
* Draft published for stakeholder consultation, with objections invited within **21 days** and an online public hearing scheduled.

### **2. Objective of the Amendment**

* To align state tariff regulations with **Electricity (Amendment) Rules, 2022**, particularly **Rule 14** on timely recovery of power purchase costs.
* To enable **automatic, timely, and complete pass-through** of fuel and power purchase cost variations.
* To address financial stress on distribution licensees arising from unrecovered fuel surcharge costs.

### **3. Key Regulatory Change Proposed**

* **Removal of the ceiling limit of 10 paise per unit** on automatic fuel surcharge recovery.
* Omission of:

* Provisos under Regulation 87(3)
* Sub-regulations 87(7) and 87(8)
* Fuel surcharge to be recovered strictly as per the **approved formula**, without artificial caps.

### **4. Background – Fuel Surcharge Mechanism**

* Regulation 87 governs recovery of uncontrollable costs such as fuel price and power purchase variations.
* First Amendment (2023) introduced a **10 paise/unit ceiling** to protect consumers.
* Recovery beyond the ceiling required explicit Commission approval.

### **5. Operational Challenges Identified**

* Analysis of the period **June 2023 to November 2025** shows:

* Actual fuel surcharge requirement frequently exceeded the 10 paise cap.
* Distribution licensee was unable to recover legitimate costs in most months.
* Resulted in **accumulated revenue gaps** and delayed cost recovery.
* Automatic recovery intent of Electricity (Amendment) Rules, 2022 was not fully achieved.

### **6. Review of Actual Recovery Levels**

* Total recovery permitted reached **19 paise/unit** (10 paise automatic + 9 paise approved).
* Additional 9 paise recovery allowed only up to **January 2025**.
* Actual surcharge exceeded 19 paise/unit only in **October 2023 and November 2025**.
* In most months, recovery levels were within manageable limits.

### **7. Changing Fuel Cost Environment**

* Significant **policy interventions by Government of India** to reduce coal import dependence:

* Increased domestic coal availability and linkage security.
* Revised SHAKTI Policy, 2025.
* Infrastructure and logistics reforms.
* Coal imports reduced from **264.53 MT (FY 2023-24)** to **243.62 MT (FY 2024-25)**.
* Target of **1.5 billion tonnes domestic coal production by FY 2029-30**.

### **8. Impact of GST Reforms on Coal**

* GST Compensation Cess of ₹400/tonne removed.
* GST increased to 18%, resulting in **net reduction in coal costs**.
* Average reduction of **₹260 per tonne** for power sector.
* Expected reduction in generation cost by **17–18 paise per kWh**.
* Rationalization eliminates inverted duty structure and improves liquidity.

### **9. Consumer Protection Considerations**

* KSERC notes improved market stability and reduced fuel cost volatility.
* Removal of ceiling supported by:

* Enhanced transparency in monthly surcharge computation.
* Mandatory **annual truing-up process**.
* Commission maintains regulatory oversight despite automatic pass-through.

### **10. State Government Direction**

* Government of Kerala has issued directions under **Section 108 of the Electricity Act, 2003**.
* KSERC required to ensure compliance with Electricity (Amendment) Rules, 2022.
* Emphasis on full and timely recovery of uncontrollable costs.

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