The Tamil Nadu Electricity Regulatory Commission (TNERC) has released its draft multi-year tariff (MYT) regulations for distribution licensees (DISCOMs) covering financial years (FY) 2027-28 to 2031-32.

Stakeholders can submit their feedback by May 27, 2026.

The draft replaces the 2005 and 2009 tariff regulations for DISCOMs, which were framed when generation and distribution were within the erstwhile Tamil Nadu Generation and Distribution Corporation (TANGEDCO).

After TANGEDCO’s restructuring into separate generation, green energy, and distribution entities, TNERC has proposed a framework for all distribution licensees in Tamil Nadu, including Tamil Nadu Power Distribution Corporation (TNPDCL).

Control period and filings

The control period runs from FY 2027-28 to FY 2031-32. Each DISCOM must file a MYT petition by November 30 of the preceding financial year, with true-up for FY 2025-26 under the earlier regulations, aggregate revenue requirement (ARR) forecasts, expected revenue from existing tariffs and charges, projected gaps, and proposed category-wise tariffs. A formula-based escalation proposal may be submitted instead, subject to regulatory asset provisions.

Matters up to March 31, 2027, including review and true-up petitions, will continue under the 2005 and 2009 regulations, irrespective of the filing date. Orders issued before April 1, 2027, including true-ups, will continue to be governed by the earlier regulations.

A mid-term review petition is due by November 30 of the third year, with true-up for FY 2026-27, true-up for the first and second years, provisional true-up for the third year, and revised forecasts for the fourth and fifth years. TNERC may revise ARR and tariffs for those years, but cannot ordinarily reopen a finally trued-up year, except for arithmetical or clerical errors, fraud, or misrepresentation.

A true-up petition for the third and fourth years is due by November 30 of the fifth year, with a provisional true-up for the fifth year. A final true-up petition for the fifth year is due by November 30, 2032, or within six months of closure.

Once a petition is admitted, the DISCOM must publish English- and Tamil-language newspaper notices, provide hard and soft copies, publish the filings online, and inform consumers through bill messages, SMS, or email. TNERC must issue or reject the tariff order within 120 days.

ARR and separation

ARR covers recoverable costs, including power purchase, transmission charges, State Load Despatch Centre (SLDC) fees and charges, operation and maintenance (O&M), additional operational expenses, depreciation, loan interest, working capital interest, other finance charges, bad debt provision, contingency reserve contribution, return on equity, and tax on return on equity. Non-tariff income, other income, and income from other businesses are deducted.

The draft requires accounting separation between distribution wires and retail supply. If full separation is unavailable, ARR is apportioned under the allocation matrix. Power purchase, transmission, and SLDC costs go fully to retail supply. O&M is split 75% wires and 25% retail supply. Additional operational expenses and working capital interest are split equally. Depreciation, long-term loan interest, return on equity, income tax, contingency reserves, and other expenses are split 90% wires and 10% retail supply. Consumer security deposit interest, bad debt provision, and non-tariff income are split 10% wires and 90% retail supply.

This separation matters for open access. An open access customer is a consumer permitted to receive electricity from a person other than the area DISCOM. The definition also includes a generating company and a licensee that has availed of, or intends to avail of, open access.

Controllable factors and FPPAS

Uncontrollable factors include force majeure, change in law, economy-wide influences, fuel or power purchase price variation, sales variation, transmission charges and losses, market interest rates for long-term loans, TNERC-allowed expenses, and prudent capital expenditure variation beyond the DISCOM’s control.

Controllable factors include technical and commercial losses, performance parameters, O&M expenses, and capital expenditure variation caused by inefficiency or poor project management.

Approved uncontrollable gains or losses pass through the tariff with carrying cost where admissible. For controllable gains, two-thirds go to consumers, and one-third may be retained. For controllable losses, one-third may be passed through the tariff, with the DISCOM absorbing two-thirds.

The fuel and power purchase adjustment surcharge (FPPAS) recovers or refunds monthly variations in fuel costs, power purchase costs, and transmission charges. FPPAS for billing month ‘n’ is based on the cost variation for power supplied in month n-2. Separate TNERC approval is not needed for each monthly levy, but annual true-up and prudence checks apply. The DISCOM must submit computations with supporting data and publish them online.

If FPPAS is up to 5% of the average billing rate (ABR), the full amount is automatically recoverable. If it exceeds 5% of ABR, 5% is automatically recoverable; 90% of the balance is also automatically recoverable; and the remaining 10% requires TNERC approval during true-up.

Carry-forward is allowed only when the monthly FPPAS exceeds 20% of the variable component of the approved retail supply tariff. It cannot exceed two months and must be recovered within one year or before the next tariff cycle.

Carrying cost is allowed at State Bank of India Marginal Cost of Funds-based Lending Rate (SBI MCLR) plus 150 basis points, subject to true-up. Deviation Settlement Mechanism (DSM) pool charges, DSM gains or losses, ancillary service charges, and Security-Constrained Economic Despatch (SCED) charges are outside FPPAS and must be handled through true-up.

Power procurement

Power procurement must align with the TNERC Resource Adequacy framework. Future short-, medium-, and long-term procurements must use competitive bidding in accordance with Government of India guidelines and Section 63 of the Electricity Act, 2003, subject to exceptions.

Short-term procurement up to one year may use Central Government guidelines or power exchanges without prior TNERC approval, subject to a prudence check. Source-wise quantum variations above 10% against the approved plan must be reported to TNERC and may be subject to prudence disallowance.

Additional procurement is allowed when demand rises unexpectedly, approved supply falls short or fails, or existing tied-up power becomes costlier than alternatives. Emergency short-term procurement without prior approval is allowed for grid security or stability events, or for directions from the SLDC or Regional Load Despatch Center. Details must be submitted within seven days.

Short-term banking or swapping ordinarily needs prior approval, though post-facto approval may be sought within 15 days. Surplus power from approved sources, excluding power exchanges, may be banked or sold on power exchanges, with TNERC able to set lower ceiling rates for certain generating stations.

Financial norms and O&M

The draft sets a normative debt-equity ratio of 70:30. Equity above 30% of the approved capital cost is treated as a normative loan, while actual equity below 30% is used where lower. Post-tax return on equity is 15.5% per year. Depreciation is calculated in accordance with Annexure II and is generally capped at 90% of the allowable capital cost, except for assets with nil salvage value. Revaluation is excluded.

Interest on working capital is simple interest at the one-year SBI MCLR plus 200 basis points, as per the tariff filing. At true-up, the rate is weighted-average one-year SBI MCLR plus 200 basis points. Regulation 28.1 says working capital includes one month of O&M, one month of approved power purchase cost, maintenance spares at 1% of opening gross fixed assets, and 60 days’ receivables, less cash security deposits. Format 12 states that the inclusion of one month of power purchase cost will be decided by TNERC if proposed by the DISCOM. This is an internal drafting inconsistency.

Other interest and finance charges, including bank charges, guarantee charges, consumer meter caution deposit interest, provident fund-related interest, and ordinary-course finance charges, are allowed at actuals at true-up, subject to a prudence check.

O&M expenses are determined normatively from the five-year average of audited actual employee, administrative and general, and repairs and maintenance expenses from FY 2021-22 to FY 2025-26, excluding abnormal expenses. The average is treated as FY 2023-24 expense, escalated at 5.72% to reach the FY 2026-27 base, then escalated at 7% for each control period year.

At true-up, O&M is allowed up to the normative amount, subject to a prudence check. Prudent variance is classified as controllable or uncontrollable. Excess O&M is not automatically allowed at actuals. Additional operational expenses for automation, new technology, IT, smart metering, and digitalization may be allowed over normative O&M, especially with government grant support, subject to prudence check and cost-benefit analysis.

Bad debts, reserves, income, and open access charges

Bad and doubtful debt provisions may pass through ARR up to 1% of trade receivables. Later recovery from written-off debt is treated as an uncontrollable item under non-tariff income. Contingency reserve contribution is allowed up to 0.5% of the original fixed asset cost at the beginning of the year, if appropriated. No further contribution is allowed once the reserve exceeds 5%. Drawal is restricted to TNERC-approved purposes.

Non-tariff income is deducted from ARR and includes rent, scrap sale, investment income, supervision charges, consumer charges, theft recovery, advertisement, tender documents, insurance claims, deferred grant or subsidy income, and miscellaneous receipts. Interest or dividends from investments made with return on equity for the regulated business are excluded. If the DISCOM conducts other business under Section 51 of the Electricity Act, authorized net revenue is deducted from ARR. If costs exceed revenue, the deficit cannot be added.

Wheeling charges equal wires ARR divided by the energy wheeled. TNERC may determine voltage-level wheeling charges, and the DISCOM may recover wheeling losses in kind from open access users. Cross-subsidy surcharge is payable under Regulation 44. The operative regulation caps it at 20% of the average cost of supply, but Format 16 caps it at 20% of the applicable tariff. This drafting inconsistency remains unresolved. An additional surcharge will be applied in accordance with TNERC’s open access and green energy open access regulations.

The DISCOM must propose consumer-category-wise time-of-day (ToD) slots, with rebates or penalties, and may propose a seasonal ToD tariff. Deviations from consumer rights rules and other laws must be justified and supported by consumption pattern analysis and impact assessment.

Regulatory assets

A regulatory asset is a revenue gap or cost that TNERC permits to be carried forward beyond the year of incurrence and recovered through future tariffs. Their creation must be an exception. TNERC may create one only after considering the consumer tariff impact, the DISCOM’s financial viability, and the Government of Tamil Nadu’s budgetary support, with reasons recorded in the tariff order.

TNERC must specify a recovery schedule, and the asset must be fully liquidated within seven years from the effective date of recovery. Any gap between approved ARR and estimated annual revenue from approved tariff created after January 10, 2024, cannot exceed 3% of approved ARR and must be liquidated within not more than three equal yearly installments from the next financial year.

If the state government provides support, TNERC may waive carrying costs on the corresponding portion and must record the quantum and period of waiver. TNERC must also specify year-wise liquidation amounts for regulatory assets outstanding as on April 1, 2024, and any created thereafter.

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