MERC dismisses MSEDCL's plea to treat Late Payment Surcharge (LPS) on disputed Change-in-Law dues as a pass-through expense in ARR
Petition of MSEDCL seeking relaxation in Regulation 36.4 of the MERC (MYT) Regulations 2015 and Regulation 37.4 of the MERC (MYT) Regulations 2019 to treat the levy of LPS as an expense for the same being as a pass-through.
MSEDCL sought relaxation of Regulation 36.4 of MERC MYT Regulations 2015 and Regulation 37.4 of MERC MYT Regulations 2019 (which bar LPS/penalties as a pass-through expense) invoking inherent powers under Conduct of Business Regulations 2004 and Regulation 105 of MYT Regulations 2019. MSEDCL argued that huge LPS liabilities accrued due to non-payment of disputed Change-in-Law claims (e.g., APML's coal shortfall/SHAKTI policy litigation spanning 2013-2023 through Commission, APTEL and Supreme Court) were not due to its inefficiency but due to genuine, prolonged litigation, and hence LPS on such disputed amounts should be treated differently from LPS on undisputed dues and allowed as a pass-through cost.
- Petition in Case No. 85 of 2024 dismissed in entirety
- Commission held LPS is penal in nature for delay in payment and represents Discom inefficiency, not a passthrough expense
- Distinguished LPS from Carrying Cost — Carrying Cost on Change in Law compensation is already an allowed passthrough, but LPS for delay beyond due date is not
- Held that once amount is agreed/decided (by parties or courts), non-payment within PPA-stipulated due date is inefficiency attributable to the Discom
- Noted MSEDCL could have availed early payment discounts or paid disputed amounts 'under protest' to avoid LPS while retaining right to litigate
- Relied on Supreme Court's 20 April 2023 judgment (Civil Appeal No. 11095 of 2018 and batch) deprecating unnecessary litigation by Discoms/Gencos leading to carrying cost burden on consumers
- MSEDCL's ARR will continue to be assessed per existing Regulation 36.4/36.5 (2015) and 37.4 (2019) — LPS remains disallowed as pass-through
- MSEDCL directed (implicitly) to avoid delay-based LPS by making timely payments, if needed 'under protest', while pursuing disputes in appropriate judicial forums
- Carrying cost on Change in Law compensation continues to be allowed as passthrough per existing mechanism, separate from LPS
- No relaxation granted; existing MYT Regulations provisions on LPS/penalties stand as-is for MSEDCL and by extension other Discoms
- No further compliance timeline set since petition was dismissed outright
- • C&I consumers are protected from any additional ARR loading via LPS costs arising from MSEDCL's payment delays to generators, keeping retail tariffs from rising due to Discom-side payment inefficiency
- • RE/thermal generators with long-term PPAs get a reaffirmed signal that LPS for delayed payments (once dues are settled/adjudicated) is a hard Discom liability, not diluted via consumer tariffs
- • Sets precedent discouraging Discoms from prolonging disputes/delaying payments as a cost-management tactic, which is relevant for open-access and IPP developers awaiting Change-in-Law compensation
- • Reinforces that Carrying Cost (time value of money on Change in Law claims) remains passthrough, but only up to adjudication — post-decision delay costs (LPS) must be absorbed by the Discom, incentivizing faster settlement processes beneficial to generators/developers
MERC has drawn a clean line: Carrying Cost is compensable passthrough, but LPS for a Discom's own payment delay is not, irrespective of litigation pendency. This closes a potential route for Discoms to inflate ARR via prolonged disputes and protects C&I tariffs from indirect litigation costs. Generators and developers should track this precedent when negotiating LPS/carrying cost clauses in PPAs and while pursuing Change in Law claims against MSEDCL or other Discoms.
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