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On June 3, 2022, the Department of Energy notified the 2022 Electricity Rules (Late Payment Surcharge and Related Matters)
(“LPS Rules”), among others strengthen the regulatory provisions for the collection of unpaid bills from production companies (“GENCO”)holders of an interstate transport license
(“TRANSCO”)and electricity distributors of distribution companies
(“DISCOM”), taking into account the financial implications and the ability of stakeholders to pay.

Payment delays in the electricity sector are a major concern for all stakeholders. From time to time, various governments have attempted to address the issue, and the LPS rules can be seen as a government initiative to reduce the outstanding payment balance.

These rules revolve around the subject of late payment surcharges (“LPS”)which are defined as the fees due by a DISCOM to a GENCO or to an electricity concessionaire for the electricity it has procured, or by a user of a transport network to a TRANSCO, due to a delay in the payment of monthly fees beyond the due date.

Although the focus was clearly on timely payment, it is still relevant to highlight a few revolutionary provisions related to the LPS rules. Accordingly, we provide below the main definitions and implications related to the LPS rules.

Key definitions

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Excerpts from the LPS rules:

  1. Surcharge for late payment: DISCOMs will be required to pay LPS on the amount remaining due after the Due Date at the Base Rate, applicable for the first month of default. The LPS rate for successive months in default will increase by 0.5% for each month in default, subject to a maximum cap not exceeding 3% above the base rate and, in addition, the LPS will not be higher at the LPS rate specified in the agreement between the Parties.

  2. Prior notification of payment schedule: Before July 2, 2022, DISCOMs are required to communicate in writing to GENCO, TRANSCO or the holder of the electricity trading license, the unpaid dues and the number of EMIs in which the unpaid dues would be paid.

  3. Priority payment adjustment: All payments made by a DISCOM will be adjusted first by LPS and then by monthly charges, starting with the most outstanding invoices.

  4. EMI Schedule Structure: Total unpaid dues including LPS up to the date of this LPS rules notice will be rescheduled and payment due date will also be re-determined in subsequent monthly installments.

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The first due date for payment of the EMI will be the fifth day of the immediate month that comes after 45 days from the notification of the LPS Rules, while the subsequent EMI will become due on the fifth day of subsequent months. In the event of timely payment of the deposit by DISCOM, LPS will not be due on the arrears as of June 3, 2022. However, in the event of late payment of the deposit, LPS will become due on the full amount of the arrears on June 3, 2022. , 2022.

  1. Operationalization of the payment security mechanism: A DISCOM or other transmission system user must maintain an unconditional, irrevocable, and adequate payment security mechanism as required by these LPS Rules. The supply of electricity will only be carried out if an adequate payment security mechanism or an advance payment is maintained/made, in the absence of which the GENCOs will lose their right to collect the LPS from the DISCOMs.

  2. Mandatory supply obligation: The GENCOs are required to offer the contracted power to the DISCOMs in accordance with the terms of the agreement signed between the parties and GENCO shall not be authorized to sell the contracted power to other parties, without the prior consent of the DISCOM, unless agreed otherwise under these LPS Rules.

  3. Compulsory programming obligations for power requisition: DISCOM will communicate its electricity requisition schedule for each day to each GENCO with which it has entered into a power purchase agreement at least two hours before the end of the time for submitting proposals or offers on the daily market. for this day.

  4. Regulation of access to failing entities:In the event of non-payment of the contributions, by DISCOM, even after two and a half months after presentation of the invoice or in the event of failure to pay the installments in accordance with this LPS Regulation, the short-term power supply of the defaulting entity will be fully regulated under the process set out in the LPS Rules. Persistent fault after short-time power supply regulation, or persistent failure of non-payment of electricity for three and a half months, would lead to long-time access and medium-time access regulation. 10%, with a progressive increase of 10% for each month of default.

What does this mean for stakeholders?

  1. Consequences of the operationalization of the payment security mechanism: GENCOs, TRANSCOs and concessionaires are required to regulate the supply of electricity according to the maintenance or non-maintenance of the required security of payment. The Department of Energy has tied the right to seek LPS only in cases where GENCO supplies electricity with an outstanding payment security mechanism.

  2. Consequences on feeding patterns:The supply on the GENCO side must be reduced to 75%, and the remaining 25% of the electricity can be sold through electricity exchanges, in the event of non-maintenance and/or non-payment unpaid contributions on the default trigger date. In addition, the pursuit of such a default authorizes GENCO to sell all of its electricity through power exchanges.

  3. Obligation necessary for the pre-requisition of power by the DISCOMs: The GENCOs have the freedom to sell electricity on the electricity exchange platforms in the absence of indication of the schedules in accordance with the LPS rules, for the requisition of electricity. In addition, DISCOMs will be responsible for paying compensation for electricity not requisitioned from the project to be executed, at the applicable PPP tariff rate.

  4. Consequences of GENCO’s inability to supply the subscribed energy: GENCO’s failure to offer the power contracted in accordance with the agreement to a DISCOM will result in the prohibition from scheduling any new short-term contract from this plant for a period of 3 (three) months from the date on which the fault was made known to the load distribution center concerned. In addition, continuing offenses are subject to other criminal provisions of the LPS rules.

  5. Required Annex EMI compliance (refer to table above): The LPS will be applicable on all unpaid contributions at the date of notification of the LPS rules, in the event of late payment in accordance with the prescribed monthly payment schedules. In addition, failure to meet payment obligations, in accordance with the requirements of the LPS rules, will also lead to regulation of access to defaulting entities.

Final remarks and expected legal consequences:

Initially, it appears that the primary purpose of the LPS rules is to settle unpaid dues from the distribution company, but it can also be inferred that it is a means of retroactively extending the deadline for payment of these unpaid contributions by the distribution companies. and to avoid the imposition of LPS.

Needless to say, to achieve ambitious renewable energy targets, overall progress in the sector is essential. Only the installation or commissioning of projects may not be enough, but the sustenance of each project must be ensured, and to support a project, timely cash flow plays a central role.

By introducing the new EMI installment mechanism for the payment of unpaid amounts, the LPS rules have postponed the deadlines for payment of unpaid amounts from the dates previously agreed between GENCO and the distribution companies
see their agreements, which could be submitted to the judicial body for judgment because such a postponement may not be favorable to these GENCOs, whose contributions have been pending for a very long time.

Furthermore, the link between the right to search for LPS and the payment security mechanism puts the GENCOs, holders of a commercial license, at a disadvantage, since the rights of the GENCOs may be directly affected by the execution or non-performance of the obligation of the payment security mechanism by the distribution companies.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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