A recent report in Business Standard highlights how there has been a massive turnaround in India’s power distribution sector: after years of losses, two reforms helped power discoms (distribution companies) achieve profitability. Power procurement costs, which include the cost of fuel, make up 70-80% of the total ACS (average cost of supply), and this was the biggest impediment to closing the gap between ACS and ARR (average realised revenue).
Discoms managed to move into the profitable zone after the government amended Rule 14 of the Electricity Rules, 2005, which allows discoms to automatically adjust electricity bills to reflect changes in fuel and power purchase costs, instead of absorbing those rising costs themselves.
Here’s a detailed look at the reforms, what they entail, and how it changes what your electricity bill looks like.
The core problem: Fuel costs rose faster than electricity tariffs
Power discoms, for the longest time, suffered heavy losses, despite rising demand and expanding generation capacity. Why? Because their power procurement and fuel purchase costs were increasing, but electricity tariffs didn’t (often kept low for political reasons), forcing discoms to absorb these costs and survive on state support.
Here’s how discoms work: they buy electricity from generators and sell it to consumers. These entities purchase electricity from power generators (coal, gas, hydro, or solar) and take care of power transmission and distribution to homes and businesses. Discoms also maintain the physical infrastructure like transformers, poles, wires, and meters. The biggest expense in this chain is power procurement, especially fuel costs such as coal and gas, which account for 70–80% of the total cost of supply.
For years, electricity tariffs did not reflect these increasing power procurement costs. Tariff hikes were delayed or diluted for political reasons, forcing discoms to absorb rising fuel prices. This created a widening gap between:
ACS: (Average Cost of Supply): What it cost to deliver power, and
ARR (Average Revenue Realised): What discoms actually earned
As the gap between ACS and ARR increased, discoms were faced with heavy losses.
The reforms: Electricity bills now include rising fuel costs
The turning point for discoms came in December 2022, when the central government amended Rule 14 of the Electricity Rules, 2005 and the rollout of smart electricity meters.
The Rule 14 amendment allowed discoms to automatically pass through fuel and power purchase cost changes to consumers every month, instead of waiting years for tariff revisions by regulators. This change linked electricity prices more closely to actual costs, reduced political interference in tariff revision decisions, and hence improved cash flow for discoms.
By FY25, 30 out of 36 states and Union Territories had implemented Rule 14 amendment, and the impact was swift: the ACS-ARR gap, which had dipped slightly from 78 paise per unit in 2013-14 to 65 paise per unit in 2020-21, fell sharply to 6 paise per unit in FY25, helping discoms come close to breaking even.
The introduction of smart meters also helped plug revenue leaks. Smart meters reduced billing errors, enabled timely billing, reduced theft, and improved overall collections. Installation increased steadily, from 4,000 meters per day in FY23, to 115,000 meters per day by May 2025, taking total installations to 31.4 million. The adoption of smart meters improved billing efficiency and collections. (Smart meters transmit real-time, 15-minute interval, or hourly consumption data to power utility providers, with prepaid functionality and remote monitoring, unlike regular meters which require manual, monthly readings.)
On ground, things improved for discoms and power generators: with improved cost recovery and collections, discoms demonstrated better payment discipline, since prices were finally aligning with costs and revenue collection got tighter.
The consumer angle: What electricity bills look like now
So what do these changes look like for the consumer when they receive their electricity bill each month? Here’s the breakdown.
A typical electricity bill might look like one total number at the bottom. But that number is really a stack of several different costs, each tied to a part of the electricity system — from generating the power to maintaining the poles and wires that deliver it to your home.
- Energy and procurement charges: This is usually the largest component of the bill, and is based on how much electricity was consumed in that month. It reflects the power procurement cost, ie, what the discom pays to buy electricity from generators.
- Fixed charges: This covers basic network and capacity costs, irrespective of whether you have consumed any units. This includes distribution infrastructure like poles, transformers, and wires; meter costs; administrative costs; and the cost of being connected to the grid.
- Transmission charges: This is the cost of moving power across the grid. This covers the cost of the high-voltage grid that moves electricity from generators (coal plants, hydro, solar parks) to the points where distribution companies take over.
- Distribution charges: This is the cost of moving that electricity from the grid to the meter – because once power reaches a city, it has to be routed through local lines.
- Taxes, surcharges and cross-subsidy charges: This includes applicable taxes, duties, and policy-driven cross-subsidies. Cross-subsidy surcharge is the extra amount charged to some consumers, to offset subsidies given to other consumer segments. Some subsidies (eg. for low income homes or farmers) may be paid by the government to the discom.)
- Fuel or power adjustment charges: FAC (Fuel Adjustment Charge) or FPPAS (Fuel and Power Purchase Adjustment Surcharge) are temporary, variable charges on electricity bills that reflect fluctuations in the cost of fuel and power procurement by discoms. Earlier fuel-cost adjustments were delayed and discretionary; Rule 14 made them automatic, ensuring fuel price fluctuations are reflected in the bill without waiting for tariff revisions.
In conclusion…
These changes don’t make electricity cheaper, but they do make electricity pricing more upfront. Automatic fuel-cost pass-through under Rule 14 ensures that changes in coal and power procurement costs are reflected in consumer bills quickly and transparently, instead of being hidden as discom losses and recovered years later through sudden tariff hikes. Smart meters, meanwhile, ensure that the electricity actually consumed is accurately measured, billed on time, and paid for, reducing leakage from theft, faulty metering, and delayed collections.
Taken together, these reforms make the monthly electricity more cost-reflective, improving transparency for consumers, steading cash flows for discoms, and strengthening the financial sustainability of the power sector.
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