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1-min read

J&K, Telangana, Rajasthan May Face Power Outage as New Rules Kick in from August

The power ministry had made it mandatory for power distribution companies to provide payment assurance to power generation companies before procuring electricity by opening and maintaining sufficient letters of credit.

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Updated:August 1, 2019, 4:17 PM IST
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J&K, Telangana, Rajasthan May Face Power Outage as New Rules Kick in from August
Image for representational purpose. (Reuters)
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Power distribution companies in the states of Jammu and Kashmir, Telangana and Rajasthan may see disruption in power supplies as they have still not issued legitimate bank guarantees to power- generating companies to back their electricity purchases, in line with the new rules set by the central government that come into effect from August 1, according to a report in the Economic Times.

On June 28, the power ministry had made it mandatory for power distribution companies (discoms) to provide payment assurance to power generation companies before procuring electricity by opening and maintaining sufficient letters of credit (LCs).

A letter of credit is a document issued by a bank that guarantees the buyer’s payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the remaining amount on behalf of the buyer. A letter of credit is issued against a pledge of securities or cash.

The government had issued such a directive to keep discoms’ mounting dues to power-generating companies under check. Hence, from August 1, if a discom doesn’t pay its bills on time, the power-generating company can enforce the letter of credit, collect payment and discontinue power supply to that company.

Following the directive, power distribution companies in most states have opened such bank guarantees for a week or 10 days in favour of private and central power plants. However, according to an Economic Times report, Rajasthan and Telangana have opened only ‘conditional’ letters of credit in favour of power plants. In the case of non-payment by discoms of these states, the power generating companies can invoke these letters of credit only if they are authorised by the state government. It was not immediately clear whether such conditional letters of credit were in line with the Centre’s new rules.

“The power ministry’s directive was issued to set right defaulting discoms. However, if we have to run to the discoms to invoke LC (letters of credit) for their default, it defeats the purpose of the power ministry’s order,” an executive with a private firm told Economic Times.

Meanwhile, power distribution companies in Jammu and Kashmir have not yet opened any bank guarantee for power plants. “Only Jammu and Kashmir had not opened the bank guarantee. However, it has

not refused the order and is in the process of opening the LC,” a senior government told the newspaper.

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