Industrial
Promotion Policies - Central Government
Tariff Policy
1.0
Introduction
1.1. In compliance with section 3 of the Electricity Act 2003 the Central Government
hereby notifies the Tariff policy in continuation
of the National Electricity Policy (NEP) notified
on 12th February 2005.
1.2. The National Electricity Policy has set the
goal of adding new generation capacity of more than
one lakh MW during the 10th and 11th
Plan periods to have per capita availability of
over 1000 units of electricity per year and to not
only eliminate energy and peaking shortages but
to also have a spinning reserve of 5% in the system.
Development of the power sector has also to meet
the challenge of providing access for electricity
to all households in next five years.
1.3. It is therefore essential to attract adequate
investments in the power sector by providing appropriate
return on investment as budgetary resources of the
Central and State Governments are incapable of providing
the requisite funds. It is equally necessary to ensure
availability of electricity to different categories
of consumers at reasonable rates for achieving the
objectives of rapid economic development of the country
and improvement in the living standards of the people.
1.4. Balancing the requirement of attracting adequate
investments to the sector and that of ensuring reasonability
of user charges for the consumers is the critical challenge
for the regulatory process. Accelerated development of
the power sector and its ability to attract necessary
investments calls for, inter alia, consistent regulatory
approach across the country. Consistency in approach becomes
all the more necessary considering the large number of
States and the diversities involved.
2.0 Legal Position
2.1 Section 3 (1) of the Electricity Act 2003 empowers the Central Government
to formulate the tariff policy. Section 3 (3) of the
Act enables the Central Government to review or revise
the tariff policy from time to time.
2.2 The Act also requires that the Central Electricity
Regulatory Commission (CERC) and State Electricity
Regulatory Commissions (SERCs) shall be guided by
the tariff policy in discharging their functions including
framing the regulations under section 61 of the Act.
2.3 Section 61 of the Act provides that Regulatory
Commissions shall be guided by the principles and
methodologies specified by the Central Commission
for determination of tariff applicable to generating
companies and transmission licensees.
2.4 The Forum of Regulators has been constituted by
the Central Government under the provisions of the Act
which would, inter alia, facilitate consistency in approach
specially in the area of distribution.
3.0 Evolution Of The Policy
The tariff policy has been evolved in consultation with the State Governments
and the Central Electricity Authority (CEA) and keeping
in view the advice of the Central Electricity Regulatory
Commission and suggestions of various stakeholders.
4.0 Objectives of The Policy
The objectives of this tariff policy are to:
(a) Ensure availability of electricity to consumers at reasonable and competitive
rates;
(b) Ensure financial viability of the sector and attract
investments;
(c) Promote transparency, consistency and predictability
in regulatory approaches across jurisdictions and
minimise perceptions of regulatory risks;
(d) Promote competition, efficiency in operations
and improvement in quality of supply.
5.0 General Approach
to Tariff
5.1 Introducing competition in different segments of the electricity industry
is one of the key features of the Electricity Act,
2003. Competition will lead to significant benefits
to consumers through reduction in capital costs
and also efficiency of operations. It will also
facilitate the price to be determined competitively.
The Central Government has already issued detailed
guidelines for tariff based bidding process for
procurement of electricity by distribution licensees
for medium or long-term period vide gazette notification
dated 19th January, 2005.
All future requirement of power should be procured competitively by distribution
licensees except in cases of expansion of existing
projects or where there is a State controlled/owned
company as an identified developer and where regulators
will need to resort to tariff determination based
on norms provided that expansion of generating capacity
by private developers for this purpose would be restricted
to one time addition of not more than 50% of the existing
capacity.
Even for the Public Sector projects, tariff of all new generation and transmission
projects should be decided on the basis of competitive
bidding after a period of five years or when the Regulatory
Commission is satisfied that the situation is ripe
to introduce such competition.
5.2 The real benefits of competition would be available only with the emergence
of appropriate market conditions. Shortages of power
supply will need to be overcome. Multiple players
will enhance the quality of service through competition.
All efforts will need to be made to bring power industry
to this situation as early as possible in the overall
interests of consumers. Transmission and distribution,
i.e. the wires business is internationally recognized
as having the characteristics of a natural monopoly
where there are inherent difficulties in going beyond
regulated returns on the basis of scrutiny of costs.
5.3 Tariff policy lays down following framework for
performance based cost of service regulation in respect
of aspects common to generation, transmission as well
as distribution. These shall not apply to competitively
bid projects as referred to in para 6.1 and para 7.1
(6). Sector specific aspects are dealt with in subsequent
sections.
a) Return on Investment
Balance needs to be maintained between the interests of consumers and the need
for investments while laying down rate of return.
Return should attract investments at par with, if
not in preference to, other sectors so that the electricity
sector is able to create adequate capacity. The rate
of return should be such that it allows generation
of reasonable surplus for growth of the sector.
The Central Commission would notify, from time to time, the rate of return on
equity for generation and transmission projects keeping
in view the assessment of overall risk and the prevalent
cost of capital which shall be followed by the SERCs
also. The rate of return notified by CERC for transmission
may be adopted by the State Electricity Regulatory
Commissions (SERCs) for distribution with appropriate
modification taking into view the higher risks involved.
For uniform approach in this matter, it would be desirable
to arrive at a consensus through the Forum of Regulators.
While allowing the total capital cost of the project, the Appropriate Commission
would ensure that these are reasonable and to achieve
this objective, requisite benchmarks on capital costs
should be evolved by the Regulatory Commissions.
Explanation: For the purposes of return on equity, any cash resources available
to the company from its share premium account or from
its internal resources that are used to fund the equity
commitments of the project under consideration should
be treated as equity subject to limitations contained
in (b) below.
The Central Commission may adopt the alternative approach of regulating through
return on capital.
The Central Commission may adopt either Return on Equity approach or Return on
Capital approach whichever is considered better in
the interest of the consumers.
The State Commission may consider ‘distribution margin’ as basis
for allowing returns in distribution business at an
appropriate time. The Forum of Regulators should evolve
a comprehensive approach on “distribution margin”
within one year. The considerations while preparing
such an approach would, inter-alia, include issues
such as reduction in Aggregate Technical and Commercial
losses, improving the standards of performance and
reduction in cost of supply.
b) Equity Norms
For financing of future capital cost of projects, a Debt : Equity ratio of 70:30
should be adopted. Promoters would be free to have
higher quantum of equity investments. The equity in
excess of this norm should be treated as loans advanced
at the weighted average rate of interest and for a
weighted average tenor of the long term debt component
of the project after ascertaining the reasonableness
of the interest rates and taking into account the
effect of debt restructuring done, if any. In case
of equity below the normative level, the actual equity
would be used for determination of Return on Equity
in tariff computations.
c) Depreciation
The Central Commission may notify the rates of depreciation in respect of generation
and transmission assets. The depreciation rates so
notified would also be applicable for distribution
with appropriate modification as may be evolved by
the Forum of Regulators.
The rates of depreciation so notified would be applicable for the purpose of
tariffs as well as accounting.
There should be no need for any advance against depreciation.
Benefit of reduced tariff after the assets have been fully depreciated should
remain available to the consumers.
d) Cost of Debt
Structuring of debt, including its tenure, with a view to reducing the tariff
should be encouraged. Savings in costs on account
of subsequent restructuring of debt should be suitably
incentivised by the Regulatory Commissions keeping
in view the interests of the consumers.
e) Cost of Management of Foreign
Exchange Risk
Foreign exchange variation risk shall not be a pass through. Appropriate costs
of hedging and swapping to take care of foreign exchange
variations should be allowed for debt obtained in
foreign currencies. This provision would be relevant
only for the projects where tariff has not been determined
on the basis of competitive bids.
f) Operating Norms
Suitable performance norms of operations together with incentives and dis-incentives
would need be evolved along with appropriate arrangement
for sharing the gains of efficient operations with
the consumers. Except for the cases referred to in
para 5.3 (h)(2), the operating parameters in tariffs
should be at “normative levels” only and
not at “lower of normative and actuals”.
This is essential to encourage better operating performance.
The norms should be efficient, relatable to past performance,
capable of achievement and progressively reflecting
increased efficiencies and may also take into consideration
the latest technological advancements, fuel, vintage
of equipments, nature of operations, level of service
to be provided to consumers etc. Continued and proven
inefficiency must be controlled and penalized.
The Central Commission would, in consultation with the Central Electricity Authority,
notify operating norms from time to time for generation
and transmission. The SERC would adopt these norms.
In cases where operations have been much below the
norms for many previous years, the SERCs may fix relaxed
norms suitably and draw a transition path over the
time for achieving the norms notified by the Central
Commission.
Operating norms for distribution networks would be notified by the concerned
SERCs. For uniformity of approach in determining such
norms for distribution, the Forum of Regulators should
evolve the approach including the guidelines for treatment
of state specific distinctive features.
g) Renovation and Modernatisation
Renovation and modernization (it shall not include periodic overhauls) for higher
efficiency levels needs to be encouraged. A multi-year
tariff (MYT) framework may be prescribed which should
also cover capital investments necessary for renovation
and modernization and an incentive framework to share
the benefits of efficiency improvement between the
utilities and the beneficiaries with reference to
revised and specific performance norms to be fixed
by the Appropriate Commission. Appropriate capital
costs required for pre-determined efficiency gains
and/or for sustenance of high level performance would
need to be assessed by the Appropriate Commission.
(h) Multi Year Tariff
1) Section 61 of the Act states that the Appropriate Commission, for determining
the terms and conditions for the determination of
tariff, shall be guided inter-alia, by multi-year
tariff principles. The MYT framework is to be adopted
for any tariffs to be determined from April 1, 2006.
The framework should feature a five-year control period.
The initial control period may however be of 3 year
duration for transmission and distribution if deemed
necessary by the Regulatory Commission on account
of data uncertainties and other practical considerations.
In cases of lack of reliable data, the Appropriate
Commission may state assumptions in MYT for first
control period and a fresh control period may be started
as and when more reliable data becomes available.
2) In cases where operations have been much below
the norms for many previous years the initial starting
point in determining the revenue requirement and the
improvement trajectories should be recognized at “relaxed”
levels and not the “desired” levels. Suitable
benchmarking studies may be conducted to establish
the “desired” performance standards. Separate
studies may be required for each utility to assess
the capital expenditure necessary to meet the minimum
service standards.
3) Once the revenue requirements are established at
the beginning of the control period, the Regulatory
Commission should focus on regulation of outputs and
not the input cost elements. At the end of the control
period, a comprehensive review of performance may
be undertaken.
4) Uncontrollable costs should be recovered speedily
to ensure that future consumers are not burdened with
past costs. Uncontrollable costs would include (but
not limited to) fuel costs, costs on account of inflation,
taxes and cess, variations in power purchase unit
costs including on account of hydro-thermal mix in
case of adverse natural events.
5) Clear guidelines and regulations on information
disclosure may be developed by the Regulatory Commissions.
Section 62 (2) of the Act empowers the Appropriate
Commission to require licensees to furnish separate
details, as may be specified in respect of generation,
transmission and distribution for determination of
tariff.
(i) Benefits under CDM
Tariff fixation for all electricity projects (generation, transmission and distribution)
that result in lower Green House Gas (GHG) emissions
than the relevant base line should take into account
the benefits obtained from the Clean Development Mechanism
(CDM) into consideration, in a manner so as to provide
adequate incentive to the project developers.
5.4 While it is recognized that the State Governments have the right to impose
duties, taxes, cess on sale or consumption of electricity,
these could potentially distort competition and optimal
use of resources especially if such levies are used
selectively and on a non- uniform basis.
In some cases, the duties etc. on consumption of electricity is linked to sources
of generation (like captive generation) and the level
of duties levied is much higher as compared to that
being levied on the same category of consumers who
draw power from grid. Such a distinction is invidious
and inappropriate. The sole purpose of freely allowing
captive generation is to enable industries to access
reliable, quality and cost effective power. Particularly,
the provisions relating to captive power plants which
can be set up by group of consumers has been brought
in recognition of the fact that efficient expansion
of small and medium industries across the country
will lead to faster economic growth and creation of
larger employment opportunities.
For realizing the goal of making available electricity to consumers at reasonable
and competitive prices, it is necessary that such
duties are kept at reasonable level.
5.5 Though, as per the provisions of the Act, the outer limit to introduce open
access in distribution is 27.1.2009, it would be desirable
that, in whichever states the situation so permits,
the Regulatory Commissions introduce such open access
earlier than this deadline.
Accelerated growth of the generation capacity sector is essential to meet the
estimated growth in demand. Adequacy of generation
is also essential for efficient functioning of power
markets. At the same time, it is to be ensured that
new capacity addition should deliver electricity at
most efficient rates to protect the interests of consumers.
This policy stipulates the following for meeting these
objectives.
6.1 Procurement of power
As stipulated in para 5.1, power procurement for future requirements should be
through a transparent competitive bidding mechanism
using the guidelines issued by the Central Government
vide gazette notification dated 19th January,
2005. These guidelines provide for procurement of
electricity separately for base load requirements
and for peak load requirements. This would facilitate
setting up of generation capacities specifically for
meeting peak.
6.2 Tariff structuring and associated
issues
(1) A two-part tariff structure should be adopted for all long term contracts
to facilitate Merit Order dispatch. According to National
Electricity Policy, the Availability Based Tariff
(ABT) is to be introduced at State level by April
2006. This framework would be extended to generating
stations (including grid connected captive plants
of capacities as determined by the SERC). The Appropriate
Commission may also introduce differential rates of
fixed charges for peak and off peak hours for better
management of load.
(2) Power Purchase Agreement should ensure adequate and bankable payment security
arrangements to the Generating companies. In case
of persisting default in spite of the available payment
security mechanisms like letter of credit, escrow
of cash flows etc. the generating companies may sell
to other buyers.
(3) In case of coal based generating stations, the cost of project will also
include reasonable cost of setting up coal washeries,
coal beneficiation system and dry ash handling & disposal
system.
6.3 Harnessing captive generation
Captive generation is an important means to making competitive power available.
Appropriate Commission should create an enabling environment
that encourages captive power plants to be connected
to the grid.
Such captive plants could inject surplus power into the grid subject to the same
regulation as applicable to generating companies.
Firm supplies may be bought from captive plants by
distribution licensees using the guidelines issued
by the Central Government under section 63 of the
Act.
The prices should be differentiated for peak and off-peak supply and the tariff
should include variable cost of generation at actual
levels and reasonable compensation for capacity charges.
Alternatively, a frequency based real time mechanism can be used and the captive
generators can be allowed to inject into the grid
under the ABT mechanism.
Wheeling charges and other terms and conditions for implementation should be
determined in advance by the respective State Commission,
duly ensuring that the charges are reasonable and
fair.
Grid connected captive plants could also supply power to non-captive users connected
to the grid through available transmission facilities
based on negotiated tariffs. Such sale of electricity
would be subject to relevant regulations for open
access.
6.4 Non-conventional sources of
energy generation including Co-generation:
(1) Pursuant to provisions of section 86(1)(e) of the Act, the Appropriate Commission
shall fix a minimum percentage for purchase of energy
from such sources taking into account availability
of such resources in the region and its impact on
retail tariffs. Such percentage for purchase of energy
should be made applicable for the tariffs to be determined
by the SERCs latest by April 1, 2006.
It will take some time before non-conventional technologies can compete with
conventional sources in terms of cost of electricity.
Therefore, procurement by distribution companies shall
be done at preferential tariffs determined by the
Appropriate Commission.
(2) Such procurement by Distribution Licensees for future requirements shall
be done, as far as possible, through competitive bidding
process under Section 63 of the Act within suppliers
offering energy from same type of non-conventional
sources. In the long-term, these technologies would
need to compete with other sources in terms of full
costs.
(3) The Central Commission should lay down guidelines
within three months for pricing non-firm power, especially
from non–conventional sources, to be followed in
cases where such procurement is not through competitive
bidding.
The transmission system in the country consists of the regional networks,
the inter-regional connections that carry electricity
across the five regions, and the State networks. The
national transmission network in India is presently
under development. Development of the State networks
has not been uniform and capacity in such networks
needs to be augmented. These networks will play an
important role in intra-State power flows and also
in the regional and national flows. The tariff policy,
insofar as transmission is concerned, seeks to achieve
the following objectives:
1. Ensuring optimal development of the transmission network to promote efficient
utilization of generation and transmission assets
in the country;
2. Attracting the required investments in the transmission
sector and providing adequate returns.
7.1 Transmission pricing
(1) A suitable transmission tariff framework for all inter-State transmission,
including transmission of electricity across the territory
of an intervening State as well as conveyance within
the State which is incidental to such inter-state
transmission, needs to be implemented with the objective
of promoting effective utilization of all assets across
the country and accelerated development of new transmission
capacities that are required.
(2) The National Electricity Policy mandates that the national tariff framework
implemented should be sensitive to distance, direction
and related to quantum of power flow. This would be
developed by CERC taking into consideration the advice
of the CEA. Such tariff mechanism should be implemented
by 1st April 2006.
(3)Transmission charges, under this framework, can be determined on MW per circuit
kilometer basis, zonal postage stamp basis, or some
other pragmatic variant, the ultimate objective being
to get the transmission system users to share the
total transmission cost in proportion to their respective
utilization of the transmission system. The overall
tariff framework should be such as not to inhibit
planned development/augmentation of the transmission
system, but should discourage non-optimal transmission
investment.
(4) In view of the approach laid down by the NEP, prior agreement with the beneficiaries
would not be a pre-condition for network expansion.
CTU/STU should undertake network expansion after identifying
the requirements in consonance with the National Electricity
Plan and in consultation with stakeholders, and taking
up the execution after due regulatory approvals.
(5) The Central Commission would establish, within
a period of one year, norms for capital and operating
costs, operating standards and performance indicators
for transmission lines at different voltage levels.
Appropriate baseline studies may be commissioned to
arrive at these norms.
(6) Investment by transmission developer other than CTU/STU would be invited
through competitive bids. The Central Government will
issue guidelines in three months for bidding process
for developing transmission capacities. The tariff
of the projects to be developed by CTU/STU after the
period of five years or when the Regulatory Commission
is satisfied that the situation is right to introduce
such competition (as referred to in para 5.1) would
also be determined on the basis of competitive bidding.
(7) After the implementation of the proposed framework for the inter-State transmission
,a similar approach should be implemented by SERCs
in next two years for the intra-State transmission,
duly considering factors like voltage, distance, direction
and quantum of flow.
(8) Metering compatible with the requirements of the proposed transmission tariff
framework should be established on priority basis.
The metering should be compatible with ABT requirements,
which would also facilitate implementation of Time
of Day (ToD) tariffs.
7.2 Approach to transmission loss allocation
(1) Transactions should be charged on the basis of average losses arrived at
after appropriately considering the distance and directional
sensitivity, as applicable to relevant voltage level,
on the transmission system. Based on the methodology
laid down by the CERC in this regard for inter- state
transmission, the Forum of Regulators may evolve a
similar approach for intra-state transmission.
The loss framework should ensure that the loss compensation is reasonable and
linked to applicable technical loss benchmarks. The
benchmarks may be determined by the Appropriate Commission
after considering advice of CEA.
It would be desirable to move to a system of loss compensation based on incremental
losses as present deficiencies in transmission capacities
are overcome through network expansion.
(2) The Appropriate Commission may require necessary studies to be conducted
to establish the allowable level of system loss for
the network configuration, and the capital expenditure
required to augment the transmission system and reduce
system losses. Since additional flows above a level
of line loading leads to significantly higher losses,
CTU/STU should ensure upgrading of transmission systems
to avoid the situations of overloading. The Appropriate
Commission should permit adequate capital investments
in new assets for upgrading the transmission system.
7.3 Other issues in transmission
(1) Financial incentives and disincentives should be implemented for the CTU
and the STU around the key performance indicators
(KPI) for these organisations. Such KPIs would include
efficient network construction, system availability
and loss reduction.
(2) All available information should be shared with
intending users by the CTU/STU and the load dispatch centers,
particularly information on available transmission capacity
and load flow studies.
Supply of reliable and quality power of specified standards in an efficient manner
and at reasonable rates is one of the main objectives
of the National Electricity Policy. The State Commission
should determine and notify the standards of performance
of licensees with respect to quality, continuity and
reliability of service for all consumers. It is desirable
that the Forum of Regulators determines the basic
framework on service standards. A suitable transition
framework could be provided for the licensees to reach
the desired levels of service as quickly as possible.
Penalties may be imposed on licensees in accordance
with section 57 of the Act for failure to meet the
standards.
Making the distribution segment of the industry efficient and solvent is the
key to success of power sector reforms and provision
of services of specified standards. Therefore, the
Regulatory Commissions need to strike the right balance
between the requirements of the commercial viability
of distribution licensees and consumer interests.
Loss making utilities need to be transformed into
profitable ventures which can raise necessary resources
from the capital markets to provide services of international
standards to enable India to achieve its full growth
potential. Efficiency in operations should be encouraged.
Gains of efficient operations with reference to normative
parameters should be appropriately shared between
consumers and licensees.
8.1 Implementation of Multi-Year Tariff (MYT) framework
1) This would minimise risks for utilities and consumers, promote efficiency
and appropriate reduction of system losses and attract
investments and would also bring greater predictability
to consumer tariffs on the whole by restricting tariff
adjustments to known indicators on power purchase
prices and inflation indices. The framework should
be applied for both public and private utilities.
2) The State Commissions should introduce mechanisms
for sharing of excess profits and losses with the
consumers as part of the overall MYT framework .In
the first control period the incentives for the utilities
may be asymmetric with the percentage of the excess
profits being retained by the utility set at higher
levels than the percentage of losses to be borne by
the utility. This is necessary to accelerate performance
improvement and reduction in losses and will be in
the long term interest of consumers by way of lower
tariffs.
3) As indicated in para 5.3 (h), the MYT framework
implemented in the initial control period should have
adequate flexibility to accommodate changes in the
baselines consequent to metering being completed.
4) Licensees may have the flexibility of charging
lower tariffs than approved by the State Commission
if competitive conditions require so without having
a claim on additional revenue requirement on this
account in accordance with Section 62 of the Act .
5) At the beginning of the control period when the
“actual” costs form the basis for future
projections, there may be a large uncovered gap between
required tariffs and the tariffs that are presently
applicable. The gap should be fully met through tariff
charges and through alternative means that could inter-alia
include financial restructuring and transition financing.
6) Incumbent licensees should have the option of filing
for separate revenue requirements and tariffs for
an area where the State Commission has issued multiple
distribution licenses, pursuant to the provisions
of Section 14 of the Act read with para 5.4.7 of the
National Electricity Policy.
7) Appropriate Commissions should initiate tariff
determination and regulatory scrutiny on a suo moto
basis in case the licensee does not initiate filings
in time. It is desirable that requisite tariff changes
come into effect from the date of commencement of
each financial year and any gap on account of delay
in filing should be on account of licensee.
8.2 Framework for revenue requirements and costs
8.2.1 The following aspects would need to be considered in determining tariffs:
(1) All power purchase costs need to be considered legitimate unless it is established
that the merit order principle has been violated or
power has been purchased at unreasonable rates. The
reduction of Aggregate Technical & Commercial (ATC)
losses needs to be brought about but not by denying
revenues required for power purchase for 24 hours
supply and necessary and reasonable O&M and investment
for system upgradation. Consumers, particularly those
who are ready to pay a tariff which reflects efficient
costs have the right to get uninterrupted 24 hours
supply of quality power. Actual level of retail sales
should be grossed up by normative level of T&D losses
as indicated in MYT trajectory for allowing power
purchase cost subject to justifiable power purchase
mix variation (for example, more energy may be purchased
from thermal generation in the event of poor rainfall)
and fuel surcharge adjustment as per regulations of
the SERC.
(2) ATC loss reduction should be incentivised by linking
returns in a MYT framework to an achievable trajectory.
Greater transparency and nurturing of consumer groups
would be efficacious. For government owned utilities
improving governance to achieve ATC loss reduction
is a more difficult and complex challenge for the
SERCs. Prescription of a MYT dispensation with different
levels of consumer tariffs in succeeding years linked
to different ATC loss levels aimed at covering full
costs could generate the requisite political will
for effective action to reduce theft as the alternative
would be stiffer tariff increases. Third party verification
of energy audit results for different areas/localities
could be used to impose area/locality specific surcharge
for greater ATC loss levels and this in turn could
generate local consensus for effective action for
better governance. The SERCs may also encourage suitable
local area based incentive and disincentive scheme
for the staff of the utilities linked to reduction
in losses.
The SERC shall undertake independent assessment of baseline data for various
parameters for every distribution circle of the licensee
and this exercise should be completed latest by March,
2007.
The SERC shall also institute a system of independent scrutiny of financial
and technical data submitted by the licensees.
As the metering is completed upto appropriate level in the distribution network,
latest by March, 2007, it should be possible to segregate
technical losses. Accordingly technical loss reduction
under MYT framework should then be treated as distinct
from commercial loss reduction which require a different
approach.
(3) Section 65 of the Act provides that no direction of the State Government
regarding grant of subsidy to consumers in the tariff
determined by the State Commission shall be operative
if the payment on account of subsidy as decided by
the State Commission is not made to the utilities
and the tariff fixed by the State Commission shall
be applicable from the date of issue of orders by
the Commission in this regard. The State Commissions
should ensure compliance of this provision of law
to ensure financial viability of the utilities. To
ensure implementation of the provision of the law,
the State Commission should determine the tariff initially,
without considering the subsidy commitment by the
State Government and subsidised tariff shall be arrived
at thereafter considering the subsidy by the State
Government for the respective categories of consumers.
(4) Working capital should be allowed duly recognising
the transition issues faced by the utilities such
as progressive improvement in recovery of bills. Bad
debts should be recognised as per policies developed
and subject to the approval of the State Commission.
(5) Pass through of past losses or profits should
be allowed to the extent caused by uncontrollable
factors. During the transition period controllable
factors should be to the account of utilities and
consumers in proportions determined under the MYT
framework.
(6) The contingency reserves should be drawn upon
with prior approval of the State Commission only in
the event of contingency conditions specified through
regulations by the State Commission. The existing
practice of providing for development reserves and
tariff and dividend control reserves should be discontinued.
8.2.2. The facility of a regulatory asset has been adopted by some Regulatory
Commissions in the past to limit tariff impact in
a particular year. This should be done only as exception,
and subject to the following guidelines:
a. The circumstances should be clearly defined through regulations, and should
only include natural causes or force majeure conditions.
Under business as usual conditions, the opening balances
of uncovered gap must be covered through transition
financing arrangement or capital restructuring;
b. Carrying cost of Regulatory Asset should be allowed
to the utilities;
c. Recovery of Regulatory Asset should be time-bound
and within a period not exceeding three years at the
most and preferably within control period;
d. The use of the facility of Regulatory Asset should
not be repetitive.
e. In cases where regulatory asset is proposed to
be adopted, it should be ensured that the return on equity
should not become unreasonably low in any year so that
the capability of the licensee to borrow is not adversely
affected.
8.3 Tariff design
: Linkage of tariffs to cost of service
It has been widely recognised that rational and economic pricing of electricity
can be one of the major tools for energy conservation
and sustainable use of ground water resources.
In terms of the Section 61 (g) of the Act, the Appropriate Commission shall be
guided by the objective that the tariff progressively
reflects the efficient and prudent cost of supply
of electricity.
The State Governments can give subsidy to the extent they consider appropriate
as per the provisions of section 65 of the Act. Direct
subsidy is a better way to support the poorer categories
of consumers than the mechanism of cross-subsidizing
the tariff across the board. Subsidies should be targeted
effectively and in transparent manner. As a substitute
of cross-subsidies, the State Government has the option
of raising resources through mechanism of electricity
duty and giving direct subsidies to only needy consumers.
This is a better way of targetting subsidies effectively.
Accordingly, the following principles would be adopted:
1. In accordance with the National Electricity Policy, consumers below poverty
line who consume below a specified level, say 30 units
per month, may receive a special support through cross
subsidy. Tariffs for such designated group of consumers
will be at least 50% of the average cost of supply.
This provision will be re-examined after five years.
2. For achieving the objective that the tariff progressively reflects the cost
of supply of electricity, the SERC would notify roadmap
within six months with a target that latest by the
end of year 2010-2011 tariffs are within ±
20 % of the average cost of supply. The road map would
also have intermediate milestones, based on the approach
of a gradual reduction in cross subsidy.
For example if the average cost of service is Rs 3 per unit, at the end of year
2010-2011 the tariff for the cross subsidised categories
excluding those referred to in para 1 above should
not be lower than Rs 2.40 per unit and that for any
of the cross-subsidising categories should not go
beyond Rs 3.60 per unit.
3. While fixing tariff for agricultural use, the imperatives of the need of using
ground water resources in a sustainable manner would
also need to be kept in mind in addition to the average
cost of supply. Tariff for agricultural use may be
set at different levels for different parts of a state
depending of the condition of the ground water table
to prevent excessive depletion of ground water. Section
62 (3) of the Act provides that geographical position
of any area could be one of the criteria for tariff
differentiation. A higher level of subsidy could be
considered to support poorer farmers of the region
where adverse ground water table condition requires
larger quantity of electricity for irrigation purposes
subject to suitable restrictions to ensure maintenance
of ground water levels and sustainable ground water
usage.
4. Extent of subsidy for different categories of consumers can be decided by
the State Government keeping in view various relevant
aspects. But provision of free electricity is not
desirable as it encourages wasteful consumption of
electricity besides, in most cases, lowering of water
table in turn creating avoidable problem of water
shortage for irrigation and drinking water for later
generations. It is also likely to lead to rapid rise
in demand of electricity putting severe strain on
the distribution network thus adversely affecting
the quality of supply of power. Therefore, it is necessary
that reasonable level of user charges are levied.
The subsidized rates of electricity should be permitted
only up to a pre-identified level of consumption beyond
which tariffs reflecting efficient cost of service
should be charged from consumers. If the State Government
wants to reimburse even part of this cost of electricity
to poor category of consumers the amount can be paid
in cash or any other suitable way. Use of prepaid
meters can also facilitate this transfer of subsidy
to such consumers.
5. Metering of supply to agricultural / rural consumers can be achieved in a
consumer friendly way and in effective manner by management
of local distribution in rural areas through commercial
arrangement with franchisees with involvement of panchayat
institutions, user associations, cooperative societies
etc. Use of self closing load limitors may be encouraged
as a cost effective option for metering in cases of
“limited use consumers” who are eligible
for subsidized electricity.
8.4 Definition
of tariff components and their applicability
1. Two-part tariffs featuring separate fixed and variable
charges and Time differentiated tariff shall be introduced
on priority for large consumers (say, consumers with demand
exceeding 1 MW) within one year. This would also help
in flattening the peak and implementing various energy
conservation measures.
2. The National Electricity Policy states that existing
PPAs with the generating companies would need to be
suitably assigned to the successor distribution companies.
The State Governments may make such assignments taking
care of different load profiles of the distribution
companies so that retail tariffs are uniform in the
State for different categories of consumers. Thereafter
the retail tariffs would reflect the relative efficiency
of distribution companies in procuring power at competitive
costs, controlling theft and reducing other distribution
losses.
3. The State Commission may provide incentives to
encourage metering and billing based on metered tariffs,
particularly for consumer categories that are presently
unmetered to a large extent. The metered tariffs and
the incentives should be given wide publicity.
4. The SERCs may also suitably regulate connection
charges to be recovered by the distribution licensee
to ensure that second distribution licensee does not
resort to cherry picking by demanding unreasonable
connection charges. The connection charges of the
second licensee should not be more than those payable
to the incumbent licensee.
8.5 Cross-subsidy surcharge and additional surcharge for open access
8.5.1 National Electricity Policy lays down that the amount of cross-subsidy
surcharge and the additional surcharge to be levied
from consumers who are permitted open access should
not be so onerous that it eliminates competition which
is intended to be fostered in generation and supply
of power directly to the consumers through open access.
A consumer who is permitted open access will have to make payment to the generator,
the transmission licensee whose transmission systems
are used, distribution utility for the wheeling charges
and, in addition, the cross subsidy surcharge. The
computation of cross subsidy surcharge, therefore,
needs to be done in a manner that while it compensates
the distribution licensee, it does not constrain introduction
of competition through open access. A consumer would
avail of open access only if the payment of all the
charges leads to a benefit to him. While the interest
of distribution licensee needs to be protected it
would be essential that this provision of the Act,
which requires the open access to be introduced in
a time-bound manner, is used to bring about competition
in the larger interest of consumers.
Accordingly, when open access is allowed the surcharge for the purpose of sections
38,39,40 and sub-section 2 of section 42 would be
computed as the difference between (i) the tariff
applicable to the relevant category of consumers and
(ii) the cost of the distribution licensee to supply
electricity to the consumers of the applicable class.
In case of a consumer opting for open access, the
distribution licensee could be in a position to discontinue
purchase of power at the margin in the merit order.
Accordingly, the cost of supply to the consumer for
this purpose may be computed as the aggregate of (a)
the weighted average of power purchase costs (inclusive
of fixed and variable charges) of top 5% power at
the margin, excluding liquid fuel based generation,
in the merit order approved by the SERC adjusted for
average loss compensation of the relevant voltage
level and (b) the distribution charges determined
on the principles as laid down for intra-state transmission
charges.
Surcharge formula:
S = T - [ C (1+ L / 100) + D ]
Where
S is the surcharge
T is the Tariff payable by the relevant category of
consumers;
C is the Weighted average cost of power purchase of
top 5% at the margin excluding liquid fuel based generation
and renewable power
D is the Wheeling charge
L is the system Losses for the applicable voltage level,
expressed as a percentage
The cross-subsidy surcharge should be brought down progressively and, as far
as possible, at a linear rate to a maximum of 20%
of its opening level by the year 2010-11.
8.5.2 No surcharge would be required to be paid in terms of sub-section (2) of
Section 42 of the Act on the electricity being sold
by the generating companies with consent of the competent
government under Section 43(A)(1)(c) of the Electricity
Act, 1948 (now repealed) and on the electricity being
supplied by the distribution licensee on the authorisation
by the State Government under Section 27 of the Indian
Electricity Act, 1910 (now repealed), till the current
validity of such consent or authorisations.
8.5.3 The surcharge may be collected either by the distribution licensee, the
transmission licensee, the STU or the CTU, depending
on whose facilities are used by the consumer for availing
electricity supplies. In all cases the amounts collected
from a particular consumer should be given to the
distribution licensee in whose area the consumer is
located. In case of two licensees supplying in the
same area the licensee from whom the consumer was
availing supply shall be paid the amounts collected.
8.5.4 The additional surcharge for obligation to supply as per section 42(4)
of the Act should become applicable only if it is
conclusively demonstrated that the obligation of a
licensee, in terms of existing power purchase commitments,
has been and continues to be stranded, or there is
an unavoidable obligation and incidence to bear fixed
costs consequent to such a contract. The fixed costs
related to network assets would be recovered through
wheeling charges.
8.5.5 Wheeling charges should be determined on the basis of same principles as
laid down for intra-state transmission charges and
in addition would include average loss compensation
of the relevant voltage level.
8.5.6 In case of outages of generator supplying to a consumer on open access,
standby arrangements should be provided by the licensee
on the payment of tariff for temporary connection
to that consumer category as specified by the Appropriate
Commission.
9.0 Trading Margin
The Act provides that the Appropriate Commission may fix the trading margin,
if considered necessary. Though there is a need to
promote trading in electricity for making the markets
competitive, the Appropriate Commission should monitor
the trading transactions continuously and ensure that
the electricity traders do not indulge in profiteering
in situation of power shortages. Fixing of trading
margin should be resorted to for achieving this objective.
