Discussion on Multi Year Tariff By Vivek Sharma & Manisha Kabra

Structure MYT – The Concept MYT – The Concept Rationale for MYT Rationale for MYT Benefit of MYT Benefit of MYT Enabling Environment Enabling Environment Draft tariff policy Draft tariff policy Experience in South Asia Experience in South Asia Issues in Implementation Issues in Implementation

MYT – The Concept “ a new system where the tariff setting exercise is done for a number of years in one exercise, termed as MYT” MYT – The Concept “ a new system where the tariff setting exercise is done for a number of years in one exercise, termed as MYT” Concept of MYT can mean several things ranging from: Concept of MYT can mean several things ranging from: Prescribing the actual numbers Prescribing the actual numbers Adherence to certain specific benchmarks that will prevail for a number of years. Adherence to certain specific benchmarks that will prevail for a number of years. It can also govern the principles governing the input costs and output prices at two different ends. It can also govern the principles governing the input costs and output prices at two different ends.

Rationale for MYT The present system of annual determination is too flexible giving considerable freedom to arbitrary decision making. The present system of annual determination is too flexible giving considerable freedom to arbitrary decision making. Average time taken: 3-6 months Average time taken: 3-6 months It is an answer to make the tariff setting exercise more predictable. It is an answer to make the tariff setting exercise more predictable. To ensure that costs are recovered in a more mechanistic manner. To ensure that costs are recovered in a more mechanistic manner.

Benefits of MYT Reduction in regulatory effort on the part of the commissions, utilities. Reduction in regulatory effort on the part of the commissions, utilities. Reduction in regulatory uncertainty Reduction in regulatory uncertainty Provision of a transparent and stable system of incentives. Provision of a transparent and stable system of incentives. Will lead to greater private sector interest in investment in the power sector. Will lead to greater private sector interest in investment in the power sector.

Enabling Environment Pakistan Pakistan Privatisation Commission Privatisation Commission Government guidelines to NEPRA Government guidelines to NEPRA India India The Electricity Regulatory Commission Act, 1998 The Electricity Regulatory Commission Act, 1998 The Electricity Act 2003 (61 f) The Electricity Act 2003 (61 f) Draft tariff policy Draft tariff policy

India- Draft tariff policy: Broad principles of tariff setting To mitigate the risk related to data uncertainity, State Commissions: To mitigate the risk related to data uncertainity, State Commissions: Use AT&C losses Use AT&C losses Ensure 100% metering Ensure 100% metering SERC to design incentive/disincentive for this SERC to design incentive/disincentive for this SERC should lay down a methodology for estimation of agricultural consumption SERC should lay down a methodology for estimation of agricultural consumption Initiate action for verification of system losses including agricultural consumption, Base year operating expenses, Capital expenditure plan Initiate action for verification of system losses including agricultural consumption, Base year operating expenses, Capital expenditure plan

Cont. Mitigation of risks related to regulatory uncertainty Mitigation of risks related to regulatory uncertainty SERC to decide time frame for implementing price- cap regulation SERC to decide time frame for implementing price- cap regulation SERC to determine (Control period = 3-5 years) SERC to determine (Control period = 3-5 years) Principles of risk sharing (between the utility and the consumers Principles of risk sharing (between the utility and the consumers Definition of controllable and uncontrollable expenses for the utility Definition of controllable and uncontrollable expenses for the utility Parameters and principles for incentives/ disincentives Parameters and principles for incentives/ disincentives Opening levels of key parameters Opening levels of key parameters Customer service standards to be met by the utility Customer service standards to be met by the utility

Experience in South Asia India India Pakistan Pakistan

Most commissions experimented with multi-year targets related to T&D losses & collection efficiency Uttar Pradesh Incentivising framework adopted. Incentivising framework adopted. In UPPCL proposed reduction in T&D losses from 36.5% to 17.5% over the next decade In UPPCL proposed reduction in T&D losses from 36.5% to 17.5% over the next decade Losses decreased marginally; from 41.55% to 41.4%. Losses decreased marginally; from 41.55% to 41.4%. Multi-year path laid down previously by UPERC had to be revised Multi-year path laid down previously by UPERC had to be revised

Maharashtra- Loss sharing Maharashtra- Loss sharing Implicit adoption of MYT - targets indicated in Tariff Order of 2000 Implicit adoption of MYT - targets indicated in Tariff Order of 2000 Against mandated loss reduction to 26.89%, losses were reduced to only 39.4%. Against mandated loss reduction to 26.89%, losses were reduced to only 39.4%. MERC held consumers equally responsible for losses - cost of excess losses to be borne equally by MSEB and consumers MERC held consumers equally responsible for losses - cost of excess losses to be borne equally by MSEB and consumers

Delhi Delhi Vidyut Board proposed long-term principles for tariff determination in Delhi Vidyut Board proposed long-term principles for tariff determination in DERC -sector was not mature for the introduction of MYT DERC -sector was not mature for the introduction of MYT Government notification - MYT incorporated in privatisation process Government notification - MYT incorporated in privatisation process Bidding criteria: reduction in loss levels Bidding criteria: reduction in loss levels Negotiated losses were accepted Negotiated losses were accepted Incentivising framework of multi-year tariffs Incentivising framework of multi-year tariffs Only one discom were unable to achieve targets Only one discom were unable to achieve targets

Pakistan - Karachi Supported by Govt. of Pakistan - Reasons included privatization Supported by Govt. of Pakistan - Reasons included privatization NEPRA approved MYT in Sept NEPRA approved MYT in Sept NEPRA considered price-cap as an appropriate way of maximizing incentives NEPRA considered price-cap as an appropriate way of maximizing incentives Allowed a price capped multi year tariff with adjustments for inflation, Fuel price, power purchase. Allowed a price capped multi year tariff with adjustments for inflation, Fuel price, power purchase.

Cont. Indexation (CPI - X) allowed on annual basis. Indexation (CPI - X) allowed on annual basis. Fuel and power purchase adjustment allowed quarterly. Fuel and power purchase adjustment allowed quarterly. Sliding scale profit sharing mechanism. Sliding scale profit sharing mechanism. No loss sharing. No loss sharing. Price control period is 7 years Price control period is 7 years

Issues in implementation of MYT Availability of reliable information: Availability of reliable information: Regulatory process cannot wait for perfect information, which given its external position, it can never obtain. Regulatory process cannot wait for perfect information, which given its external position, it can never obtain. However, reliable and timely information is an imperative, and all steps should be taken to achieve this. However, reliable and timely information is an imperative, and all steps should be taken to achieve this. Sharing of downward and upward targets Sharing of downward and upward targets Controllable and non-controllable costs Controllable and non-controllable costs

Cont. Government Subsidy Government Subsidy Phased out our the period of time. Phased out our the period of time. What should be the Control period? What should be the Control period? Needs preparedness and involvement of all participants. Needs preparedness and involvement of all participants.

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