Legal provision for Tariff determination 61. The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely:- (a) the principles and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees; (b) the generation, transmission, distribution and supply of electricity are conducted on commercial principles; (c) the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments; (d) safeguarding of consumers' interest and at the same time, recovery of the cost of electricity in a reasonable manner; (e) the principles rewarding efficiency in performance; multi year tariff principles; (g) that the tariff progressively reflects the cost of supply of electricity and also, reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission; (h)the promotion of co-generation and generation of electricity from renewable sources of energy; (i)the National Electricity Policy and tariff policy: Provided that the terms and conditions for determination of tariff under the Electricity (Supply) Act, 1948, the Electricity Regulatory Commission Act, 1998 and the enactments specified in the Schedule as they stood immediately before the appointed date, shall continue to apply for a period of one year or until the terms and conditions for tariff are specified under this section, whichever is earlier.

Legal provision for Tariff determination 62. (1)The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for – (a) supply of electricity by a generating company to a distribution licensee: Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity; (b)transmission of electricity ; (c)wheeling of electricity; (d)retail sale of electricity. Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity. (2) The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be specified in respect of generation, transmission and distribution for determination of tariff. (3)The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required. (4)No tariff or part of any tariff may ordinarily be amended more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified. (5) The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover. (6) If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

What are Terms and Conditions of Tariff? Rules and Norms for determining the Tariff of ISGS and Transmission licensees. Applicable to –a) Generating Stations supplying to more than one beneficiary (Thermal, Hydro, CCGT) –(NTPC, NLC, NHPC, DVC, NEEPCO) –b) Inter State Transmission System Tariff of Nuclear power stations is fixed by DAE.

Some Imp Definitions and terminology Control Period : Period for which tariff is specified (April March 2014) MYT : Multi Year Tariff: The tariff spread over useful life of the equipment Beneficiary : Person purchasing power from the ISGS Cut off date :Last day of FY after 2 years from the CoD. Date of Commercial Operation: date from which Tariff recovery starts ‘Infirm power’ : Power injected before CoD. ‘Inter-State generating station’ or ‘ISGS’ : Gen Stns supplying power to more than one state. ‘Useful life’: Life of the system from CoD used for computing Depreciation and determination of Tariff norms. ( Coal/Gas based/ Substation=25 yrs, Hydro/Line 35 yrs) ‘Design energy' means the quantum of energy which can be generated in a 90% dependable year with 95% installed capacity of the hydro generating station;

Time Lines in Tariff Period Project Start date (2- 4 years) 1 st Trial synchronisation CoD Cut-Off Date for addl. CapitalisationApply for True I Up of TarriffEnd of Loan repaymentEnd of Useful LifeDepreciation in straight Line method (12 years) 2-4 years 2-3 months yrs 2-3 months 2+ years Project schedule and CoD to determine addl. RoE Control Period 1 Eligibility for R&M Control Period 1 Control Period 2 Control Period 5 Tariff after Renovation and Modernisation Construction Period Operati ng Norms for extend ed period of life Billing starts True I Up by CERCAdjustment billing for as per True I Up

Steps in Tariff and Collection Apply for Tariff fixation (6 months before) Tariff fixation Bench mark norms of Project Cost Billing by the ISGS/ ISTS Filing of AddCap+ deferred Liabilities +actual Expenditure Accounting in REA Truing up by CERC CoD Cut off Date Adjustment of Excess or Deficit collection Audited Costs Interest Rates Beneficiaries Audited Costs

Project Exp. IDC FERV Initial Spares Addl Cap Rehab & Resettle (hydro) Contribution to RGGYY (hydro) Asstets not in Use (for next tariff periods) Profit in Sale of Infirm power Debt:Equity Ratio Capital Cost Loan Equity Total Project Cost considered for Tariff fixation Rs.

EquityReturn Equity Rate of RoE Loan Interest on Loan Rate of Interest Loan +Equity Depreciation Rate of Depreciation Type/Size of Unit/ / Tr. system O&M Exp Normative O&M Exp Working Capital Interest on Working Capital Interest rates Sec Oil charges Normative Seondary Oil consumption Sec. Oil rates

Interest on Loan Return Equity O&M Exp Depreciation Interest on Working Capital Annual Fixed Charges Availability factor Monthly Fixed Charges Secondary Oil Consumption R&M allowance (after Useful Life)

Interest On Loan Normative Loans = Actual Loan + Equity beyond 30% (A) Normative Loan Outstanding= Loan- Depreciation (B) Interest on Loan = Normative Loan Outstanding * Wt, Avg. Rate of Interest

Depreciation Regulation 17 Allowed up to maximum of 90% of the capital cost and salvage value is 10% 5.28% for 1 st 12 years Balance depreciable value spread over the balance useful life IT eqpt.=15% ; PLCC=6.33 ; Motor vehicles=9.5% ; AC=9.5% Bldgs= 3.34% Land under lease=3.34% Temp erections=100% Advance Against Depreciation removed

EquityReturn Equity Rate of RoE Loan Interest on Loan Rate of Interest Loan +Equity Depreciation Rate of Depreciation Type/Size of Unit/ / Tr. system O&M Exp Normative O&M Exp Working Capital Interest on Working Capital Interest rates Sec Oil charges Normative Seondary Oil consumption Sec. Oil rates

Interest on Loan Return Equity O&M Exp Depreciation Interest on Working Capital Annual Fixed Charges Availability factor Monthly Fixed Charges Secondary Oil Consumption R&M allowance (after Useful Life)

Interest On Loan Normative Loans = Actual Loan + Equity beyond 30% (A) Normative Loan Outstanding= Loan- Depreciation (B) Interest on Loan = Normative Loan Outstanding * Wt, Avg. Rate of Interest

Depreciation Regulation 17 Allowed up to maximum of 90% of the capital cost and salvage value is 10% 5.28% for 1 st 12 years Balance depreciable value spread over the balance useful life IT eqpt.=15% ; PLCC=6.33 ; Motor vehicles=9.5% ; AC=9.5% Bldgs= 3.34% Land under lease=3.34% Temp erections=100% Advance Against Depreciation removed

O&M Exp for 1 month Cost of 1.5* month primary fuel / Lime Stone Stock Cost of Maint. Spares (as a % of O&M ch.) Cost of 2 months Sec oil Stock 2 months receivables Working Capital Interest rates Interest on Working Capital * 2 months for non-pit head stns. Note :For Hydro stations and Transmission system, fuel stock, sec. oil stock not applicable

Bench marking Model for Transmission lines Benchmarking by CERC Voltage class No. of circuits Conductor type No. of Conductors Insulator type Line length Wind zones & Terrain No. of Towers Types of Terrains No. of River crossings Bill of Quantities Conductor length Earthwire length No. of insulators Qty. of Hardware Tower Weights Foundation Volume Total cost / Cost per ckm Source: CERC Explanatory Memorandum ( 8 th Dec.’09) Generous set of assumptions Unit cost based on historical data and Application of PV Formula and indices

Availability Calculation of Transmission System Availability = ( *NAFM) Where NAFM= Non-availability factor in per unit for the month 1) For AC system [ Σ ( OH L x Cktkm L x NSC L ) + Σ ( OH T x MVA T x 2.5 ) +Σ ( OH R x MVAR R x 4 ) ] THM x [ Σ (Cktkm l xNSC L ) + Σ (MVA T x 2.5 ) + Σ (MVAR R x 4 ) ] Where OH L, OH T & OH R = Outage hours for Line or Transformer or Reactor Cktkm = Length of a transmission line circuit in km NSC = Number of sub-conductors per phase MVA = MVA rating of a transformer / ICT MVAR = MVAR rating of a bus reactor, THM = Total hours in the month 2) NAFM for each HVDC system NAFM = [ Σ (TCR x hours) ] ÷ [ THM x RC ] TCR = Transmission capability reduction of the system in MW RC = Rated capacity of the system in MW.

Transmission charges of ISTS : Monthly transmission Charges = AFC x ( NDM / NDY ) x ( TAFM / NATAF ) If TAFM > NATAF, incentive will be given For 1% increase in Avb, 1% of Fixed charges are given

Sample Calculation of Tariff – CERC Norms Case Study : A Project Consisting 1 No. 400KV D/C Transmission Line of 75 km line length and 4 Nos of 400KV Bays. Capital Cost of the Project : Rs 100 Cr Adopting Debt : Equity Ratio of 70 : 30 Loan (Debt) Amount : Rs 70 Cr Equity Amount : Rs 30 Cr CALCULATION OF TARIFF for (For illustration purpose only) Interest on Loan : 70 x = 6.65 Cr ( 9.5%) Return on Equity : 30 x = 5.24 Cr % {15.5%/ 16% before MAT}) Depreciation : 100 x = 5.28 Cr 5.28% {Building : 3.34%, TL/SS : 5.28%, PLCC : 6.33 % and balance spread over after 12 Years}) O&M Expenses = 2.57 Cr 4 No * Lakh/Bay (400KV) 75 Km * Lakh/Km (400KV D/c Twin) Interest on Working 12.25% = 0.41 Cr ( WC=2 Month Receivables + 1 Month O&M + 15% O&M for spares) TOTAL TARIFF = Rs Cr / year

Note : Only for illustration purpose. Norms assumed to remain same through out for all control periods

Will Tariff be paid after ‘Useful life’?  Yes. Tariff is receivable by the Owner  ‘Depreciation’ component will not be receivable  Eligible for Renovation and Moderation  Various options for the owner:  Asset can be written off  and new project can be constructed  or R&M can be taken up  Allowance for R&M Rs.5Lac/MW/yr through Fixed Charges  R&M charges  R&M as a separate project ‘useful life’ in relation to a unit of a generating station and transmission system from the COD shall mean the following, namely:- (a) Coal/Lignite based station :25 years (b) Gas/Liquid fuel based station :25 years (c) AC and DC sub-station: 25 years (d) Hydro generating station : 35 years (e) Transmission line : 35 years