1 17 August 2001 K Balarama Reddi & Usha Ramachandra TARIFF SETTING UNDER INDEPENDENT REGULATION Rs.

2 TARIFFS IN ELECTRICITY Tariffs for: Generated power (from each generating company) Transmission Tariffs Bulk Supply Tariffs (Pooled power & transmission charges) Retail Supply Tariffs (for end consumers)

3 TARIFFS BEFORE INDEPENDENT REGULATION State Electricity Boards: Bundled tariff for generation, transmission & distribution according to: Section 59 & Section 63 of ES Act (1948)

4 TARIFFS BEFORE INDEPENDENT REGULATION Cont…d Distribution Licensees: Section 57, 57A & Sixth Schedule of ES Act 1948 The provision under Sixth Schedule (ES Act) reads: ………The licensee shall so adjust the charges that his clear profit in any year shall not as for as possible, exceed the amount of reasonable return. Sixth Schedule clearly defines - Capital base Reasonable return on capital base Clear profit

5 TARIFFS BEFORE INDEPENDENT REGULATION Cont…d Generating Companies: K.P. Rao Committee CEA Amendments of 1992 for IPPs & the PPAs consequently drawn up

6 Tariffs for: Generation tariff for centrally-owned generating companies Generation tariff for Companies supplying power to more than one state Transmission tariff for interstate transmission of power CENTRAL ELECTRICITY REGULATORY COMMISSION

7 H Regulation of: H Purchase of power H Transmission tariffs within the state H Retail distribution tariffs within the state STATE ELECTRICITY REGULATORY COMMISSIONS Generation Tariffs for State Gencos with State Govt. New PPAs to the cleared by the SERCs

8 PRINCIPLES OF TARIFF SETTING The Commission shall be guided by the following: O The principles and their application in Section 46, 57 & 57A of Electricity (Supply) Act and the Sixth Schedule O The tariff progressively reflects the cost of supply O The factors that would encourage efficiency, economical use of the resources O The tariff shall not show undue preference to any consumer, but may differentiate according to various factors O Where the commission departs from the laid down principles, the reasons shall be provided in writing

9 GENERATION TARIFFS Single part tariff Two part tariff - K P Rao Availability Based Tariff (ABT).Capacity charge.Energy Charge.Unscheduled Interchanges

10 ò Capacity charge will be related to availability of the generating station. ò Incentive payment will be made when the actual generation is more than the normative generation corresponding to the target availability ò Energy charges shall be worked out on the basis of p/kwh rate on ex- bus energy sheduled to be sent out from the generating station as per the following formula ò As a disincentive the fixed charges and ROE will get reduced proportionately if the availability is less than availability factor fixed. ò Charges for unscheduled interchanges as stated. ABT: Salient Features

11 Availability Factor (cont..d)

12 ABT & Unscheduled Interchange

13 Merits of ABT * facilitates grid discipline * facilitates trading in capacity and energy * facilitates merit order despatch

14 PGCIL Availability Are incentives based on availability relevant for transmission systems? Target availability for recovery of full fixed charges - 95% or 98%.

15 Reactive Energy Charge Reactive Energy supplied by generators at the cost of real power could be charged to the SEBs as a separate charge - CERC Consultation Paper on Bulk Tariffs, Sept. 1999

16 The transmission tariff is based on investment costs (fixed costs) covering: ý Interest on debt ý Depreciation ý Operation & Maintenance costs ý Return on equity ý Interest on working capital ý Taxes, if any Transmission Tariff

17 Transmission access and wheeling is a complex arena encompassing physics, economics and regulation. What is Wheeling? Wheeling in its broadest sense, is the delivery of electric power from one party to another, utilising the transmission facilities of the third party.

18 Transmission Rates Paise/kwh: A flat rate per kWh generally measured at the point(s) of delivery. This category includes rates stated in paise per Kwh. Paise/kW: A flat rate based on either contract or billing demand. Billing demand is generally defined as the highest 30 or 60 minute integrated demand measured during the billing month. In some instances a demand ratchet is employed. Demand & Energy: A two-part rate including flat rate per kWh delivered plus a demand charge expressed in kW based on metered demand. Mileage Component Rates: A rate wherein the charge is based in part upon distance, generally stated in Rs. Per circuit mile. Billing demand is generally calculated as the highest 30 or 60 minute integrated demand during the billing month.

19 The bulk supply tariff contains two components: i) The cost of purchase of power ii) Transmission costs Bulk Supply Tariffs

20 RETAIL SUPPLY TARIFFS APPLICATION & ORDER A Typical Tariff Application comprises: 1. Demand Forecasts 2.Determination of Capital Base 3. Details of Expenditure 4. Revenue Requirement 5. Tariff Setting (average cost of supply per kwh & tariff structure) 6. Efficiency Improvements

21 Retail Supply Tariff Calculation Calculation of Revenue Requirements: Req.Rev = Expenses + (Return on Capital Base) Tariff Structure to meet Revenue Requirements

22 çRevenue Requirements Sum of: Rate of return on fixed assets Expenses Less: Miscellaneous revenue and sales to other states Subsidy from State Government Revenue Requirements

23 Tariff Determination - Existing çExisting Tariff Structure Correlation of Demand and Energy Costs to Fixed and Variable Costs Monthly minimum charges çFuel cost adjustment çExisting customer charges etc. Meter maintenance Meter reading, billing and serving of bills Collection of revenue Maintenance of Customer Accounts çMeter rents çPower factor charges çDelayed payment charges

24 çRationalization of existing tariff structure çTariffs to different categories of consumers - an attempt to move towards cost of services çSocial aspects including tariff to Agricultural Sector çFuel cost adjustment çElectricity duty and taxes Tariff Determination - Proposed ISSUES

25 EFFICIENCY IMPROVEMENTS çStatus of Metering çBilling and revenue realisation çDSM, If any çRepair and Maintenance costs çMaterial Management - Inventory Control çT&D Losses reduction programme Transformer repairs etc. Technical Non technical (Commercial)

26 Revenue Gap The gap between the revenue requirement and revenue from current tariffs. (Rs. Crores) Revenue requirement Revenue from current tariff THE GAP

27 The gap has to be met by: Revenue Gap Subsidies Efficiency Gains (T & D loss & exp.) Tariff Increases

28 Re-evaluation of revenue gap Likely revenue from additional sales. Subsidy from State Government. Additional resources through tariff increase. The issue is whether tariff can be increased to meet the entire revenue gap? If not what is to be done?

29 SERC ORDERS  Orissa ERC, 1997, 1998, 1999 & 2000  Maharashtra ERC May 2000  Andhra Pradesh ERC May 2000, 2001  Uttar Pradesh ERC July 2000  Gujarat ERC October 2000  Haryana ERC, December 2000  Karnataka ERC, December 2000  Since then Rajasthan, Delhi

30 Orissa Case 1. Orissa Tariff Order for (Gridco) 2. Orissa Tariff Order for (Gridco separate for transmission & distribution) 3. Orissa Tariff Order for Gridco & four Distribution Companies Tariff Orders

31 OERC: Power Purchase & Cost OERC: Power Purchase & Cost

32 OERC: Category wise Sales: OERC: Category wise Sales:

33 OERC: Benchmarks OERC: Benchmarks

34 Power Sector Restructuring Orissa distribution was divided into four joint venture companies:WESCOSOUTHCONESCOCESCO * WESCO, SOUTHCO & NESCO filed joint application for RST revision on BSES AES

35 Retail Tariff for WESCO Tariff Order Retail Supply Tariff (RST) filed: Further information sought by OERC: Fresh application with all details filed: Objections received 17 Objections Heard 12 Enquiry:Dec Tariff Order: OERC could pronounce tariff orders of 5 companies within the mandatory 3 months.

36 Differential Bulk Tariff Differential Bulk Tariff WESCO: Demand Charge: Rs.200/KVA/month Energy Charge: paise/kwh SOUTHCO, CESCO, NESCO: Demand Charge: Rs.200/KVA/month Energy Charge: paise/kwh

37 Pre-reform Post-reform % % (GoO) % % % % % Tariff Reforms in Orissa

38 T & D losses Compare the Three Tariff Revisions: : Gridco’s losses of 42% to be reduced to 35% : Gridco claimed that actual losses were 46% and has been reduced to 41%. OERC rules that 35% is a benchmark & incentive of 1% increase in return for every 1% decrease in T & D losses below 35% : WESCO’s losses are really 46%, only 3% decrease is possible in the coming year but agreed for 40% decrease for distribution and 4% for transmission.

39 Desired level of T&D loss reduction has not been achieved Sale projections fell much below the level of expectation Asset revaluation soared the revenue requirement of GRIDCO Handling of accumulated losses of approx. Rs.900 Crores for the period to Who should share the burden? Consumers/Licensee/Government? ISSUES AT STAKE

40 Summary of Expenses Approved by the MERC for MSEB MERC Remarks Proposal Approval Generation of Power3,540 3,387 Based on the Commission’s targets for Generation. Purchase of Power3,7983,542 Based on the Commission’s approval of power purchase. Repairs & Maintenance Employees Costs1,5191,419 Additional expenses arising out of implementation of 5th Pay Commission may be recovered through efficiency improvement. Admn & Gen. Expenses Depreciation1,2941,293 Token deduction of Rs.1 Crore for non- submission of information to the Commission to ascertain the prudency of the capital investment during last five years. Figures in Rs.Crores) Contd.

41 MSEB MERC Remarks Proposal Approval Interest Charges1,239 1,127 Interest on investment in DPC has been disallowed. Also token reduction of Rs.1 crore for non-submission of information to allow the Commission to ascertain the predency of the capital expenditure investment. Token reduction for working capital on account of poor receivables management. Provision for doubtful debts Other debts Cost of recovery from agricultural consumers has been disallowed. Total Expenses allowed12,73312,071 Note: All expenses have been shown net of capitalisation Contd.

42 Summary of Revenue Statement for Year Existing Tariff withDescriptionMSEB MERC MSEB ForecastProposal & Forecast & ForecastApproval 10,703Revenue from Sale of power12,72111, Miscellaneous Revenue Other Income Additional Revenue from T&D loss reduction ,137Total (Revenue) (Rs. Crores)13,15512,360 12,733Total Expenses12,73312,071 -1,596Surplus Average Realisation (Rs./Unit) Average Cost of Supply (Rs./Unit)

43 Tariff Hike Description MSEB MERC (Proposal)(Approval) Tariff increase in Rs. Crores2, Tariff Hike in %

44 A P Transco: Cost of Service A P Transco: Cost of Service2000 Current realisation is: Domestic p/kwh Agriculture - 18 p/kwh

45 APTRANSCO: Revenue Required

46 A P Transco: Filing of Proposed Tariff A P Transco: Filing of Proposed Tariff2000 Suggested that the Revenue Gap would be bridged by creating a regulatory asset This year’s proposal - tariff increase is nominal, govt subsidy at the same level as last year has been envisaged & “revenue gap” of Rs.1450 crs to be bridged through efficiency improvements & internal resources

47 Features of KERC Tariff Order: 2000 Features of KERC Tariff Order: 2000 KPTCL should report to the Commission by March 31st confirming that all unauthorised IP sets have been disconnected. KPTCL should submit an Action Plan to KERC on how to reduce T & D losses by at least 2% in ERC was approved on the basis of a reduction of 5.5% in commercial losses in & a further 5% in

48 Features of KERC Tariff Order: 2000 Features of KERC Tariff Order: 2000(Con..t) Penalty of Rs.5 crs for not providing requested information on purchased power Merit Order Purchase plan to be prepared & approved by KERC 15 days before the start of the month All works more than Rs. 1 lakh to be allotted through a bidding process and NO price preference at all.

49 Features of KERC Tariff Order: 2000 Features of KERC Tariff Order: 2000(Con..t) Socio-economic profile of Bhagya jyothi/ KJ consumers to assess ability to pay Should implement metering of the streetlight installations in one year Dues from PSUs & Govt. local bodies to be added to the amount of subsidy due from Govt. Toll free phone numbers to register complaints Rs. 35 crs disallowed on account of free electricity, bonus & DA overestimated Benchmarking of system parameters

50 Features of KERC Tariff Order: 2000 Features of KERC Tariff Order: 2000(Con..t) Profile of agricultural consumers and charge equivalent to ave. cost of power purchased charged to those who Those who have more than one IP set Income tax payer Owner of a tractor Owner of four wheeled vehicle Telephone connection including mobile set

51 Features of UPERC Tariff Order: 2000 Features of UPERC Tariff Order: 2000 Efficiency improvement targets over the next five years: T & D loss reduction programme from 36.5% in to 20.5% in for UPPCL and 30.2% in to 15% in for KESCO Installation of meters at all 11 KV feeders by % metering of all consumers by On-line billing in 20 selected towns by March

52 Features of UPERC Tariff Order: 2000 Features of UPERC Tariff Order: 2000(Cont…d) UPPCL application was inclusive of subsidy available from Govt. of UP. Used the ave. cost of supply as a benchmark to fix tariffs for each consumer category

53 Features of HERC Tariff Order: 2000 Features of HERC Tariff Order: 2000 Unless trust if formed for retirement benefits, HERC would not allow any funding from the tariff revenue to be used for this purpose No diversion of PF contribution to the business Deferred payment of subsidy by Government will not be ordinarily allowed in the future As long of Govt. ownership continues the amount of depreciation allowed would be adjusted against this regulatory asset till fully amortised Any efficiency gains by reduction of T & D losses shall be shared between the Licensee & consumers in the ratio of 6:4