1. TARIFF DETERMINATION: GENERATION AND TRANSMISSION
Presentation by
Umesh Kumar Shukla
2nd July,2008
Capacity Building Programme For
Officers Of Electricity Regulatory Commissions
30th June – 5th July,2008
Organized by
Indian Institute of Technology, Kanpur

2. Overview of the Presentation
Various Methods
Issues
Tariff Determination In Indian Power Sector
Provisions of Electricity Act,2003
Regulatory Procedures and Processes
CERC Tariff Norms for
Deviation by SERC from CERC Norms
Some Important Cases
Tariff Calculation – Excel spreadsheet

3. VARIOUS MODELS OF TARIFF DETERMINATION
Embedded Cost
Marginal Cost
Normative Cost
RPI minus X
Tariff based on Competitive bidding
Hybrid Method
Market based Tariff

4. VARIOUS ISSUES IN TARIFF DETERMINATION (Contd….)
Rate Base - Gross Fixed Assets or Net Fixed Assets
Return - Return on capital employed or Return on equity + interest on Debt
Rate of Return - Post tax or Pre tax
Interest on working capital - Normative working capital or an additional ROCE/ROE
O&M expenses - Based on Actual or Normative (% of capital cost or benchmark cost)

5. VARIOUS ISSUES IN TARIFF DETERMINATION (Contd….)
Depreciation - Repayment of loan or Recovery of Asset or Replacement of Asset
Incentives - Thermal - Hydro - Transmission systems
Other Issues - Tariff period - Peak & off peak tariff in bulk generation
Performance based regulation
Step towards Competition

6. VARIOUS ISSUES IN TARIFF DETERMINATION
Thermal - Availability/PLF - Station Heat Rate - Secondary fuel oil consumption - Auxiliary energy consumption
Hydro - Capacity Index - Auxiliary energy consumption
- Rate of primary and Secondary Energy
Transmission
- Availability

7. TARIFF DETERMINATION IN INDIAN POWER SECTOR
Single part tariff
Two part tariff for Generation as per K.P. Rao Committee
GOI two part tariff notification for Generation Companies
Transmission tariff notification dated effective from
CERC Tariff Notification for Tariff Period
CERC Tariff Notification for Tariff Period

8. CREATION OF CERC and SERCs
Creation of State Electricity Regulatory Commision in some states e.g. OERC in 1995, HERC in 1998
The Electricity Regulatory Commissions Act,1998
Creation of Regulatory Commissions at the Centre and States.
Central Electricity Regulatory Commission (CERC) in July,1998.
The ERC Act, 1998 replaced by the Electricity Act, 2003
CERC and SERCs created under the provisions of the ERC Act, 1998 and State Acts recognized as the Central Electricity Regulatory Commission and State Electricity Regulatory Commissions under the Electricity Act, 2003.

9. CERC: STATUTORY FUNCTIONS SECTION 79 (1) 0F THE ELECTRICTY Act,2003
regulate the tariff of generating companies
owned or controlled by the Central Government;
composite scheme for generation & sale of electricity in more than one state
regulate inter-state transmission of electricity and determine tariff
for inter-state operations issue licences to persons to function as:
transmission licensee and
electricity trader;
adjudicate upon disputes involving generating companies or transmission licensee
to levy fees for the purposes of the Act;
to specify Grid Code, specify and enforce the standards with respect to quality, continuity and reliability of service by licensees;
to fix the trading margin in the inter-State trading of electricity

10. CERC: ADVISORY FUNCTIONS SECTION 79 (2) 0F THE ELECTRICTY Act,2003
The Commission also have advisory function and shall advise the Central Government on:
formulation of National Electricity Policy and Tariff Policy;
promotion of competition, efficiency and economy in the activities of the electricity industry;
promotion of investment in electricity industry;
any other matter referred to the Central Commission by the Central Government.

11. SERC : STATUTORY FUNCTIONS SECTION 86 0F THE ELECTRICTY Act,2003
determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail within the State
regulate electricity purchase and procurement process of distribution licensees including the price
facilitate intra-state transmission and wheeling of electricity
for intra-state operations issue licences to persons to act as transmission licensee, distribution licensees and electricity trader;
promote cogeneration and generation of electricity from renewable sources of energy
adjudicate upon disputes between the licensees and generating companies and refer any dispute for arbitration
to specify State Grid Code, specify and enforce the standards with respect to quality, continuity and reliability of service by licensees;
to fix the trading margin in the intra-State trading of electricity

12. SERC: : ADVISORY FUNCTIONS SECTION 86 (2) 0F THE ELECTRICTY Act,2003
The Commission also have advisory function and shall advise the State Government on:
promotion of competition, efficiency and economy in the activities of the electricity industry;
promotion of investment in electricity industry;
reorganization and restructuring of electricity industry in the State;
matters concerning generation, transmission , distribution and trading of electricity or any other matter referred to the State Commission by that Government.

13. GUIDING PRINCIPLES OF TARIFF SECTION 61 OF THE ELECTRICITY ACT, 2003
In specifying the terms and conditions for the determination of tariff, Appropriate Commission shall be guided by:
(a) Principles and methodologies specified by CERC for determination of tariff applicable to generating companies and transmission licensees
(b) Generation, transmission, distribution and supply are conducted on commercial principles
(c) Factors which would encourage efficiency, economical use of resources, good performance, optimum investments
(d) Safeguarding of consumers’ interest and recovery of the cost of electricity in a reasonable manner
(e) Principles rewarding efficiency in performance
(f) Multiyear tariff principles
(g) Reflection of cost of supply in tariff progressively, and reduction and elimination of cross-subsidies
(h) Promotion of co-generation and generation of electricity from renewable source of energy
(i) National electricity policy and tariff policy

14. ROLE OF THE COMMISSION
The Commission has to play the role of harmonizing the interest of various stake holders
Gain of one stake holder is perceived as loss to the other stake holder

15. REGULATORY PROCEDURES & PROCESSES
The Commission in discharge of its functions
notifies Regulations and
issues orders on petitions relating to
grant of licence,
determination of tariff and
review/miscellaneous petitions.

16. PROCEDURE FOR REGULATIONS
Consultation Paper/ Staff Paper
Publicity
Electronic Media
Print Media
Comments/ Suggestions
Public hearing
Draft Regulations
Discussions
Comments
Previous Publication
Regulations
Publication

17. PROCEDURE FOR PETITION
Petitioner
Admission
Petition
Arguments
Order
Petition Copy
Option for Review
Reply
Option
Respondent
Appeal to Appellate Tribunal

18. CERC (TERMS & CONDITIONS OF TARIFF) REGULATIONS,2004 (Contd….)
Applicable from to
Not Applicable where tariff has been determined through the transparent process of bidding
Applicable where tariff is to be determined based on capital cost
Historical Cost based Normative Tariff:
Fixed Charges primarily on Historical Cost Base
Variable Charges (only for thermal power generating stations) based on the Quantitative Norms and Actual Cost

19. CERC (TERMS & CONDITIONS OF TARIFF) REGULATIONS,2004 (Contd….)
Norms of Operation as Ceiling Norms
Generating companies or transmission licensees and beneficiaries may agree to improved norms
Determination of tariff
Generating Station : stage-wise, unit-wise
Transmission System: line-wise, sub-station-wise and system wise
Two Stage process: Provisional and final tariff

20. CERC (TERMS & CONDITIONS OF TARIFF) REGULATIONS,2004
Reduction of cost of bulk power
Reduction in ROE from 16% to 14%
New investment on or after in 70:30 Debt-Equity ratio
if equity deployed is less than 30%, actual equity is to be considered for the purpose of tariff
Dispensing with the accelerated rate of depreciation to thermal generating station to reduce front loading of tariff.
Tightening the norms of stations heat rate, secondary fuel oil consumption and auxiliary energy consumption for coal/lignite/gas based station.
Raising the norm of target availability for lignite based stations to 75% from 72%.
Raising the capacity index norms for run of the river hydro stations.

21. COMPONENTS OF TARIFF Fixed Charges Energy (variable) Charges
Interest on Loan
Depreciation
Advance against Depreciation
Return on Equity
Operation & Maintenance Expenses
Interest on working capital
O&M Expense
Maintenance spares
Receivables
Cost of Coal and Secondary Fuel Oil linked to target availability (only in thermal generation)
Energy (variable) Charges

22. GENERATION TARIFF: THERMAL OPERATION NORMS

23. GENERATION TARIFF: THERMAL FINANCIAL NORMS

24. GENERATION TARIFF: THERMAL ENERGY CHARGES
Shall cover fuel costs
Worked out based on
Rate of energy charges (Rs./kWh) multiplied by
Scheduled energy (ex-bus) for the month in kWh corresponding to the scheduled generation (for generating station under ABT)
energy delivered (ex-bus) for the month in kWh (for generating station not under ABT)
Rate of energy charge is worked out on the basis of:
Price of primary and secondary fuel
Quantity of primary and secondary fuel
Calorific value of primary and secondary fuel
Normative gross station heat rate
Normative Auxiliary energy consumption

25. GENERATION TARIFF: THERMAL RECOVERY
Recovery of fixed charges below the level of target availability on pro-rata basis
Incentive payable at a flat rate for scheduled generation in excess of ex-bus energy corresponding to target PLF

26. GENERATION TARIFF: HYDRO OPERATION NORMS

27. GENERATION TARIFF: HYDRO FINANCIAL NORMS

28. GENERATION TARIFF: HYDRO RECOVERY
Capacity charges = Annual fixed cost - primary energy charges
Pro-rata recovery of capacity charges below normative capacity index
Primary energy charges based on primary saleable energy (ex-bus), primary energy rate and free power to home state
Rate of primary energy = lowest variable charges of central sector TPS of the concerned region
Secondary energy charges based on secondary saleable energy (ex-bus), secondary energy rate & free power to home state

29. INTER-STATE TRANSMISSION FINANCIAL NORMS

30. INTER-STATE TRANSMISSION RECOVERY
Pro-rata recovery of fixed charges below the target availability
AC systems – 98%
HVDC systems – 95%

31. DEVIATION IN NORMS BY SERCs RETURN ON EQUITY

32. DEVIATION IN NORMS BY SERCs DEPRECIATION

33. DEVIATION IN NORMS BY SERCs
SERCS have broadly following the norms notified by CERC
The deviation in norms are mainly in operation norms and O & M expenses
For Example HERC in their order dated 21st April,2008 has allowed higher Operational norms
The deviation in operational norms are permissible and the same has also been allowed by CERC in Tanda TPS, Talchar TPS and various other projects.

34. IMPORTANT TARIFF ORDERS SETTING TATIFF PRINCIPLES
Tanda TPS
Treatment of Capital Cost and Depreciation after transfer of the plant at a price higher than the original cost
Chandrapur HVDC (Back to Back Project Between SR & WR) Transmission Line
Treatment of Grant on capital cost, depreciation, debt, equity and Operation & maintenance expense in determination of tariff
ULDC Tariff
Reducing the front loading of Tariff of ULDC projects involving high capital cost

35. TANDA TPS FACTS OF THE CASE CERC ORDER TARIFF PRINCIPLE
Tanda TPS transferred on by UP to NTPC at Rs.1000 crores
though the original cost was Rs.607 crores
depreciated book value of the plant on the date of transfer was Rs crores as depreciation of Rs crores was recovered before the transfer of the plant
CERC ORDER
capital cost of Rs.607 crores as recommended by Special Bench was considered for determining the tariff by the Commission.
depreciation of Rs crores charged up to the date of transfer was considered for limiting the cumulative depreciation amount claimed to 90% of the project cost of Rs.607 crores.
TARIFF PRINCIPLE
Transfer of plant can not be used to inflate the capital cost and Tariff
Tariff would continue to be determined based on the original cost

36. CHANDRAPUR HVDC (BACK TO BACK PROJECT BETWEEN SR & WR) TRANSMISSION LINE (Contd….)
FACTS OF THE CASE
Total capital cost of the line was crore
ODA Grant of crore was received from Govt of UK as Energy Efficiency Grant 1990.
CERC ORDER
Capital Cost and Equity is to be reduced by the amount of Grant for working out Depreciation
Operation & maintenance expenses are to be worked out on the gross capital cost
TARIFF PRINCIPLE
Grant received is to be used for reduction in tariff
depreciation is the spreading of the original cost over effective life of the asset and value base for the purpose of depreciation should be the historical cost and not the replacement cost or any other values.
Impact on Tariff of both the alternatives under AS 12 is same

37. CHANDRAPUR HVDC (BACK TO BACK PROJECT BETWEEN SR & WR) TRANSMISSION LINE

38. ULDC PROJECTS FACTS OF THE CASE CERC ORDER TARIFF PRINCIPLE
PGCIL proposed the concept of levellised tariff as against the conventional method of front-loaded tariff, keeping in view nature of equipment/services under the Scheme, the high initial cost and financial position of the constituents. The concept of levellised tariff entails uniform charges over the period of assumed life of the Scheme of 15 years for recovery of capital cost.
CERC ORDER
The Commission allowed the charges for the ULD&C Scheme by taking the weighted average rate of interest on loan and return on equity. Based on the weighted average rate of interest on loan and return on equity, the recovery factors for loan and equity were worked out based on the following formula:
Recovery factor= i (1+i)n / (1+i)n -1
Where I = weighted average rate of interests and RoE and n = period
TARIFF PRINCIPLE
Norms other than prescribed may be allowed in tariff provided it is beneficial.

39. For further clarification and queries, E-mail: umeshk07iimb@gmail.com
I LIKE INTERACTION
WITH THE PARTICIPANTS
THANK YOU
For further clarification and queries,
Please contact:
Umesh Kumar Shukla
Mobile:

40. GENERATION TARIFF: HYDRO
Capacity Index - Average of daily capacity indices over 1 year
Daily capacity index = Declared capacity/ Maximum Available Capacity x 100
Declared capacity= Capacity to be available over peaking hours of the next day
Primary Energy = Energy generated upto design energy on an annual basis
Design Energy= Energy generated in 90% dependable year with 95% installed capacity
Secondary Energy Charge = Energy generated in excess of design Energy