1. The Lesser Known Tariff
Fuel Surcharges levied in Indian States
Prayas (Energy Group)

2. Scope of report
To understand the processes and methodology in the determination, collection and reconciliation of fuel surcharges
Framework, regulations and practices for various states covered in report
15 Indian states namely, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttar Pradesh and West Bengal and erstwhile Andhra Pradesh
Covers states which do not actively levy surcharges to highlight practices and experiences which can inform future implementation in other states.
Focuses on state-owned distribution companies. Private DISCOMs in Maharashtra, Gujarat, Uttar Pradesh and West Bengal are not discussed.
Data obtained from SERC regulations, orders, DISCOM petitions and commercial circulars, APTEL orders, Supreme Court judgments and various state and central government policy documents.

3. What are fuel surcharges?
Power procurement costs, can ↑ due to uncontrollable factors:
change in fuel prices
change in tax/cess rates
revision of rail freight charges for coal transportation etc.
Such expenses cannot be met through recovery of approved tariffs.
Increases DISCOM’s working capital requirement  short-term liabilities.
Leads to carrying cost to be recovered from consumers at the end of the year.
Fuel surcharges are levied to address deviation in actual costs (especially power procurement costs) from costs approved by SERC at the beginning of the year.
Per unit surcharge levied over and above tariffs which are approved by SERC on an annual basis.
Typically levied on a monthly basis and determined on a quarterly basis.

4. Why is it relevant?
Fuel surcharges help avoid carrying cost for consumers and ease the cash flow situation of the generators and DISCOMs.
Significant policy push as it is seen as a way to ensure generation viability and to reduce DISCOM liabilities
Despite policy push, the response to adoption of fuel surcharges has been mixed.
In states which have been actively levying fuel surcharges, the impact is significant.
Accounting for 7% to 25% of total revenue recovered from consumers.
Public acceptance of fuel surcharges is low not only because it is an additional tariff but also due to:
Lack of transparency in determination
Lack of adequate processes to hold DISCOMs accountable for costs incurred and recovery of surcharge
Lack of public participation in determination and vetting of fuel surcharges.

5. Policy Mandate before 2011 Name and Year Description
Report of the committee on power chaired by V.G. Rajadhyaksha, 1980
Mid-year increases in wages and coal prices should be recovered through tariff review.
Common Minimum Action Plan for Power, 1996
Fuel surcharges are to be automatically incorporated into the tariff.
State Power Sector Reform Acts, 1996–2000
States like Andhra Pradesh, Odisha, Haryana, Rajasthan, and Karnataka allowed for fuel surcharge in the State Electricity Acts. Committees on reforms reiterated the need for fuel surcharges.
The Electricity Act, 2003
Section 62 (4) states that “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.”
The National Tariff Policy, 2006
In Para 5.1 (h) (4), in the context of the Multi-Year Tariff regime, the policy specifies that “uncontrollable costs should be recovered speedily to ensure that future consumers are not burdened with past costs” .

6. Policy Mandate post 2011 Name and Year Description
APTEL Suo Motu Judgment in O.P. 1 of 2011 (Nov 2011)
Directs SERCs to have mechanisms for fuel surcharge preferably on a monthly basis within 6 months from the date of the order .
Shunglu Committee Report December 2011
Reiterated the need for fuel surcharge along with regular tariff revision and true-ups .
Financial Restructuring Plan, 2012
The mandatory conditions of the bailout specifies that “fuel adjustment costs be allowed as directed by APTEL to off-set the increase in power procurement cost”.
Ujwal Discom Assurance Yojana (UDAY), 2015
States should permit quarterly revision of tariff to offset fuel price increase as “such tariff increase will be easier to implement and can be absorbed by consumers.”
Amendment to the National Tariff Policy, 2016
Added Para (7) which states that SERCs “shall specify an appropriate price adjustment formula for recovery of the costs arising on account of variation in the price of fuel, power purchase, etc. on a monthly/quarterly basis for recovery of all prudent costs of the generating company and the licensee’’ .

7. Implementation: Mixed response in states
Periodicity and regularity of levy
Maharashtra, Gujarat, Madhya Pradesh, Karnataka, Punjab, West Bengal, Chhattisgarh, Haryana
Levied on a monthly basis
Rajasthan
Not levied since 2015–16
Kerala, Himachal Pradesh
Not levied since 2014–15
Bihar
Not levied since 2013–14
Erstwhile Andhra Pradesh, Assam
No levied since
Uttar Pradesh, Tamil Nadu
Not implemented
States not regularly levying fuel surcharges despite commitment in MoUs signed under UDAY
Rajasthan, Kerala, Himachal Pradesh, Bihar, Andhra Pradesh, Assam and Uttar Pradesh
States not committed to quarterly revision of fuel surcharge under UDAY.
Tamil Nadu and Telangana
States which have been levying fuel surcharge on a regular basis, before being part of UDAY
Maharashtra, Gujarat, Punjab, Haryana, Chhattisgarh, Madhya Pradesh, West Bengal and Karnataka
Like regular tariff revision, regular levy of fuel surcharge takes place only with State Government commitment.

8. Share of Total Revenue Recovered through Fuel Surcharges
Impact
State
Share of Total Revenue Recovered through Fuel Surcharges
FY 15
FY 16
FY 17
Maharashtra 5%
12% 4%
Gujarat
28%
25%
N. A.
Madhya Pradesh 2%
Karnataka
Punjab 1%
Chhattisgarh 6% 7%
Haryana
11%
10%
West Bengal
N.A 3%
Observations
Gujarat impact is high due to levy of a base fuel surcharge
Significant fuel surcharges in Maharashtra, Haryana and Chhattisgarh which have been levying surcharges > 5 years
Nominal surcharges in Madhya Pradesh, West Bengal, Karnataka and Punjab, which have been levying fuel surcharges < 3 years
Even states which currently do not levy fuel surcharges used to have high surcharges
In , share of revenue from fuel surcharge was:
15% for erstwhile Andhra Pradesh
9% for Bihar
17% for Assam.
N.A denotes not available.

9. Methodology for determination

10. Assessment of costs
Uncontrollable costs allowed - wide variations across states.
Unscheduled Interchange/Deviation Settlement Mechanism Charges
Disallowed in Rajasthan, Chhattisgarh, Himachal Pradesh, erstwhile Andhra Pradesh
Allowed for recovery in Haryana and West Bengal
Short term power procurement
Disallowed in Rajasthan, Chattisgarh
Allowed for recovery in Haryana, Himachal Pradesh, Uttar Pradesh, Maharashtra and West Bengal
State specific treatments due to unique experiences and concerns
REC costs disallowed in Gujarat
Changes in coal quality from different sources allowed in Maharashtra
Costs due to sale of power outside state disallowed in Chattisgarh
Beyond fuel costs
Costs due to change in transmission charges allowed in Gujarat and U.P

11. Consumer categories exempt
Assessment of sales
Metered sales as per actuals, unmetered sales as per ERC estimates
Treatment for sales for exempt categories
If subsidised, included in sales
If cross-subsidised, not included in sales .
Consumer categories exempt
States
No exemptions
Madhya Pradesh, Maharashtra, Rajasthan, Chhattisgarh , Assam
Agricultural consumers
Erstwhile Andhra Pradesh, Karnataka and Gujarat, Haryana
Below Poverty Line (BPL) consumers
Himachal Pradesh
Domestic consumers using < 20 units per month
Kerala
BPL and agricultural consumer.
Punjab, Bihar
Agricultural, domestic consumers using < 300 units per month
West Bengal

12. Subsides and treatment of T&D losses
States which provide subsidies
Gujarat, West Bengal, Haryana, Karnataka, and Punjab
T&D losses
Actual T&D losses are typically higher than the normative losses.
All states use gross up sales using normative T&D losses
Thus, sales estimated will be ↑ than actual sales and norm-based per-unit surcharge will be lower.
Costs incurred due to excess T&D losses are not recovered from consumers
States
Subsidy support provided in (Rs. Cr.)
As % of revenue from fuel surcharges
Punjab 14 9%
Haryana
378
27%
Gujarat
2596
29%

13. Ceiling levied and under/over-recovery of charges
State
Fuel surcharge to not exceed
Maharashtra
20% of energy charges
Gujarat, Karnataka
10 paise per unit. In Gujarat this above base fuel surcharge of Rs.1.43/unit
Haryana, Rajasthan, Himachal Pradesh
10% of approved average power purchase cost
Bihar
10% of approved average cost of supply
Uttar Pradesh
10% of variable component of tariff
Chhattisgarh
5% of total tariff for domestic consumers using < 200 units per month.
Assam
25% of variable power procurement cost
Madhya Pradesh, Punjab, West Bengal, erstwhile Andhra Pradesh and Kerala
No limit specified
Power purchase as the basis for the per unit ceiling can result in undue tariff impact
High ceiling not desirable without regulatory approval, public attention .
Power procurement accounts for more than 75% of the costs incurred
Any cap based on power procurement will be significantly high.
Energy charges is preferable as a base for ceiling
Reflects cross subsidy design and prevents undue tariff impact
Treatment of costs if it exceeds ceiling
Recovered in same quarter post regulatory approval in Gujarat, Assam, Karnataka, Maharashtra
Recovered with applicable carrying costs in subsequent periods in other states.

14. Processes for determination and levy of fuel surcharge
Transparency
Announcement of charges
Information on assessment of costs
Information on category-wise
under -recovery or over- recovery of costs
Accountability
Regulatory Approval of fuel surcharge
Post facto vetting or verification of costs
Post facto vetting or verification of under-recovery and over-recovery of fuel surcharge
Participation
Consultation process during change in regulations
Consultation process during determination of fuel surcharge
Consultation process during vetting or verification of fuel surcharge

15. Transparency
Provisions
States
DISCOMs only announce the applicable per unit fuel surcharge rate
Madhya Pradesh, Rajasthan, Haryana and Himachal Pradesh
Month-wise approved and actual costs for each power station, applicable T&D losses , metered and unmetered sales
Punjab, Bihar, Assam, Maharashtra, erstwhile Andhra Pradesh, West Bengal, Chhattisgarh, Kerala, Gujarat and Haryana
Reports all information as states listed above except station-wise costs
Karnataka
All states announce applicable fuel surcharges, report it in consumer bills
Some states also report disaggregated cost information, applicable sales and information of T&D losses
No state studied reports category-wise under-recovery or over-recovery.

16. Regulatory Approval and Scrutiny
Regulatory approval of fuel surcharges
Practice in Assam, Haryana, Punjab, Karnataka and erstwhile Andhra Pradesh
Approval needed in special cases (Maharashtra, Gujarat, Bihar, Punjab)
Provisions to ensure timely and correct submission of claims
Penalties for furnishing wrong data in erstwhile Andhra Pradesh
Forfeiting claims in case of delay in submission in Assam and erstwhile Andhra Pradesh
Effective if forfeited claims is not recovered in annual process with carrying cost.
SERC directives
Due to under-recovery, West Bengal ERC directed DISCOM to recover all eligible costs through fuel surcharges, else costs will be disallowed during true-ups
Due to non-implementation of fuel surcharges UPERC directives specified disallowance of eligible costs during true-up process.

17. Vetting of costs, revenue recovered
Quarterly vetting only in Maharashtra
Vetting has faced significant delays in the past
20 month delay in 2013, 21 month delay in 2014, 12 month delay in 2015 and 5.2 month delay in 2016.
Delays have implications on carrying costs.
Vetting in approval orders
Karnataka, Bihar, Assam, Kerala, Punjab, and erstwhile Andhra Pradesh have approval orders but without vetting.
Haryana approval orders have vetting as well but the orders are issues once in 2 to 3 years.
Treatment of fuel adjustment charges, revenues in tariff orders
No detailed vetting in tariff orders
Maharashtra, Punjab, Bihar, Chhattisgarh, Assam and erstwhile Andhra Pradesh specify revenue recovered through fuel surcharge and tariff increase is specified over and above surcharges

18. Public Participation
Determination of framework/regulations for fuel surcharges
All states have public consultation processes except Gujarat
During fuel surcharge determination
Most states do not have any public consultation during determination
The exceptions are Kerala and erstwhile Andhra Pradesh
public comments were sought and public hearings were conducted
comments and the responses are recorded in the final order.
this is despite a quarterly determination process for fuel surcharges
Haryana ERC conducts periodic processes once in 2 to 3 years
public hearings, comments and responses were recorded in the final order.
Limited vetting in tariff determination processes
Public comments are restricted to consultations or hearings during the tariff determination or true-up process in all states

19. Practices in select states

20. Levy of base fuel surcharge in Gujarat
Gujarat ERC annually approves a fixed fuel surcharge in their tariff order. This is known as base FPPPA.
Base FPPPA ~ 20% to 25% of the total revenue projected for the year.
An additional amount is recovered every month through incremental fuel surcharge
Base FPPPA is determined based on average fuel surcharge levied in previous years
2011–12 to 2013–14  Rs. 0.61/unit, (fuel surcharge for 2009–10)
2014–15 to 2016–17  Rs.1.20 /unit (fuel surcharge for 2012–13)
2017–18  Rs. 1.43/ unit (fuel surcharge 2015–16)
Despite high fuel surcharges, there is a lack of regulatory scrutiny of final fuel surcharge levied, nor any accountability for over-recovery or under-recovery of costs
The levy of a base FPPPA could also be seen as a way to increase tariffs without much public scrutiny.
It is in consumers’ interest if the SERC includes the recovery of such costs via tariff increase itself, rather than by levying a base FPPPA.

21. Levy of additional charge in Maharashtra
MSEDCL petition in for costs recovery due to review order through an additional charge, similar to fuel surcharge in levy.
MERC disallowed additional surcharge. Any amendment to tariff, except fuel surcharges should be done once a year via a public process.
In April 2013, MERC directed costs to be included in next years tariff petition.
MSEDCL delayed filing tariff petitions and more costs to be recovered due to various APTEL orders started accruing.
In September 2013,MERC allowed recovery of these costs via an additional surcharge through a suo-motu process without public hearings.
The order was set aside by APTEL and MERC had to undertake due tariff process to account for costs.
MERC’s MYT regulations allow recovery of impact due to decisions of higher courts, review orders on an annual basis.
MERC did not follow its own precedent when it came to additional charges.
Given delay filing in tariff petitions, the SERC could have undertaken a more public and transparent suo motu tariff determination process.
The new MYT regulations have addressed the mode of this recovery.

22. Carrying cost in Haryana
Fuel surcharge capped at 10% of APPC but fuel surcharge is often higher than cap
Excess costs recovery is carried forward and recovered over 2-3 years along with additional fuel surcharge over subsequent period
Not recovered in the annual tariff determination process or through SERC approval
This incurs significant carrying cost which could have been avoided with annual reconciliation of costs
Year
Fuel surcharge as % of revenue recovered
Carrying cost as a % of total fuel surcharge
2011–12
19%
10%
2012–13
18%
25%
2013–14
14%
22%
2014–15
11%
24%
2015–16 6%
31%
2016–17 8%

23. Need for a framework and key insights…1
Large variations in the regulations and the practice of levy of fuel surcharge across states
Need for a guiding framework at the national level which the states can refer to while implementing fuel surcharge.
Such a framework can be based on implementation experiences in various states
The framework could be developed by the Ministry of Power or the Forum of Regulators
Could act as a practice guide for fuel surcharge levy.
SERCs could be free to adopt and adapt practices suitable for their state realities.

24. Need for framework and key insights…2
Recovery through fuel surcharges to be limited to uncontrollable costs:
Other cost-heads which can be considered should be specified ex-ante in regulations, orders
Ad-hoc inclusion of costs will reduce the legitimacy of the process.
SERCs to provide information to encourage informed public scrutiny of surcharge
SERC to report potential reduction in revenue requirement (by avoiding carrying costs)
SERCs can regularly publishes details of station-wise costs passed on to consumers, revenue recovered, subsidy availed, carrying costs applied and the detailed calculations done by the DISCOMs / ERC
Penalties for delays in filing
Forfeiting of cost recovery due to delayed filing
Alternatively, costs claimed under fuel surcharge should not be subject to carrying costs. Unless delay is due to exigent circumstances / delay in action by the SERC
SERCs to initiate suo motu proceedings in case of delay

25. Need for framework and key insights…3
Ceiling on fuel surcharges based on energy charges with carrying cost settlement at the end of the year
Ceilings on the basis of power procurement costs can be high and carrying costs build-up can defeat the purpose of levying fuel surcharges.
Levy of fuel surcharge should not change the cross-subsidy structure and tariff design:
Akin to tariffs, there is a need for support to consumers with low paying capacities.
Emphasized in a Supreme Court judgment on the levy in Andhra Pradesh .
Extent of support through subsidies and cross-subsidies can vary given state realities, and needs to be deliberated by the Commission.
Detailed vetting of costs and revenue recovered to take place with tariff determination process:
Ideally, quarterly vetting and verification of costs by SERCs should be adopted .
If such a process is onerous, detailed vetting should be part of every tariff determination process.

26. ann@prayaspune.org manabika@prayaspune.org shantanu@prayaspune.org
Thank you