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17 August 2001

K Balarama Reddi & Usha Ramachandra

TARIFF SETTING UNDER TARIFF SETTING UNDER INDEPENDENT REGULATIONINDEPENDENT REGULATION

Rs.

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TARIFFS IN ELECTRICITYTARIFFS 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)

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TARIFFS BEFORE INDEPENDENT REGULATION TARIFFS BEFORE INDEPENDENT REGULATION

State Electricity Boards:

Bundled tariff for generation, transmission & distribution according to:

Section 59 & Section 63 of ES Act (1948)

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TARIFFS BEFORE INDEPENDENT REGULATION TARIFFS BEFORE INDEPENDENT REGULATION Cont…d Cont…d

Distribution Licensees:

Section 57, 57A & Sixth Schedule of ES Act 1948The 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

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TARIFFS BEFORE INDEPENDENT REGULATION TARIFFS BEFORE INDEPENDENT REGULATION Cont…d Cont…d

Generating Companies:

K.P. Rao Committee

CEA Amendments of 1992 for IPPs & the PPAs consequently drawn up

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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

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Regulation of:

Purchase of power

Transmission tariffs within the state

Retail distribution tariffs within the state

STATE ELECTRICITY REGULATORY COMMISSIONSSTATE ELECTRICITY REGULATORY COMMISSIONS

Generation Tariffs for State Gencos with State Govt.New PPAs to the cleared by the SERCs

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PRINCIPLES OF TARIFF SETTING PRINCIPLES OF TARIFF SETTING

The Commission shall be guided by the following:

The principles and their application in Section 46, 57 & 57A of Electricity (Supply) Act and the Sixth Schedule

The tariff progressively reflects the cost of supply The factors that would encourage efficiency, economical

use of the resources The tariff shall not show undue preference to any

consumer, but may differentiate according to various factors

Where the commission departs from the laid down principles, the reasons shall be provided in writing

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GENERATION TARIFFSGENERATION TARIFFS

• Single part tariff

• Two part tariff - K P Rao

• Availability Based Tariff (ABT)

Capacity charge Energy Charge Unscheduled Interchanges

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Capacity charge will be related to availability of the generating station.

Incentive payment will be made when the actual generation is more than the normative generation corresponding to the target availability

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

As a disincentive the fixed charges and ROE will get reduced proportionately if the availability is less than availability factor fixed.

Charges for unscheduled interchanges as stated.

ABT: Salient FeaturesABT: Salient Features

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MW 100

0

Partialoutages

Econ

omic

shut

down

(m

erit

orde

r de

spat

ch)

Outa

ges

Time (%) 80 90

Target availability in such a case has to be between 80 and 90%.

Energy Produced

Available, butunused

Availability Factor (cont..d)

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ABT & Unscheduled Interchange

Ave. Frequency ofTime Block

UI Rate (p/ kwh)

50.5 Hz & above 0.0

Below 50.0 Hz &upto 50.48 Hz

5.6

Below 49.04 Hz &upto 49.02 Hz

414.4

Below 49.02 Hz 420

Between 50.5 Hz &49.02 Hz

Linear in 0.02 Hzstep

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Merits of ABT

facilitates grid discipline

facilitates trading in capacity and energy

facilitates merit order despatch

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PGCIL Availability

• Are incentives based on availability relevant for transmission systems?

• Target availability for recovery of full fixed charges - 95% or 98%.

•

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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

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The transmission tariff is based on investment costs (fixed costs) covering:

Interest on debt Depreciation Operation & Maintenance costs Return on equity Interest on working capital Taxes, if any

Transmission Tariff

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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.

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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.

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The bulk supply tariff contains two components:

i) The cost of purchase of power

ii) Transmission costs

Bulk Supply Tariffs

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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

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Retail Supply Tariff Calculation

Calculation of Revenue Requirements:

Req.Rev = Expenses + (Return on Capital Base)

Tariff Structure to meet Revenue Requirements

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Revenue Requirements

Sum of:• Rate of return on fixed assets • Expenses

Less:

• Miscellaneous revenue and sales to other states• Subsidy from State Government

Revenue Requirements

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Tariff Determination - Existing

Existing Tariff Structure

• Correlation of Demand and Energy Costs to Fixed and Variable Costs

• Monthly minimum charges Fuel cost adjustment Existing customer charges etc.

• Meter maintenance• Meter reading, billing and serving of bills• Collection of revenue• Maintenance of Customer Accounts

Meter rents Power factor charges Delayed payment charges

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Rationalization of existing tariff structure

Tariffs to different categories of consumers - an attempt to move towards cost of services

Social aspects including tariff to Agricultural Sector

Fuel cost adjustment Electricity duty and taxes

Tariff Determination - Proposed

ISSUES

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EFFICIENCY IMPROVEMENTS

Status of Metering Billing and revenue realisation DSM, If any Repair and Maintenance costs

Material Management - Inventory Control T&D Losses reduction programme

• Transformer repairs etc.

• Technical• Non technical (Commercial)

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Revenue Gap

The gap between the revenue requirement and revenue from current tariffs.

(Rs. Crores)

Revenue requirementRevenue from current tariff

-------------THE GAP

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The gap has to be met by:

Revenue Gap

Subsidies

Efficiency Gains(T & D loss &

exp.)

Tariff Increases

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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?

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SERC ORDERSSERC 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

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Orissa CaseOrissa Case

1. Orissa Tariff Order for 1997-98 (Gridco)

2. Orissa Tariff Order for 1998-99 (Gridco separate for transmission & distribution)

3. Orissa Tariff Order for 1999-2000 Gridco & four Distribution Companies

4. 2000-01 Tariff Orders

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Power Station Gridco’sProjection

MU

OERC’sProposal

MU

Gridco’sProjectionRate P/U

OERC’sProposalRate P/U

1 Hydro (State) 3800.00 3800.00 49.00 49.002 Hydro (Machkund) 300.00 300.00 8.00 8.003 Hydro (Chukha) 200.00 200.00 76.00 76.004 Kaniha (Infirm) 100.00 100.00 48.00 48.005 Thermal (CPP) 1000.00 905.00 90.00 90.006 Thermal (TTPS) 1600.00 1600.00 140.00 130.687 IB TPS (OPGC) 2330.00 2330.00 165.00 157.828 Farakka 900.00 143.84 135.00 126.009 Kaniha (Firm) 470.00 0.00 255.00 176.0510 Kahalgoan 300.00 0.00 255.00 176.05

Total 11000.00 9370.62Source: OERC Case No.4 of 1997, p.44 & 46

OERC: Power Purchase & CostOERC: Power Purchase & Cost

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Category Gridco’s Proposal ofconsumption in MU

OERC’s ApprovalIn Mu

1 Kutir Jyothi 30.000 30.0002 Domestic 1995.000 2134.6653 Commercial 354.000 432.3104 Irrigation 197.000 236.8575 LT (Other) 440.300 425.8686 HT Category 1410.700 1411.2007 EHT Category 1953.000 1952.500

Total 6380.000 6623.400T & D Losses 41% 35%Total Purchase 10814.97 10093.47

Source:OERC Case No. of 1998, Annexure E

OERC: Category wise Sales: 1998-99OERC: Category wise Sales: 1998-99

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Number of Employees per thousand Consumers

1 All India Average 12 (Compiled upto end of 1995)2 Gridco 24.82 or 25 (Compiled upto end of 1998)Number of employees per MKwh of electricity sold:

1 All India Average 3.9 or 4 (Compiled upto end of 1995)2 Gridco 4.9 or 5 (Compiled upto end of 1998)Source: OERC Case No.19 of 1998, p.20.

OERC: BenchmarksOERC: Benchmarks

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Power Sector Restructuring - 1999Power Sector Restructuring - 1999

Orissa distribution was divided into four joint venture companies:

WESCOWESCO

SOUTHCO SOUTHCO

NESCONESCO

CESCOCESCO

* WESCO, SOUTHCO & NESCO filed joint application for RST revision on 30-07-99

BSESBSES

AESAES

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Retail Tariff for WESCORetail Tariff for WESCOTariff Order 30-12-1999Tariff Order 30-12-1999

Retail Supply Tariff (RST) filed: 30-07-1999

Further information sought by OERC: 13-08-1999

Fresh application with all details filed: 27-09-1999

Objections received 17

Objections Heard 12

Enquiry: Dec. 1999

Tariff Order: 30-12-1999

OERC could pronounce tariff orders of 5 companies within the mandatory 3 months.

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Differential Bulk Tariff 1999-2000Differential Bulk Tariff 1999-2000

WESCO: Demand Charge: Rs.200/KVA/monthEnergy Charge: 99.20 paise/kwh

SOUTHCO, CESCO, NESCO:Demand Charge: Rs.200/KVA/monthEnergy Charge: 80.70 paise/kwh

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Pre-reform Post-reform07.9.93 28.58% 21.5.96 17% (GoO)16.7.94 15.73% 01.4.97 10.33%05.01.95 17.47% 01.12.98 9.3%

01.2.2000 4 - 5%

Tariff Reforms in OrissaTariff Reforms in Orissa

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T & D lossesT & D losses

Compare the Three Tariff Revisions:

1. 1997-98: Gridco’s losses of 42% to be reduced to 35%

2. 1998-99: 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%.

3. 1999-00: 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.

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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 01.4.96 to 31.3.99

Who should share the burden? Consumers/Licensee/Government?

ISSUES AT STAKEISSUES AT STAKE

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Summary of Expenses Approved by the MERC for 2000-01

MSEB MERC RemarksProposal Approval

Generation of Power 3,540 3,387 Based on the Commission’s targets for Generation.

Purchase of Power 3,798 3,542 Based on the Commission’s approval of power purchase.

Repairs & Maintenance 675 675

Employees Costs 1,519 1,419 Additional expenses arising out of implementation of 5th Pay Commission may be recovered through efficiency improvement.

Admn & Gen. Expenses 151 151Depreciation 1,294 1,293 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.

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MSEB MERC RemarksProposal Approval

Interest Charges 1,239 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 doubtfuldebts 200 200

Other debts 317 277 Cost of recovery from agricultural consumers has been disallowed.

Total Expenses allowed 12,733 12,071

Note: All expenses have been shown net of capitalisation

Contd.

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Summary of Revenue Statement for Year 2000-01

Existing Tariff with Description MSEB MERCMSEB Forecast Proposal & Forecast &

Forecast Approval

10,703 Revenue from Sale of power 12,721 11,215 84 Miscellaneous Revenue 84 91 350 Other Income 350 454

Additional Revenue from T&D loss reduction 600

11,137 Total (Revenue) (Rs. Crores) 13,155 12,36012,733 Total Expenses 12,733 12,071

-1,596 Surplus 422 289 2.60 Average Realisation (Rs./Unit) 3.08 2.85 2.98 Average Cost of Supply (Rs./Unit) 2.98 2.79

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Tariff Hike

Description MSEB MERC(Proposal) (Approval)

Tariff increase in Rs. Crores 2,018 691

Tariff Hike in % 18.9 6.5

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A P Transco: Cost of ServiceA P Transco: Cost of Service20002000

Category Cost to Serve(ps/kwh)

Expected Realisationfrom proposed tariffs(p/kwh)

Percentage of costof service realised

Domestic (LT-I) 455 224 49Commercial (LT-II) 375 455 121Industrial (LT-III) 336 392 117Irrigation & Agric. (LT-V) 329 30 9HT Industry (HT I&III) 203 466 230Railway Traction (HT-V) 202 466 231Average 327 227 69

Current realisation is: Domestic - 168 p/kwhAgriculture - 18 p/kwh

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Sl.No Item (Rs. Crores)

(a) Energy sales (MU) 27538(b) Total expenses 8948.93(c) Reasonable Return 89.71(d) Miscellaneous Revenue

Variable cost adjustments457.47216.00

(e) Revenue Requirement (b+c-d) 8365.17(f) Revenue based on current tariffs 5447.87(g) Additional revenue requirements 2917.30(h) Subsidy in Government of A.P. 1345.00(i) Revenue by way of efficiency improvement by

APTRANSCO500.00

(j) Gap to be filled by increase in tariffs 1072.00

APTRANSCO: Revenue Required

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A P Transco: Filing of Proposed TariffA P Transco: Filing of Proposed Tariff20002000

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

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Features of KERC Tariff Order: 2000Features 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 2001-02

ERC was approved on the basis of a reduction of 5.5% in commercial losses in 2000-01 & a further 5% in 2001-02

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Features of KERC Tariff Order: 2000Features of KERC Tariff Order: 2000(Con..t)(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.

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Features of KERC Tariff Order: 2000Features of KERC Tariff Order: 2000(Con..t)(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

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Features of KERC Tariff Order: 2000Features of KERC Tariff Order: 2000(Con..t)(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

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Features of UPERC Tariff Order: 2000Features of UPERC Tariff Order: 2000

Efficiency improvement targets over the next five years:

T & D loss reduction programme from 36.5% in 2000-2001 to 20.5% in 2005-06 for UPPCL and 30.2% in 1999-2000 to 15% in 2004-05 for KESCO

Installation of meters at all 11 KV feeders by 30.9.2000

100% metering of all consumers by 31.12.2001 On-line billing in 20 selected towns by March 31

2001

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Features of UPERC Tariff Order: 2000Features of UPERC Tariff Order: 2000(Cont…d)(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

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Features of HERC Tariff Order: 2000Features 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