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

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

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 additionalROCE/ROE

O&M expenses - Based on Actual or Normative (% of capital cost

VARIOUS ISSUES IN TARIFF DETERMINATION(Contd.)

Depreciation - Repayment of loan or Recovery of Asset orReplacement of Asset

Incentives- Thermal - Hydro - Transmission systems

Other Issues- Tariff period - Peak & off peak tariff in bulk generation

Performance based regulation

VARIOUS ISSUES IN TARIFF DETERMINATION ThermalAvailability/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

TARIFF DETERMINATION IN INDIAN POWER SECTOR Single part tariff Two part tariff for Generation as per K.P. Rao Committee - 1992 GOI two part tariff notification for Generation Companies - 30.3.92 Transmission tariff notification dated 16.12.97 effective from 1.4.97 CERC Tariff Notification 26.3.2001 for Tariff Period 2001-04 CERC Tariff Notification 26.3.2004 for Tariff Period 2004-09

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 Electricity Act, 2003 CERC and SERCs created under

the the

CERC: STATUTORY FUNCTIONSSECTION 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;

CERC: ADVISORY FUNCTIONSSECTION 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.

SERC : STATUTORY FUNCTIONSSECTION 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

SERC: : ADVISORY FUNCTIONSSECTION 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.

GUIDING PRINCIPLES OF TARIFFSECTION 61 OF THE ELECTRICITY ACT, 2003In 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

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

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.

PROCEDURE FOR REGULATIONSConsultation Paper/ Staff Paper Electronic Media Publicity

Print Media

Public hearing

Discussions

Comments/ Suggestions

Draft Regulations Previous Publication

Regulations

Comments

Publication

PROCEDURE FOR PETITIONPetitioner Petition Copy Respondent

Petition

Admission

Reply

Arguments Option for Review Order Option Appeal to Appellate Tribunal

CERC (TERMS & CONDITIONS OF TARIFF) REGULATIONS,2004(Contd.)

Applicable from 01.04.2004 to 31.03.2009 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

CERC (TERMS & CONDITIONS OF TARIFF) REGULATIONS,2004(Contd.)

Norms of Operation as Ceiling NormsGenerating companies or transmission licensees and beneficiaries may agree to improved norms

Determination of tariffGenerating Station : stage-wise, unit-wise Transmission System: line-wise, sub-stationwise and system wise Two Stage process: Provisional and final tariff

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 1.4.2004 in 70:30 DebtEquity 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

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

- Energy (variable) Charges

GENERATION TARIFF: THERMAL OPERATION NORMSTarget Availability for recovery of full Capacity (Fixed) charges Target Plant Load Factor for Incentive Gross Station Heat Rate of coal-based thermal power generating stations (kCal/kWh) Gross Station Heat Rate of gas turbine/ combined cycle generating stations (kCal/kWh) Secondary fuel oil consumption (ml/kWh) Auxiliary Energy Consumption: coal based Stabilization Period Afterwards Advanced machines E/EA/EC/E2 machines Small gas turbine coal-based lignite-based 80% 80% 200/210/250 MW sets 2600 2500 500 MW and above sets 2550 2450 Combined cycle 1850 1950 2030 Subsequent period 2.0 3.0 Without cooling tower 8.5% 7.0% 8.5%

Open cycle 2685 2830 3125

Stabilization period 4.5 5.0 With cooling tower 9.0% 7.5% 9.0%

200 MW series 500 MW: steam driven 500 MW: electrically driven Combined cycle- 3.0% Open cycle- 1.0%

Auxiliary Energy Consumption: gas based

GENERATION TARIFF: THERMAL FINANCIAL NORMSDebt-Equity Ratio Interest on loan capital Depreciation Advance against Depreciation Return on Equity (post tax) Operation and Maintenance expenses (Rs. Lakh/MW) (coal/lignite based) 70:30 On the normative loan and normative repayments Based on straight line method over useful life of asset on 90% value of historical cost Loan repayment subject to ceiling of 1/10th of loan minus depreciation 14% on normative equity Year 200/210/250 MW sets 500 MW and above sets 2004-05 10.40 9.36 2005-06 10.82 9.73 2006-07 11.25 10.12 2007-08 11.70 10.52 2008-09 12.17 10.95 Year 10 years warranty spares 7 years warranty spares Small gas turbine 2004-05 5.20 7.80 9.46 2005-06 5.41 8.11 9.84 2006-07 5.62 8.44 10.24 2007-08 5.85 8.77 10.65 2008-09 6.08 9.12 11.07 (i) Fuel Cost (corresponding to the target availability) 1 months pit-head coal/ lignite based generating stations 2 months non-pit-head coal/ lignite based generating stations 1 months gas based generating stations (ii) Cost of secondary fuel oil corresponding to the target availability (coal/ lignite 2 months based generating stations) Liquid fuel stock (gas based generating stations) months (iii) Operation and Maintenance expenses 1 month (iv) Maintenance spares @ of the historical cost escalated @ 6% per annum from 1% the date of commercial operation (v) Receivables (of fixed and variable charges) calculated on the target 2 months availability Short-term PLR of SBI as on 1.4.2004 or on 1st April of the year of COD, whichever is later. Scheduled energy corresponding to scheduled generation in 25.0 paise/ kWh excess to target Plant Load Factor Reimbursement Actual

Operation and Maintenance expenses (Rs. Lakh/MW) (gas based)

Elements of Interest on Working Capital

Rate of Interest on working capital Incentive Tax on Income

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

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

GENERATION TARIFF: HYDRO OPERATION NORMSNormative capacity index for recovery of full Capacity (Fixed) charges Normative capacity index for Incentive Auxiliary Energy Consumption Year 1 of COD Purely run of river power stations 85% Storage type power stations 80% Purely run of river power stations Storage type power stations 90% 85% With static exciters 0.5% 0.7% Afterwards 90% 85%

With rotating exciters Surface HEP stations 0.2% Underground HEP stations 0.4% 0.5%

Transformation losses

GENERATION TARIFF: HYDRO FINANCIAL NORMSDebt-Equity Ratio Interest on loan capital Depreciation Advance against Depreciation Return on Equity (post tax) Operation and Maintenance expenses Elements of Interest on Working Capital 70:30 On the normative loan and normative repayments Based on straight line method over the useful life of the asset on 90% value of historical cost Loan repayment subject to ceiling of 1/10th of loan minus depreciation 14% on normative equity 1.5% of the actual admitted capital cost in the year of COD with annual escalation of 4% per annum (i) Operation and Maintenance expenses (ii) Maintenance spares @ of the historical cost escalated @ 6% per annum from the date of commercial operation (iii) Receivables calculated on the target availability 1 month 1% 2 months

Rate of Interest on working capital Incentive Tax on Income

Short-term PLR of SBI as on 1.4.2004 or on 1st April of the year of COD, whichever is later. 0.65 x annual fixed charges x (capacity index achieved normative capacity index) Reimbursement Actual

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),

INTER-STATE TRANSMISSION FINANCIAL NORMSDebt-Equity Ratio Interest on loan capital Depreciation Advance against Depreciation Return on Equity (post tax) Operation and Maintenance expenses (Rs. Lakh) 70:30 On the normative loan and normative repayments Based on straight line method over the useful life of the asset on 90% value of historical cost Loan repayment subject to ceiling of 1/10th of loan minus depreciation 14% on normative equity Year 2004-05 2005-06 2006-07 2007-08 2008-09 Per ckt-km 0.227 0.236 0.246 0.255 0.266 Per bay 28.12 29.25 30.42 31.63 32.90 1 month 1% 2 months

Elements of Interest on Working Capital

(i) Operation and Maintenance expenses (ii) Maintenance spares @ of the historical cost escalated @ 6% per annum from the date of commercial operation (iii) Receivables calculated on the Normative availability

Rate of Interest on working capital Incentive Tax on Income

Short-term PLR of SBI as on 1.4.2004 or on 1st April of the year of COD, whichever is later. Annual transmission charges x (annual availability achieved target availability i.e. 99.75% for AC system and 98.5% for HVDC system) Reimbursement Actual

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

DEVIATION IN NORMS BY SERCsRETURN ON EQUITYSN 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. SERC APERC AERC BERC CSERC DERC GERC HERC HPERC JSERC J&KSERC KERC KSERC MPERC MERC MsERC OERC PSERC RERC TNERC TERC UERC UPERC WBERC RoE % Summary 14 adopted ROCE instead of ROE in TO 2006-07 14 In TO 2007-08, 14% ROE for AEGCL, 14% ROE for KLHEP & 7% for LTPS and NTPS stations of APGCL and 7% ROE for LAEDCL, CAEDCL & UAEDCL 14 ROE @ 14% for Transmission and Distribution Licensee in the relevant regulations. 14 Notified in T&C of Tariff on 01-03-06(RoE as per CERC) 14 DERC MYT Regulations for the Control Period 2007-11, Discoms are entitled to Return on capital employed. Equity is allowed upto a maximum of 30% and RoE is prescribed at 14%. 14 Tariff Orders for 2007-08 ROE @ 7% for Distribution Companies, @10% for Transmission Company and @ 13% for Generation Company. For Torrent Power Ltd this was allowed @ 14%. N/A No claims by Discoms, the Commission is continuing with Return on Capital Base as the Capital Base is negative, no return on capital base has been allowed. 16 Generation, Transmission and Distribution businesses at the rate of 14%,14% and 16% respectively 14 The Commission has decided on ROE @ 14% 14 The Commission has decided to give ROE @ 14% 14 The Commission has specified RoE of 14% for the Licensees in the State. 14 Commission has decided on RoE 14% and order issued. 14 14% for Transmission, Generation and Retail supply Tariff. 16 Return on Equity (RoE) post-tax return in INR on approved equity capital Distribution Licensee- 16% p.a., Transmission Licensee- 14% p.a., Generation Company- 14% p.a. 14 The MsERC has used 14% return on equity. 16 ROE @ 16%. ROE linked to RBI bank rate plus a margin for investment risk in power sector. 14 RoE is allowed by the Commission as per CERC norms. 14 RoE prescribed as per rate specified by CERC. Presently, state owned companies are not claiming any RoE except the new power plants. 14 RoE notified in the T&C of tariff. The Commission is considering to adopt ROCE N/A transfer scheme under completion, return on equity not yet pegged. likely to be between 14-16%. 14 with a Debt:Equity ratio of 70:30. Where, equity is less than 30% the said actual equity is considered for tariff 16 RoE for State Generators and Transmission licensee is 14% and 16% for Discoms. 15 Distribution Licensee - 15%. Other area of electricity segment- 14% except for hydro where additional ROE upto 4% more than provided for by the CERC depending on certain criteria.

DEVIATION IN NORMS BY SERCsDEPRECIATIONSN 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. SERC APERC AERC BERC CSERC DERC GERC HERC HPERC JSERC J&KSERC KERC KSERC MPERC MERC MsERC OERC CERC Rates FOIR rates adopted Adopted Adopted Adopted Adopted Adopted Not Adopted Completely Adopted Adopted Adopted Adopted FOIR rates Adopted Adopted Adopted Not Adopted Suggestions for separate Depreciation Rates Adopted Ministry of Power depreciation rates. Adopted CERC depreciation rates. CERC rates adopted in tariff order 2006-07. CERC rates adopted. Control Period (2007-11): over useful life of asset on the original cost with residual value of 10% CERC depreciation rates are adopted. Transmission licensee and generation company depreciation including AAD as per CERC. followed CERC norms for calculations of depreciation. allowing depreciation linked to Gross Fixed Assets (GFA). With the availability of the asset-wise details, the Commission will be following the CERC norms. CERC depreciation rates adopted. CERC depreciation rates have been adopted adopted the depreciation rates as per CERC .KERC favors separate rates for distribution to be evolved. Depreciation rates approved by CERC adopted for Generation, Transmission & Distribution. followed the CERC specified depreciation rates in respect to Generation and Transmission. transmission rates are also being followed for Distribution Tariff. Depreciation on approved original cost of fixed assets computed annually based on the straight line method based on the useful life of the asset at the rates specified and residual value of the asset at 10% Depreciation on fixed assets has been accepted at rates prescribed by the CERC. OERC has adopted a weighted average of 3.67% in RSTO 24-06-03. OERC has been directed by High Court to depreciation rates calculated for assets in accordance with the state Governments, DoE notification no. 1068/E dt. 29-01-03 & at pre-1992 norms as notified by GoI. PSEB is integrated Utility. Depreciation is allowed based on straight line method up to 90% of the cost of asset. The rates of depreciation allowed are as notified by Govt. of India in 1994. CERC rates adopted. CERC rates to be adopted, but suggests separate rates for distribution assets based on different useful life to be fixed for meter of different type in distribution network. The straight line method (SLM) is followed. accounts not yet completed, ad-hoc depreciation for the purpose of fixing AAR. CERC specified rates are adopted by the UERC Distribution Licensee: depreciation rates specified by MoP vide notification S.No. 265(E) dt. 27.3.1994. Generation Licensee: CERC rates along with AAD. Transmission Licensee: rates specified by CERC CERC rates adopted.

17. 18. 19. 20. 21. 22. 23.

PSERC RERC TNERC TERC UERC UPERC WBERC

Not adopted Adopted Adopted N/A Adopted Adopted Adopted

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.

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

TANDA TPS FACTS OF THE CASE Tanda TPS transferred on 14.1.2000 by UP to NTPC Rs.1000 crores though the original cost was Rs.607 crores depreciated book value of the plant on the date transfer was Rs.431.09 crores as depreciation Rs.175.91 crores was recovered before the transfer the plant at

of of of

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.175.91 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.

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

FACTS OF THE CASE Total capital cost of the line was 931.51 crore ODA Grant of 321.50 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.

CHANDRAPUR HVDC (BACK TO BACK PROJECT BETWEEN SR & WR) TRANSMISSION LINEANALYSIS OF 2 METHODS OF AS-12 OF ICAI FOR THE PURPOSE OF DEPRECIATION Captal Cost Rate of Depreciation Method I Balance Sheet Sources of Funds (Rs.) (Rs.) Aplication of Funds (Rs.) (Rs.) Shareholders Funds Fixed Assets Equity 300 Gross Block 800 Grant in Aid 0 Depreciation 48 752 Less Deductions during the year 0 0 Loan Funds 500 Profit & Loss Account 48 Total 800 Total 800 Profit & Loss Account Expenditures (Rs.) Income (Rs.) Depreciation 48 Deferred Income (Transferred from Capital Reserve on a/c of Grant-in-aid) 0 Balance transferred to Balance Sheet 48 Total 48 Total 48 Method II Sources of Funds (Rs.) (Rs.) Shareholders Funds Equity 300 Grant in Aid 200 Less Deductions during the year 12 188 Loan Funds 500 Total 988 Expenditures Depreciation Total Balance Sheet Aplication of Funds Fixed Assets Gross Block Depreciation Profit & Loss Account Total (Rs.) 1000 60 (Rs.) 1000 6% Debt Equity Grant 500 300 200

940 48 988 (Rs.) 12 48 60

Profit & Loss Account (Rs.) Income 60 Deferred Income (Transferred from Capital Reserve on a/c of Grant-in-aid) Balance transferred to Balance Sheet 60 Total

ULDC PROJECTS FACTS OF THE CASE 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 /

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For further clarification and queries, Please contact: Umesh Kumar Shukla E-mail: umeshk07iimb@gmail.com u_k_shukla@yahoo.com Mobile: 09868889551