Incentivise efficiency improvement Obviate regulatory uncertainty – reduce regulatoryrisk Less intrusive and avoids tendency to micromanage Assists the utility to plan its business
Determine framework for regulating the utilities for a period oftime,◦ Principles of regulation of returns/profits of utilities◦ Principles of regulating individual cost and revenue elements◦ Degree of regulation on an on-going basis Incentivise utilities to become more efficient in operations Mitigate risks that are external to the utilities Make the sector financially sound Introduce efficient tariff design Separates costs into controllable and uncontrollablecomponents and treats them separately
Section 61 states that the appropriate commissions, fordetermining the terms and conditions for the determination oftariffs shall be guided by multi-year tariff principles MYT framework to be adopted for any tariffs from 1 April 2006 The framework should feature a five year control period The initial control period can be of 3 years for transmission &distribution if deemed necessary on account of datainadequacies and other practical considerations ERC can state assumptions in first control period and then asmore reliable data becomes available, a fresh control period maybe started
Where operations are below norms for severalyears, improvement trajectories may berecognized at “relaxed” levels and not “desired”levels Suitable benchmarking studies must be conductedto establish “desired” performance standards Separate studies may be carried out by eachutility to assess the capital expenditure necessaryto meet minimum service standards
Once revenue requirements are established at thebeginning of the control period, the ERC should focuson regulation of outputs and not the input cost elements Uncontrollable costs should be recovered speedily toensure that future consumers are not burdened withpast costs Uncontrollable costs would include (but not limited to):◦ Fuel costs, cost on account of inflation, taxes and cess,variation in power purchase unit costs including onaccount of hydel thermal mix in case of adverse naturalevents
Supply of electricity by a Generating Co to a Discom Intra-state transmission of Electricity Intra-state wheeling of electricity Retail supply of electricity◦ If there are two or more distribution licensees, GERC canprescribe a tariff ceiling or cap General framework for tariff determination and theCommission reserves a right to vary the parametersand procedures when facts and/or circumstances sowarrant
ARR and expected revenue from tariff andcharges for Genco, Transmission Licensee,Distribution wires and retail supply business All the companies would file the MYT petition/applications separately
The MYT Petition comprises:◦ Truing up for the year for 2009-10 for which audited resultsare available under GERC (Terms & Conditions)Regulations and GERC (MYT) Regulations◦ Annual Performance Review for 2010-11◦ Multi-year ARR for the entire control period (2011-12 to2015-16) with year wise details◦ Revenue from the sale of power at existing tariffs andcharges & projected revenue gap for the first year of thecontrol period◦ Application for determination of tariff for the first year of thecontrol period
All MYT Applications would be filed along with a BusinessPlan for the control period Business Plan shall comprise (but not limited to) inaccordance with the guidelines & formats as prescribed bythe ERC:◦ Detailed category wise sales & demand projections◦ Power procurement plan◦ Capital investment plan◦ Financing plan◦ Physical targets Capital investment plan shall show on-going projects to becompleted in the control period and new projects that will spillbeyond the control period ERC will approve the capital investment plan
Discom will project the power procurement planbased on merit order despatch principles, RPPO,DSM, Energy Efficiency etc. The Business Plan has to be approved by theERC
The MYT Application shall necessarily contain thetrajectories for the following variables for thecontrol period:◦ O & M expenses◦ Target Plant Load Factor◦ Distribution Losses The companies may seek a mid-term review ofthe trajectory at the time of the mid-term review ofthe Business Plan
From the first year of the Control Period andonward, the Petition will comprise:◦ Truing up for FY 2010-11◦ Revenue from the sale of power at existing tariffs andcharges for the ensuing year◦ Revenue gap for the ensuing year calculated based onARR approved in the Tariff Order or MYT Order andtruing up for the previous year◦ Application for determination of tariff for the ensuing year
◦ Truing up for previous year◦ Modification of the ARR for the remaining years of thecontrol period with justification◦ Revenue from the sale of power at existing tariffs and thechanges for the ensuing year◦ Revenue gap for the ensuring year calculated based onthe ARR approved in the MYT Order and Truing up forthe previous year◦ Application for the determination of tariff for the ensuingyear
True up is of expenses and revenue during the control period The approved forecast of ARR and Expected revenue fromtariff is compared with the audited performance includingpass through of uncontrollable factors Review of compliance with ERC directives ERC will then pass an order recording the approvedaggregate gain and loss – components of costs related touncontrollable factors will be pass through Once ERC notifies the regulations for submission ofregulatory accounts, the application for tariff determinationand truing up shall be based on the Regulatory Accounts
Costs are categorised as controllable & uncontrollable Uncontrollable factors include:◦ Force Majeure events◦ Change in law/ judicial pronouncements by govts or commission◦ Fuel price variation◦ Power purchase in accordance with FPPPA formula◦ Variation in consumer number or mix or quantities of electricitysupplied to consumers/ under open access◦ Transmission loss◦ Variation in market interest rate◦ Taxes & statutory levies◦ Taxes on income
Variation in capitalization on account of time or costoverruns or inefficiencies in implementation Variation in interest & financial charges on account ofthe above Variation in technical an commercial losses of discoms Variations in performance parameters Variations in working capital requirements Failure to meet performance standards Variation in labour productivity Variation in O&M expenses Variation in wires availability
Uncontrollable Factors:◦ Aggregate gain or loss on account of uncontrollablefactors is a pass through in the next year’s ARR Controllable Factors:◦ In case of gain, one third is passed onto consumers andthe remaining to be utilised at the discretion of the utility◦ In case of loss, one third of the loss may be passed onas additional charge over tariffs and balance absorbedby the utility
In accordance with the GERC (Conduct ofBusiness Regulations) 2004 GERC can suo moto or on basis of a petitiondetermine the tariff including terms and conditionsthereof
Existing arrangements would continue but thesearrangements would be converted to PPAs to beapproved by ERC PPAs must be signed with new generatingstations Where Discom has own generation, transfer priceshall be determined by ERC
Process as specified in the regualtion◦ Filing of tariff◦ Notification in papers◦ Call for objections◦ Public Hearing◦ Tariff Order◦ Process of judicial review – APTEL/ Supreme Court
Govt has to pay in advance the amount tocompensate the DISCOM/ affected party No such direction of state govt would be operativeif payment is not made in advance
Debt equity ratio is 70:30 Where equity is more than 30 the amount of equity forthe purpose of tariff shall be 30% and the balanceconsidered a loan When equity is less than 30%, actual equity isconsidered In case of retirement or replacement of assets, theequity capital approved as mentioned above, shall bereduced to the extent of 30% (or actual if less than 30)of the original cost of the retired or replaced asset
Capital cost is expenditure incurred or projected to beincurred including◦ Interest during construction and financing charges◦ Forex variations on the loan during construction uptocommercial operation of project◦ Capitalized initial spares subject to ceiling rates Capital expenditure will undergo a prudency check byERC Replacement of assets, R&M, extension of life will betreated as follows:◦ Net value of replaced assets = OCFA – AD – CC where OCFA – Original capital cost of replaced assets AD – accumulated depreciation pertaining to replaced assets CC – Total consumer contribution pertaining to the replaced asset
The capital cost may include capitalised initialspares:◦ upto 2.5% of original capital cost in case of coalbased/lignite fired generating stations;◦ upto 4.0% of original capital cost in case of gasturbine/combined cycle generating stations;◦ upto 1.5% of original capital cost in case of hydro-generating stations; and◦ upto 1.5% of original capital cost in case of TransmissionLicensee and Distribution Licensee.
Additional capitalisation is allowed on account of: Un discharged liabilities within the original scope of work; On works within the original scope of work, deferred for execution To meet award of arbitration and compliance of final andunappealable order or decree of a court arising out of originalscope of works; On account of change in law; On procurement of initial spares included in the original projectcosts subject to the ceiling norm laid down in Regulation 35.6; Any additional works/services, which have become necessary forefficient and successful operation of a generating station or atransmission system or a distribution system but not included in theoriginal capital cost: Provided that original scope of work is submitted in theBusiness Line
Works after obtaining a part or all of the fundsfrom the users in the context of deposit works; Capital works undertaken by utilising grantsreceived from the State and Central Governments,including funds under RGGVY, APDRP, etc; Any other grant of similar nature and such amountreceived without any obligation to return the sameand with no interest costs attached to suchsubvention
Return on equity shall be computed on the paid up equity capital - the rate of 14%for Generating Companies, including hydro generation stations above 25 MW,Transmission Licensee, and Distribution Licensee: Provided that for Genco, Tranco, and Discoms, ROE shall be allowed on theamount of allowed equity capital for the assets put to use at the commencement ofeach financial year and on 50% of equity capital portion of the allowable capital costfor the investments put to use during the financial year: For the purpose of truing up for the utilites, ROE shall be allowed on pro-rata basisbased on documentary evidence provided for the assets put to use during the year. The premium raised by the utilities while issuing share capital and investment ofinternal resources created out of free reserve, if any, shall also be reckoned as paidup capital for the purpose of computing return on equity, provided such premiumamount and internal resources are actually utilised for meeting capital expenditure. Equity invested in foreign currency shall be converted to rupee currency based onthe exchange rate prevailing on the date(s) it is subscribed.
The loans arrived at shall be considered as gross normativeloan for calculation of interest on loan: Provided that interest and finance charges on capital worksin progress shall be excluded: Provided further that in case of retirement or replacement ofassets, the loan capital approved as mentioned above, shallbe reduced to the extent of outstanding loan component ofthe original cost of the retired or replaced assets, based ondocumentary evidence. The repayment for the year during the tariff period from FY2011-12 to FY 2015-16 shall be deemed to be equal to thedepreciation allowed for that year.
The rate of interest shall be the weighted average rate of interest calculated onthe basis of the actual loan portfolio at the beginning of each year applicable tothe Generating Company or the Transmission Licensee or the DistributionLicensee: Provided that if there is no actual loan for a particular year but normative loanis still outstanding, the last available weighted average rate of interest shall beconsidered: The above interest computation shall exclude interest on loan amount,normative or otherwise, to the extent of capital cost funded by ConsumerContribution, Grants or Deposit Works carried out by Transmission Licenseeor Distribution Licensee or Generating Company, as the case may be. The utilities shall make every effort to re-finance the loan as long as it resultsin net savings on interest and in that event the costs associated with such re-financing shall be borne by the beneficiaries and the net savings shall be sharedbetween the beneficiaries and the utilities in the ratio of 2:1. Interest shall be allowed on the amount held as security deposit held in cashfrom Transmission System Users, Distribution System Users and Retailconsumers at the Bank Rate as on 1stApril of the financial year in which thePetition is filed
The approved original cost of the project/fixed assets shall be the valuebase for calculation of depreciation; Depreciation shall be computed annually based on the straight linemethod at the rates specified by ERC The remaining depreciable value as on 31st March of the year closingafter a period of 12 years from date of commercial operation shall bespread over the balance useful life of the assets: Specifies that the utilities formed as part of transfer scheme shall becharged as per rates specified in these Regulations for a period of 12years from the date of the Transfer Scheme, and thereafter depreciationwill be spread over the balance useful life of the assets: The salvage value of the asset shall be considered at 10 per cent of theallowable capital cost and depreciation shall be allowed upto amaximum of 90 per cent of the allowable capital cost of the asset:
Provided that in the case of hydro generating station, the salvage value shall beas provided in the agreement, if any, signed by the developers with the StateGovernment. Land other than the land held under lease and the land for reservoir in case ofhydro generating station shall not be a depreciable asset and its cost shall beexcluded from the capital cost while computing depreciable value of the asset. In case of the existing projects, the balance depreciable value as on April 1,2011, shall be worked out by deducting the cumulative depreciation asadmitted by the Commission upto March 31, 2011, from the gross value of theassets. In case of projected commercial operation of the asset for part of the year,depreciation shall be calculated based on the average of opening and closingvalue of asset, approved by the Commission: Provided that depreciation will be re-calculated during truing-up for assetscapitalised at the time of Truing Up of each year of the Control Period, basedon documentary evidence of asset capitalised by the applicant, subject to theprudence check of the Commission, such that the depreciation is calculatedproportionately from the date of capitalisation.
Working capital is defined separately for:◦ Generation Coal/ lignite/ oil fired plants Gas Turbine/ combined cycle plants Hydro plants Transmission Distribution Wires Business Retail Supply Business Interest on working capital shall be allowed at a rateequal to the State Bank Advance Rate (SBAR) as on1stApril of the financial year in which the Petition isfiled.
Working capital shall shall cover: Cost of coal or lignite for one (1) month for pit-head generating stations andone and a half (1½) months for non-pit-head generating stations, correspondingto target availability; plus Cost of oil for one (1) month corresponding to target availability; plus Cost of secondary fuel oil for two (2) months corresponding to targetavailability; plus Operation and Maintenance expenses for one (1) month; plus Maintenance spares at one (1) per cent of the historical cost escalated at 6%from the date of commercial operation; plus Receivables for sale of electricity equivalent to one (1) month of the sum ofannual fixed charges and energy charges calculated on target availability: In case of own generating stations, no amount shall be allowed towardsreceivables, to the extent of supply of power by the Generation Business to theRetail Supply Business
Fuel cost for one (1) month corresponding to target availability factor,duly taking into account the mode of operation of the generatingstation on gas fuel and /or liquid fuel; plus Liquid fuel stock for fifteen (15) days corresponding to targetavailability; plus Operation and maintenance expenses for one (1) month; plus Maintenance spares at one (1) per cent of the historical cost escalatedat 6% from the date of commercial operation; plus Receivables equivalent to one (1) month of capacity charge and energycharge for sale of electricity equivalent calculated on normative plantavailability factor, duly taking into account mode of operation of thegenerating station on gas fuel and liquid fuel: In case of own generating stations, no amount shall be allowed towardsreceivables, to the extent of supply of power by the GenerationBusiness to the Retail Supply Business
Operation and maintenance expenses for one (1)month; Maintenance spares at one (1) per cent of the historicalcost escalated at 6% from the date of commercialoperation; and Receivables equivalent to one (1) month of fixed cost: Provided that in case of own generating stations, noamount shall be allowed towards receivables, to theextent of supply of power by the Generation Businessto the Retail Supply Business, in the computation ofworking capital in accordance with these Regulations.
Operation and maintenance expenses for one month; plus Maintenance spares at one (1) per cent of the historical costescalated at 6% from the date of commercial operation; plus Receivables equivalent to one (1) month of transmissioncharges calculated on target availability level; minus Amount, if any, held as security deposits except the securitydeposits held in the form of Bank Guarantee fromTransmission System Users.
Operation and maintenance expenses for one month; plus Maintenance spares at one (1) per cent of the historical costescalated at 6% from the date of commercial operation; plus Receivables equivalent to one (1) month of the expectedrevenue from charges for use of Distribution Wires at theprevailing tariffs; minus Amount, if any, held as security deposits under clause (b) ofsub-section (1) of Section 47 of the Act from DistributionSystem Users except the security deposits held in the formof Bank Guarantees.
Operation and maintenance expenses for one month; plus Maintenance spares at one (1) per cent of the historical costescalated at 6% from the date of commercial operation; plus Receivables equivalent to one (1) month of the expectedrevenue from sale of electricity at the prevailing tariffs; minus Amount held as security deposits under clause (a) andclause (b) of sub-section (1) of Section 47 of the Act fromconsumers except the security deposits held in the form ofBank Guarantees;
Tax on income: provisionally allow for thecontrol period and then actuals after auditedresults are available Rebate: Delayed Payment surcharge: Forex Rate Variation: Utilities will be encouragedto hedge; cost of hedging will be allowed
Tariffs for Generation, Transmission andDistribution dealt with in separate session Certain specific norms etc as spelt out in GERCMYT regulations follows:
Annual Fixed Charge Energy (variable charges) for recovery of primaryand secondary fuel cost
Depreciation; Operation & Maintenance Expenses; Return on Equity; Interest and Finance Charges on Loan Capital; Interest on Working Capital; minus: Non-Tariff Income:Capital costs as specified in the MYT regulations
Indicative list of various heads to be considered for Non-Tariff Incomeshall be as under:◦ Income from rent of land or buildings;◦ Income from sale of scrap;◦ Income from statutory investments;◦ Income from sale of Ash/rejected coal;◦ Interest on delayed or deferred payment on bills;◦ Interest on advances to suppliers/contractors;◦ Rental from staff quarters;◦ Rental from contractors;◦ Income from hire charges from contactors and others;◦ Income from advertisements, etc.: Provided that the interest earned from investments made out of Return onEquity corresponding to the regulated business of the Generating Companyshall not be included in Non-Tariff Income.
Norms are specified for:◦ Plant Availability – 85% for full fixed cost recovery◦ Gross station Heat rate – Existing and new stations◦ Secondary Fuel oil consumption - Existing and new stations Coal-based generating stations: 1.00 ml/kWh; Lignite-Fired generating stations except stations based on CFBC technology:2.00 ml/kWh; Lignite-Fired generating stations based on CFBC technology: 1.25 ml/kWh; Trajectory determined separately for GSECL stations◦ Auxiliary Energy consumption - Existing and new stations◦ Transit and Handling losses◦ O&M expenses◦ Norms for Hydro stations◦ Norms specified are ceiling norms
The target Wires Network Availability for full recovery of Return onEquity for Wires Business shall be as under:◦ Rural Areas 90 percent;◦ Towns and cities 95 percent; Provided that the Commission may stipulate a trajectory for achievingthe target Availability for Wires Business of the Distribution licenseeas part of the Order on the Business Plan filed by the DistributionLicensee Provided further that for every 1 percent under-achievement in WiresAvailability vis-a-vis target availability, Rate of Return on Equity shallbe reduced by 0.1%: Provided further that for every 1 percent over-achievement in WiresAvailability vis-a-vis target availability, Rate of Return on Equity shallbe increased by 0.1%.
Components of Tariffs (will be dealt with in ARRsession) Amount received as cross subsidy surcharge willbe deducted from ARR