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MultiYear Tariffs


Creation of investor confidence in context of regulatory uncertainty the driving ... In India (most States) all else pales into insignificance, for the time being. ... – PowerPoint PPT presentation

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Title: MultiYear Tariffs

Multi-Year Tariffs
  • in the Power Sector
  • in India so far
  • (August 2003)

Why a multi-year framework (MYT or MYTP) for
power tariffs?
  • The two general reasons
  • Incentivise efficiency improvement
  • Obviate regulatory uncertainty.
  • In India (not uniquely) the issue arose
    specifically in the context of efforts to
    privatise distribution
  • Creation of investor confidence in context of
    regulatory uncertainty the driving concern.
  • Then existing legal framework incompatible with
    MYT, hence MYTP.

Role of the Government
  • MYT(P) can be mandated either by Regulator or by
  • Privatisation is necessarily a Government, not a
    regulatory, decision
  • The first multi-year framework was improvised (in
    Delhi) in a situation where the overriding
    concern was investor uncertainty about efficiency
    improvement expectations.
  • The power to give policy directions proved
    crucial in the face of Regulators reluctance.

Legal ContextBefore the Electricity Act, 2003
The Indian Electricity Act, 1910
  • Defined the responsibilities of licensees and
  • Gave State Government some powers to regulate
  • Did not mandate any periodic tariff fixation

Electricity (Supply) Act, 1948
  • SEBs were to set tariffs with reference to annual
    revenues (section 59).
  • SEB to be guided by any Policy Directions that
    the State Government might issue
  • CEA to decide in any dispute as to whether a
    particular question was a question of policy.

Electricity (Supply) Act, 1948
  • Licensee tariffs to be set according to Sixth
    Schedule (section 57)
  • Cost plus
  • Tariff to be adjusted annually limiting profits
    to reasonable return defined by the statute
  • Up to 5 of excess profit at disposal of
    undertaking balance divided between consumers
    and a Tariffs Dividends Control Reserve).

Electricity Regulatory Commissions Act, 1998
  • SERC to be guided by the following principles
    (section 29)
  • Principles laid down in E(S)Act 1948
  • Progressively reflect costs at adequate
    improving efficiency levels
  • Factors (as SERC considers appropriate)
    encouraging efficiency
  • Interests of consumers requirement to pay in a
    reasonable manner based on average cost of
  • Commercial principles
  • National power plans.

Electricity Regulatory Commissions Act, 1998
  • SERC to be guided by any Policy Directions given
    to it by State Government (Section 39).
  • State Governments decision final as to whether
    any particular direction qualified as a policy
    direction in the public interest.

State Reform Acts typically required SERC to be
guided, but not bound, by E(S) Act tariff
  • Delhi Electricity Reforms Act, 2000 (section 28)
  • DERC to be guided by
  • Sixth Schedule
  • Factors encouraging efficiency, economy etc.
  • Consumer interests.
  • When the Commission departs fromthe Sixth
    Scheduleit shall record the reasons therefor in
  • Licensee to submit an Annual Revenue Requirement
  • Annual exercise laid down.

Policy Directions under State Reform Acts
  • All provide for policy directions.
  • Most provide for some external authority (High
    Court, CERC) to determine whether a State
    Government direction qualifies as a policy
    direction in public interest.
  • But DERA followed ERC Act
  • Governments decision final.

The Case of Delhi
Reform Milestones
  • Feb 99 - GNCTD Strategy Paper.
  • Nov., 99 -SBI Caps engaged as Consultant.
  • Dec., 99 -Regulator Appointed.
  • Oct., 2000 Delhi Electricity Reforms

Reform Milestones
  • Oct 2000 Tripartite agreement between staff, DVB
    and Government, on same day as Ordinance.
  • Jan 2001 Investors Conference.
  • Feb 2001 RFQ issued
  • Bought by 31 parties.
  • Feb 2001 DVB applies for MYTP along with its
  • May 2001 DERC rejects MYTP.

  • Mar 2001 - Delhi Electricity Reforms Act, 2000
    comes into force
  • July 2001 Consultants final report
  • May 2001 - Bidders short listed
  • Six bidders
  • Two expressed lack of interest
  • Nov 2001- RFP issued
  • Nov 2001 - Policy Directions

  • Feb 2002 DERC order fixing opening loss levels
    and initial BST.
  • April 2002 Bids received from two bidders.
  • Considered not acceptable in present form by
  • Core Committee authorised to explore alternatives
    including negotiation.

  • Share Acquisition Agreement, May 31, 2002
  • Amendments to Policy Directions and Transfer
    Scheme Rules
  • Shareholders Agreement and other agreements
    signed June 27
  • Operative from June 30
  • Transfer Scheme operationalised June 30
  • Management handover

Reform process once startedThere may be no time
to waste.
  • Political will
  • Its relationship with compulsions of situation.
  • If available, it must be honoured
  • Implications for time framedelay will damage
  • Necessity to go it alone in Delhi to achieve
    tangible results within a Governments term.

The main objective of reform
  • Reduce the high commercial losses in
  • In India (most States) all else pales into
    insignificance, for the time being.
  • Motivation for other efficienciesreducing
    technical losses, DSMalso depends on it.

Design of package essentially to handle the
transitional phase
  • During the transitional phase, it is necessary to
  • Realistic expected efficiency gains
  • Possible tariff increases
  • Transitional assistance until the benefits of
    greater efficiency are realised.
  • Therefore the main features of the package should
    preferably be frozen for the transitional

No Time Gap between Corporatisation
Privatisation in Delhi
  • Shell companies registered in advance.
  • Objective was privatisation, not mere
  • New entities would incur losses before
  • Govt. retained option to abort the entire
    exercise in absence of investor response.

In Delhi, time assumptions were an input in the
  • Business Valuation method used for second time in
    IndiaKanpur, then Delhi.
  • Business Valuation, as adopted
  • value assets on going concern basis
  • asset value derived based on future earnings
    potential assuming reasonable retail tariff
    increase and efficiency improvements

... Valuation of Assets
  • Principles applied
  • electricity business becomes self sustaining
    within five years
  • Minimise retail tariff shock.
  • Support from GNCTD for funding initial losses -
    about Rs. 2600 crores (increased to Rs 3450

...Financial Restructuring Plan
...Financial Restructuring Plan
  • Support for funding losses in initial years
  • About Rs 3450 cr to TRANSCO
  • at interest rate of 12
  • moratorium of four years on interest and
    principal repayment
  • Servicing of principal in eighteen equal half
    yearly installments.

...Power Purchase/ Bulk Supply Arrangements
  • TRANSCO to buy and sell power for initial 5 years
  • but no bar on additional purchases by DISCOMs
    direct from generating companies or other sources
  • After 5 years DISCOMs to buy power directly and
    pay wheeling charges to TRANSCO

Setting efficiency improvement targets
  • Primary investor concern.
  • Regulatory (and public) regulatory approval not
    forthcoming for reasonable, achievable multi-year
  • Lack of understanding of nature of problem.
  • Lack of benchmark experience.

Multi-year tariff principles proposed by DVB in
  • Annual Tariff fixation general principles for
    power purchase, OM, salaries, interest,
  • DERC to fix targets for collection efficiency
  • TD loss reduction targets

Negative response (except from investors)
  • No general appreciation of the necessity for MYTP
    in the context of developing Orissa experience.
  • DVB accused of bad faith in making proposals on
    behalf of future, as yet non-existent, discoms.
  • Targets considered too low.
  • Collection inefficiency pass-through thought to
    be contrary to accounting principles.

DERCs views
  • multi-year tariff approach linking to some
    indices would be suitable for a mature and stable
    environment so that the investing companies can
    undertake efficiency improvements and reap
    benefits from them. The efficiency benchmarks
    have to be robustneither the utility nor the
    consumer should suffer or benefit unduly in
    future. In conclusionalthough multi-year tariff
    setting principles is an issue that merits
    consideration, it is not the mature stagefor the
    purpose of this tariff order.

Delhi Solution Legitimise targets through
bidding procedure.
  • Criteria of Selection of Investor
  • Minimum target of Aggregate Technical
    Commercial Loss to be achieved by investors each
    year for next five years specified.
  • Bids invited on Aggregate Technical Commercial
    Loss with shares being sold at par value.
  • ATC Loss concept addresses not only the problem
    of data reliability but also that of collection

Policy Directions to DERC
  • To mitigate uncertainty and ensure successful
    privatisation, GNCTD issued policy directions
    under Section 12 of DERA, binding Regulator to
    the outcome of the bidding process.
  • It was (then) felt that it would suffice to
    mitigate risk only in respect of loss reduction

The Policy Directions
  • require that tariffs for 2001-07 take into
  • Selection process of bidders
  • Technical Commercial Loss to be on the basis of
    the bid of the selected bidder
  • DISCOMS earn 16 Return on Equity (Assuming loss
    reduction, ARR approval)
  • Incentives on over-achievement 50 retained, 50
    to rebate on tariff

Loss level reduction targets accepted
Reform package tariff projections
  • Years 1 to 3 retail tariff increase up to 10
    per annum.
  • Year 1 for 6 months only.
  • Years 4 5 retail tariff increases of 5, 3.
  • Bulk (Transco) Tariff to rise more sharply, with
    phasing out of Government assistance, efficiency

First post-reform tariff order
  • 5.18 increase overall.
  • Government decision to further subsidize to avoid
    tariff increase for consumers up to 400 kwh per
  • Discom issues
  • Depreciation rate
  • Deferred tax liability
  • Base for next year (BRYPL)
  • And more.

First post-reform tariff order(Continued)
  • Order effective July 4, 03.
  • Holding Company collections assigned to Transco
  • Transco and Genco issues.
  • Overall, effect on investor interest to be
  • Was the presumption that advance fixation of loss
    reduction targets suffices to allay investor
    apprehensions on regulatory uncertainty justified?

Some other States
  • Shortly after DERC rejection of MYTPs, UPERC
    introduced 5-year MYTPs for Kanpur
  • TD loss reduction 2 per annum
  • Collection efficiency improvement targets
  • Concept of effective lossATC loss.
  • Orissa Electricity Regulatory Commission has
    announced its intention to fix MYTPs.

Some other States
  • Karnataka package (still in the making) tries an
    alternative approach
  • envisages prior fixation of a Distribution
    Margin comprising
  • Base revenue set in advance for each year of
    transition period
  • Incentive charge (being amount collected above a
    Minimum Revenue Requirement) to be fixed by

Karnataka continued
  • Investor to be protected from
  • Regulatory risk on tariff
  • Collection risk in certain cases (unmetered
    consumers Govt)
  • Partial protection from risk of commercial losses
    because of lack of law enforcement support.

Karnataka continued
  • Risks transferred to the investor
  • Collection risk in respect of metered consumers
  • Theft risk above announced starting level
  • Inaccurate metering
  • Operating expenditure management risk
  • Technical losses risk.

Karnataka continued
  • Karnataka package involves prior fixation of
    annual figures
  • Therefore control period likely to be only three
  • The starting point was perceived unreliability of
    ATC loss figures
  • Perhaps a genuine problem, but could not a
    simpler alternative have been found? Revenue per
    unit input?
  • Too early to judge package still not final.

APERC approach to Long-Term Tariff Principles may
offer an alternative
  • Control Period
  • Annual targets to be fixed in advance for
    controllable items
  • Network costs
  • Financing costs
  • System losses
  • Licensee to normally enjoy benefits or losses of
    variation from annual targets.

APERC (Continued)
  • Uncontrollable items pass-through
  • Force Majeure
  • Change of law
  • Judicial decisions
  • Government policies
  • Economy-wide influences.
  • Mid-term review.

Electricity Act, 2003
  • Section 61 Commission to be guided by
  • Commercial principles
  • Factors encouraging competition, efficiency,
  • Principles rewarding efficiency
  • Multi-year tariff principles
  • Progressively reflect cost of supply, eliminate

  • No specific provision necessitating annual
  • But how far do the provisions on open access and
    multiple distribution licenses change the context?

Thank you