LOKTAK ESTIMATE COMMITTEE

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Dept. of IME, IIT Kanpur Short-term course
Challenges and Implementation Issues Post
Electricity Act 2003 Regulatory, Policy
Technical Solutions April 10 -14,
2004 This document can be downloaded
from www.iitk.ac.in/ime/anoops
Bulk Electricity Tariff (Hydro) Reforms
Thereafter
by S.K.Agarwal, GM (Comml) Prashant
Kaul, CE V.K.Sinha, SM Ravi Kumar, Engineer
M.G. Sharma, Engineer National
Hydroelectric Power Corporation Ltd.Faridabad
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Bulk Electricity Tariff (Hydro) Reforms
Thereafter

Electricity Industry in India was governed by the
following Acts before enactment of the
Electricity Act, 2003
1. The Indian Electricity Act, 1910. 2. The
Electricity (Supply) Act, 1948. 3. The ERC Act,
1998.
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The Indian Electricity Act, 1910
i) Meant for supply and use of Energy. ii) License
e established.
Positive Impact -
a. Beginning of development of Electricity
Industry. b. Charges for energy to be without
undue preference.
Negative Impact -
Neither principles nor methodology for
determination of tariff prescribed.
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The Electricity (Supply) Act, 1948
- Concept of Grid system introduced in
India. - Central Electricity Authority
established. - State Electricity Boards and
Generating Companies established. - Licensees
continued. Provisions for tariff -
a. Charges for energy to be determined as per
schedule VI. b. Reasonable return on investment
allowed (3) to the licensee/Generating Company
(SEB). c. State Govt. to determine the tariff.
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The Electricity (Supply) Act, 1948

Negative Impact -
- State Govt. did not allow SEBs to earn a
reasonable return. - Tariff highly subsidized
by State Govts. - Financial health of SEBs
deteriorated. - No policy for Private investments.
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K.P. Rao Committee Tariff Norms

• Central Generating Companies (NTPC and NHPC)
  established in mid Seventies.
• Bulk Electricity Tariff to be charged as
  mutually agreed between Central Generating
  Companies and SEBs.
• K.P.Rao Committee formed by GOI in 1989 for
  prescribing norms for determination of tariff of
  Central Generating Stations (NHPC NTPC).
• K.P. Rao recommendations considered as land
  mark reform in the Bulk Electricity Tariff.
• Concept of two part tariff theory recommended
  by K.P. Rao consisting of

a. Fixed Charges. b. Variable Charges (zero in
case of Hydro)
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Notification Regarding Terms and Conditions of
Tariff by GOI

• Govt. of India issued terms and conditions for
  determination of Tariff in March, 1992 for
  Central Generating Stations. Thus, K.P. Rao
  recommendations implemented (Partly)
• Elements of tariff

1. Interest on Loan To be charged as per
actual. 2. Depreciation As per rates
notified by GOI. 3. Return on Equity
12 4. OM Charges One percent (1) of
Capital Cost plus escalation .
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Notification Regarding Terms and Conditions of
Tariff by GOI
5. Interest on Working Capital
i. one month OM Charges. ii. Two months
receivables. iii. Maintenance Spares at actuals
but not exceeding one years requirement.
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Further reforms in Bulk Electricity Tariff (By an
amendment in 1995 to March 1992 notification)

• Introduced concept of machine availability for
  Hydro - Normative Value 85.
• Introduced concept of Incentives /
  Disincentives.
• Capacity charges to be recovered by Hydro
  Generator if machine availability achieved 85,
  otherwise prorata reduction in capacity charges.
• Concept of deemed generation also introduced.
• Tariff determined by GOI, MOP for Central
  Generating Stations under section 43 A(2) of
  Electricity (Supply) Act, 1948 based on 1992
  norms.
• Issued policy guide lines for private
  investment in Power Sector in 1997.
• Issued policy on Hydro Power Development in
  1998.

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Further reforms in Bulk Electricity Tariff (By an
amendment in 1995 to March 1992 notification)
Negative Impacts
1. Disputes related to tariff increased between
generators and SEBs. 2. Charges of Central
Generating Companies remained unpaid and
arrears accumulated on account of outstanding
dues. 3. Fixed Charges arbitrarily divided into
capacity charges and energy charges in the case
of Hydro. 4. Machine availability for Hydro to be
certified by REBs, This has been a cumbersome
process for REBs due to insufficient data
available with them.
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Further reforms in Bulk Electricity Tariff (By an
amendment in 1995 to March 1992 notification)
5. SEBs opined that they did not participate in
full in tariff determination process of Central
Generating Stations. 6. Private participation in
Power Sector did not comeforth in spite of a
number of liberalized policies issued by GOI for
IPPs
Reasons
SEBs could not establish LCs for private IPPs
due to poor financial health.
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THE ERC Act, 1998

• CERC SERCs established

CERC to be guided by i. Being fair to
consumers and ii. At the same time ensure
mobilization of resources for capacity
addition.

• Operational parameters for Grid operation
  codified through IEGC.
• ABT order issued in Jan. 2000 by CERC.

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THE ERC Act, 1998

• New Norms for determination of tariff for
  Central Generating and Transmission Companies
  IPPs selling power to more than one state
  (Issued on March 26th, 2001 by CERC for the
  period 01.04.2001 to 31.03.2004)
• Introduced concept of Capacity Index for Hydro
  in place of machine availability.
• Rate of Return maintained at 16 as prescribed
  by GOI earlier. CERC in its order said ROE to
  remain at least 16 in future also.
• Implemented ABT from 01.07.2002 in Western,
  01.12.2002 in Northern, 01.01.2003 in Southern,
  01.04.2003 in Eastern, 01.11.2003 North
  Eastern Regions.

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THE ERC Act, 1998
_ Issued regulations for participation of IPPs
through International competitive
bidding Positive Impacts -
1. SEBs participated in tariff determination
process of Central Generating Stations. 2. Disput
es related to tariff reduced. 3. Current tariff
payments not withheld by SEBs. 4. Grid frequency
improved considerably with implementation of ABT
for inter-state. 5. Few SEBs unbundled after
adopting reforms. 6. Efficiency of SEBs improved
to some extent. Awareness in respect of reforms
/ improvement increased among all utilities.
Few SEBs also earned UI by planning less drawl.
from Grid during low frequency period.
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THE ERC Act, 1998
7. Issue of arbitrarily spliting of fixed charges
into capacity and energy charges for Hydro
addressed. 8. Concept of development surcharge
for capacity addition introduced. 9. IPPs
started investing in the Power Sector.
Negative Impact
1. Orders of CERC could be challenged by any
utility in any High Court of the
Country. 2. Implementation of ABT got delayed due
to challenge of CERC order on ABT.
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The Electricity Act, 2003

• Thermal generation de-licensed.
• Hydro schemes above certain cost still to get
  concurrence from CEA.
• CERC (Terms and conditions of Tariff)
  Regulations,2004 issued under the Electricity
  Act, 2003.

• ROE reduced from 16 to 14 for both Thermal
  and Hydro Generators.
• Debt equity ratio for the operating and for
  construction Projects starting commercial on or
  after 1st April2004 changed to 70 30.
• Methodology for calculation of incentive for
  Hydro changed.

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The Electricity Act, 2003
Impact
1. Central Generators shall be put to loss
ranging from several hundred crores due to
reduction in ROE. 2. Capacity addition programmes
of generating companies for Xth XIth Plan
will get affected. 3. Private participation in
generation under doubt due to ROE reduced to
14. 4. Development surcharge discontinued which
could have been a source for capacity
addition. 5. CERC proceeded in haste to issue new
tariff regulations without waiting for the
National Electricity and Tariff Policy to be
issued by GOI as per the provisions of the
Electricity Act, 2003.
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