SAFIR Core Course Infrastructure Regulation & Reforms

1. SAFIR Core CourseInfrastructure Regulation & Reforms Tariff Regulation: ARR and Tariff Analysis – Distribution, Generation and Transmission Administrative Staff College of India Hyderabad, INDIA

2. Session Overview • Legal Aspects • Policy Aspects • Regulatory Aspects • Annual Revenue Requirements • Application from Utility • Analysis and Decisions

3. Tariff Determination • Section 86 of Electricity Act, 2003 deals with the Functions of State Commissions: • SERC to decide tariff for generation, supply, transmission and wheeling of electricity. • Regulate electricity purchase and procurement process of distribution licensees. • Regulate Intra-state transmission and wheeling of electricity. • Issue licenses • Promote cogeneration and renewable energy • Specify and enforce Standards of Performance • Fix trading margin

4. Tariff Determination Process • Part VII of Indian Electricity Act, 2003 deals with the provisions relating to determination of tariff by the regulatory Commission. • Sections 61 and 62 specify the tariff determination principles by the appropriate Commission. • The State Government may grant subsidy to any consumer or class of consumers in the tariff determined by the concerned SERC. Contd.

5. Tariff Determination Process (contd.) • Tariff shall be determined by Regulations • The Regulations shall be in accordance with the EA, 2003, National Electricity Policy and Tariff Policy. • Tariff may not be amended ordinarily more than once a year. Variation in fuel cost/power purchase cost can be recovered at regular intervals. • Section 108 of the EA Act enables the Government to issue directions to the Commission in public interest.

6. Tariff Determination Process (contd.) • As per the provisions of Electricity Act 2003 - • Appropriate Commission shall specify the terms and conditions for the determination of tariff in accordance with guidelines under the Act. • The Commission has to issue Regulations specifying the terms and conditions for determination of tariff. • CERC issued (Terms & Conditions of Tariff) Regulations in March 2004 effective from 1.4.2004 for determination of tariff for generation and inter-state transmission lines and revised the above Regulations in January 2009 effective from 1.4.2009 for a period of 5 years till 2014. • All the ERCs have issued Regulations for one year / MYT

7. The process • Filing of ARR and Tariff Petitions by utilities • Proposal for ARRProposal for Tariff Revision • Once a year / multi year tariff • Notification on ARR and tariff filing in newspapers in abridged form • Objections/ Suggestions from stakeholders • Public hearings • Issue of orders • Review application before the Commission • First appeal before APTEL • Second appeal lies with the Honourable Supreme Court of India

8. A typical Tariff Application of Discom has to include Power Procurement (Self+Purchase) Annual Revenue Requirement to meet the Cost of Supply to cater to the demand • Factoring of subsidies • Arriving at Revenue Gap • Measures to meet the Gap through: • Tariff Revision • Subsidies • Efficiency Improvements Demand Forecast O & M Expenses • Interest on loans & • security deposit • Interest on Working • capital • Depreciation • Income Tax • Return on Equity The petition would also include performance review of the previous year and truing up of the prior year for which audited results are available

9. Distribution Business

10. Annual Revenue Requirement (ARR) For Distribution Business • ARR is the Revenue Required by an Utility • to meet all the expenses to carry on the business in a year and a return on equity. • The expenses in the case of Distribution Co. include - • Power purchase cost. • Operation and maintenance expenses. • Interest and finance charges • Interest on consumer security deposit • Interest on working capital • Depreciation • Return on Equity (ROE) / ROCE • Income tax

11. ARR: Distribution (Contd.) • In the case of Distribution Company having self generation the expenses include - • Fuel and • Fuel related costs. • An integrated utility shall furnish separate details for generation, transmission and distribution for determination of tariff under section 62 of the Indian Electricity Act 2003.

12. ARR – Distribution (Contd.) Filing of ARR under MYT • Data to be furnished under each head for 3/5 years – previous year (actuals), current year actuals for six months and estimated for the balance six months and projections for the coming 3 years / 5 years (Control period) as per format furnished by the Commission. • Commission may ask for data for earlier years also.

13. ARR: Prudency Check by Regulatory Commission(Contd.) • Regulatory check would be based on: • Regulations issued by the Commission. • Norms and Standards set by the Commission • National Tariff Policy • Past trends • Special conditions / circumstances / contingencies if any

14. ARR: Power Purchase Costs • Energy Balance • Total energy sales Category-wise (Metered and Estimated for un-metered) • Distribution losses (Technical and Commercial) • Energy input (1+2) to distribution • Transmission loss • Energy required (3+4) • Self generation, if available • Energy to be purchased (6-5) • Availability from firm allocation • Balance to be purchased from market/ UI

15. Costs • Purchase (Source-wise) • Capacity charges • Energy charges based on merit order despatch • Transmission charges • Total Power Purchase cost • Self generation (variable cost) • Purchase from market • Self Generation (variable cost) • Operational parameters • Fuel costs • Transit loss of coal • Fuel handling charges

16. Operation and Maintenance Costs - Inputs • Employees Cost • Repair and Maintenance Cost • Administration and General Expenses • The costs are generally Benchmarked with past performance and specified in regulations.

17. Interest and Finance charges - Inputs • Loans outstanding • Capital investments less grants and consumer contribution during the year • Fresh loans and sources. (Normative loan of 70% in case of self financing) • Interest rates for existing loans and fresh loans • Swapping of loans • Interest on consumer security deposit • Total Interest and Finance charges

18. Interest on Working Capital • Working capital allowed as per regulations of the Commission • Distribution Company • Operation and Maintenance expenses for one month. • Maintenance spares @1% of the historical cost of Assets escalated at 6% per annum from the date of commercial operation. • Receivables equivalent to two months sales revenue less consumer security deposit. • Interest is on normative basis and shall be equal to short-term prime lending rate of SBI as on 1st April of the year (CoD) • Interest on working capital allowed irrespective of whether working capital is borrowed or not

19. Depreciation – Inputs • Fixed Assets with values at the beginning of the year. • Assets added / withdrawn during the year less grants and consumer contribution • Depreciation rates asset-wise. (As determined by CERC) • Depreciation calculated annually based on the straight line method. • Residual value considered at 10% of the original cost of asset. • Depreciation charged from the first year of operation. • Depreciation for the asset brought into operation for part of year shall be charged pro-rata or 1st April of succeeding year.

20. Return on Equity • Equity • General reserve/Free reserve • Reserves invested in capital expenditure during the year subject to debt equity ratio of 70:30. • Rate of Return is 16% / 14% as specified in the regulations

21. Return on Capital Employed (ROCE) • Some State Electricity Regulatory Commissions are adopting ROCE instead of ROE. • Where as ROE provides return on equity, ROCE provides return on capital employed. ROCE is arrived at as under (Rs. in lakhs)

22. Total Revenue Requirement Rs. Lakh • Power purchase cost • Operation and Maintenance expenses • Interest and finance charges • Interest on working capital • Depreciation • Total Expenses • Return on equity / Return on Capital • Income Tax / Other taxes • Total Revenue Requirement

23. Total Revenue Rs.Lakh • Revenue from sale of electricity at existing tariffs .…. • Other income ….. • Total Revenue (1+2) ….. Surplus / Gap • Total Revenue Requirement …… Less • 2. Total Revenue …… • Subsidy from State Government, if any, …… • Total Revenue with Subsidy (2+3) …… • Revenue Gap (1-4) or surplus (4-1) …… The gap is either bridged by increasing tariff or utility asked to meet by efficiency gains – reduction of Distribution loss, reduction of other costs etc.

24. Approval of Expenses under MYT Regime • The expenses other than power purchase and taxes are freezed for the three or five years during the control period. All expenses other than power purchase and taxes are controllable items. • The tariffs are determined for the first year of the control period, if the control period is 2008-09, 2009-10 and 2010-11. The tariffs are determined for 2008-09. • Truing up for 2008-09 is done on filing of petition for balance two years of control period. Surplus / deficit carried over. • Tariffs for 2009-10 are determined based on power purchase costs, tax etc. If any, controllable costs have increased due to reasons beyond the control of utility they may be considered by the Commission. • Similarly for FY 2010-11

25. Generation

26. The components of generation tariff: Fixed charges • Fixed charges consist of: • Operation and Maintenance expenses • Interest on loan capital • Depreciation • Interest on working capital • Return on equity / Capital base • Income tax and other taxes, if any Energy charge • Energy charge covers mainly fuel cost

27. ARR - Genco • ARR is the Revenue Required by an Utility to meet all the expenses to carry on the business in a year and a return on equity/ capital base. • The expenses in the case of Generation Co. include - • Fixed charges. • Operation and maintenance expenses. • Interest and finance charges • Interest on working capital • Depreciation • Return on Equity • Other related expenses (Taxes etc.) and • Variable charges. • Fuel and fuel related costs. -

28. ARR – cont…d • Filing of ARR under MYT • Data to be furnished under each head for 3/ 5 years – previous year (actuals), current year actuals for six months and estimated for the balance six months and projections for the coming 3 years / 5 years (Control period) in the format furnished by the commission. • Commission may ask for data for earlier years also.

29. ARR – Prudency check by Regulatory Commission • Regulatory check would be based on: • Regulations issued by the Commission. • Norms and Standards set by the Commission • National Tariff Policy • Past trends • Special conditions / circumstances / contingencies if any

30. Operation and Maintenance Costs - Inputs • Employees Cost • Repair and Maintenance Cost • Administration and General Expenses • CERC has fixed norms at ______/MW • Most of the SERCs go by past trend with escalation indexed to WPI/CPI as specified in the regualtions.

31. Interest and Finance charges - Inputs • Inputs to be provided: • Loans outstanding at the beginning of the year • Capital investment during the control period • Fresh loans and sources (normative loan in case of self financing) • Interest rates for earlier & fresh loans • Swapping of loans • Total Interest and Finance charges

32. Interest on Working Capital • Working capital allowed on normative basis as per Regulations of the Commission. • Fuel costs for one and half to two months corresponding to target availability. • Liquid fuel stock for two months. • Operation and Maintenance expenses for one month. • Maintenance spares at 20% of operation and maintenance costs. • Receivables equivalent to two months of fixed and variable charges for sale of electricity calculated on target availability • Rate of interest on working capital shall be on normative basis and shall be equal to the short-term prime lending rate of SBI as on 1st April of the year • Interest on working capital to the paid on normative basis whether working capital is borrowed or not

33. Depreciation – Inputs • Fixed Assets with values at the beginning of the year. • Assets added and withdrawn during the year • Depreciation rates asset-wise. (As determined by CERC) • Depreciation calculated annually based on the straight line method. • Residual value considered at 10% of the original cost of asset. • Depreciation charged from the first year of operation. • Depreciation for the asset brought into operation for part of year shall be charged pro-rata.

34. Return on Equity (ROE) • Equity • General reserve/Free reserve • Reserves invested in capital expenditure during the year subject to debt equity ratio of 70:30. • Rate of Return is 14% as specified in the regulations

35. Return on Capital Employed (ROCE) Some State Electricity Regulatory Commissions are adopting ROCE instead of ROE. Whereas ROE provides return on equity, ROCE provides return on capital employed. ROCE is arrived at as under (Rs. in lakh)

36. Total Fixed Costs Rs. Lakhs • Operation and Maintenance cost • Interest and finance charges • Depreciation • Interest on working capital • Total Expenses • Return on Equity or Capital Base • Income tax • Total Fixed Charges • Total Energy generated • Fixed charges / Unit generated • Total Energy sent out • Fixed charge / unit (net)

37. Energy charges • Energy charges include • Fuel costs • Fuel related costs

38. Fuel Cost Inputs • Gross station heat rate approved • Specific oil consumption approved (in the case of coal stations) • Auxiliary consumption approved • Calorific value of main fuel (coal in the case of coal stations and gas in the case of gas stations). • Calorific value of secondary fuel (secondary fuel oil mainly in the case of coal stations). • Unit price of main fuel including transport and stocking expenses. • Unit price of secondary fuel including transport and stocking expenses. • Transit loss of fuel in case of coal stations.

39. Total fuel cost of coal station

40. Total fuel cost of a coal station (contd.)

41. Total fuel cost in the case of gas stations

42. Transmission

43. Annual Transmission Charges - Inputs Rs. Lakhs 1. Operation and Maintenance expenses. • Employees cost • Repair and Maintenance charges • Administrative and General Expenses • ULDC / SLDC charges • 2. Depreciation • Interest and finance charges • Interest on working capital • Total Expenses • Return on equity • Income tax • Total Transmission charges • Less other income • Annual Transmission charges (net)

44. Data to be furnished by the Transmission Company and the analysis of data by the Commission. • The data to be furnished by the Transmission company for determination of transmission charges (Tariff) is the same as that to be furnished by Generation Company expect fuel costs. • The Commission analyses the data furnished and determines the tariff .