CII's Presentation On National Tariff Policy (July 2005)

1. CII's Presentation On National Tariff Policy (July 2005)

2. Background • Being a monopoly the Power tariff has always been regulated by authorities • Schedule VI of IE Act 1948 was the guiding force for distribution utilities while the SEB's were governed by Sec 44 • IPP's tariff was governed through GOI/CERC guidelines - PLF based guaranteed returns and normative norms are in vogue • Returns Capped but Unlimited downside • Present draft is in line to define the principles which the ERC's can apply uniformly Presentation is made available by Infraline.com

3. Legal Position • Sec 3 (1) of EA 03 empowers Central government to formulate national Tariff Policy which can be reviewed from time to time • EA 03 requires CERC & SERC's to be guided by the policy • CERC norms to guide transmission and generation tariffs of SERC • FOIR to facilitate consistency Presentation is made available by Infraline.com

4. Objectives of the Policy • The Preamble of EA 03 guides the policy • Ensure Financial Viability and attract Investments • Availability of Electricity at Reasonable rates • Promoting Transparency & minimize Regulatory Risk • Promote competition & efficiency Presentation is made available by Infraline.com

5. Approach • Competition led Benefits • Scarcity to be removed and Service levels to improve on account of multiple players • Common Framework across the value chain • ROE -Investment in this sector shall not be dwarfed by other sectors • Reasonable surplus in the industry based on Risk Analysis and Cost of Capital • CERC Transmission norms to be adopted by SERC for Distribution • Equity premium and Internal resources applied in the business to qualify for returns Presentation is made available by Infraline.com

6. Approach (contd…) • Debt : Equity – 70 : 30 for Gen, Trans, Dist • Depreciation- CERC to Notify for Gen and Trans • Transmission norms to apply for Distribution • All efforts to avoid front loading of tariff • Consumers to benefit from fully depreciated assets • Cost of debt to be re looked every 3 years • Any reduction to benefit consumers with some incentives to utilities • Foreign Exchange Risk coverage allowed for capital projects only Presentation is made available by Infraline.com

7. Approach (contd…) • Operating norms - To be evolved with suitable incentives & disincentives • Normative levels to apply for tariff and not "lower of normative or actual" • CERC in consultation with CEA to notify norms for Generation and Transmission • SERC's to notify for Distribution • FOIR to harmonise the state specific guidelines • R&M - To be encouraged for efficiency improvement Presentation is made available by Infraline.com

8. Multi Year Tariff • Initial control period for 3 Years to start from 1st April 06 & subsequently for 5 Years • Improvement trajectories to start from actuals with benchmarks • Separate studies to asses the capital expenditure for each utility to achieve minimum standards • Regulations of outputs to be focused and uncontrolled costs to be recovered in the same FY • ERCs to issue clear disclosure and accounting norms • Distortions are to be avoided for captive users Presentation is made available by Infraline.com

9. Generation • Growth essential to meet demand • Competitive Bidding to be used for peak and non peak requirements • Two part tariff structure to facilitate MOD • ABT in states by April 2006 for all generators including captive up to 25 MW • Differential rates for fixed charges for peak and off peak for better load management • Capacities can be sold to other buyers in the event of default by initial buyer • Captive capacity to be harnessed through firm agreements or through ABT mechanism • Non conventional sources to be tapped in line with Sec 86(1)e - Minimum % to be in power mix Presentation is made available by Infraline.com

10. Transmission • Optimal development of network to efficiently use Generation and Transmission assets • Attract investments Transmission pricing • Suitable for all networks • Sensitive to Distance, Direction and Quantum • Users to share total cost in proportion of use • Guidelines to be issued for bidding process of transmission Capacities • Metering at all levels to meet TOD and ABT Loss allocation • Apply average loss for relevant voltage level • Loss compensation linked to benchmarks • ERC’s to conduct studies and fix benchmarks • All data to be shared with LDC's and users Presentation is made available by Infraline.com

11. Distribution • Most important segment for success of the sector • Efficiency gains with normative to be shared MYT for distribution • To minimize risk and greater predictability • Tariff adjustments for both private and public pegged against known indicators like inflation index • Sharing of excess profit and losses • Initial sharing may be asymmetric towards utilities to encourage investments • Initial control period to accommodate change baselines consequent to metering • May charge lower tariffs without claim on ARR • Separate filing for multi licensed areas • FOIR to discuss and set desired performance r levels with built in penalties Presentation is made available by Infraline.com

12. Distribution Revenue allowances • All power purchase to be legitimate unless it violates MOD or at unreasonable rates • Revenue required shall be power supply for 24 hours which is the right of all consumers • ATC loss to be incentivised and could be made area specific • Sec 65 to be enforced for state governments to pay in advance • Unpaid subsidy to be made a part of ARR- for subsequent year • Working capital requirements to consider ground realities and bad debts should be recognised • Pass through of past losses to be allowed to the extent of uncontrollable factors and MYT to determine sharing of controllable factors between utility and consumers Presentation is made available by Infraline.com

13. Distribution • Regulatory asset system to be used only as an exception • Tariff Design to be done • Special support to Consumers 30 KWH/mth but not less than 50% of average cost • Tariffs to be in range of + 20 % of average cost by 2010-11 with intermediate milestones • Agriculture subsidy to consider ground water table and poor farmers to ensure sustainable ground water usage • Free power to be discouraged and subsidized power consumption to be capped. Direct subsidy route to be preferred Presentation is made available by Infraline.com

14. Distribution (contd…) • Two part tariff and TOD to be done for large demand consumers • Generation PPA's to be assigned to unbundled Discom's • Meter based billing to be encouraged • Cross Subsidy and additional Surcharge-Sec 42(2) to be prudent and shall be • Difference between Relevant category tariff and distribution cost for the category • Marginal cost of Costliest power to be used for subsidy computation Presentation is made available by Infraline.com

15. Illustration • Tariff payable - Rs 4.00/unit • Weighted average cost of  top 5% power as per MOD - Rs 3.00/unit • Applicable System Loss - 6% • Distribution /wheeling charge- Rs 0.3/unit • Cross Subsidy surcharge = 4-(3/0.94+0.3) = Rs 0.5 I/unit Presentation is made available by Infraline.com

16. Illustration (contd…) • Consumers getting power from different source not paying cross subsidy not to pay subsidy till current validity • Surcharge to be collected by respective utility whose facility is being used and to be distributed to concerned utilities • Additional surcharge only when it is proved that capacity is stranded and fixed cost obligation remains • Wheeling charge to be calculated on same lines as intra state transmission plus average loss compensation for relevant voltage • Stand by arrangement to be provided in event of non supply by open access generator on payment of category tariff or UI whichever is higher Presentation is made available by Infraline.com

17. Thank You