General Principles of

Tariff

Conclusion

ABT

Power Tariff Evolution

Tariff Principles

Introduction

Presentation Outlines

Introduction

What is Regulation

Regulation is defined as

The act of regulating;

A rule or order prescribed for management or government;

A regulating principle;

A percept, rule or order prescribed by superior or competent authority relating to action of those under its control

Blacks Law Dictionary

Electricity a concurrent subject as per Constitution of India

Both Centre and States can legislate

In case of repugnancy or conflict, Central legislation prevails

Basic Legal Framework

STAKEHOLDERS REGULATORY FRAMEWORK

CONSUMER

DISTRIBUTORS

GENERATORS

REGULATOR

CPPs

REGULATOR

TRANSMITTERS

TRADER

TRANSMITTERS

PX

RE

GU

LA

TO

R

GOVT.

The Electricity supply industry was earlier governed by three Acts i.e. before enactment of the Electricity Act- 2003, namely

Indian Electricity Act, 1910

Electricity (Supply) Act, 1948

Electricity Regulatory Commissions Act, 1998

The above three Acts now repealed in Electricity Act, 2003

History of Electricity Regulation in

India

Indian Electricity Act 1910 laid down basic framework for the power sector in the country along with all the policies governing the electricity supply in India

o Growth of the sector through private licensees

o Licence by State Govt.

o Provision for licence for supply of electricity in a specified area

o Legal framework for laying down of wires and other works

o Provisions laying down relationship between licensee and consumer

Indian Electricity Act, 1910

The supply of electricity was limited to urbanareas and most of the country was deprived ofelectricity

The situation was so grim that afterindependence not a single private organizationwas competent to administer the power supplyin the country, thereby, making way for stateparticipation in the power sector

Indian Electricity Act, 1910

Post-Independence Policy

The Act concentrated on increasing state monopolyover the sector by

Mandated creation of SEBs

Establishment of CEA

Need for the State to step in (through SEBs) to extendelectrification (so far limited to cities) all across the countryespecially in rural areas

As a result of this, 19 SEBs (State Electricity Boards)were formed under the Act which enjoyed monopoly overgeneration, transmission and distribution at intra-state level

However the power situation lacked in quality, security andreliability

Electricity (Supply) Act, 1948

Main amendments to the existing Acts

1956 Amendment- to increase role of State Govt to monitor SEBs

Amendment in 1964 to enable REBs

Amendment in 1975 to enable generation in Central sector

Amendment to bring in commercial viability in thefunctioning of SEBs Section 59 amended to make the earning of a minimum return of 3%

on fixed assets a statutory requirement (w.e.f 1.4.1985)

Amendment in 1991 to open generation to private sector (foradditional capacity requirement) and establishment of RLDCs

Amendment in 1998 to provide for private sectorparticipation in transmission and also provision relating toTransmission Utilities

Legal Framework Old Laws

In order to strictly implement reforms and rationalizing of thetariff structure, second generation reforms were introduced

In 1998 the GOI implemented The Electricity RegulatoryCommission Act, 1998

It emphasized on the establishment of state and central levelelectricity regulatory commissions (ERCs) (independentregulatory bodies) for rationalizing the tariff structure, creatingtransparency in policy formulation, to frame and promoteefficient and environmentally benign policies and for greaterinvolvement of private participation

Objective distancing of Govt./Govt. organization fromfunctioning of SEBs i.e. regulation and tariff determination

Electricity Regulatory Commission

Act, 1998

Resultant Industry Structure

Need for New Legislation

The SEBs incurred heavy loses and failed to make the necessarypayments to the CPSUs, owing to their bulky design, these utilitieswere inevitably becoming cumbersome to manage, therefore, theadministration decided to unbundle the utilities into more'manageable' size which paved the way for the Electricity Act 2003

Requirement of harmonizing and rationalizing the provisions in the existing laws to a self-contained comprehensive legislation

Create competitive environment which would result in enhancing quality and reliability of services to consumers

Distancing of Govt. from regulatory responsibilities

Obviating need for individual States to enact their own reform laws

Requirement of introducing newer progressive concepts like power trading, open access, Appellate Tribunal etc.

Special provision for the Rural areas

Regulatory Milestones

1910 1948 1975 1998 2003

IE Act ES Act EA Central Utilities ERC ACT

British India-

agglomeration of provincesIndian Union

Isolated Private LicenseesIsolated

SEBs

Regional

SystemCentral Utilities Central Utilities, IPPs,

CTU, SEBs

Early British Model State Govt Central Govt Regulator

Country

Status

Sectoral

Makeu

p

Institutional

Structure

Electricity Regulation in India

This Act seeks to consolidate

The laws relating to generation, transmission, distribution, trading and useof electricity

Taking measures conducive to development of electricity industry,promoting competition

Protecting interest of consumers and supply of electricity to all areas, Rationalization of electricity tariff ensuring transparent policies regarding

subsidies

Promotion of efficient and environmentally benign policies Constitution of Electricity Regulatory Commissions to rationalize electricity

tariff and establishment of Appellate Tribunal and for matters connected

Electricity Act, 2003 - enacted June 10th 2003, envisages development in an open, nondiscriminatory, competitive, market driven environment in the interest of the consumers/ suppliers of power

Legal Framework

Electricity Act-2003

Objectives of

Electricity Act

2003

Liberal Framework

Competitive Environment

Private Investments

DelicensesGeneration

Rural Distribution Delicenced

Controlling Theft of

Electricity

Restructure Electricity

Boards

Regulatory Commission/

Appellate Tribunal

Open Access

Trading

Competitive Bidding

Industry Structure After Electricity Act 2003

National Electricity Policy and Plan

Central Govt. to prepare National Electricity Policy and TariffPolicy in consultation with State Govt. and CEA Feb 05

National Electricity Plan for a period of 5 years issued by CEAin accordance with National Electricity Policy Aug 07

National Policy on rural electrification including stand alonesystems (including renewable and non-conventional energysources) to be issued by Central Government in consultationwith State Government Aug 06

Policy for electrification and distribution in rural distributionPanchayats, Co-operatives, NGOs, franchisees

Rule Making through Notifications for carrying out various provisions of the Act

Powers to issue directions to the Regulatory Commissions on issues involving public interest

Role of Government

Total village electrification by year 2010

By year 2012 :

Per capita availability 1000 units

Installed capacity over 200,000 MW

Spinning reserves 5%

Minimum lifeline consumption of 1 unit per household per day

Inter-regional transmission capacity 37,000 MW

Energy efficiency/ conservation savings about 15%

National Electricity Policy

Mandates competitive procurement of power andtransmission services transitional window of 5 years periodgiven to public sector companies

Encourage efficiency in operations by sharing of gains betweenlicensees and consumers

Promote Multi-Year Tariff (MYT) framework

Encourage loss reduction Strategies

Tariff design : Linkage of tariffs to cost of service

gradual reduction in cross subsidy (+/- 20% of average costof supply)

Progressive reduction in Cross-subsidy surcharge for openaccess

Tariff policy - Jan 06

Tariff Principles

o Electricity Provides consumers with the ability torealize numerous conveniences in their everydaylives

One does not buy electricity as an end product

o One buys electricity as an input which is then utilizeto produce consumable goods or services or to enjoydomestic comforts

Features of Electricity

23

Electricity is different from other commodity

o Electricity is not Visible

o It can not be touched

o It can not be stored

o Production & Consumption of

electricity inseparable

o Can only be sent through wires

o Travels at a speed of light

o Can not carry a brand mark

o Transfer of ownership is not possible

o It obeys laws of physics

o Electricity has demand side flaws

Features of Electricity

24

Tariff should provide correct pricing signals toinvestors as well as consumer

Protection of consumer interest and alsoinvestors risk by Stable and predictable over aperiod of time

Appropriate incentive for efficiencyenhancement and rational use of energy bysuppliers and consumers

Tariff Principles

25

Economic conservation of societal resources,i.e. scarce national economic resources mustbe allocated efficiently

Socio-economic need of the country, i.e. tariffmust be made affordable to all sectors of theeconomy and minimum level of service evento the low income group of the society

Transparency and simplicity in determinationof tariff

Encourage market determination of prices

Tariff Principles

26

Institutional Arrangement Options

Government monopoly

Private monopoly without regulation

Private monopoly with (National, Regionalor Local) regulation

Two Basic Regulatory Forms

Rate-of Return (ROR) also known as Cost-of-Service (COS)

Performance Based Ratemaking (PBR)

Tariff Principles

27

In ROR regulations, role of regulation is toencourage enough investment to meetcustomer demand and to compensate investorswith a reasonable rate of return

Under ROR or COS regulation, regulatordetermines The value of invested capital The allowed rate of return on invested capital Appropriate expenses

Required Revenue = Expenses + {allowed rateof return x (Allowed Investment)}

Tariff Principles ROR

28

Performance Based Ratemaking (PBR) orincentive regulations sets performance targets -both operational and financial for utility

The return to the utility depends uponperformance, over achievement of theperformance criteria can increase returns for theutility while underachievement will decreasereturns

"Light Handed" regulation i.e. least interferenceby the regulators

Tariff Principles PBR

29

Establishment of extensive data base forbenchmarking performance criteria on the basisof industry best practices, historic data etc. areessential component for effective regulationunder this method

A form of PBR is in actual use in India, wheretariffs are based on normative parameters

PBR weakens the link between a utilitysregulated tariff and its costs by increasingregulatory lags which also provides incentivesfor cost reduction

Tariff Principles PBR

30

Regulation is intended to serve as an offset tothe monopoly situation

Regulatory agencies are charged withresponsibilities to balance the interest of bothcustomer and utility

Regulation strives to keep price as low aspossible for consumers while allowing theutility to earn a fair return on its investment

Tariff Principles

31

To achieve this balance, regulator generallyoperate from a position that prices should bebased upon costs

o Cost plus mechanism

To bring accountability and performanceenhancement PBR element is introduced in thecost plus structure

Electricity Pricing

32

Power Tariff Evolution In India

Single part Two part- K P Rao

ABTMarket Based

Mutually Agreed Govt. of India

Regulatory Commission

Evolution of Power Tariff

Competitive Bidding

34

Pricing of power prior to 1992 in India

The rate of power was fixed by GOI on the basis of

reasonable ROE at the then operating PLF level

Both Fixed Charges and Variable Charges realized in

one part as energy charge Existed before NTPC

Initially adopted for NTPC

The rates were very liberal and in favor of generators

Tariff was not related to availability or frequency

Calculated so as to cover both the fixed cost as well as

variable (energy) cost at a certain (normative)

generation level

Single Part Tariff

35

Single Part Tariff

36

Single Part Tariff was conducive neither toeconomic generation of power and itsabsorption by boards as per merit order, nor tosatisfactory operation of regional grid

Distorts Economic Dispatch (Merit Order Operation)

SEBs found that total cost to be paid to GENCOswas higher than the marginal cost of theirstation

Under drawal accrues monetary benefit tobeneficiaries

Shortcomings of Single Part Tariff

37

With Actual Generation Level much higher thannormative, collection of fixed charges was muchhigher than the fixed charges agreed

GENCOs resorted to dumping power even whenfrequency was high

Led to sharp difference between Central SectorGencos & SEBs on who should back down

Shortcomings of Single Part Tariff

38

The Central Government constituted a Committee in 1989 togo into the issues of Power Sector and recommend a tariffstructure

The Committee submitted its report on Principles and Normsfor Tariff Fixation of Central Sector Generating Stations inJune 1990

GOI adopted a Two Part Tariff formula for NTPC stations in1992 based on K. P. Rao Committee recommendations

Fixed Charges and Variable Charges computed separately

Fixed Charges compensate for the cost of capacity,including investment cost

Variable Charges compensates for cost of energy

Laid down fairly sound costing principles

K. P. Rao Committee

39

Fixed charges Return on equity O&M charges Interest on loans Interest on working

capital Depreciation

Variable Charge Primary fuel (Coal/Gas) Secondary fuel Oil

Recovery of charges Fixed charges recoverable at

62.8% PLF (i.e. actual generationplus deemed generation)

Incentive at the rate of 1paisa/kWh for every 1% increasein PLF above 68.5%

Disincentive at graded reductionin fixed charges below 62.8%subject to a minimum of 50% offixed charges at nil generation

Fixed charges and incentives/disincentive are paid bybeneficiaries in proportion totheir energy drawals

Variable charges in paisa/kWhsubject to fuel price adjustment

Recommendations

40

Two Part Tariff

41

Did nothing for promoting grid discipline Low frequency during peak hours High frequency during off-peak hours Rapid changes in frequency and fluctuating voltages

Reasons K. P. Rao Committee tackled only Central Generating Stations Conflicting commercial interest of stakeholders- SEBs/CGS 50% FC is assured to generating stations even at 0% PLF Lack of generating capacity and transmission systems No penalty for jeopardizing the GRID Over-drawals by SEBs during peak-load hours and under-

drawals during off-peak hours continued unabated, causingserious frequency excursions

Shortcomings of K. P. Rao

Committee Recommendations

42

SEBs/CGs have conflicting commercial interests

Absence of direct incentives or penalties to control this

Lack of generating capacity and transmission systems

One SEB suffers for nonperformance of other

Off-Peak

Peak

Did not encourage grid discipline

43

Problems in grid operation

Load

(MW)

Time (hours)

Low frequency:

48 48.5 Hz

Off-Peak

Peak

High frequency:

50.5 51 HzRapid change:

1 Hz in 5 10 minutes;

many hours everyday

1 2 3

Frequent grid disturbances:

Generator tripping, supply interruptions,

grid disintegration

4

Freq.

(Hz)

44

The Central Government considered further structuralreforms in bulk power and transmission tariff to inducebetter system operation and grid discipline through amechanism of commercial incentives and disincentives

M/S ECC of USA were commissioned under a grant fromADB to undertake comprehensive study of Indian powersystem and recommend a suitable tariff structure

ECC submitted its report in February, 1994, recommendedAvailability Tariff for generating stations, which wasaccepted in principle by GOI in November, 1994

A National Task Force (NTF) was constituted by MoP inFebruary, 1995 to oversee the implementation of ECCsrecommendations

Based on NTF deliberations between 1995 and 1998, MoPnotified a draft notification of ABT in 1999

Availability Based Tariff

45

Electricity Regulatory Commissions Act, 1998 Providesfor establishment of CERC at Central level and SERC atState levels

CERC was formed in May,1999

Date of implementation of ABT

oWestern region: 1.7.2002

o Northern region: 1.12.2002

o Southern region: 1.1.2003

o Eastern region: 1.4.2003

o North Eastern region: 1.11.2003

Availability Based Tariff

46

ISGS 500 MWe

Aux

30 MWe

470 MWe ex-bus

SEB1 SEB2

loss is distributed to

all the constituents in

proportion to

schedule

o Installed Capacity

o Aux Power (%)

o Declared Capability

o NAPAF (%)

o Scheduled Generation

o AFC (Rs.)

o ECR (Rs./kWh) on ex-bus basis

o GHR (kcal/kWh)

Relevant Terms

47

Auxiliary power consumption or AUX is the quantum of energyconsumed by auxiliary equipment and transformer losses withinthe generating station, expressed as a percentage of the sum ofgross energy generated at the generating terminals of all theunits of the generating station

Declared capacity (DC) means the capability of the generatingstation to deliver ex-bus electricity in MW declared by theGenco in relation to reference period considering availability ofFuel/ water

Plant Availability Factor (PAF) means the average of the dailydeclared capacities (DCs) expressed as a % of the installedcapacity in MW reduced by the normative auxiliary energyconsumption

Scheduled Generation (SG) with reference to any period is theschedule of generation in MW ex bus as given by Load DispatchCentre

Some Definitions

48

Gross Station Heat Rate means the heat energy inputin kcal required to generate one kWh of electricalenergy at generator terminals of a thermal generatingstation In case of coal stations:

(i) Coal consumed in kg/kWh is converted into kcal bymultiplying with GCV of coal

(ii) Heat due to oil consumption in kcal

Gross Calorific Value means the heat produced inkcal by complete combustion of one kilogram of solidfuel or one litre of liquid fuel or one standard cubicmeter of gaseous fuel, as the case may be;

Some Definitions..

49

For Thermal generating station

o Capacity Charge (for recovery of annual fixed cost)linked to availability and are recovered at Normativeavailability & pro-rata recovery below norm

o Energy charges (for recovery of primary fuel cost)linked to scheduled generation and are based onactual fuel cost and normative operating parameters

o UI charges (real time pricing) are linked to frequencyand are levied on deviations from schedules

Components of Tariff

50

UNSCHEDULED INTERCHANGE (UI) CHARGES

o Variation between actual generation or actual drawaland scheduled generation or scheduled drawalaccounted for through Unscheduled Interchange (UI)Charges

o UI for a generating station shall be equal to its actualgeneration minus its scheduled generation

o UI for a beneficiary shall be equal to its total actualdrawal minus its total scheduled drawal

o UI worked out for each 15 minute time block

o Charges for all UI transactions shall be based onaverage frequency of the time block

Availability Based Tariff concept

51

Unscheduled Interchange (UI)

Charges

Frequency (Hz)

UI C

ha

rge

s (

Pa

isa

)

52

Gen

Beneficiary

Load

Import = Load - Gen

For beneficiary: UI = Import Scheduled drawal

For CGs: UI = Actual sent out Scheduled generation

UI Charges

53

Encourage merit order

generation

Save natural resources

Help protect environment

Establish a level playing field

for all the constituents

No conflicting commercial

interests

Ensure grid stability

Protect equipments

Gen

Beneficiary

Load

Import = Load -

Gen

States additional power

requirement can be met by its

reserved generating stations

(DG, Pump storage, GT etc. or

import from CGs)

ABT Rational Tariff Structure

54

Energy is metered in 15 min Time Block

UI (Metered Scheduled) energy payments are made into and

from UI pool account operated by the concerned RLDC

Deviation from Schedule

55

Decentralised Scheduling

Availability

DeclarationEntitlements

S

L

D

C

Requisition &

Bilateral Agreements

Injection Schedule Drawal Schedule

Revision in DC Revision in Requisition

Final

Injection ScheduleFinal

Drawal Schedule

08:00

10:00

15:00

18:00

22:00

23:00

R

L

D

C

I

S

G

S

Time

Revisions during

Current dayRevisions during

Current day

0 to 24

hours 56

The station foresees a capability to deliver 900 MW(ex-bus) on the next day, and advises the same to theRLDC by 8 AM

The RLDC would break it up, and advise the SLDCs by10 AM that their entitlements in the CGS for the nextday

Entitlements in the other Central stations would alsobe advised by RLDC to the SLDCs similarly

Simultaneously, the SLDCs would receive availabilitystatus from their intra - state stations as well

Day by Day Scheduling

57

They would then carry out a detailed exercise as tohow best to meet the expected consumer demand intheir respective States

For this, they would compare the variable costs ofvarious intra - state power stations, and with energycharge rates of the CGS

The total dispatch schedule for the CGS of 900 MWduring the day time and 740 MW during the nighthours

Daily Scheduling Process

58

This would be issued by the RLDC by 5 PM, andwould be effective from the following midnightunless modified in the intervening hours

States A, B and C shall pay CC for the whole daycorresponding to DC of 270, 270 and 360 MW andthe GS would get CC corresponding to 900 MW

EC payments by the three States would be for 270 x24 MWh, 270 x 24 MWh, and (200 x 24 + 160 x 16)MWh at the specified EC rate of the generatingstation

Daily Scheduling Process

59

Daily Scheduling Process

60

The two areas marked X represent the off-peak

hour capability of the Central generating station

Back down the station during off-peak hours

The station gets CC for the day corresponding to

its DC (900 MW), and EC to fully recover its fuel

cost for generating the scheduled quantum of

energy

Options for Generating Stations

61

Find a buyer (other than State - C)

As long as the energy sale rate agreed upon ishigher than the fuel cost per kWh of the station

It would also reduce the technical problemsassociated with backing down of the station andimprove the stations efficiency

The agreement has to be non-firm or interruptible

Low price

Trading Opportunity for Generating

Stations

62

The station may accept the schedule given by the

RLDC, but generate power to its full capability of

900 MW even during off-peak hours

Earn UI*

Options for Generating Stations

63

The options for the generating station arise only in case

a State has not requisitioned its full entitlement

In fact, the same three options are available to State-C,

before they get passed on to the Central station

Requisition power from the Central station only as per

its own requirement, and draw power as per the

resulting schedule

Options for States

64

Requisition full entitlement of 360 MW from the

Central station for the entire 24 - hour period, find a

buyer for the off-peak surplus, and schedule a

bilateral sale

This would make sense as long as the sale rate

per kWh is more than the energy charge rate of

the Central station

Trading Opportunity for States

65

Requisition the full entitlement for the entire 24 -

hour period, but draw power only according to its

actual requirement

Earn UI*

Availability of various and similar options, both for

the beneficiaries and for the generating companies,

means that the mechanism is sound and equitable

Options for States

66

A frequency pattern would emerge depending on the daily

profile of the total system load and the generation mix

The corresponding UI rate profile shall reflect the daily pattern of

the system marginal cost

System Marginal Price Pattern

67

Frequency (Hz)

UI

rate

pa

ise

/kW

h

0

100

200

300

400

500

600

700

800

900

1000

279, 49.92132, 50.04

LC PH

Un

it lo

ad

(%

)

States marginal gen cost will move down towards the

prevailing UI rate

Gen station will maximize its gen as long f < its threshold f

UI Rate Vs System Marginal Cost

68

0100

200

300

400

500

600

700

800

900

1000

49.50

49.52

49.54

49.56

49.58

49.60

49.62

49.64

49.66

49.68

49.70

49.72

49.74

49.76

49.78

49.80

49.82

49.84

49.86

49.88

49.90

49.92

49.94

49.96

49.98

50.00

50.02

50.04

50.06

50.08

50.10

50.12

50.14

50.16

50.18

50.20

50.20

Frequency Based Dispatch

69

70