Forum of Regulators

Department of Industrial and Management Engineering

Indian Institute of Technology Kanpur

3rd Capacity Building Programme for Officers of Electricity Regulatory Commissions

23 – 28 August, 2010

Distribution Tariff Determination and Rationalization

Anand KumarMember, UERC

TODAY’S TOPICS

• Legal Provisions

• Guiding Principles for Tariff determinations & Filing Procedures

• Norms for ARR fixation

• Tariff Determination for Distribution Business

• Key Issues in tariff Rationalization

• Next step - MYT

• Section 86 of the Electricity Act, 2003 stipulates that the State Commission shall determine the tariff for GTD.

• Section 61 of the Electricity Act, 2003 states that the Commission shall specify the terms and conditions for the determination of tariff.

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LEGAL POSITION-Electricity Act, 2003

• SERC to be guided by:-

a) Central Electricity Regulatory Commission’s principles

b) Business to run on commercial principles;

c) factors to encourage competition, efficiency, economical use of the resources, good performance and optimum investments;

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LEGAL POSITION-Electricity Act, 2003

d) Safeguarding of consumers' interest e) recovery of the cost of electricity in a reasonable

manner;f) Multi year tariff principles;g) tariff progressively reflects the cost of supply of

electricity and also, reduces and eliminates cross-subsidies within the period to be specified by the appropriate Commission;

h) The promotion of co-generation and generation of electricity from renewable sources of energy;

i) The National Electricity Policy and Tariff Policy.UERC 5

ELECTRICITY ACT, 2003

LEGAL POSITION-NATIONAL TARIFF POLICY

• RECOVERY OF COST OF SERVICES & TARGETTED SUBSIDIES

• TECHNOLOGY DEVELOPMENT AND R&D

• COMPETITION AIMED AT CONSUMER BENEFITS

• FINANCING POWER SECTOR PROGRAMMES INCLUDING PRIVATE SECTOR PARTICIPATION

• TRANSMISSION & DISTRIBUTION LOSSES

• ENERGY CONSERVATION

• PROTECTION OF CONSUMER INTERESTS AND QUALITY STANDARDS

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PROCESS FOR TARIFF DETERMINATION

• FILING OF ARR

• ADMISSION

• PUBLICATION

• PUBLIC PROCESS

• CONSULTATION

• TECHNICAL SESSIONS

• ISSUE OF ORDER

• PUBLICATION OF TARIFF

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TERMS AND CONDITIONS IN REGULATIONS

1. Schedule and procedure of filing ARR and tariff application.

2. Methodology of estimating sales forecast, energy losses and availability of power.

3. Principles for projecting annual expenditure

4. Forecasts of expected revenue from sale of power and other non-tariff revenues.

5. Revenue gaps and methods to bridge the gap.

6. Tariff proposals. UERC 8

NORMS FOR DETERMINATION OF DISTRIBUTION TARIFF (I)

Particulars NORMSSales Forecast •Consumer category wise on past trends.

•On monthly basis to capture seasonality in demand.•For unmetered category as per the norms approved by the Commission from time to time.

Energy Loss •Difference between energy injected and the energy sold or delivered.•Segregation into technical and commercial loss.•Targets for loss reduction by the Commission.

Energy requirement for State

Derived from sale forecast and target loss level

Availability of Power

•From CGS on the basis of the allocated/unallocated capacity, or likely availability projected by generators and historical data, PLF/generation targets fixed by CEA.•From other sources depending on licensee’s banking agreements and other agreements for purchase of power.

Cost of Power Purchase

Merit order principle for estimating cost of purchased for meeting requirement from available sources.

Employee Costs/A&G expenses and R&M expenses

Shall be calculated on the basis of historical costs and prevailing norms with appropriate validated changes subject to prudence check by the Commission.

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NORMS FOR DETERMINATION OF DISTRIBUTION TARIFF (II)

Particulars NORMS

Bad and Doubtful Debts

Shall be allowed only if it is within the norms fixed by the Commission and to the extent the licensee has identified and actually written off the bad debts according to a transparent policy approved by the Commission.

Capital Cost As is incurred or proposed to be incurred with the approval of the Commission shall be considered for the purposes of tariff.

Debt-equity Ratio & RoE

Shall be 70:30 as on CoD, where equity includes all external and internal resources actually utilised for meeting part of the capital expenditure and forms part of the approved financial package. Return @ 14% on equity base.

Working Capital

As per the norms linked to O&M expenses, collection inefficiencyand receivables for a period equivalent to the billing cycle plus one month adjusted for security and credit given by suppliers.

AAD Will be limited to loan repayment amount subject to a ceiling of1/10th of loan amount less depreciation.

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NORMS FOR DETERMINATION OF DISTRIBUTION TARIFF (III)

PARTICULARS NORMS

Revenues Comprising of revenue from forecast sale of power to each category of consumers, non-tariff income and other revenues from subsidies/grants

Revenue gap •Difference between expenditure and the projected revenue. •To be bridged by measures such as improvements in efficiency, utilisation of reserves, tariff changes, etc. As may be approved by the Commission.

Taxes/cess/duty Recoverable directly from the beneficiaries.

Cost standard & rationalisation of tariff

•Tariffs for various categories to be benchmarked and shall reflect progressively the cost of supply.•Suitable mergers of categories and sub-categories to evolve a simple, easy to comprehend and logical tariff structure.

Peak and off-peak tariffs

Differential tariff for peak and off-peak hours may be designed to promote demand side management.

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TARIFF RATIONALIZATION

– Approach adopted by SERCs.Ø Role of Regulators is critical in a natural monopoly

and under evolving market in competitive forces.

Ø Average cost or marginal cost

Ø Average cost a pragmatic approach

KEY ISSUES

– Recovery of prudent cost

– Minimizing the gap between tariff and cost.

– Effective subsidy allocation

– Simplifying slab structure.

– Reducing cross subsidy.

– Rationalization and simplification of tariff

– Functional incentives and penalties.

COST OF SERVICE

– Cost of supply depend on load factor, voltage and technical and commercial losses, peak contribution etc.

– It can be voltage wise or average.

– Marginal cost.

CROSS SUBSIDY

– As per National Tariff Policy, tariff and cost gap should not be plus minus 20%

– Minimum tariff should not be less than 50% of the cost

SIMPLIFICATIOIN OF SLAB STRUCTURE

– Economic Support for lifeline consumers.

– Encourage efficient consumption

TARIFF RATIONALIZATION

– Two part tariff

– kVAh based tariff

– Voltage wise tariff

– Time of day tariff

– Incentive

– Penalties

– Unmetered tariff

– Reliability charges

LEGAL POSITION ON MYT

• Section 61 of EA, 2003 - SERC to be guided by MYT principles while specifying terms and condition for tariff determination.

• Tariff Policy- MYT to be adopted from April 2006. Control period to be 5 years. Initially 3 years can if data uncertainty is there for T&D business. Initial starting point for trajectory can be relaxed not desired level.

Status of MYT in India

• Maharashtra, MP, ND, AP, Kerala, Gujarat, Karnataka, WB, Chhattisgarh, Rajasthan- MYT

• MYT Orders Issued• From 2006-7 and 07-08• Control Period 3 years• Periodicity of Tariff-Annually

MYT FEATURES

Ø Multi Year Tariff (MYT) framework is an important structural incentive

ü To minimize risks for utilities and consumers,

ü Promote efficiency and rapid reduction of system losses.

ü It would serve public interest through economic efficiency and improved service quality.

MYT FEATURESØ MYT framework to be adopted for any tariffs

to be determined from April 1, 2006

Ø The framework should feature a five year control period.

Ø Initial control period of 3 years duration for transmission and distribution

Ø Assumption to be stated in first control period in case of unreliable data and start fresh control period on availability of reliable data.

MYT FEATURESØ In case operations found much below the

norms for many previous years the initial starting point in determining the revenue requirement and improvement trajectory should be recognized at relaxed levels instead of desired levels.

Ø Focus on Regulation of output and not on input cost element once revenue requirement is established at beginning of control period.

Ø Uncontrollable costs should be recovered speedily to ensure that future consumers are not burdened with past costs.

Guiding Principles for MYT Framework

• Control Period- Normal control period of five (5) years.

• Base Year- Financial year immediately preceding the first year of the control period

• Norms of operation to be ceiling

Ø The norms of operation specified in the Regulations are ceiling norms .

Ø The norms of operation shall not preclude the Commission from stipulating or the Generating Company/Licensee and the Beneficiaries from agreeing to improved norms of operations.

Guiding Principles for MYT Framework

• Specify Trajectory for certain variables:

Ø The Commission may stipulate a trajectory for certain variables having regard to the past performance.

Ø Generating Company/Licensee shall achieve the trajectory as may be stipulated by the Commission for different performance parameters in the multiyear tariff order.

Ø The Commission shall utilize the trajectory stipulated by it for determining the Annual Revenue Requirement and Tariffs.

Guiding Principles for MYT Framework

• Treatment of Uncontrollable factors:

Ø The approved aggregate gain or loss on account of uncontrollable factors shall be passed through in the tariff as may be specified in the order of the Commission.

Guiding Principles for MYT Framework

• “Uncontrollable Factor”: shall include the following factors which were beyond the control of, and could not be mitigated by, the applicant, as determined by the Commission.

Ø Force Majeure events, such as acts or war, fire, natural calamities, etc.

Ø Change in law, judicial pronouncements and orders of the central Government, State Government or Commission;

Ø Economy wide influence such as unforeseen changes in inflation rate, market interest rates, taxed and statutory levies;

Ø Variation in fuel prices;

Ø Variation in freight rates; and

Ø Variation in power purchase expenses for the distribution licensee;

Ø Variation in number or mix the consumes or quantities of electricity supplied to the consumers.

Guiding Principles for MYT Framework….. 4/4

• Treatment of Controllable Factors:

Ø The approved aggregate loss or gains on accounts of controllable factors shall be to the account of the Generating Company and shall not be trued up.

• Controllable Factor”: shall include the following factors which under control of Licensee.

Ø Variations in capital expenditure on account of time and/or cost overrun/efficiencies in the implementation of a capital expenditure project not attributable to an approved change in scope of such project, change in statutory levies or force majeure events;

Ø Variation in performance parameters;

Ø Distribution Loss, A&G Expenses, Repair Exp

SALES FORECAST

– Sales forecast for each year of the Control Period to be made consumer category-wise and shall be based on the past trends.

– Sales forecast for un-metered consumers shall be validated with norms that may be approved by the Commission.

SALES FORECAST

– Forecasts for reasonableness based on growth in number of consumers, the connected load and the energy consumption in previous years and anticipated growth in the next year.

– Sales shall be forecasted on monthly basis for first year of the Control Period in the MYT

DISTRIBUTION LOSSES

– Distribution Loss above and up to a particular voltage level shall be calculated as the difference between the energy initially injected into the distribution system and the sum of energy sold up to that level and energy delivered to next voltage level.

– The Commission may segregate voltage-wise Distribution Loss into Technical loss and Commercial Loss.

POWER PROCUREMENT PLAN– Distribution Licensee to prepare a three (3) year

plan for procurement of power to serve the demand for electricity in its area of supply and submit such plan to the Commission for approval as part of Business Plan. The long-term procurement plan should be prepared considering the:Ø Quantitative forecast of the unrestricted demand for

electricity, within the area of supply, from each tariff category over the Control Period;

Ø An estimate of the quantities of electricity supply from the approved sources of generation and power purchase;

POWER PROCUREMENT PLAN

Ø Measures proposed to be implemented as regards energy conservation and energy efficiency;

Ø Minimum share of renewable energy percentage

Ø Requirement for new sources of power generation and/or procurement; and

Ø Cost estimates for power procurement.

AVAILABILITY OF POWER– For the ensuing year, monthly availability of

power shall be ascertained on the basis of the following:Ø From Central/State Sector Generating Stations

ü Distribution Licensee’s share in the allocated and unallocated capacity, if any, of the Station; and

ü Likely availability of energy from each generating station as approved by the Commission based on projections given the generators and thehistorical data of supply from the generators; or

ü The PLF/Generation targets for the Station fixed by Central Electricity Authority; or

ü The historical performance of the Station adjusted for any planned maintenance or shut-downs

AVAILABILITY OF POWER

Ø From other sources:

üDistribution Licensee’s banking arrangement

with any other Distribution Licensee, Board or

Trading Licensee

üDistribution Licensee’s agreement with any

other Distribution Licensee, Board, Generating

Company or Trading Licensee regarding

purchase of power

ESTIMATE OF POWER PURCHASE REQUIREMENT

– Distribution Licensee shall submit the monthly estimated power procurement quantum and cost for first year of the Control Period in the MYT Petition and for ensuing year in the APR Petitions.

– Any variation, during any quarter of a financial year, in the quantum or cost of power procured and any procurement from sources other than that mentioned in the power procurement plan approved by the Commission, in excess of five (5) percent of the quantum or cost, as the case may be, of power procurement for such quarter, as approved by the Commission in the power procurement plan of the Distribution Licensee

ESTIMATE OF POWER PURCHASE REQUIREMENT

– The Commission shall scrutinize and approve the power purchase

requirement with such modifications as deemed fit for the ensuing

year and for the tariff period under consideration.

– Where there has been a shortfall or failure in the supply of

electricity from any approved source of supply during the financial year, the Distribution Licensee may enter into a short-

term arrangement or agreement for procurement of power without

the prior approval of the Commission where tariff is determined

as under:

Ø a transparent process of bidding in accordance with competitive bidding guidelines issued by the Central Government

Ø when the tariff of such generating station has been approved by the

Appropriate Commission.

AGGREGATE REVENUE REQUIREMENT

– Aggregate Revenue Requirement should

comprise of

Ø Cost of power purchase + Return on equity

capital + Interest on loan capital +

Depreciation + Interest on working capital

and on consumer security deposits and

deposits from Distribution System Users

+Operation and Maintenance expenses;

AGGREGATE REVENUE REQUIREMENT

– Net Revenue Requirement from sale of electricity = Aggregate revenue requirement, minus:Ø Non-tariff income; Ø Income from wheeling charges recovered from open

access consumers;Ø Income from Other Business, to the extent specified

in these Regulations;Ø Receipts on account of cross-subsidy surcharge from

open access consumers; andØ Receipts on account of additional surcharge on

charges of wheeling from open access consumers.

REVENUE – DISTRIBUTION BUSINESS

– Tariff IncomeØ Income from all charges determined by the Commission for

supply of electricity by the Distribution Licensee shall be considered as tariff income.

– Other RevenueØ All revenues including charges for unauthorized use of

electricity and composition money, other than tariff revenue shall be grouped as other revenue.

– Non-Tariff IncomeØ The amount of non-tariff income relating to the Distribution

Business as approved by the Commission shall be deducted from the aggregate revenue requirement in calculating the revenue requirement from sale of electricity of the Distribution Licensee.

– Performance of Distribution LicenseeØ The quality of service provided by the Distribution Licensee

to its consumers shall be an important consideration and shall

be judged by the extent of adherence by the Distribution

Licensee to the standards of performance laid down by the

Commission.

Ø The Commission may by a separate order, lay down long term targets for technical improvement of the distribution

system like reducing transformer failure rate, reducing

voltage imbalance, reducing non working/ defective meters,

etc.

Thank You.