Terms and Conditions of Tariff

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Terms and Conditions of Tariff

• MPERC Comments on CERC Discussion Paper

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In this presentation

• Market Development
• Transmission and wheeling charges for
  Transmission Lines
• Transmission and wheeling charges for
  Inter-regional Lines
• Tariff Setting
• Rate of return methodology
• Depreciation
• Development Surcharge
• Rate base
• Interest on working capital
• Operational norms
• Other Discussion Points

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Market Development
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Market DevelopmentTransmission and Wheeling
Charges

• Pan Caking (2.3.3.2)
• Definition Term used to describe stacking up of
  charges in a transmission system due to repeated
  application of charges for different regions

• Mechanism of charging
• Original Beneficiaries cover full cost
• Reimbursed by income from Open Access Charges and
  from Traded Power

• Comments
• Expansion of network should be done on the basis
  of a Long-Term Transmission Capacity Demand
  Forecast (Example 7-Year Plan in UK)
• Commission must regulate the level of investment
  by CTU / STU and ensure that it is at a certain
  margin above strictly required.

• Implications
• Increase in the landed cost of power
• Discouragement to inter regional exchange of power

• Comments
• Open Access mechanism of Regional Incremental
  Postage Stamp

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Market DevelopmentTransmission and Wheeling
Charges for Inter-Regional Lines

• Sharing of Income from Open Access / Traded Power
• Should be adjusted on a monthly basis
• Should be returned to Firm Users in the
  proportion of costs paid in that month

Charging of Fixed Costs

• Present system of sharing of costs of
  Inter-regional assets is 5050 between Regions.
• Method of charging should be changed to allocated
  usage basis.
• Provisional fixed costs may be charged based on
  Allocation of Capacity in Agreement between CTU
  and Beneficiaries
• Adjustments to be made at the month-end based on
  actual allocation. These adjustments may be
  billed in next months bill

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Tariff Setting
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Tariff SettingRate of Return

• ROCE, ROE and Return on Debt

• Existing methodology
• Cost-plus approach

• ROE
• Interest rates have reduced
• Escrows and LCs are established
• Suggestion Government Bond Return 5 say 11
• Margin to cover
• Risk premium
• Investment incentive
• Return on Debt _at_ PLR
• Normative Debt Equity Ratio 8020
• ROCE 1180/100 1120/100 11
• Annual revision, retrospective-forward
  compensation or through VCA

• Options
• ROE
• Return to equity investment is measured
• ROCE ( ROI)
• Return on total investment is measured
• Measured against WACC
• Incentive for optimization by financial
  engineering / refinancing incentive to
  investors
• No FERV
• Beneficial to consumers
• ROCE may be adopted

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Tariff SettingDepreciation, Development Surcharge
Depreciation
Development Surcharge

• Purpose of depreciation
• Wear and tear
• Repayment of loan
• Comments
• Allow to explicitly charge loan repayment
• After full loan repayment, balance depreciation
  may be charged on SLM till useful life of the
  plant
• Develop norms for loan repayment
• Rate PLR
• Term of loan Moratorium Minimum 10 years
• Buyers must be protected by ensuring term of PPA
  is for the fair life of the plant. If such an
  assurance is not given, then depreciate at the
  current rates

• There should not be any such surcharge on the
  beneficiaries for the purpose of creation of
  corpus for investment in generation
• Reasonable return is being provided

• Instead, a Developmental Charge may be levied for
  a "Universal Service Obligation" Fund
• USO Fund can be used for improving access to all
• Rural electrification programs
• Promotion to non-conventional sources
• Off-grid generation

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Tariff SettingRate Base, Interest on Working
Capital

• Rate Base
• Asset-side NFA approach

• Interest on Working Capital
• Allow interest portion as pass-through on net
  Normative Working Capital
• Net of working capital may be derived after
  deduction of fuel costs

• Initial Capital Expenditure
• Initial Capex
• In case a prior order exists As per the order
• In case prior order does not exist Should be
  determined by competitive bidding.
• Norms must be developed by the CERC / CEA for
  setting up of projects for quality of equipment,
  costs, gestation, competitive bidding processes
  for EPC etc
• Additional Capex
• Allow subject to prior approval by the CERC
• Or, norms may be developed for this

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Tariff SettingOperating Norms

• Operating Norms
• Define operational norms this should consider
  technology in place, inflation, age of the plant
  / equipment

• Generation Gross Calorific Value
• Price of coal is notified based on UHV and coal
  consumed is determined based on GCV
• There is a need of fixing norms for linking UHV
  with GCV.
• Norms for stacking and transit losses should also
  be fixed based on transport mode and distance

• Operation and Maintenance Expenses
• Pass-through on actuals subject to a limit as a
  percentage of capital costs
• Allow a portion of the savings to be retained

• Generation Specific Oil Consumption
• Norms should be reduced to 2 ml/kwh from the
  current 3.5 ml/kwh if the target PLF is above
  normative
• At low PLF Specific Oil Consumption is higher to
  keep the furnace stable. Higher Sp.oil
  consumption can be allowed at low targeted PLF

• Generation SHR
• Should be linked with guaranteed heat rate. A
  reasonable margin should be provided above this
  which should keep in view the age of the plant

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Other Issues
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Other Issues

• Tariff Period
• MPERC suggestion
• 5-year period, which is a business planning cycle
• May be reviewed before in case of drastic change

• Peak and Off-peak Tariff for Hydel
• MPERC suggestion
• Apply to depreciated hydel plants for peak period
• Off-peak tariff need not be changed
• Surplus income may be paid into a "Universal
  Service Obligation" fund for to provide access to
  all

• Declared Capacity
• Current Definition / Analysis
• One MWh ex-bus capacity
• Scheduling is on MW basis
• MPERC suggestion
• Change definition to MW basis

• Single Regional Tariff
• MPERCs views
• Promotes generation from lower cost stations,
  since they now earn more, but an expensive
  generator will not generate
• Not recommended
• Individual tariff setting is preferable

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Other Issues

• Auxiliary Consumption
• Current

• Proposed

• MPERC suggestion
• Do not adopt the proposed change. A change will
  result in beneficiaries bearing the cost of
  losses between switchyard and bus

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MPERC
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Pan caking
Exporting Region
ER
Rourkela
Raipur
Chandrapur
SR
Ramagundam
TNEB
Selling price 200 P/U Landed cost 255
P/U Thus, pan caking is a major disincentive to
inter regional sale
Numbers are purely for the purpose of
illustrating the concept and may not be correct
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Transmission / OA Charges Inter-Regional Lines
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Tariff SettingOperating Norms