CERC%20Terms%20and%20Conditions%20of%20Tariff

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CERC Terms and Conditions of Tariff

• This presentation will only highlight the
  relevant financial principles and operation
  norms. APERC would like to put forward for the
  consideration of CERC in the Policy paper to be
  issued on Terms Conditions of Tariff
• Written response was sent to the Commission vide
  letter APERC/SECY/D.No. CERC-3/2003- 2.8.2003
• The norms are based on the experience of APERC,
  however ERCs are open to improve these norms

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Clarification on Intervening Transmission
facilities

• View of CERC is sought on intervening
  transmission facility and why a separate
  treatment has been provided for in the Act when
  there is open access.

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Financial Principles
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Tariff Setting Financial Principles

• Advocates forward looking principles
• The rate of return must be commensurate the risks
  involved in the business and the macro economic
  environment.
• Moving forward is critical
• Compensate the developer for the risks incurred
  by allowing a margin over and above the current
  bank rate. The margin be open for negotiation.
• The consumer to benefit from prevailing falling
  interest rate regime.

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Tariff Setting Financial Principles

• Cost of Capital
• CERC to determine the rate base (either debt or
  equity or both) for computing returns
• Interest shall be benchmarked to Prime Lending
  Rate plus debt margin to reflect credit
  worthiness
• Return on Equity shall be pegged at Bank Rate
  plus a margin to reflect the investment risk in
  the power sector
• Foreign Exchange Risk Variation
• Foreign component may be converted into rupee
  terms at the Commissioning date

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Tariff Setting Financial Principles

• APERC accepts the suggestion of CERC that ROCE
  can be evolved by bench marking the debt equity
  ratio.
• Debt to be pegged at PLR margin
• Equity to be pegged at Bank Rate margin
• The return should recognize the concept of time
  value of money and it should be ensured that only
  the approved return (IRR) should be permitted to
  the investor on annual basis
• This should be applied uniformly for existing and
  new generation projects.

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Tariff Setting Financial Principles

• Depreciation
• Depreciation rate should be linked to the life of
  the asset
• To avoid front loading of tariffs by way of
  advance against depreciation, benchmarking the
  term of debt (12 yrs as followed earlier by CERC)
  could be considered, irrespective of tenure of
  debt.
• The current practice of Short-Term Loans being
  utilised for funding the assets needs a re-look.
  
• To explore Rolling of Debt by way of Call and
  Put options should be encouraged.
• Treatment of Tax
• Post Tax return shall be provided to protect the
  investors from changes in the law of land
• However, adjustments shall be made in the revenue
  requirement to reflect actual outflow of taxes
  paid.

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Tariff Setting Financial Principles response to
specific suggestions

• CERC Suggestions
• Aggregated rate base v/s disaggregated Rate Base
• Initial capital expenditure will be the capital
  cost
• Norms on capitalized initial spares as a
  percentage of approved project costs or actual
  expenditure whichever is lower.

• APERC Response
• Aggregated rate base total Fixed assets as per
  the balance sheet, less assets not related
  regulated business.
• Initial capital expenditure will be the capital
  cost. But preferable to to include township
  rather than take it as additional capital
  expenditure. Maintenance of Asset Register
  should be mandatory.
• Capitalizing of initial spares should be allowed
  on recommendations by the expert group

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Tariff Setting O M

• For new projects, the current CERC norm of OM be
  capped at 2.5 (Thermal) and 1.5 (Hydro) of the
  approved project cost at the start of a control
  period may be continued. The same may be
  reviewed at the end of the control period to
  check if the level of O M expenses.
• For existing projects the OM cost for the first
  year of control period should be based on the
  average annual actual expenditure (excluding
  abnormal expenses) for the past five years.
• The existing formula for escalation (60 WPI and
  40 CPI) be continued for the generation sector.
  For transmission sector the CPI weight age may be
  increased.
• Benchmarking the OM expenditure to the approved
  project cost and in a situation of the project
  being awarded through competitive bidding route
  reduces the risk of over capitalisation. OM
  being computed based on macro numbers like RS Crs
  per MW etc will not provide a true reflection of
  the project cost and instead might involve many
  assumptions like separate numbers based on the
  fuel type, type of hydro project etc.

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Tariff Setting Working Capital

• Continue with the existing arrangement. Some of
  the Electricity Boards made have made the point
  that working capital should not include one
  months OM expenses. But the existing procedure
  of offering rebate of 2.5 for payment through LC
  and 1 for payment within the due date addressed
  this issue.

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Tariff Setting Development Surcharge

• There is no linkage between development surcharge
  and depreciation as the latter is meant to
  compensate for the wear and tear of existing
  projects and at best the repayment of loans.
  Whereas the development surcharge is intended to
  be used for setting up Central Generating
  Projects in future.
• In future with the liberalisation of the
  generation sector (and consequent availability
  from IPPs and state generation) the requirement
  of power from Central Generating Stations may be
  reduced. Hence blocking the funds through such
  contributions will further deteriorate the
  financial health of the Utilities.

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Tariff Setting Control Period

• The tariff period may be kept as five years with
  a provision for review of the norms during the
  period to reflect improvements in technology and
  general macro economic environment.
• However any changes in the norms must only be
  done with prospective effect.
• The tariff for generation should be station
  specific.

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Tariff Setting Availability Based Tariff

• The implementation of separate tariffs for peak
  and off peak generation will be contingent upon
  the metering infrastructure, the ability of the
  constituents to manage their respective demand
  and also its co-ordination with ABT regime.
  Given the nascent stage of implementation of the
  ABT regime it is advised to have time
  differentiated generation tariffs at a later
  date.
• The capacity should be declared ex-bus in MW
  terms
• The auxiliary energy consumption should not
  include the supply for construction power and
  residential townships and must be computed
  station wise.

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