S D Mathur

CEO & Director

_______________________________________________________________

Preface
This background material has been developed and prepared for the forthcoming three-day
workshop on “Step-by-Step Process involved in Tariff Determination for Electricity Sector (Right
from Preparation of Tariff Petition to issue of Tariff Orders)”, keeping in mind educating and
familiarizing the technical and non-technical personnel, in the utilities and regulatory
commissions. Special focus has been given on preparation of the petition to issue tariff orders and
regulations.
We are glad to inform that now onwards Training Material/Reading Material would be provided to
all participants in an Electronic Format loaded in Pendrive.

I express my sincere gratitude and grateful acknowledgements to Shri V.P. Raja, Former
Chairman, Maharashtra Electricity Regulatory Commission (MERC), Shri V.S.Verma, Ex.
Member, Central Electricity Regulatory Commission, and Shri V.J.Talwar, Former Member,
APTEL who motivated me to take up this endeavor in the power sector, which enabled me to
acquire the knowledge and experience needed to pen down this work.

We would also like to acknowledge the relentless support and guidance rendered by Shri Anand
Kumar, Chairman Meghalaya Electricity Regulatory Commission Shillong on this initiative.

I am also deeply thankful to Mr. J.B. Poon , Secretary MSERC for enabling this workshop to take
shape. Inputs from websites of Government of India, Ministry of Power, Prayas Pune, CERC,
MERC, Shri Sudheer Karkhanis, Regulatory Expert and other blogs are gratefully acknowledged.
Thanks are also due to Mrs. Sheetal Mathur, Mr. Kshitij Mathur, and Ms. Ankita Sethi, Manager,
RMCS (Delhi Office) for their constant support, inputs and help.

Suggestions for improvement are welcome.

S.D.Mathur
CEO and Director

( Page No. 1 )
 Foreword
Electricity Regulatory Commissions are mandated to promote competition, efficiency and economy
in the power sector and to regulate tariffs of power generation, transmission and distribution with a
view to protect the interest of the consumers and other stakeholders. Discharge of such a complex
role demands a high degree of technical, legal, economic, financial and general management skills.
Collaborative learning involving officials of both regulatory commissions and utilities is the method
to achieve this.

In the Regulatory system, there is a need for dissemination of correct and authentic knowledge on
the subject of Electricity Regulations, which includes the Tariff determination to all the stake
holders. It was realized recently that such an initiative for training of officers/staff of regulatory
commissions and power utilities in North East and eastern part of India had been lacking.. I am
happy to note that the three day Workshop on “Step-by-Step Process involved in Tariff
Determination for Power Sector (Right from preparation of Tariff Petition to issue of Tariff Orders)
is being organized by Rachana Management Consultants and Studies (P) Ltd. Mumbai (RMCS)
under knowledge partnership with Meghalaya Electricity Regulatory Commission, Shillong during
April 16-18, 2015.

In this context Shri S D Mathur, Former HR Consultant MERC and now CEO and Director RMCS
has taken initiative on my behest to develop a Workshop on “Step-by-Step Process involved in
Tariff Determination for Power Sector ( Right from preparation of Tariff Petition to issue of Tariff
Orders) to enhance the knowledge and skills of power sector professionals. This reading material
covers the process of the Tariff Determination. In addition, it also covers certain historical and
contemporary facts related to power sector and the reforms there in.

I congratulate Shri S D Mathur for his contribution to this excellent publication. This reading
material would continue to serve as a useful primer for regulatory professionals.

I wish the workshop all success.

(Anand Kumar)
Chairman
Meghalaya State Electricity Regulatory Commission
Shillong
April 10, 2015

( Page No. 2 )
 Workshop on
Step-by-Step Process involved in Tariff Determination for Electricity Sector
(Right from Preparation of Tariff Petition to issue of Tariff Orders)
April 16-18, 2015
Reading Material

Table of Contents
Electricity Sector in India .............................................................................................................................. 4
Funding of power infrastructure .................................................................................................................36
Power Sector Reforms in India....................................................................................................................37
An overview on Tariff Fixation Process in the Electricity Sector ................................................................58
Tariff Policy and Procedures ......................................................................................................................74
National TARIFF POLICY ..............................................................................................................................89
Financial Principles of ARR........................................................................................................................117
Steps to be followed by UTILITIES for preparation of...............................................................................128
Tariff Petition and Submission to SERC..................................................................................................... 128
Process of Tariff Determination for Generation ......................................................................................130
Power Procurement by DISCOMs and its impact on Tariff....................................................................... 131
Availability Based Tariff.............................................................................................................................132
Power Purchase Agreement .....................................................................................................................138
Regulatory Framework & Polices for Renewables Energy........................................................................ 144
Steps to be followed by SERC for determination of Tariff and issue of Tariff Order................................145
Salient features of some key aspects involved in the tariff determination by UTILITIES and SERCs: ...... 146
The 10 Questions to be ask Series : Framework for Designing Good Electricity Policy............................149
Qualities That Make a Good Regulator/Leader ........................................................................................167

( Page No. 3 )
 Electricity Sector in India

The electricity sector in India had an installed capacity of 245.394 GW as of end April 2014, the
world's fourth largest. Captive power plants generate an additional 39.375 GW. Non Renewable
Power Plants constitute 87.55% of the installed capacity, and Renewable Power Plants constitute
the remaining 12.45% of total installed Capacity. India generated around 911 BU (911,652 MU
i.e. 911 TWh) of electricity (excluding electricity generated from renewable and captive power
plants) during the 2012–13 fiscal. The total annual generation of electricity from all types of
sources was 1053.9 TeraWatt-hours (TWh) in 2012.

In terms of fuel, coal-fired plants account for 59% of India's installed electricity capacity,
compared to South Africa's 92%; China's 77%; and Australia's 76%. After coal, renewable
hydropower accounts for 17%, renewable energy for 12% and natural gas for about 9%.

In December 2011, over 300 million Indian citizens had no access to frequent electricity. Over one
third of India's rural population lacked electricity, as did 6% of the urban population. Of those who
did have access to electricity in India, the supply was intermittent and unreliable. In 2010,
blackouts and power shedding interrupted irrigation and manufacturing across the country. States
such as Gujarat, Madhya Pradesh and others] provide continuous power supply.

The per capita average annual domestic electricity consumption in India in 2009 was 96 kWh in
rural areas and 288 kWh in urban areas for those with access to electricity, in contrast to the
worldwide per capita annual average of 2600 kWh and 6200 kWh in the European Union. India's
total domestic, agricultural and industrial per capita energy consumption estimate varies
depending on the source. Two sources place it between 400 to 700 kWh in 2008–2009. As of
January 2012, one report found the per capita total consumption in India to be 778 kWh. India
currently suffers from a major shortage of electricity generation capacity, even though it is the
world's fourth largest energy consumer after United States, China and Russia

The International Energy Agency estimates India will add between 600 GW to 1200 GW of
additional new power generation capacity before 2050. This added new capacity is equivalent to
the 740 GW of total power generation capacity of European Union (EU-27) in 2005. The
technologies and fuel sources India adopts, as it adds this electricity generation capacity, may
make significant impact to global resource usage and environmental issues.

India's electricity sector is amongst the world's most active players in renewable energy utilization,
especially wind energy. As of December 2013, India had an installed capacity of about 29.5 GW
of renewal technologies-based electricity, exceeding the total installed electricity capacity in
Austria by all technologies.

( Page No. 4 )
 According to some ambitious estimates, India has 10,600 MW of potential in the geothermal
provinces but it still needs to be exploited.

India's network technical losses are 23.65% in 2013, compared to world average of less than 15%.
The Government has pegged the national T&D losses at around 24% for the year 2011 & has set a
target of reducing them to 17.1% by 2017 & to 14.1% by 2022. A high proportion of non-
technical losses are caused by illegal tapping of lines, and faulty electric meters that underestimate
actual consumption also contribute to reduced payment collection. A case study in Kerala
estimated that replacing faulty meters could reduce distribution losses from 34% to 29%.

Key implementation challenges for India's electricity sector include new project management and
execution, ensuring availability of fuel quantities and qualities, lack of initiative to develop large
coal and natural gas resources present in India, land acquisition, environmental clearances at state
and central government level, and training of skilled manpower to prevent talent shortages for
operating latest technology plants.[14]

History

The first demonstration of electric light in Calcutta was conducted on 24 July 1879 by P W Fleury
& Co. On 7 January 1897, Kilburn & Co secured the Calcutta electric lighting license as agents of
the Indian Electric Co, which was registered in London on 15 January 1897. A month later, the
company was renamed the Calcutta Electric Supply Corporation. The control of the company was
transferred from London to Calcutta only in 1970. Enthused by the success of electricity in
Calcutta, power was thereafter introduced in Bombay. Mumbai saw electric lighting
demonstration for the first time in 1882 at Crawford Market, and Bombay Electric Supply &
Tramways Company (B.E.S.T.) set up a generating station in 1905 to provide electricity for the
tramway. The first hydroelectric installation in India was installed near a tea estate at Sidrapong
for the Darjeeling Municipality in 1897. The first electric train ran between Bombay's Victoria
Terminus and Kurla along the Harbour Line, in 1925. In 1931, electrification of the metre gauge
track between Madras Beach and Tambaram was started.

Growth of Installed Capacity in India

Installed Thermal (in MW) Nuclear Renewable (in MW) Total %

Capacity Coal Gas Diesel Sub- (in Hydel Other Sub-Total (in Growth
as on Total MW) Renewable Renewable MW) (on
Thermal yearly
basis)
31-Dec- 756 - 98 854 - 508 - 508 1,362 -
1947
31-Dec- 1,004 - 149 1,153 - 560 - 560 1,713 8.59%
1950

( Page No. 5 )
 31-Mar- 1,597 - 228 1,825 - 1,061 - 1,061 2,886 13.04%
1956
31-Mar- 2,436 - 300 2,736 - 1,917 - 1,917 4,653 12.25%
1961
31-Mar- 4,417 137 352 4,903 - 4,124 - 4,124 9,027 18.80%
1966
31-Mar- 8,652 165 241 9,058 640 6,966 - 6,966 16,664 10.58%
1974
31-Mar- 14,875 168 164 15,207 640 10,83 - 10,833 26,680 12.02%
1979 3
31-Mar- 26,311 542 177 27,030 1,095 14,46 - 14,460 42,585 9.94%
1985 0
31-Mar- 41,236 2,343 165 43,764 1,565 18,30 - 18,307 63,636 9.89%
1990 7
31-Mar- 54,154 6,562 294 61,010 2,225 21,65 902 22,560 85,795 4.94%
1997 8
31-Mar- 62,131 11,16 1,135 74,429 2,720 26,26 1,628 27,897 105,04 4.49%
2002 3 9 6
31-Mar- 71,121 13,69 1,202 86,015 3,900 34,65 7,760 42,414 132,32 5.19%
2007 2 4 9
31- 112,02 18,38 1,200 131,603 4,780 38,99 24,503 63,493 199,87 9.00%
March- 2 1 0 7
2012
31- 145,27 21,78 1,199 168,274 4,780 40,53 29,463 69,994 243,02 10.26%
March- 3 2 1 9
2014[27]

Demand

Satellite pictures of India show thick haze and black carbon smoke above India and other Asian
countries. This problem is particularly severe along the Ganges Basin in northern India. Major
sources of particulate matter and aerosols are believed to be smoke from biomass burning in rural
parts of India, and air pollution from large cities in northern India.

"Expanding access to energy means including 2.4 billion people: 1.4 billion that still has no access
to electricity (87% of whom live in the rural areas) and 1 billion that only has access to
unreliable electricity networks. We need smart and practical approaches because energy, as a
driver of development, plays a central role in both fighting poverty and addressing climate change.
The implications are enormous: families forego entrepreneurial endeavors children cannot study
after dark, health clinics do not function properly, and women are burdened with time consuming
chores such as pounding grain or hauling water, leaving them with less time to engage in income
generating activities. Further, it is estimated that kitchen smoke leads to around 1.5 million
premature deaths every year, more than the number of deaths from malaria each year. After

( Page No. 6 )
gaining access to energy, households generate more income, are more productive and are less
hungry, further multiplying the Millennium Development Goal's progress."

— Rebeca Grynspan, UNDP Associate Administrator and Under Secretary General, Bloomberg
New Energy Summit, 7 April 2011 Of the 1.4 billion people of the world who have no access to
electricity in the world, India accounts for over 300 million.

Some 800 million Indians use traditional fuels – fuel wood, agricultural waste and biomass cakes
– for cooking and general heating needs. These traditional fuels are burnt in cook stoves, known as
chulah or chulha in some parts of India. Traditional fuel is inefficient source of energy, its burning
releases high levels of smoke, PM10 particulate matter, NOX, SOX, PAHs, polyaromatics,
formaldehyde, carbon monoxide and other air pollutants.[31][32][33] Some reports, including one by
the World Health Organisation, claim 300,000 to 400,000 people in India die of indoor air
pollution and carbon monoxide poisoning every year because of biomass burning and use of
chullahs. Traditional fuel burning in conventional cook stoves releases unnecessarily large
amounts of pollutants, between 5 to 15 times higher than industrial combustion of coal, thereby
affecting outdoor air quality, haze and smog, chronic health problems, damage to forests,
ecosystems and global climate. Burning of biomass and firewood will not stop, these reports
claim, unless electricity or clean burning fuel and combustion technologies become reliably
available and widely adopted in rural and urban India. The growth of electricity sector in India
may help find a sustainable alternative to traditional fuel burning.

In addition to air pollution problems, a 2007 study finds that discharge of untreated sewage is
single most important cause for pollution of surface and ground water in India. There is a large
gap between generation and treatment of domestic wastewater in India. The problem is not only
that India lacks sufficient treatment capacity but also that the sewage treatment plants that exist do
not operate and are not maintained. Majority of the government-owned sewage treatment plants
remain closed most of the time in part because of the lack of reliable electricity supply to operate
the plants. The wastewater generated in these areas normally percolates in the soil or evaporates.
The uncollected wastes accumulate in the urban areas because unhygienic conditions, release
heavy metals and pollutants that leaches to surface and groundwater. Almost all rivers, lakes and
water bodies are severely polluted in India. Water pollution also adversely impacts river, wetland
and ocean life. Reliable generation and supply of electricity is essential for addressing India's
water pollution and associated environmental issues.

Other drivers for India's electricity sector are its rapidly growing economy, rising exports,
improving infrastructure and increasing household incomes.

Demand trends

( Page No. 7 )
Electricity transmission grid in eastern India.

A tower supporting 220kV line near Ennore, Chennai

As in previous years, during the year 2010–11, demand for electricity in India far outstripped
availability, both in terms of base load energy and peak availability. Base load requirement was
861,591 (MU against availability of 788,355 MU, an 8.5% deficit. During peak loads, the demand
was for 122 GW against availability of 110 GW, a 9.8% shortfall.

In a May 2011 report, India's Central Electricity Authority anticipated, for 2011–12-year, a base
load energy deficit and peaking shortage to be 10.3% and 12.9% respectively. The peaking
shortage would prevail in all regions of the country, varying from 5.9% in the North-Eastern
region to 14.5% in the Southern Region. India also expects all regions to face energy shortage
varying from 0.3% in the North-Eastern region to 11.0% in the Western region. India's Central
Electricity Authority expects a surplus output in some of the states of Northern India, those with
predominantly hydropower capacity, but only during the monsoon months. In these states,
shortage conditions would prevail during winter season. According to this report, the five states
with largest power demand and availability, as of May 2011, were Maharashtra, Andhra Pradesh,
Tamil Nadu, Uttar Pradesh and Gujarat.

In late 2011 newspaper articles, Gujarat was declared a power surplus state, with about 2–3 GW
more power available than its internal demand. The state was expecting more capacity to become

( Page No. 8 )
available. It was expecting to find customers, sell excess capacity to meet power demand in other
states of India, thereby generate revenues for the state.

Despite an ambitious rural electrification programme, some 400 million Indians lose electricity
access during blackouts. While 80% of Indian villages have at least an electricity line, just 52.5%
of rural households have access to electricity. In urban areas, the access to electricity is 93.1% in
2008. The overall electrification rate in India is 64.5% while 35.5% of the population still lives
without access to electricity.

According to a sample of 97,882 households in 2002, electricity was the main source of lighting
for 53% of rural households compared to 36% in 1993.

The 17th electric power survey of India report claims:

 Over 2010–11, India's industrial demand accounted for 35% of electrical power requirement,
domestic household use accounted for 28%, agriculture 21%, commercial 9%, public
lighting and other miscellaneous applications accounted for the rest.
 The electrical energy demand for 2016–17 is expected to be at least 1392 Tera Watt Hours,
with a peak electric demand of 218 GW.
 The electrical energy demand for 2021–22 is expected to be at least 1915 Tera Watt Hours,
with a peak electric demand of 298 GW.

If current average transmission and distribution average losses remain same (32%), India needs to
add about 135 GW of power generation capacity, before 2017, to satisfy the projected demand
after losses.

McKinsey claims that India's demand for electricity may cross 300 GW, earlier than most
estimates. To explain their estimates, they point to four reasons:

 India's manufacturing sector is likely to grow faster than in the past

 Domestic demand will increase more rapidly as the quality of life for more Indians improve
 About 125,000 villages are likely to get connected to India's electricity grid
 Currently blackouts and load shedding artificially suppresses demand; this demand will be
sought as revenue potential by power distribution companies

A demand of 300 GW will require about 400 GW of installed capacity, McKinsey notes. The extra
capacity is necessary to account for plant availability, infrastructure maintenance, spinning reserve
and losses.

In 2010, electricity losses in India during transmission and distribution were about 24%, while
losses because of consumer theft or billing deficiencies added another 10–15%.

( Page No. 9 )
According to two studies published in 2004, theft of electricity in India, amounted to a nationwide
loss of $4.5 billion. This led several states of India to enact and implement regulatory, and
institutional framework; develop a new industry and market structure; and privities distribution.
The state of Andhra Pradesh, for example, enacted an electricity reform law; unbundled the utility
into one generation, one transmission, and four distribution and supply companies; and established
an independent regulatory commission responsible for licensing, setting tariffs, and promoting
efficiency and competition. Some state governments amended the Indian Electricity Act of 1910
to make electricity theft a cognizable offence and impose stringent penalties. A separate law,
unprecedented in India, provided for mandatory imprisonment and penalties for offenders, allowed
constitution of special courts and tribunals for speedy trial, and recognized collusion by utility
staff as a criminal offence. The state government made advance preparations and constituted
special courts and appellate tribunals as soon as the new law came into force. High quality
metering and enhanced audit information flow was implemented. Such campaigns have made a
big difference in the Indian utilities' bottom line. Monthly billing has increased substantially, and
the collection rate reached more than 98%. Transmission and distribution losses were reduced by
8%.

Power cuts are common throughout India and the consequent failure to satisfy the demand for
electricity has adversely effected India's economic growth.

Growth of Electricity Consumption in India

Consumptio Total % of Total Per-Capita

n (in Domesti Commerci Industri Tractio Agricultur Misc Consumptio
as on GWh) c al al n e n (in kWh)
31-Dec-1947 4,182 10.11% 4.26% 70.78% 6.62% 2.99% 5.24 16.3
%
31-Dec-1950 5,610 9.36% 5.51% 72.32% 5.49% 2.89% 4.44 18.2
%
31-Mar-1956 10,150 9.20% 5.38% 74.03% 3.99% 3.11% 4.29 30.9
%
31-Mar-1961 16,804 8.88% 5.05% 74.67% 2.70% 4.96% 3.75 45.9
%
31-Mar-1966 30,455 7.73% 5.42% 74.19% 3.47% 6.21% 2.97 73.9
%
31-Mar-1974 55,557 8.36% 5.38% 68.02% 2.76% 11.36% 4.13 126.2
%
31-Mar-1979 84,005 9.02% 5.15% 64.81% 2.60% 14.32% 4.10 171.6
%
31-Mar-1985 124,56 12.45% 5.57% 59.02% 2.31% 16.83% 3.83 228.7
9 %
31-Mar-1990 195,09 15.16% 4.89% 51.45% 2.09% 22.58% 3.83 329.2
8 %

( Page No. 10 )
 31-Mar-1997 315,29 17.53% 5.56% 44.17% 2.09% 26.65% 4.01 464.6
4 %
31-Mar-2002 374,67 21.27% 6.44% 42.57% 2.16% 21.80% 5.75 671.9
0 %
31-Mar-2007 525,67 21.12% 7.65% 45.89% 2.05% 18.84% 4.45 559.2
2 %
31-Dec-2011 710,67 21.56% 8.96% 45.23% 1.88% 18.16% 4.21 813.3Provisional
3 %

Electricity Consumption

Per-Capita Consumption of Electricity(kWh) (in 2011–12)

State / Union Territory Region Per-Capita Consumption
(kWh)
Dadra & Nagar Haveli Western 13,766.6
Daman & Diu Western 7,785.2
Goa Western 2,025.5
Gujarat Western 1,663.2
Chhattisgarh Western 1,319.6
Maharashtra Western 1,204.4
Madhya Pradesh Western 671.5
Western Region 1,201.2
Pondicherry Southern 2,124.7
Tamil Nadu Southern 1,276.6
Andhra Pradesh Southern 1,156.5
Karnataka Southern 1,081.4
Kerala Southern 593.8
Lakshadweep Southern 1,098.0
Southern Region 938.88
Punjab Northern 1,799.0
Haryana Northern 1,628.3
Delhi Northern 1,586.7
Himachal Pradesh Northern 1,289.4
Uttarakhand Northern 1,232.2
Chandigarh Northern 1,217.4
Jammu & Kashmir Northern 1,015.2
Rajasthan Northern 927.4
Uttar Pradesh Northern 449.9
Northern Region 833.2
Odisha Eastern 1,145.8
Sikkim Eastern 886.4
Jharkhand Eastern 790.2
West Bengal Eastern 563.8
Andaman & Nicobar Islands Eastern 501.4

( Page No. 11 )
Bihar Eastern 133.6
Eastern Region 521.2
Arunachal Pradesh North Eastern 683.1
Meghalaya North Eastern 657.6
Mizoram North Eastern 506.7
Nagaland North Eastern 257.2
Tripura North Eastern 253.8
Assam North Eastern 249.8
Manipur North Eastern 235.9
North Eastern Region 257.98
NATIONAL 883.6

( Page No. 12 )
Electricity Generation

Tehri Hydroelectric Power station's lake in Uttarakhand. Tehri is world's 7th tallest dam. With a
capacity of 2.4 GW, it is India's largest hydroelectric power generation installation.

Power development in India was first started in 1897 in Darjeeling, followed by commissioning of
a hydropower station at Sivasamudram in Karnataka during 1902. Thermal power stations which
generates electricity more than 1,000 MW are referred as Super Thermal Power Stations.

India's electricity generation capacity additions from 1950 to 1985 were very low when compared
to developed nations. Since 1990, India has been one of the fastest growing markets for new
electricity generation capacity. India's electricity generation capacity has increased from 179 TW-
h in 1985 to 1053 TW-h in 2012.

The country's total installed capacity of electricity has increased in last 22 years by about 168 GW,
from about 66 GW in 1991 to over 100 GW in 2001, to 233.93 GW in 2013. India's Power
Finance Corporation Limited projects that current and approved electricity capacity addition
projects in India are expected to add about 100 GW of installed capacity between 2012 and 2017.
This growth makes India one the fastest growing markets for electricity infrastructure equipment.
India's installed capacity growth rates are still less than those achieved by China, and short of
capacity needed to ensure universal availability of electricity throughout India by 2017.

The table below presents the electricity generation capacity, as well as availability to India's end
user and their demand. The difference between installed capacity and availability is the
transmission, distribution and consumer losses. The gap between availability and demand is the
shortage India is suffering. This shortage in supply ignores the effects of waiting list of users in
rural, urban and industrial customers; it also ignores the demand gap from India's unreliable
electricity supply.

( Page No. 13 )
 Electricity sector capacity and availability in India (excludes effect of blackouts / power-shedding)
Item Value Date reported Reference
[58][59]
Total installed capacity (GW) 209.27 October 2012
[60]
Available base load supply (MU) 893371 October 2012
[60]
Available peak load supply (GW) 125.23 October 2012
[60]
Demand base load (MU) 985317 October 2012
[60]
Demand peak load (GW) 140.09 October 2012

State-owned and privately owned companies are significant players in India's electricity sector,
with the private sector growing at a faster rate. India's central government and state governments
jointly regulate electricity sector in India.

As of August 2011, the states and union territories of India with power surplus were Himachal
Pradesh, Sikkim, Tripura, Gujarat, Delhi and Dadra and Nagar Haveli.[38][39]

Major economic and social drivers for India's push for electricity generation include India's goal to
provide universal access, the need to replace current highly polluting energy sources in use in
India with cleaner energy sources, a rapidly growing economy, increasing household incomes,
limited domestic reserves of fossil fuels and the adverse impact on the environment of rapid
development in urban and regional areas.[61]

State-wise All India installed capacit

(as of 31-December-2013 including allocated shares in joint and central sector utilities)
State / Thermal (in MW) Nuclear Renewable (in MW) Total (in % o
Union Coal Gas Diesel Sub-Total (in Hydel Other Sub-Total MW) Nationa
Territory Thermal MW) Renewable Renewable Installed
Capacit
Maharashtra 20,239.27 3,475.93 - 23,715.20 690.14 3,331.84 4,768.80 8,100.64 32,505.98 13.90%
Gujarat 15,738.27 4,978.99 17.48 20,734.74 559.32 772.00 4,203.06 4,975.06 26,269.12 11.23%
Madhya 8,503.89 257.18 - 8,761.07 273.24 3,223.66 644.38 3,868.04 12,902.35 5.52%
Pradesh
Chhattisgarh 6,388.49 - - 6,388.49 47.52 120.00 308.90 428.90 6,864.91 2.93%
Dadra & 1,622.35 196.91 - 1,819.26 228.14 - - - 2,047.40 0.88%
Nagar Haveli
Goa 326.17 48.00 - 374.17 25.80 - 0.05 0.05 400.02 0.17%
Daman & 36.71 4.20 - 40.91 7.38 - - - 48.29 0.02%
Diu
Central - 1,622.35 196.91 - 1,819.26 228.14 - - - 2,047.40 0.88%
Unallocated
Western 52,899.51 8,988.31 17.48 61,905.30 1,840.0 7,447.50 9,925.19 17,372.69 81,117.99 34.68%
0
Uttar Pradesh 10,682.95 549.97 - 11,232.92 335.72 1,859.45 846.48 2,705.93 14,274.57 6.10%
Rajasthan 7,679.72 775.03 - 8,454.75 573.00 1,548.32 3,483.05 5,031.37 14,059.12 6.01%
Haryana 6,082.03 560.29 3.92 6,646.24 109.16 1,373.21 123.20 1,496.41 8,251.81 3.53%

( Page No. 14 )
Punjab 3,790.88 288.92 - 4,079.80 208.04 3,029.53 297.58 3,327.11 7,614.95 3.26%
Delhi 4,556.37 2,116.01 - 6,672.38 122.08 690.33 16.00 706.33 7,500.79 3.21%
Himachal 152.02 61.88 3.92 214.03 34.08 2,950.94 625.91 3,576.85 3,824.96 1.64%
Pradesh
Uttarakhand 300.50 69.35 - 369.85 22.28 2,006.01 189.87 2,195.88 2,588.01 1.11%
Jammu & 329.32 304.14 8.94 642.40 77.00 1,658.03 147.53 1,805.56 2,524.96 1.08%
Kashmir
Chandigarh 32.54 15.32 - 47.86 8.84 52.88 - 52.88 109.58 0.05%
Central - 977.19 290.35 - 1,267.54 129.80 524.05 - 524.05 1,921.39 0.82%
Unallocated
Northern 34,583.50 5,031.26 12.99 39,627.75 1,620.0 15,692.7 5,729.62 21,422.37 62,670.12 26.79%
0 5
Tamil Nadu 8,726.40 1026.30 411.66 10,014.36 524.00 2,182.20 7,946.13 10,128.33 20,666.69 8.83%
Andhra 8,573.48 3,370.40 36.80 11,980.68 275.78 3,734.53 1,294.49 5,029.02 17,285.48 7.39%
Pradesh
Karnataka 6,158.39 - 234.42 6,392.81 254.86 3,599.80 3,693.19 7,292.99 13,940.66 5.96%
Kerala 914.56 533.58 256.44 1,704.58 95.60 1881.50 193.52 2,075.02 3,875.20 1.66%
Pondicherry 230.09 32.50 - 262.59 19.28 - - - 281.87 0.12%
Central - 1,329.58 - - 1,329.58 150.48 - - - 1,480.06 0.82%
Unallocated
Southern 25,932.50 4,962.78 939.32 31,834.60 1,320.0 11,398.0 13,127.33 24,525.36 57,679.96 24.66%
0 3
West Bengal 7,216.87 100.00 12.20 7,329.07 - 1,248.30 131.45 1,379.75 8,708.82 3.72%
Odisha 5,115.06 - - 5,115.06 - 2,166.93 99.80 2,266.73 7,381.79 3.16%
DVC 6,555.60 90.00 - 6,645.60 - 193.26 - 193.26 6838.86 2.92%
Jharkhand 2,358.88 - - 2,358.88 - 200.93 20.05 220.98 2,579.86 1.10%
Bihar 1,954.70 - - 1,954.70 - 129.43 114.00 243.43 2,198.13 0.94%
Assam 60.00 598.52 20.69 679.21 - 429.72 31.11 460.83 1,140.04 0.49%
Meghalaya - 65.61 2.05 67.66 - 356.58 31.03 387.61 455.27 0.19%
Tripura - 349.84 4.85 354.69 - 62.37 16.01 78.38 433.07 0.19%
Sikkim 82.61 - 5.00 87.61 - 174.27 52.11 226.38 313.99 0.13%
Arunachal - 32.05 15.88 47.93 - 97.57 103.91 201.48 249.41 0.11%
Pradesh
Manipur - 46.96 45.41 92.37 - 80.98 5.45 86.43 178.80 0.08%
Mizoram - 27.28 51.86 79.14 - 34.31 36.47 70.78 149.92 0.06%
Nagaland - 32.84 2.00 34.84 - 53.32 28.67 81.99 116.83 0.05%
Central - 1,454.16 55.40 - 1,509.56 - 127.15 - 127.15 1,636.71 0.70%
Unallocated
Eastern 24,797.88 1,398.50 159.94 26,356.32 - 5,355.12 670.06 6,025.18 32,381.5 13.84%
Andaman & - - 60.05 60.05 - - 10.35 10.35 70.40 0.03%
Nicobar
Lakshadweep - - 9.97 9.97 - - - - 9.97 0.00%
Islands - - 70.02 70.02 - - 10.35 10.35 80.37 0.03%
TOTAL 138,213.3 20,380.8 1,199.7 159,793.9 4,780 39,893.4 29,462.55 69,355.95 233,929.9 100.00%
9 5 5 9 0 4

( Page No. 15 )
In 2010, the five largest power companies in India, by installed capacity, in decreasing order, were
the center-owned NTPC, center-owned NHPC, followed by three privately owned companies:
Tata Power, Reliance Power and Adani Power.

In India's effort to add electricity generation capacity over 2009–2011, both central government
and state government owned power companies have repeatedly failed to add the capacity targets
because of issues with procurement of equipment and poor project management. Private
companies have delivered better results.

Sector-wise All India installed capacity

Sector Thermal (in Hydel (in Nuclear (in Renewable (in Total (in % of total
MW) MW) MW) MW) MW)
Central 52,500.54 9,717.4 4,780.00 - 66,997.94 28.64%
Govt.
State 59,627.93 27,482.00 - 3,726.77 90,836.70 38.83%
Govt.
Private 47,665.52 2,694.00 - 25,735.78 76,095.30 32.53%
TOTAL 159,793.99 39,893.40 4,780 29,462.55 233,929.94 100.00%

( Page No. 16 )
Conventional Sources

Thermal power

A super thermal power plant in Rajasthan

A thermal power plant in Maharashtra

Thermal power plants convert energy rich fuel into electricity and heat. Possible fuels include
coal, natural gas, petroleum products, agricultural waste and domestic trash / waste. Other sources
of fuel include landfill gas and biogases. In some plants, renewal fuels such as biogas are co-fired
with coal.

Coal and lignite accounted for about 57% of India's installed capacity. However, since wind
energy depends on wind speed, and hydropower energy on water levels, thermal power plants
account for over 65% of India's generated electricity. India's electricity sector consumes about
80% of the coal produced in the country.

India expects that its projected rapid growth in electricity generation over the next couple of
decades is expected to be largely met by thermal power plants.

( Page No. 17 )
Fuel constraints

A large part of Indian coal reserve is similar to Gondwana coal. It is of low calorific value and
high ash content. The iron content is low in India's coal, and toxic trace element concentrations are
negligible. The natural fuel value of Indian coal is poor. On average, the Indian power plants using
India's coal supply consume about 0.7 kg of coal to generate a kWh, whereas United States
thermal power plants consume about 0.45 kg of coal per kWh. This is because of the difference in
the quality of the coal, as measured by the Gross Calorific Value (GCV). On average, Indian coal
has a GCV of about 4500 Kcal/kg, whereas the quality elsewhere in the world is much better; for
example, in Australia, the GCV is 6500 Kcal/kg approximately.

The high ash content in India's coal affects the thermal power plant's potential emissions.
Therefore, India's Ministry of Environment & Forests has mandated the use of beneficiated coals
whose ash content has been reduced to 34% (or lower) in power plants in urban, ecologically
sensitive and other critically polluted areas, and ecologically sensitive areas. Coal benefaction
industry has rapidly grown in India, with current capacity topping 90 MT.

Thermal power plants can deploy a wide range of technologies. Some of the major technologies
include:

 Steam cycle facilities (most commonly used for large utilities);

 Gas turbines (commonly used for moderate sized peaking facilities);
 Cogeneration and combined cycle facility (the combination of gas turbines or internal
combustion engines with heat recovery systems); and
 Internal combustion engines (commonly used for small remote sites or stand-by power
generation).

India has an extensive review process, one that includes environment impact assessment, prior to a
thermal power plant being approved for construction and commissioning. The Ministry of
Environment and Forests has published a technical guidance manual to help project proposers and
to prevent environmental pollution in India from thermal power plants.

Installed thermal power capacity

The installed capacity of Thermal Power in India, as of 31 October 2012, was 140206.18 MW
which is 66.99 of total installed capacity.

 Current installed base of Coal Based Thermal Power is 120,103.38 MW which comes to
57.38% of total installed base.
 Current installed base of Gas Based Thermal Power is 18,903.05 MW which is 9.03% of
total installed capacity.

( Page No. 18 )
  Current installed base of Oil Based Thermal Power is 1,199.75 MW which is 0.57% of total
installed capacity.

The state of Maharashtra is the largest producer of thermal power in the country.

Hydro power

Main article: Hydroelectric power in India

Indira Sagar Dam partially completed in 2008

Nagarjuna Sagar Dam and hydroelectric power plant on the Krishna River. It is the world's largest
masonry dam, with an installed capacity of 800MW. The dam also irrigates about 1.4 million
acres of previously drought-prone land.

In this system of power generation, the potential of the water falling under gravitational force is
utilized to rotate a turbine which again is coupled to a Generator, leading to generation of
electricity. India is one of the pioneering countries in establishing hydro-electric power plants. The
power plants at Darjeeling and Shimsha (Shivanasamudra) were established in 1898 and 1902
respectively and are among the first in Asia.

India is endowed with economically exploitable and viable hydro potential assessed to be about
84,000 MW at 60% load factor. In addition, 6,780 MW in terms of installed capacity from Small,
Mini, and Micro Hydel schemes have been assessed. Also, 56 sites for pumped storage schemes

( Page No. 19 )
with an aggregate installed capacity of 94,000 MW have been identified. It is the most widely
used form of renewable energy. India is blessed with immense amount of hydro-electric potential
and ranks 5th in terms of exploitable hydro-potential on global scenario.

The present installed capacity as of 31 October 2012 is approximately 39,291.40 MW which is

18.77% of total electricity generation in India. The public sector has a predominant share of 97%
in this sector. National Hydroelectric Power Corporation (NHPC), Northeast Electric Power
Company (NEEPCO), Satluj jal vidyut nigam (SJVNL), Tehri Hydro Development Corporation,
NTPC-Hydro are a few public sector companies engaged in development of hydroelectric power
in India.

Bhakra Beas Management Board (BBMB), illustrative state-owned enterprise in north India, has
an installed capacity of 2.9 GW and generates 12000-14000 MU[37] per year. The cost of
generation of energy after four decades of operation is about 20 paise/kWh[citation needed] (=0.2
rupee/kWh = approx. 0.3 US cents/kWh). BBMB is a major source of peaking power and black
start to the northern grid in India. Large reservoirs provide operational flexibility. BBMB
reservoirs annually supply water for irrigation to 12.5 million(12.5 million) acres of agricultural
land of partner states, enabling northern India in its green revolution.

Nuclear power

Main article: Nuclear power in India

Kudankulam Nuclear Power Plant under construction in 2009. It was 96% complete as of March
2011, with first phase expected to be in use in 2012. With initial installed capacity of 2 GW, this
plant will be expanded to 6.8 GW capacity.

As of 2011, India had 4.8 GW of installed electricity generation capacity using nuclear fuels.
India's nuclear plants generated 32455 million units or 3.75% of total electricity produced in India.

India's nuclear power plant development began in 1964. India signed an agreement with General
Electric of the United States for the construction and commissioning of two boiling water reactors
at Tarapur. In 1967, this effort was placed under India's Department of Atomic Energy. In 1971,

( Page No. 20 )
India set up its first pressurised heavy water reactors with Canadian collaboration in Rajasthan. In
1987, India created Nuclear Power Corporation of India Limited to commercialise nuclear power.

Nuclear Power Corporation of India Limited is a public sector enterprise, wholly owned by the
Government of India, under the administrative control of its Department of Atomic Energy. Its
objective is to implement and operate nuclear power stations for India's electricity sector. The
state-owned company has ambitious plans to establish 63 GW generation capacity by 2032, as a
safe, environmentally benign and economically viable source of electrical energy to meet the
increasing electricity needs of India.

India's nuclear power generation effort satisfies many safeguards and oversights, such as getting
ISO-14001 accreditation for environment management system and peer review by World
Association of Nuclear Operators including a pre-start up peer review. Nuclear Power Corporation
of India Limited admits, in its annual report for 2011 that its biggest challenge is to address the
public and policy maker perceptions about the safety of nuclear power, particularly after the
Fukushima incident in Japan.

In 2011, India had 18 pressurised heavy water reactors in operation, with another four projects of
2.8 GW capacity launched. The country plans to implement fast breeder reactors, using plutonium
based fuel. Plutonium is obtained by reprocessing spent fuel of first stage reactors. India
successfully launched its first prototype fast breeder reactor of 500 MW capacity in Tamil Nadu,
and now operates two such reactors.

India has nuclear power plants operating in the following states: Maharashtra, Gujarat, Rajasthan,
Uttar Pradesh, Tamil Nadu and Karnataka. These reactors have an installed electricity generation
capacity between 100 to 540 MW each. New reactors with installed capacity of 1000 MW per
reactor are expected to be in use by 2012.

In 2011, The Wall Street Journal reported the discovery of uranium in a new mine in India, the
country's largest ever. The estimated reserves of 64,000 tones, could be as large as 150,000 tones
(making the mine one of the worlds largest). The new mine is expected to provide India with a
fuel that it currently imports. Nuclear fuel supply constraints had limited India's ability to grow its
nuclear power generation capacity. The newly discovered ore, unlike those in Australia, is of
slightly lower grade. This mine is expected to be in operation in 2012.

India's share of nuclear power plant generation capacity is just 1.2% of worldwide nuclear power
production capacity, making it the 15th largest nuclear power producer. Nuclear power provided
3% of the country's total electricity generation in 2011. India aims to supply 9% of its electricity
needs with nuclear power by 2032. India's largest nuclear power plant project under
implementation is at Jaitapur, Maharashtra in partnership with Areva, France.

( Page No. 21 )
Non-Conventional Sources

Main article: Renewable energy in India

Renewable energy in India is a sector that is still in its infancy.
As of 31 January 2014, India had an installed capacity of about 31.15 GW of non-conventional
renewable technologies-based electricity, about 13.32% of its total. For context, the total installed
capacity for electricity in Switzerland was about 18 GW in 2009.

Renewal Energy Installed Capacity in India (as of 31 January 2014)

Type Technology Installed capacity
(in MW)
Grid Connected Power
Wind 20,298.83
Small Hydel Power Projects 3,774.15
Biogases Cogeneration 2,512.88
Solar 2,208.36
Biomass Power & Gasification 1,285.60
Waste to Power 99.08
Total - Grid Connected Power 30,177.90
Off-Grid / Captive Power
Biogases Cogeneration 517.34
SPV Systems (>1 kW) 159.77
Biomass Gasifiers - Industrial 146.40
Waste to Power 119.63
Biomass Gasifiers - Rural 17.63
Water Mills/Micro Hydel 10.18
Aerogenerator / Hybrid Systems 2.18
Total - Off-Grid / Captive Power 973.13
TOTAL 31,151.03

As of August 2011, India had deployed renewal energy to provide electricity in 8846 remote
villages, installed 4.4 million family biogas plants, 1800 microhydel units and 4.7 million square
metres of solar water heating capacity. India anticipates to add another 3.6 GW of renewal energy
installed capacity by December 2012

India plans to add about 30 GW of installed electricity generation capacity based on renewal
energy technologies, by 2017.

Renewable energy projects in India are regulated and championed by the central government's
Ministry of New and Renewable Energy.

Solar power

Main article: Solar power in India

( Page No. 22 )
Solar resources in India

India is endowed with a vast solar energy potential. India receives one of the highest global solar
radiations - energy of about 5,000 trillion kWh per year is incident over India's land mass with
most parts receiving 4-7 kWh per m2 per day. Under Solar Mission, a central government
initiative, India plans to generate 1 GW of power by 2013 and up to 20 GW grid-based solar
powers, 2 GW of off-grid solar power and cover 20 million square metres with solar energy
collectors by 2020. India plans utility scale solar power generation plants through solar parks with
dedicated infrastructure by state governments, among others, the governments of Gujarat and
Rajasthan.

The Government of Gujarat taking advantage of the national initiative and high solar irradiation in
the state, launched the Solar Power Policy in 2009 and proposes to establish a number of large-
scale solar parks starting with the Charanka Solar Park in Patna district in the sparsely populated
northern part of the state. The development of solar parks will streamline the project development
timeline by letting government agencies undertake land acquisition and necessary permits, and
provide dedicated common infrastructure for setting up solar power generation plants largely in
the private sector. This approach will facilitate the accelerated installation of private sector solar
power generation capacity reducing costs by addressing issues faced by stand alone projects.
Common infrastructure for the solar park include site preparation and leveling, power evacuation,
availability of water, access roads, security and services. In parallel with the central government's
initiative, the Gujarat Electricity Regulatory Commission has announced feed-in tariff to
mainstream solar power generation which will be applied for solar power generation plants in the
solar park. Gujarat Power Corporation Limited is the responsible agency for developing the solar
park of 500 MW and will lease the lands to the project developers to generate solar power. Gujarat
Energy Transmission Corporation Limited will develop the transmission evacuation from the
identified interconnection points with the solar developer. This project is being supported, in part,
by the Asian Development Bank.

( Page No. 23 )
The Indian Solar Loan Programme, supported by the United Nations Environment Programme has
won the prestigious Energy Globe World award for Sustainability for helping to establish a
consumer financing programme for solar home power systems. Over the span of three years more
than 16,000 solar home systems have been financed through 2,000 bank branches, particularly in
rural areas of South India where the electricity grid does not yet extend. Launched in 2003, the
Indian Solar Loan Programme was a four-year partnership between UNEP, the UNEP Risoe
Centre, and two of India's largest banks, the Canara Bank and Syndicate Bank.

Canal Solar Power Project in Kadi, Gujarat

Installation of solar power plants require nearly 2.4 hectares (6 acres) land per MW capacity
which is similar to coal fired power plants when life cycle coal mining, consumptive water storage
& ash disposal areas are also accounted and hydro power plants when submergence area of water
reservoir is also accounted. 1.33 million MW capacity solar plants can be installed in India on its
1% land (32,000 square km). There are vast tracts of land suitable for solar power in all parts of
India exceeding 8% of its total area which are unproductive barren and devoid of vegetation. Part
of waste lands (32,000 square km) when installed with solar power plants can produce 2000
billion Kwh of electricity (two times the total generation in the year 2013-14) with land
productivity/yield of 1.5 million Rs per acre (6 Rs/kwh price) which is at par with many industrial
areas and many times more than the best productive irrigated agriculture lands. Moreover these
solar power units are not dependant on supply of any raw material and are self productive. There
is unlimited scope for solar electricity to replace all fossil fuel energy requirements (natural gas,
coal, lignite and crude oil) if all the marginally productive lands are occupied by solar power
plants in future. The solar power potential of India can meet perennially to cater per capita energy
consumption at par with USA/Japan for its ultimate population.

Land acquisition is a challenge to solar farm projects in India. Some state governments are
exploring means to address land availability through innovation; for example, by exploring means
to deploy solar capacity above their extensive irrigation canal projects, thereby harvesting solar
energy while reducing the loss of irrigation water by solar evaporation. The state of Gujarat was
first to implement the Canal Solar Power Project, to use 19,000 km (12,000 mi) long network of

( Page No. 24 )
Narmada canals across the state for setting up solar panels to generate electricity. It was the first
ever such project in India.

Synergy with irrigation water pumping and hydro power stations

The major disadvantage of solar power (PV type) is that it cannot produce electricity during the
night time and cloudy day time also. In India, this disadvantage can be overcome by installing
pumped-storage hydroelectricity stations. Ultimate electricity requirement for river water pumping
is 715 billion Kwh to pump one cubic meter of water for each square meter area by 125 m height
on average for irrigating 140 million hectares of arable land (44% of total land) and another 35.2
million hectares plantations (11% of total land). This is achieved by utilizing all the utilizable river
waters by interlinking Indian rivers. These river water pumping stations would also be envisaged
with pumped-storage hydroelectricity features to generate electricity during the night time. These
pumped-storage stations would work at 200% water pumping requirement during the day time and
generate electricity at 50% of total capacity during the night time. Also, all existing and future
hydro power stations can be expanded with additional pumped-storage hydroelectricity units to
cater night time electricity consumption.

( Page No. 25 )
Wind power

Main article: Wind power in India

Wind farm in Rajasthan.

Wind turbines midst India's agricultural farms.

Wind farms midst paddy fields in India.

( Page No. 26 )
 India has the fifth largest installed wind power capacity in the world. In 2010, wind power
accounted for 6% of India's total installed power capacity, and 1.6% of the country's power output.

The development of wind power in India began in the 1990s by Tamil Nadu Electric Board near
Tuticorin, and has significantly increased in the last few years. Suzlon is the leading Indian
company in wind power, with an installed generation capacity of 6.2 GW in India. Vestas is
another major company active in India's wind energy initiative.

As December 2011, the installed capacity of wind power in India was 15.9 GW, spread across
many states of India. The largest wind power generating state was Tamil Nadu accounting for
30% of installed capacity, followed in decreasing order by Maharashtra, Gujarat, Karnataka, and
Rajasthan.[84] It is estimated that 6 GW of additional wind power capacity will be installed in India
by 2012. In Tamil Nadu, wind power is mostly harvested in the southern districts such as
Kanyakumari, Tirunelveli and Tuticorin.

The state of Gujarat is estimated to have the maximum gross wind power potential in India, with a
potential of 10.6 GW.[83]

Biomass power

In this system biomass, bagasse, forestry and agro residue & agricultural wastes are used as fuel to
produce electricity.

Biomass gasifier

India has been promoting biomass gasifier technologies in its rural areas, to utilise surplus
biomass resources such as rice husk, crop stalks, small wood chips, and other agro-residues. The
goal was to produce electricity for villages with power plants of up to 2 MW capacities. During
2011, India installed 25 rice husk based gasifier systems for distributed power generation in 70
remote villages of Bihar. The Largest Biomass based power plant in India is at Sirohi, Rajasthan
having the capacity of 20 MW.i.e. Sambhav Energy Limited. In addition, gasifier systems are
being installed at 60 rice mills in India. During the year, biomass gasifier projects of 1.20 MW in
Gujarat and 0.5 MW in Tamil Nadu were successfully installed.[74]

Biogas

This pilot programme aims to install small scale biogas plants for meeting the cooking energy
needs in rural areas of India. During 2011, some 45000 small scale biogas plants were installed.
Cumulatively, India has installed 4.44 million small scale biogas plants.

In 2011, India started a new initiative with the aim to demonstrate medium size mixed feed
biogas-fertilizer pilot plants. This technology aims for generation, purification/enrichment,

( Page No. 27 )
 bottling and piped distribution of biogas. India approved 21 of these projects with aggregate
capacity of 37016 cubic meters per day, of which 2 projects have been successfully commissioned
by December 2011

India has additionally commissioned 158 projects under its Biogas based Distributed/Grid Power
Generation programme, with a total installed capacity of about 2 MW.

India is rich in biomass and has a potential of 16,881MW (agro-residues and plantations),
5000MW (biogases cogeneration) and 2700MW (energy recovery from waste). Biomass power
generation in India is an industry that attracts investments of over INR 6 billion every year,
generating more than 5000 million units of electricity and yearly employment of more than 10
million man-days in the rural areas

As of 2010, India burnt over 200 million tons of coal replacement worth of traditional biomass
fuel every year to meet its energy need for cooking and other domestic use. This traditional
biomass fuel – fuel wood, crop waste and animal dung – is a potential raw material for the
application of biomass technologies for the recovery of cleaner fuel, fertilizers and electricity with
significantly lower pollution.

Biomass available in India can and has been playing an important role as fuel for sugar mills,
textiles, paper mills, and small and medium enterprises (SME). In particular there is a significant
potential in breweries, textile mills, fertilizer plants, the paper and pulp industry, solvent
extraction units, rice mills, petrochemical plants and other industries to harness biomass power.

Geothermal energy

Geothermal energy is thermal energy generated and stored in the Earth. Thermal energy is the
energy that determines the temperature of matter. India's geothermal energy installed capacity is
experimental. Commercial use is insignificant.

India has potential resources to harvest geothermal energy. The resource map for India has been
grouped into six geothermal provinces:

Himalayan Province – Tertiary Organic belt with Tertiary magmatic

 Areas of Faulted blocks – Aravalli belt, Naga-Lushi, West coast regions and Son-Narmada
lineament.
 Volcanic arc – Andaman and Nicobar arc.
 Deep sedimentary basin of Tertiary age such as Cambay basin in Gujarat.
 Radioactive Province – Surajkund, Hazaribagh, Jharkhand.
 Cratonic province – Peninsular India

( Page No. 28 )
 India has about 340 hot springs spread over the country. Of this, 62 are distributed along the
northwest Himalaya, in the States of Jammu and Kashmir, Himachal Pradesh and Uttarakhand.
They are found concentrated along a 30-50-km wide thermal band mostly along the river valleys.
Naga-Lusai and West Coast Provinces manifest a series of thermal springs. Andaman and Nicobar
arc is the only place in India where volcanic activity, a continuation of the Indonesian geothermal
fields, and can be good potential sites for geothermal energy. Cambay graben geothermal belt is
200 km long and 50 km wide with Tertiary sediments. Thermal springs have been reported from
the belt although they are not of very high temperature and discharge. During oil and gas drilling
in this area, in recent times, high subsurface temperature and thermal fluid have been reported in
deep drill wells in depth ranges of 1.7 to 1.9 km. Steam blowout have also been reported in the
drill holes in depth range of 1.5 to 3.4 km. The thermal springs in India's peninsular region are
more related to the faults, which allow down circulation of meteoric water to considerable depths.
The circulating water acquires heat from the normal thermal gradient in the area, and depending
upon local condition, emerges out at suitable localities. The area includes Aravalli range, Son-
Narmada-Tapti lineament, Godavari and Mahanadi valleys and South Cratonic Belts.

In a December 2011 report, India identified six most promising geothermal sites for the
development of geothermal energy. These are, in decreasing order of potential:

 Tattapani in Chhattisgarh
 Puga in Jammu & Kashmir
 Cambay Graben in Gujarat
 Manikaran in Himachal Pradesh
 Surajkund in Jharkhand
 Chhumathang in Jammu & Kashmir

India plans to set up its first geothermal power plant, with 2–5 MW capacity at Puga in Jammu
and Kashmir.

Tidal wave energy

Tidal energy technologies harvest energy from the seas. The potential of tidal wave energy
becomes higher in certain regions by local effects such as shelving, funneling, reflection and
resonance.

India is surrounded by sea on three sides, its potential to harness tidal energy is significant.

Energy can be extracted from tides in several ways. In one method, a reservoir is created behind a
barrage and then tidal waters pass through turbines in the barrage to generate electricity. This
method requires mean tidal differences greater than 4 metres and also favourable topographical
conditions to keep installation costs low. One report claims the most attractive locations in India,

( Page No. 29 )
 for the barrage technology, are the Gulf of Khambhat and the Gulf of Kutch on India's west coast
where the maximum tidal range is 11 m and 8 m with average tidal range of 6.77 m and 5.23 m
respectively. The Ganges Delta in the Sunderbans, West Bengal is another possibility, although
with significantly less recoverable energy; the maximum tidal range in Sunderbans is
approximately 5 m with an average tidal range of 2.97 m. The report claims, barrage technology
could harvest about 8 GW from tidal energy in India, mostly in Gujarat. The barrage approach has
several disadvantages, one being the effect of any badly engineered barrage on the migratory
fishes, marine ecosystem and aquatic life. Integrated barrage technology plants can be expensive
to build.

In December 2011, the Ministry of New & Renewable Energy, Government of India and the
Renewable Energy Development Agency of Govt. of West Bengal jointly approved and agreed to
implement India's first 3.75 MW Durgaduani mini tidal power project. Indian government believes
that tidal energy may be an attractive solution to meet the local energy demands of this remote
delta region.

Another tidal wave technology harvests energy from surface waves or from pressure fluctuations
below the sea surface. A report from the Ocean Engineering Centre, Indian Institute of
Technology, Madras estimates the annual wave energy potential along the Indian coast is between
5 MW to 15 MW per meter, suggesting a theoretical maximum potential for electricity harvesting
from India's 7500 kilometer coast line may be about 40 GW. However, the realistic economical
potential, the report claims, is likely to be considerably less. A significant barrier to surface energy
harvesting is the interference of its equipment to fishing and other sea bound vessels, particularly
in unsettled weather. India built its first seas surface energy harvesting technology demonstration
plant in Vizhinjam, near Thiruruvananthpuram.

The third approach to harvesting tidal energy consists of ocean thermal energy technology. This
approach tries to harvest the solar energy trapped in ocean waters into usable energy. Oceans have
a thermal gradient, the surface being much warmer than deeper levels of ocean. This thermal
gradient may be harvested using modified Rankine cycle. India's National Institute of Ocean
Technology (NIOT) attempted this approach over the last 20 years, but without success. In 2003,
with Saga University of Japan, NIOT attempted to build and deploy a 1 MW demonstration plant.
However, mechanical problems prevented success. After initial tests near Kerala, the unit was
scheduled for redeployment and further development in the Lakshadweep Islands in 2005. The
demonstration project's experience has limited follow-on efforts with ocean thermal energy
technology in India.

Problems with India's power sector

India's electricity sector faces many issues. Some are:

( Page No. 30 )
 Government giveaways such as free electricity for farmers, partly to curry political favour,
have depleted the cash reserves of state-run electricity-distribution system. This has
financially crippled the distribution network, and its ability to pay for power to meet the
demand. This situation has been worsened by government departments of India that do not
pay their bills.
 Shortages of fuel: despite abundant reserves of coal, India is facing a severe shortage of
coal. The country isn't producing enough to feed its power plants. Some plants do not have
reserve coal supplies to last a day of operations. India's monopoly coal producer, state-
controlled Coal India, is constrained by primitive mining techniques and is rife with theft
and corruption; Coal India has consistently missed production targets and growth targets.
Poor coal transport infrastructure has worsened these problems. To expand its coal
production capacity, Coal India needs to mine new deposits. However, most of India's coal
lies under protected forests or designated tribal lands. Any mining activity or land
acquisition for infrastructure in these coal-rich areas of India, has been rife with political
demonstrations, social activism and public interest litigations.
 Poor pipeline connectivity and infrastructure to harness India's abundant coal bed methane
and shale gas potential.
 The giant new offshore natural gas field has delivered less fuel than projected. India faces a
shortage of natural gas.
 Hydroelectric power projects in India's mountainous north and north east regions have been
slowed down by ecological, environmental and rehabilitation controversies, coupled with
public interest litigations.
 India's nuclear power generation potential has been stymied by political activism since the
Fukushima disaster in Japan.
 Average transmission, distribution and consumer-level losses exceeding 30% which
includes auxiliary power consumption of thermal power stations, fictitious electricity
generation by wind generators & independent power producers (IPPs), etc.
 Over 300 million (300 million) people in India have no access to electricity. Of those who
do, almost all find electricity supply intermittent and unreliable.
 Lack of clean and reliable energy sources such as electricity is, in part, causing about
800 million (800 million) people in India to continue using traditional biomass energy
sources – namely fuel wood, agricultural waste and livestock dung – for cooking and other
domestic needs. Traditional fuel combustion is the primary source of indoor air pollution in
India, causes between 300,000 to 400,000 deaths per year and other chronic health issues.
 India's coal-fired, oil-fired and natural gas-fired thermal power plants are inefficient and
offer significant potential for greenhouse gas (CO2) emission reduction through better
technology. Compared to the average emissions from coal-fired, oil-fired and natural gas-
fired thermal power plants in European Union (EU-27) countries, India's thermal power
plants emit 50% to 120% more CO2 per kWh produced.

( Page No. 31 )
  The July 2012 blackout, affecting the north of the country, was the largest power grid
failure in history by number of people affected.

Resource potential in electricity sector

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (Tcf) of proven
natural gas reserves as of January 2011, world's 26th largest. United States Energy Information
Administration estimates that India produced approximately 1.8 Tcf of natural gas in 2010, while
consuming roughly 2.3 Tcf of natural gas. The electrical power and fertiliser sectors account for
nearly three-quarters of natural gas consumption in India. Natural gas is expected to be an
increasingly important component of energy consumption as the country pursues energy resource
diversification and overall energy security.

Until 2008, the majority of India's natural gas production came from the Mumbai High complex
in the northwest part of the country. Recent discoveries in the Bay of Bengal have shifted the
centre of gravity of Indian natural gas production.

The country already produces some coalbed methane and has major potential to expand this
source of cleaner fuel. According to a 2011 Oil and Gas Journal report, India is estimated to have
between 600 to 2000 Tcf of shale gas resources (one of the worlds largest). Despite its natural
resource potential, and an opportunity to create energy industry jobs, India has yet to hold a
licensing round for its shale gas blocks. It is not even mentioned in India's central government
energy infrastructure or electricity generation plan documents through 2025. The traditional
natural gas reserves too have been very slow to develop in India because regulatory burdens and
bureaucratic red tape severely limit the country's ability to harness its natural gas resources.

Electricity trading with neighbor countries

Despite low electricity per capita consumption in India, the country is going to achieve surplus
electricity generation during the 12th plan (2012 to 2017) period provided its coal production and
transport infrastructure is developed adequately. Surplus electricity can be exported to the
neighbor countries in return for natural gas supplies from Pakistan, Bangladesh and Myanmar.

Bangladesh, Myanmar and Pakistan are producing substantial natural gas and using for electricity
generation purpose. Bangladesh, Myanmar and Pakistan produce 55 million cubic metres per day
(mcmd), 9 mcmd and 118 mcmd out of which 20 mcmd, 1.4 mcmd and 34 mcmd are consumed
for electricity generation respectively Whereas the natural gas production in India is not even
adequate to meet its non-electricity requirements.

Bangladesh, Myanmar and Pakistan have proven reserves of 184 billion cubic metres (bcm), 283
bcm and 754 bcm respectively. There is ample opportunity for mutually beneficial trading in

( Page No. 32 )
 energy resources with these countries. India can supply its surplus electricity to Pakistan and
Bangladesh in return for the natural gas imports by gas pipe lines. Similarly India can develop on
BOOT basis hydro power projects in Nepal, Myanmar and Bhutan.

Already, India has constructed few hydro projects in Bhutan totaling nearly 2600 MW. Most of
the electricity generated by Bhutan from these hydro projects is presently exported to India. India
can also enter into long term power purchase agreements with China for developing the hydro
power potential in Brahmaputra River basin of Tibet region. India can also supply its surplus /
imported electricity to Sri Lanka by undersea cable link. There is ample trading synergy for India
with its neighbor countries in securing its energy requirements.

Electricity as substitute to imported LPG and Kerosene

The net import of LPG is 6.093 million tons and the domestic consumption is 13.568 million tons
with Rs. 41,546 crores subsidy to the domestic consumers in the year 2012-13. The LPG import
content is nearly 40% of total consumption in India. The affordable electricity (860 Kcal/Kwh at
90% heating efficiency) retail tariff to replace LPG (lower heating value 11,000 Kcal/Kg at 75%
heating efficiency) in domestic cooking is 6.47 Rs/Kwh when the retail price of LPG cylinder is
Rs 1000 (without subsidy) with 14.2 kg LPG content. Replacing LPG consumption with
electricity reduces its imports substantially.

The domestic consumption of Kerosene is 7.349 million tons with Rs. 30,151 crores subsidy to the
domestic consumers in the year 2012-13. The subsidized retail price of Kerosene is 13.69 Rs/liter
whereas the export/import price is 48.00 Rs/liter. The affordable electricity (860 Kcal/Kwh at 90%
heating efficiency) retail tariff to replace Kerosene (lower heating value 8240 Kcal/liter at 75%
heating efficiency) in domestic cooking is 6.00 Rs/Kwh when Kerosene retail price is 48 Rs/litre
(without subsidy).

In the year 2013-14, The plant load factor (PLF) of coal fired thermal power stations is only
65.43% whereas these stations can run above 85% PLF comfortably provided there is adequate
electricity demand in the country. The additional electricity generation at 85% PLF is nearly 240
billion units which is adequate to replace all the LPG and Kerosene consumption in domestic
sector. The incremental cost of generating additional electricity is only their coal fuel cost which is
less than 3 Rs/Kwh. Enhancing the PLF of coal fired stations and encouraging domestic electricity
consumers to substitute electricity in place of LPG and Kerosene in household cooking, would
reduce the government subsidies and idle capacity of thermal power stations can be put to use
economically. The domestic consumers who are willing to surrender the subsidized LPG or
Kerosene permits or eligible for subsidized LPG or Kerosene permits, may be given free
electricity connection and subsidized electricity tariff.

( Page No. 33 )
 During the year 2013, many IPPs offered to sell solar power below 6.50 Rs/Kwh to feed in to the
low voltage (<33 KV) grid. This price is close to affordable electricity tariff for the solar power to
replace LPG and Kerosene use (after including subsidy on LPG & Kerosene) in domestic sector.

Electricity driven vehicles

The retail prices of petrol and diesel are high in India to make electricity driven vehicles more
economical as more and more electricity is generated from solar energy in near future without
appreciable environmental effects. The retail price of diesel is 53.00 Rs/litre in the year 2012-13.
The affordable electricity (860 Kcal/Kwh at 75% input electricity to shaft power efficiency) retail
price to replace diesel (lower heating value 8572 Kcal/litre at 40% fuel energy to crank shaft
power efficiency) is 9.97 Rs/Kwh. The retail price of petrol is 75.00 Rs/litre in the year 2012-13.
The affordable electricity (860 Kcal/Kwh at 75% input electricity to shaft power efficiency) retail
price to replace petrol (lower heating value 7693 Kcal/litre at 33% fuel energy to crank shaft
power efficiency) is 19.06 Rs/Kwh. In the year 2012-13, India consumed 15.744 million tons
petrol and 69.179 million tons diesel which are mainly produced from imported crude oil at huge
foreign exchange out go. The electricity driven vehicles would become popular in future when its
energy storage / battery technology becomes more long lasting and maintenance free.

Rural electrification

Source: Main article: Rural Electrification Corporation Limited

India's Ministry of Power launched Rajiv Gandhi Grameen Vidyutikaran Yojana as one of its
flagship programme in March 2005 with the objective of electrifying over one lakh (100,000) un-
electrified villages and to provide free electricity connections to 2.34 crore (23.4 million) rural
households. This free electricity programme promises energy access to India's rural areas, but is in
part creating problems for India's electricity sector.

( Page No. 34 )
Human resource development

Rapid growth of electricity sector in India demands that talent and trained personnel become
available as India's new installed capacity adds new jobs. India has initiated the process to rapidly
expand energy education in the country, to enable the existing educational institutions to introduce
courses related to energy capacity addition, production, operations and maintenance, in their
regular curriculum. This initiative includes conventional and renewal energy.

A Ministry of Renewal and New Energy announcement claims State Renewable Energy Agencies
are being supported to organise short-term training programmes for installation, operation and
maintenance and repair of renewable energy systems in such places where intensive RE
programme are being implemented. Renewable Energy Chairs have been established in IIT
Roorkee and IIT Kharagpur.

Education and availability of skilled workers is expected to be a key challenge in India's effort to
rapidly expand its electricity sector.

Trading

India lit up at night. This media, courtesy of NASA, was taken by the crew of Expedition 29 on 21
October 2011. It starts over Turkmenistan, moving east. India begins past the long wavy solid
orange line, marking the lights at the India-Pakistan borderline. New Delhi, India's capital and the
Kathiawar Peninsula are lit. So are Mumbai, Hyderabad, Chennai, Bangalore and many smaller
cities in central and southern India, as this International Space Station's video shifts south-
eastward through southern India, into the Bay of Bengal. Lightning storms are also present,
represented by the flashing lights throughout the video. The pass ends over western Indonesia.

Multi Commodity Exchange has sought permission to offer electricity future markets in India.

( Page No. 35 )
Regulation and administration

The Ministry of Power is India's apex central government body regulating the electrical energy
sector in India. This ministry was created on 2 July 1992. It is responsible for planning, policy
formulation, processing of projects for investment decisions, monitoring project implementation,
training and manpower development, and the administration and enactment of legislation in regard
to thermal, hydro power generation, transmission and distribution. It is also responsible for the
administration of India's Electricity Act (2003), the Energy Conservation Act (2001) and to
undertake such amendments to these Acts, as and when necessary, in conformity with the Indian
government's policy objectives.

Effective 28 October 2012, the Union Minister of state for Power is Jyotiraditya Madhavrao
Scindia.

Electricity is a concurrent subject at Entry 38 in List III of the seventh Schedule of the
Constitution of India. In India's federal governance structure this means that both the central
government and India's state governments are involved in establishing policy and laws for its
electricity sector. This principle motivates central government of India and individual state
governments to enter into memorandum of understanding to help expedite projects and reform
electricity sector in respective state.

Government owned power companies

India's Ministry of Power administers central government owned companies involved in the
generation of electricity in India. These include National Thermal Power Corporation, Damodar
Valley Corporation, National Hydroelectric Power Corporation and Nuclear Power Corporation of
India. The Power Grid Corporation of India is also administered by the Ministry; it is responsible
for the inter-state transmission of electricity and the development of national grid.

The Ministry works with various state governments in matters related to state government owned
corporations in India's electricity sector. Examples of state corporations include Andhra Pradesh
Power Generation Corporation Limited, Assam Power Generation Corporation Limited, Tamil
Nadu Electricity Board, Maharashtra State Electricity Board, Kerala State Electricity Board, and
Gujarat Urja Vikas Nigam Limited.

Funding of power infrastructure

India's Ministry of Power administers Rural Electrification Corporation Limited and Power
Finance Corporation Limited. These central governments owned public sector enterprises provide
loans and guarantees for public and private electricity sector infrastructure projects in India.

( Page No. 36 )
 Power Sector Reforms in India
Introduction
In line with the Industrial Policy Resolution of 1948, the government played a dominant role in
initiating and regulating development in key sectors of the economy which inter alia included the
Indian Electricity Sector. According to the Seventh Schedule of the India’s Constitution,
“Electricity” is a concurrent subject thereby implying that both the Parliament of India and the
State Legislatures are empowered to make laws on the subject of “Electricity” - Sl. No. 38 of List-
III -Concurrent List (Acharya). Thus, with Independence, the principle that both the Central
Government and the States should be able to legislate on power was embodied in the Constitution.
Shortly after this, legislative authority was more formally divided in the Electricity Supply Act of
1948. The Act provided for the establishment of the Central Electricity Authority (CEA) and of
State Electricity Boards (SEBs) which were to become the main agencies for supplying power
throughout India. The SEBs were autonomous bodies responsible for the development and
operation of generation, transmission and distribution in the “most economical and efficient way”.
The mandate for the CEA was spelt out clearly in the Act: to develop national plans and help
formulate national power policy, to report the progress of the electricity supply industry, to
provide technical assistance, to advise Central Government/ State Government/Boards/generating
company, act as arbitrator between State or Board or licensees, to train personnel in the sector, to
promote research and, in general, to facilitate efficient power supply. Its role, however, was
essentially advisory rather than executive. The Industrial Policy Resolution of 1956 reserved the
generation and distribution of electricity almost exclusively for the states, letting, existing private
licensees, however, to continue. This led to the gradual domination of the electricity sector by
government enterprises. Amendment in 1976 enabled generation companies to be set up by the
central and state governments resulting in the establishment of National Thermal Power
Corporation Ltd. (NTPC Ltd.), National Hydro Power Corporation Ltd. (NHPC), North Eastern
Electric Power Corporation Ltd. (NEEPCO), Mysore (now Karnataka) Power Corporation and
Water & Power Consultancy Services (a consulting firm), etc.

The development of the sector took place essentially through various public sector utilities – some
under the central government and the majority under the state governments – between them they
accounted for more than 95% ownership.

Until the 1980s, electricity services in most developing countries of the world, as also in many
developed countries of Europe, were delivered by state-owned monopolies. It was considered that
monopolies were best suited to deliver electricity services, as they enjoyed economies of scale and
scope. In India also reflecting the same sentiment, until 1991, the sector in the states was
managed by one large, vertically integrated entity that generated, transmitted and distributed
power, under the respective State Ministries of Power. The rationale for state-owned integrated
electric utilities reflected the internationally common view that electricity sector was a natural
monopoly with the exception of US and Japan (Dossani, 2004).

( Page No. 37 )
However, in many instances, the absence of competition led to poor quality of services, sub
optimal utilization of resources, and little consideration for consumer interests. The inability of
state-owned enterprises to deliver services in an efficient and cost-effective manner led to
reassessment of the policies relating to the provision of services, and there was a growing
perception that corporatization of the sectors could improve efficiencies, quality of service and
improve the bottom-line. As countries began to open up their electricity sector to private sector
participation, they realized the need for new mechanism to balance the interests of the various
stakeholders, to ensure the viability of the industry and reduce transaction costs associated with
privatization. However, recent global experience has shown that generation is not a natural
monopoly. As such, generation can be separated from distribution and competition can be
introduced in generation. Juskow (1998) proposes privatization of the generation sector leading
towards competition in bulk supply through transmission access, while distribution network could
remain a natural monopoly along with availability of retail choices to consumers. Hawdon (1996)
using data envelopment analysis of productive efficiency of power sector in 82 countries has
found that privatizing groups of eight countries exhibit significantly higher efficiency than non-
privatizing groups.

Taking cue from UK and the USA and developing countries like Argentina, Chile, Brazil,
Philippines and Pakistan, the Indian government also commenced the restructuring of the Indian
power sector which commenced with the unbundling, corporatization and privatization of Orissa
power utility. The Indian power sector has witnessed significant changes since early 1990s.
Beginning with allowing private investment in power generation in 1991, initiating regulatory
reforms through Electricity Regulatory Commissions Act, 1998, the Indian government has
enacted the Electricity Act, 2003 which seeks a paradigm shift. In fact the decade of the 1990s
has been the one of experimentation with new governance paradigms not only in India but in
many parts of the world as well. Till then the governance of the electricity sector was based on
the following tenets: the public sector was the best avenue for delivering infrastructure services,
and the private sector’s presence in it was to be restricted, if not prohibited; public sector entities
would serve the public interest the best; parliamentary democracy provided sufficient
accountability to protect consumers’ interest and to ensure efficiency

This approach to governance in the power sector led to prices of electricity being fixed on political
considerations and not on costs, huge cross-subsidies for some class of consumers which led to
endemic power shortages, unsatisfactory operational efficiencies and mounting financial and
commercial losses of State Electricity Boards (SEBs), poor quality of services, huge transmission
and distribution losses etc. This poor state of affairs prompted the Government of India to make a
number of policy and regulatory changes – focusing essentially on better fiscal and operational
management and control of the power industry and also for attracting private capital and rely more
on market forces and competition in order to improve the delivery of the electricity to consumers.

Policy changes that have been initiated are in tune with the global trends and take care of policy,
institutional and regulatory issues and are expected to address technical and financial challenges
( Page No. 38 )
 facing the Indian power sector. This paper takes brief account of the state of affairs of the Indian
power sector and of concerns that have prompted various steps taken by the central and the state
governments for the development of the sector. It details out the key features of the Act and its
likely impact on the Indian electricity industry in the emerging scenario – which comprise the
structural as well as the policy related issues impacting the generation, transmission and
distribution of power. The paper also discusses major issues like role of regulator in the new
regime, issue of open access, power trading, and introduction of power markets and role of
Appellate Tribunal for Electricity in harmonizing the orders of the various regulators keeping in
mind the federal nature of the Indian electricity industry. So as to understand the role of Appellate
Tribunal in ensuring uniformity of policy, rules and regulations for the entire power sector of the
country, some case studies have been discussed.

The Indian Electricity Sector:

Electricity is central to achieving economic, social and environmental objectives of sustainable

human development. In the present digital age electricity has emerged as the most crucial and
critical input for sustaining the process of economic as well as social development. Development
of different sectors of economy is not possible without matching development of the electricity
sector. In fact it has become essential ingredient for improving the quality of life and its absence
is usually associated with poverty and poor quality of life. Though the Indian power sector has
achieved substantial growth during the post-independence era, the sector has been ailing from
serious functional problems during the past few decades.

Per capita consumption of electricity in India increased from 178 kWh in 1985-86 to 338 kWh in
1996-97 (GOI, 2002b) and to 665 kWh in 2005-06 (General Review, 2007). This level of per
capita consumption is less than 1/20 of that prevailing in the US, less than half that in China
against the world average of 2400 kWh and the OECD average of 6900 kWh (IEA data). The
power sector annually avails a substantial share of the outlay of the national economic plan (about
13–18%) (GOI, 2002c), but most of the State Electricity Boards (SEBs) in India have been
working under resource crunch and operating at massive commercial losses. According to the
Government of India reports (Baijal, 1999, GOI, 2001b,d; Parikh and Radhakrishna,2002)
inefficiencies were mainly due to:

 Unsatisfactory operational efficiencies, with the availability of thermal plants at less than
80 percent, losses (including theft of power) as high as 20 to 21 percent;
 High transmission and distribution losses substantially higher than normal technical
standards, with a high component on non-technical losses, accounted for by
poor/inadequate metering and high incidence of theft of energy;
 Poor billing and collection, because of incorrect reporting and billing, and inadequate
collection efforts, tampering with meters and misreporting in collusion with consumers;
 Imbalance in the mix of generation sources and undesirable proliferation of captive
generating units; and

( Page No. 39 )
 Unmanageable size and monolithic structure, making it unwieldy, inefficient and
unresponsive to change as well manpower related problems; poor productivity, low skills
and lack of training for up gradation, low motivation levels.
This was coupled with some states having Generating Plant Load factor (PLF) as low as
40% due to lack of transmission capacity, proper maintenance of plants and supply of
coal (GOI, 2002c). Also the rate of damage of distribution transformers was very high -
for instance as high as 35 percent yearly in some circles of Haryana, leading to a life
expectancy of only a few years, as compared to 40 years in western countries. Further, it
emerged that real figure of technical plus non-technical losses were around 40-50 percent
(Task Force Report, 2004). Consequently, the electricity services provided to the
consumers by these SEBs - both in terms of quality and quantity - are ‘poor’. As the
supply of electricity over a period of time was viewed as public service, over the years
the operation and financial condition of the SEBs began to deteriorate. In addition,
substantial amount of energy generated was lost on account of Transmission and
Distribution (T&D) losses. As a consequence, the SEBs was unable to achieve the
targeted capacity addition. Further, the increase in dues from the SEBs to the Central
Power Sector Undertakings (CPSUs) compounded the problem of capacity addition in the
sector as even the CPSUs were stretched to meet the targets. This led to a situation where
the supply–demand gap of electricity consistently widened over the years and most of the
States in India are facing acute electricity shortage. The energy deficit increased to
11.5% and peak deficit to 18% by 1990/91 (GOI, 2002b). While there has been sub
optimal capacity addition in the sector, the financial conditions of the SEBs deteriorated
over the years. The annual commercial losses (without subsidy) also showed a spiraling
trend increasing to over Rs 330,000 million during 2001-02, which is equivalent to about
1.5% of India’s Gross Domestic Product. Gross subsidy which was Rs 202,100 million
in 1996-97 more than doubled to about Rs. 430,000 million in 2000-2001(GOI, 2002c).
The average rate of return (without subsidy) of the SEBs has reduced to minus 44.1% in
2001-2002 from minus 12.7 in 1992-93(GOI, 2002c). The gap between the average cost
of supply and average tariff increased from 50 paise/kWh in 1996-97 to 110 paise/kWh in
2001-02 thereby entailing huge losses to SEBs(GOI, 2002c). The generating capacity
additions were totally inadequate to meet the burgeoning demand and consequently the
deficits in electrical energy and peak power requirement became the order of the day.
Internal governance mechanisms designed to make SEBs function like commercial
entities failed miserably and the SEB design seemed hopelessly flawed and in dire need
of mending or revamp. Thus there was a general approved consensus that maintaining
this status quo will be detrimental to the nation and may harm the sector itself. It was in
this situation that in 1991 Government of India decided to radically restructure the power
sector through a set of comprehensive reforms.

Power Sector Reforms

( Page No. 40 )
The first reform phase began in 1991 with the introduction of Independent Power Producers (IPP)
paradigm. Government initiated reform process due to the following reasons: (i) the ever-
widening gap between the demand and availability of electricity, (ii) the poor technical and
financial performance of the State Electricity Boards and (iii) inability of the Central and State
Governments to finance and mobilize resources for generation capacity expansion projects,
making third party investment in power sector imperative. The initial step in this direction has
been the amendment of legislation governing the electricity sector in 1991. The Indian Electricity
Act, 1910 and the Electricity (Supply) Act, 1948 were amended to attract private investment in
power generation. The first policy statement of October 19991, titled the Government of India
Resolution – Policy on Private Participation in Power Sector, achieved the following:

 it allowed the private sector to ‘‘set up thermal projects, hydroelectric projects, and
wind/solar energy projects of any size’’. Generators were invited to submit unsolicited
proposals to SEBs for the purpose;
 it allowed the private sector to ‘‘supply and distribute energy in a specified area, … (even
without ownership of) a generating station’’;
 foreign ownership up to 100% was allowed;
 the contract between the generator and the SEB would be a long-term power purchase
agreement (PPA) offering a guaranteed return on equity of 16%. Foreign investors would
receive exchange rate protection up to the benchmark return and for servicing the costs of
foreign debt.
This facilitated the tapping of domestic and foreign capital markets, provided assured returns on
investment and reduced legal hassles to allow the private investors to set-up generation capacities
or operate as licensee in distribution segments, which were hitherto a monopoly of the SEBs.
Private power initiative in generation banked on long-term power purchase agreements. However,
the distribution was not privatized. Further, the policy did not have any provision aimed at
improving the fiscal health of SEBs, which is a prerequisite for the viability of the PPA.

The National Development Council set up in 1993 was the first official body to steer the reform
process. The Committee recommended the following:

 the industry should be re-oriented to be accountable to the consumers;

 foremost reform needed in the state power sector is to restore the autonomy of the state
power utilities;
 The State Government must distance itself from the management of the SEBs to enable the
latter to have necessary technical, managerial and financial autonomy;
 In the long run, the SEBs should function as corporate bodies;
 Minimum tariff should be gradually be increased so that it is not less than 50% of the
average cost of generation and distribution of electricity during the year;
 Objective of the scheme of private sector participation in the power sector should be to
attract domestic and foreign investment in a competitive environment so that the consumer
of the retail may get power so generated at the least cost;
 Stringent measures for unauthorized use and theft

( Page No. 41 )
Having experienced success in restructuring the electricity industry in the Latin American
countries, World Bank put forth power sector reforms as a necessary condition for future
assistance to power sector in the recipient countries (Rajan, 2000). Therefore, at the urging of the
World Bank, Orissa was the first state to enact, in 1996, comprehensive power sector reform act
involving (1) an independent regulatory commission, (2) unbundling of the State Electricity Board
(SEB) into separate generation, transmission and distribution entities, and (3) eventual
privatization, particularly of distribution. The rationale for choosing Orissa was that the share of
agriculture as a percentage of the total energy consumed being less than 10% would mean that the
problems associated with agriculture tariff subsidy would not be there thereby reducing the
political fallout of the reform process. The state was in dire need for reforms with its performance
reaching an all-time low – peak shortages increased from 24% in 1991-92 to 37% in 1993-94; PLF
went down from a low of 34% in 1990-91 to 29% in 1994-95; tariff did not cover cost – they were
78% of cost in 1991-92 and went down to 71% in 1993-94; in 1993-94 revenue was Rs. 3.34
billion short of the required 3 % return on the capital employed (Ranganathan, 2004). The
financing requirement for the sector was estimated at $995 million by the World Bank and this
amount was neither available with the State Government nor the utility – therefore this was an
incentive for the State Government that they would get this loan from the World Bank if they
agreed to reform (Ranganathan, 2004). The ‘Orissa Model’ was based on functional unbundling
and corporatisation of the SEB into generation, transmission and distribution companies.
Subsequently the companies were privatized. The Orissa Electricity Regulatory Commission
(OERC) was set-up under the Orissa Electricity Reforms Act 1995. Subsequently, Haryana and
Andhra Pradesh followed suit but did not privities the distribution companies. The main functions
of State Electricity Regulatory Commission (SERC) include licensing for undertaking business in
its jurisdiction and the setting of tariffs for Transmission and Distribution (T&D) businesses. For
the purpose of tariff determination, the SERCs followed costs-plus tariff-setting approach as
already in vogue (Shankar and Ramachandra, 2000).

In 1995, these measures were further strengthened by a Mega Power Policy, whereby plants above
1000MW capacity would receive additional incentives in the form of a 10-year tax holiday
anytime during the first fifteen years, exemption of customs duty for imports, reduced hassles for
clearances, etc. This also provided for the setting up of Power Trading Corporation (PTC) to act as
an intermediary between the private developers of mega projects and the SEBs. Though
independent power producers (IPPs) evinced interest for adding generation capacity for about
95,000MW, only 6500MW was added during the eighth and ninth five-year plans (1992–2002)
(WEC Report, 2002). Further, out of a targeted capacity addition of 17,588 MW from the private
sector during the ninth Five-year plan (1997–2002), a mere 5061MW only materialized (GOIe,
2002).

The Ministry of Power organized discussions between the Centre and the States in October and
December 1996, from which emerged the ‘‘Common Minimum National Action Plan for Power’’
(CMNAP). The CMNAP recommended:

( Page No. 42 )
 That the SEBs be corporatized, initially within the existing framework of public ownership
followed by gradual privatization;
 That the SEBs focus on improving efficiency in both generation and distribution via
reorganization, efficient metering and energy audits;
 The creation of independent State Electricity Regulatory Commissions (SERCs),
answerable only to the state High Court;
 That tariffs be set—‘‘with immediate effect’’—to earn a return on capital employed of at
least 3%;
 Cross-subsidization is continued provided that no user pays less than 50% of its average
costs. A 3-year phase-in was allowed for farmers only, who would immediately pay at least
Rs 0.50/kWh;
 Simplification of procedures, including that adjustments for changes in fuel charges be
‘‘automatically incorporated’’ in the tariff structure as a pass-through cost. This concept
was incorporated in the June 1997 guidelines for private sector participation in generation.

The CMNAP formed the basis for the June, 1997 guidelines on generation in power sector.
However, the 1996/97 reforms were not comprehensive as it had altogether neglected the reforms
in the distribution sector which were essential to improve the fiscal health of the SEBs. Reforms
at the central level were initiated in 1998, through the enactment of the Electricity Regulatory
Commissions Act, which provided for the setting up of the Central Electricity Regulatory
Commission (CERC) and state level regulatory commissions. This Act was primarily enacted to
distance the government from determination and also to introduce professionalism in tariff
determination through an independent agency. Central Electricity Regulatory Commission was
formed on 26 April 1999 and State Electricity Regulatory Commissions (SERCs) have been set up
in twenty five (25) States and are already functioning and have been notified in four (4) other
states. Most of the States have initiated reform process and some have made substantial progress
in restructuring of the power sector. Tariff Orders have been issued by twenty (20) SERCs and
thirteen (13) states have unbundled/corporatised and nine (9) are expected to follow suit shortly.
The main functions of CERC include regulating tariffs of generating companies, owned or
controlled by the Government of India and any other generating company catering to more than
one state, and also tariffs for the inter-state transmission of electricity. Apart from this, significant
steps taken by CERC include introduction of Availability Based Tariff (ABT), Indian Electricity
Grid Code, and Guidelines for transmission licensing, open access Regulations, Trading
Regulations and fixing of trading margins, etc. ABT has been instrumental in bringing discipline
to the grid by providing frequency linked incentives and disincentives. In the ABT, a two-part
tariff is supplemented with a charge for Unscheduled Interchange (UI) for the supply and
consumption of energy in variation from the pre-committed daily schedule and depending on grid
frequency at that point of time. The regulatory changes have brought transparency to the tariff-
making process. They have also led to the rationalization of distribution tariffs, thereby arresting
increases of cross-subsidy in the system. Public hearings have been able to give voice to
consumers in raising their concerns and contribute constructively to the regulatory process. In

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order to address the consumer complaints, SERCs have come up with a complaint-handling
system.

Due to poor capacity addition by the IPPs, the need for distribution reforms was recognized. It was
towards this effort that in the Meeting of the Chief Ministers on Power Sector Reforms was held
in March 2001 where some level of political convergence concerning the reforms emerged. The
most important step to improve the bottom-line of the sector is effective and creative management
to reduce technical and commercial losses and increase revenues. The resulting revenues along
with performance-tied grants from government and multilateral and bilateral agencies can be used
to improve technical performance involving reduction of T&D losses and improvement of power
quality (frequency, voltage, continuity). Towards this effort, the Accelerated Power Development
& Reform Program (APDRP) was launched in February 2001 by the Union government to
promote distribution reforms and provide transitional finance for the SEBs undertaking reforms.
The main objectives pertaining to distribution reform are aimed at achieving 100% metering,
conducting energy audits, improving HT/LT ratio, replacement of distribution transformers and
the use of IT solutions to ensure accountability. The APDRP aims at reduction of AT&C losses,
bring about commercial viability, reduce outages & interruptions and increase consumer
satisfaction

This program has two components namely the Investment Component which covers
strengthening and up gradation of sub-transmission and distribution and the Incentive Component
which is a grant for states/Utilities towards reduction of cash losses with 2000-01 as the base year.
Eight (8) states namely Andhra Pradesh, Gujarat, Haryana, Kerala, Maharashtra, Punjab,
Rajasthan and West Bengal have been the recipient of such incentive totaling Rs. 17233 million.

Most of the SEBs was on the verge of financial collapse. Large amount of SEBs debts to Central
Public Sector Utilities (CPSUs) and the railways cast a shadow on their balance sheet. One-time
settlement scheme of SEB debts was initiated and came into effect from 17 April, 2002 as a
tripartite agreement between the respective State Government, the Ministry of Finance and the
Reserve Bank of India (RBI) (Ahluwalia, 2000). As per this scheme, 60% of the surcharge and
interest on delayed payment as of 30 September 2001 is waived. The scheme securitises the
remaining surcharge and interest and the full principal amount through tax free bonds to be issued
through Reserve Bank of India by the respective state governments. It also provides for recovery
of future defaults exceeding 90 days from the funds due to the state.

The Electricity Act, 2003

Recognizing the need for the Reform process covering the entire facets of the electricity sector
comprising generation, transmission and distribution to the consumers, a comprehensive
Electricity Bill was drafted in 2000 following a wide consultative process. After a number of
amendments, the bill finally sailed through the legislative process and was enacted on 10 June,
2003. It replaces the three existing legislations governing the power sector, namely Indian

( Page No. 44 )
Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory
Commissions Act, 1998. The Electricity Act, 2003 mandates that Regulatory Commissions shall
regulate tariff and issue of licenses and that State Electricity Boards (SEBs) will no longer exist in
the existing form and will be restructured into separate generation, transmission and distribution
entities. Regulatory function has been taken away from the purview of the government. The
Electricity Act, 2003 mandates licensee-free thermal generation, non-discriminatory open access
of the transmission system and gradual implementation of open access in the distribution system
which will pave way for creation of power market in India. The main provisions of the act are:

 De-licensing of thermal generation and captive generation.

 Open access in distribution to be introduced in phases
 Provision for license-free generation and distribution in rural areas and provision for
management of rural distribution by Panchayats, Cooperative Societies, non-government
organizations, franchisees, etc.
 Non-discriminatory open access in transmission.
 Multiple licensing in distribution.
 Mandatory metering of all electricity supplies.
 Adoption of multi-year tariff principles.
 Provision for cross-subsidy surcharge on direct sale to consumers.
 Power Trading recognized as a distinct activity with ceilings on trading margins to be fixed
by the Regulatory Commissions.
 Upfront payment of subsidies by the States.
 Setting up of an Appellate Tribunal to hear appeals against the decisions of the CERC and
the SERCs.

The Act is aimed at providing an investor friendly environment for potential developers in the
power sector by removing administrative hurdles in the development of power projects and shall
provide impetus to distribution reform to be undertaken in India. Provisions like de-licensing of
thermal generation, open access and multiple licensing; no surcharge for captive generation shall
be the basis for a competitive environment in the Indian power sector. Provisions of open access
would be instrumental in the development of competitive power markets, and multiyear tariffs
shall bring in necessary incentives for performance improvement and to reduce regulatory risk.

Evaluation of the Reform Process

Power sector reform is a long process and its impacts would be known after a long time. Though it
is difficult to predict the outcome of the reform process, a mid course review of developments
could, however, help learn from the past mistakes and take some mid-course corrective measures.
Indeed, advocates for the power sector reforms argue that the proposed changes will bring better
quality of power at lower rates, with positive effects on economy and society at large. In India the
initial impetus of the reform was on the generation side rather than the distribution side where the
actual problem lay. Distribution reform was given thrust by incentive based schemes like the

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Accelerated Power Development and Reform Program (APDRP). Thirteen (13) SEBs and
Electricity Departments have unbundled and corporatised and another nine (9) are expected
shortly, political compulsions to go ahead with privatization has forced many state governments to
repeatedly postpone the same in their respective states.

Bacon and Besant–Jones (2001) advocate that privatization of the distribution and supply
functions ought to be carried out first. This facilitates the entry of potential investors in the
generation by improving the creditworthiness of buyers of power from the generators. The same
model had been adopted for Orissa reforms, however, it has not yielded the desired results and it is
ranked 21st amongst 29 states by ICRA/CRISIL, 2006 (Report on Rating of State Power Sectors,
2006). In the case of Orissa, post privatization, the operations of distribution companies are not
viable as the tariffs that have been fixed by the regulator are based on normative T & D loss of
35% against the actual losses that were estimated to be around 45–47% (Anoop Singh, 2006).
Revenues from sale of the government stake in Orissa were not ploughed back into the sector
which limited the government’s ability to influence the future developments in the sector.
However, Orissa provided a powerful demonstration effect for other states to follow and learn
from its experiences.

The World Bank’s staff appraisal report on Orissa, before commencing of the reforms, has
targeted a reduction of T&D losses to the level of 25% by the year 2001 but this has not been
realized at all (Orissa Power Sector Restructuring, 1996). The picture of Haryana, UP, AP and
Karnataka also are not different. In the case of these States, the losses showed an increasing trend
and are currently above 30%. In AP and Karnataka the percentage of T&D losses have shown
about two-fold increase while undergoing restructuring. Regarding the growth in per capita
consumption of electricity, the rates in these States except that of AP have not indicated any
substantial improvement above the national average growth rate of 3.5%.

In the ‘Delhi model’ some of these lacunae were taken care of to some extent. Involvement of
Regulators at all stages of privatization and long-term tariff profile led to the reduction of
regulatory uncertainty. However, it continues with the single-model buyer approach as in the case
of Orissa and other restructured state utilities. In the Delhi model, phased reduction in T&D
losses, revenue collections and transitional financial assistance (subsidy) are the three critical
areas.

Today India, like many Asian economies, has achieved impressive rates of economic growth. Real
economic growth has averaged 6.0 percent during the 11-year period from 1992–93 to 2004–05.
By contrast, American economic growth has averaged a mere 3.5 percent per year for the past
several decades and growth within the European Union has been even lower (Reineberg, 2006).
An analysis of the actual growth in per capita real GDP and electricity generation estimated from
the time series data since 1990-91 shows that elasticity of electricity consumption with respect to
GDP is around 1.06 compared to 1.30 for the period since 1980-81 (Integrated Energy Policy,
2006) and is likely to reduce further during the forthcoming 10 th Plan, 11th Plan, 12th Plan, 13th

( Page No. 46 )
Plan and 14th Plan as is the trend in other countries. However, for India, the energy elasticity of
GDP growth will fall very substantially as rising income levels will foster life style changes that
are more energy intense. This means that 8% GDP growth will not be possible unless annual
growth in electricity generation is around 8 % during the 10th - 14th Plans.

The Electricity Act : what it entails

As this Act shall overrule all previous acts, this will pave way for providing greater clarity to the
regulators as well as the judicial system. The Act provides a comprehensive yet flexible legislative
framework that would ensure power development and at the same time the sector will move
towards competitive market scenario. Competition with regulatory oversight are the cardinal
principals around which the entire Act is woven – competition to encourage efficiency in
performance and regulatory oversight to protect the interest of all the stake holders with special
emphasis on protecting the consumers and ensuring recovery of costs for the investors. The Act
entails encouraging private sector participation in generation, transmission and distribution with
the role of the Governments being relegated to advisory in nature. The act also obviates the
requirement of each State Governments to pass its own Reform Act and has introduced new
concepts like power trading and open access. The Act aims to establish market-based regime in
the electricity sector. The Act promotes rationalization of tariff, ensures transparent policies
regarding subsidies, promotes efficient and environmentally benign policies, constitution of
Regulatory Commissions and the establishment of Appellate Tribunal for Electricity, etc.
measures that cover all facts of the electricity industry and shall have a major bearing on the
structure of the sector which hitherto existed.
Introduction of competition is the main feature of the new legislation - non-discriminatory open
access in transmission has introduced competition amongst the generators at the outset. This
entails that the generators can choose any distributors and distributors their suppliers with the
transmission wires providers obliged to give non-discriminatory open access for transmission of
electricity from generator to supplier on payment of transmission charges which would lead to the
emergence of the Multi Buyer Model (MBM) markets in the near future.

Competition on the distribution end had also been introduced by providing for open access in
distribution and by allowing more than one licensee in the same area of the supply. Open access in
distribution shall pave way for the consumer to have choice of supplier. The concept of have more
than one licensee in same area shall also give the consumers choice to choose their supplier. The
law is replete with promise for growth in the sector – controls in thermal generation have been
totally done away with. Freedom for captive generation along with non-discriminatory open
access for conveyance of electricity generated from captive station to the destination of its own
use and to any consumer (on payment of surcharge) subject to availability of the transmission
system on payment of transmission/wheeling charges to be determined by an independent
regulator is also another such provision. A major thrust to promote competition has been given by
recognizing trading (i.e. the activity of purchase of power for resale thereof) as an independent

( Page No. 47 )
activity. While liberalization is the cornerstone, the Electricity Act does not encourage unbridled
growth of the sector – Regulatory Commissions have been envisaged as the watchdogs and have
to regulate tariff, specify performance standards for licensees. The Act envisages Appellate
Tribunal for Electricity (specialized court) which would go a long way in ensuring speedy disposal
of cases and at the same time to provide technical expertise in decision on appeal. Further, for
safeguarding the interests of the consumers, the Act mandates every distribution licensee to set up
grievance redressal forum. Appeal against the forum lies before the Ombudsman to be appointed
by the State Commission. As regards, theft of electricity, the Act makes elaborate provisions to
curb this menace.

The mantra of competition in all facets of the electricity industry that has been enshrined in The
Electricity Act, 2003 will lead to improved efficiency and better customer service standards and
the wholesale and eventually retail markets shall provide choice to end users in terms of supplier,
reliability of supply and competitive tariffs which would in times to come be market determined.

Role of Government:
The role of the Government as envisaged in this Act is that of a facilitator through Policy
instruments. The polices are meant to provide the roadmap for future development of the power
sector in India. There are four policies that the Central Government is required to frame; viz.

 National Electricity Policy and Tariff Policy: The Act empowers the Central Government
to prepare the National Electricity Policy and Tariff Policy in consultation with the State
Governments and Central Electricity Authority (CEA). These policies have to be prepared for
development of power systems based on optimal utilization of resources such as coal, natural gas,
nuclear substances, hydro and renewable sources of energy. These policies have to be published
and are also subject to review or revision in consultation with the State Governments and CEA.
Further, in accordance with National Electricity Policy, the CEA has to prepare National
Electricity Plan after inviting suggestions from all stake holders and notify it once in five years.
Such Plan can be notified by CEA after obtaining approval from the Central Government and
incorporating directions, if any, given by the Central Government while granting such approval.

 National Policy on standalone systems for rural areas and non-conventional energy
systems: The Central Government after consultation with the State Governments shall prepare and
notify a national policy, permitting stand alone systems (including those based on renewable
sources of energy and other conventional sources of energy) for rural areas.

 National Policy on electrification and local distribution in rural areas: The Central
Government in consultation with State Governments and State Commissions shall formulate a
national policy for rural electrification and for bulk purchase of power and management of local
distribution in rural areas through Panchayats Institution, user’s association, co-operative
societies, non-governmental organizations or franchisees.

( Page No. 48 )
At the national level, the responsibility of planning rests with CEA and the National Electricity
Plan notified by CEA shall form the basis for future capacity addition in generation and
transmission networks. The Act mandates that Regulatory Commissions shall be guided by the
National Electricity Policy, National Electricity Plans and Tariff Policy in discharge of their
functions. Further the Regulatory Commissions are to be guided by any direction of the
government (Central Government for CERC and State Government for SERC) pertaining to any
policy involving public interest.

Impact on Generation :

Despite making massive capacity addition since the time of inception – present capacity being
1,32,000 MW (General Review, 2007) the industry has not been able to meet the burgeoning
demand of reliable and cost-effective supply. The demand has continued to grow at a compound
annual rate of growth of nearly 8% (Das et al, 1999) has far outstripped the supply leading to a
widening of gap and endemic shortages. The Electricity Act makes a departure from the old
regime as regards generation and lays the foundation for creation of a competitive environment by
removing entry barriers. Generation has been recognized as an activity that does not require
license. The earlier controls (in the form of techno-economic clearance (TEC) of CEA) for
thermal generation have been dispensed with. However, hydro electric power projects would still
require TEC in order to ensure that there is optimal exploitation of the hydro potential of the river
basin as well as other technical considerations such as dam design and safety and also to take care
of the inter-state river issues. Any generating company (which now includes association or body
of individuals, whether incorporated or not) may set up a generating station if it complies with the
technical standards relating to grid connectivity as specified by CEA. Provisions pertaining to
non-discriminatory open access in transmission shall enable generators to sell their power to any
entity – distribution company/trading company/directly to consumers which shall foster
competition. Further, Section 63 of the Act encourages procurement of power through competitive
bidding.

Captive Generating Plants:

Harnessing unutilized captive generation capacity has also been addressed by this Act. The
installed capacity of captive generation of 1 MW or more was estimated to be in excess of 27,500
MW (Captive Report, 2001) in 2001. i.e. more than one-fifth of the total installed capacity. The
policies to set up captive stations hitherto had not been uniform and very state specific and there
was wide variation in certain pricing policies in respect of wheeling and banking charges, standby
charges and requirement to compensate for entire T&D losses for wheeling of energy, fuel use and
restrictions in captive power plant size (SEB to seek approval of CEA if plant capacity is more
than 25MW) required have impeded the growth of captive stations. Such restrictions and controls
on the captive generation have been dispensed with in the Act. As per Section 2(8) The

( Page No. 49 )
expression “captive generating plant” has been defined to mean a generating plant set up by a
person to generate electricity primarily for his own use and includes a power plant set up by any
co-operative society or association of persons for generating electricity primarily for use of
members of such co-operative society or association (consume at least 51 percent of electricity
generated from such a plant). Thus the definition of captive generation enables setting up of group
captive plants. Further, open access for conveyance of energy generated from such plant to the
destination of his own use is allowed and for this, unlike in the case of open access consumers, no
surcharge is payable so long as it is for his own use. Any surplus power generated by the plants
can be offloaded into the grid. Supply of electricity from such plants to the grid shall be regulated
in the same manner as generating stations of the generating company. Provisions on non
discriminatory open access, power trading and transparent wheeling charges based on economics
should provide the right environment for harnessing the spare captive capacity since multiple
avenues are available to the generators for selling their output. The liberal provision regarding
captive generation shall enable consumers to meet their requirements of electricity if the existing
utility is unable to meet their demand in terms of quantity, quality and reliability of supply. This
shall force the existing utilities to improve their performance also.

( Page No. 50 )
Impact on Transmission

A robust transmission network is an essential pre-requisite for power market operations. In fact
some of the experts have recommended that the market reforms should commence with
transmission and not with generation. Joskow vide referring to the development of competitive
power markets in US had commented “Transmission networks provide the essential supporting
platform upon which competitive wholesale markets depend. Transmission congestion effectively
reduces the geographic expense of competition, increases the incidence of location market power
and can limit entry of competing generators. A well functioning transmission network is a critical
component of a programme to create robust competitive wholesale and retail markets for
electricity. Yet the legacy transmission network that we inherit from the era of large number of
vertically integrated regulated firms was not designed to promote competition among generators
over large geographic areas, focused on interconnecting generators and loads within individual
utility control areas and did not take local market power and other market performance problems
into account when investments were made. It should come as no surprise that the legacy network
is not well suited for supporting competitive wholesale markets and that significant investments
will be required to adapt the legacy network to its new role”.

In India, the development of the power transmission system has essentially been taken care of by
Power grid Corporation of India Ltd. (PGCIL) at the central level and by the State Electricity
Boards at the state level with CEA playing a supervisory role for overall development of efficient
transmission network across the country. For having efficient economical integrated transmission
and supply system the Government of India had constituted Region-wise Regional Load Dispatch
Centers (RLDCs). Through the Electricity Laws (Amendment) Act, 1998, a proviso was made to
treat transmission as a distinct activity under the Indian Electricity Act, 1910 and the Indian
Electricity (Supply) Act, 1948 and to empower the Central Government or the CERC to grant
transmission licenses in case of inter-state transmission of energy and the State Government or the
SERC in the case intra -state transmission of energy. This Act also introduced the concept of
transmission utility with the prime responsibility for planning and coordination of the transmission
system - Central Transmission Utility (CTU) for interstate transmission system and State
Transmission Utility (STU) for intrastate transmission system. The Government of India has for
the time being designated POWERGRID as CTU. The Act of 1998 has allowed independent
transmission service providers to set up transmission lines for inter- state and intra –state
transactions, but under the direction, control and supervision of the CTU/STU. The RLDC which
was mandated to coordinate the integrated operation of the power system in a particular region are
required by law to be operated by a CTU.

The Electricity Act, 2003, has continued with the concept of planning and coordination of the
transmission system still being vested with the transmission utility, however, the new enactment
has brought about some changes in the role of transmission utilities. The transmission utilities
(prior to The Electricity Act, 2003) were empowered to approve the application of a person for
grant of license before the Regulatory Commission actually granted license to such persons and
( Page No. 51 )
the transmission utilities themselves were deemed licensees which led to conflict of interest.
Therefore, the new law provides that the transmission utilities shall have only a recommendatory
role in grant of transmission licenses and the Regulator shall have the powers to grant the same.
The new Act envisions multiple licenses in parallel transmission and distribution lines - such
proviso has been made for private licensees for inter-state and intra-state transmission of
electricity. Non-discriminatory open access is the fundamental requirement of the Electricity Act
upon which the entire competitive framework rests. The law mandates that it shall be the duty of
the transmission utility/licensee to provide non-discriminatory open access to its transmission
system to every licensee and generating company and also to consumers after open access in
distribution is introduced as per provisions of Section 42. Open access in transmission thus
enables the licensees (distribution licensees and traders) and generating companies the right to use
the transmission system without any discrimination. This would entail that the distribution
licensee could procure power any source and would also allow traders and generating companies
to directly sell electricity to the distribution companies of their choice and pave way for Multi
Buyer Model market. To ensure that such markets are operational transmission capacity in the
country would need to come up in such a fashion that would ensure direct flow to the bulk
consumers along with inter-regional links having sufficient capacity for interconnectivity of all the
regions. This would generate competition amongst sellers and help in reduction of
generation/procurement costs. With the purpose of ensuring neutrality in transmission of
electricity and guarantee non-discriminatory open access in the transmission system, the Act
debars the transmission utility from engaging in trading in electricity. This shall ensure that the
transmission utilities/licensees would not have any commercial interest and would be responsible
only for maintenance and up-keep of their transmission networks/facilities and would be entitled
to transmission charges for the use of these networks/facilities. For better management of day to
day operations, the Central Government can establish National Load Dispatch Centre (NLDC) for
optimum scheduling and dispatch of electricity among the Regional Load Dispatch Centers. The
NLDC shall be operated by a Government Company and shall not engage in the business of
trading in electricity. The RLDC and SLDC shall also not engage in the business of trading and
shall comply with the principles, guidelines and methodologies in respect of wheeling and
optimum scheduling and dispatch of electricity as the Central Commission/SERC may specify.

Bulk electricity supply business which was hitherto being undertaken by the Transmission
Companies of the States shall cease to exist in their present form where they are presently
purchasing power from the generating companies through long term PPA’s and then reselling the
same as well as wheeling all rolled into one business. In the new set up, the transmission
companies shall be responsible for operating and maintaining transmission networks for which
they shall be entitled to recover wheeling charges. The transmission utilities shall plan and
coordinate development of transmission networks to ensure congestion does not occur.

Impact on Distribution:

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Private sector participation on the generation side has materialized in a number of states, however,
on the distribution side it is still in a nascent stage with privatization of distribution completed in
the states of Orissa and Delhi. SEBs in India has functioned as government departments and their
operations have lacked commercial orientation. The fallout has been that the objective of
supplying good quality and reliable power to the consumer’s at the most efficient price has been
compromised. The irrational tariff policies being adopted by the SEBs has resulted in widening of
gap between the cost of supply and average tariff over the years and has had a negative impact on
both the industrial and commercial sectors which has greatly impacted the competitiveness of
these sectors. The gap has increased from a level of 50 paise/kWh in 1996-97 to about 110/kWh
paise in 2001-02. This has led to burgeoning commercial losses over the years and the industrial
and commercial consumers facing the maximum brunt as these two sectors were cross-subsidizing
the lower tariffs of the agricultural and domestic sector which were due to political compulsions.
Unrealistic tariff coupled with cross subsidy has been the bane of problems being encountered by
the Indian power sector which has resulted in industry seeking other alternatives for sourcing of
their energy needs – the share of industry in the total energy sales is showing a declining trend, in
2001-02 it was 29% as against 33% in 1996-97 (GOI, 2002c).

The experience of a decade of electricity reforms in the India has made it apparent that unless the
distribution segment of the industry is efficient and solvent, any solution to the problems of the
power sector may not be adequate. Changes in the distribution segment are generally more visible
and have a direct impact on consumers and hence most difficult to implement. It was with this
backdrop that as the private sector would be driven by commercial principles it would bring about
improvements in operational efficiency. Further, private sector participation coupled with strong
competitive market scenario would result in meeting the objective of better quality and lower
tariffs. Participation by private sector would also introduce a kind of “peer effect” on the public
sector of the kind experienced in the Indian telecom sector.

Like transmission, distribution of electricity also being a natural monopoly has been envisaged as
a licensed activity under the Electricity Act, 2003. Distribution of electricity involves both supply
and wires business. A distribution licensee is required to supply electricity to consumers and at the
same time build, own and maintain his distribution system. This is true even in cases where more
than one licensee operates in the same area of supply. The Act envisions two facets of competition
in distribution - open access to consumers and multiple licensees in the same area of supply. Open
access to consumers shall enable consumers to get supply from a person other than the distribution
licensee of his area of supply by using the distribution system of such distribution licensee. Open
access in distribution shall be introduced in phases to take care of cross-subsidies. The law
provides open access in distribution would be allowed by the State Commissions in stages with a
proviso that if open access is allowed a surcharge will be levied by the State Commission to take
care of the requirements of current level of cross-subsidy and the fixed cost arising out of the
licensee’s obligation to supply. The law, therefore, balances the right of the consumers to procure

( Page No. 53 )
electricity from a source of his own choice as well as takes care of the legitimate rights of the
existing licensees. The Act mandates that the State Commission shall within five years (i.e.
January, 2009) necessarily allow open access to consumers having demand exceeding one
megawatt. Open access shall also encourage competition amongst the suppliers and exert on the
existing utilities to improve their performance both in terms of quality and price in order to ensure
that they do not lose their existing customers.

While the provision of open access in distribution is expected to benefit primarily the bulk
consumers, the provision enabling multiple licensees in the same area of supply could benefit the
common consumers. It envisages a situation where a consumer would have a real choice of
supplier to get supply of electricity. This would end the monopoly of any single supplier in a given
area of supply. Competition amongst the suppliers would help improve the quality of power and
reduce cost of supply. In fact, in order to encourage competition amongst multiple licensees in the
same area of supply, the law mandates that the Regulatory Commissions would determine only the
ceiling price for designated area and within this ceiling the licensees would be free to adjust their
tariffs keeping in view the competition being faced.

The Act also mandates that every distribution licensee is required to give supply of electricity to a
consumer within his area of supply within one month after receipt of the application requiring
such supply. There are, however, certain circumstances in which this period of one month can be
extended. Where a distribution licensee fails to supply within a stipulated period, he shall be liable
to penalty. This provision safeguards the interest of the consumers and ensures improved
performance on the part of the licensee. The Act mandates that no licensee shall supply electricity
after the expiry of two years from the appointed date, except through installation of a correct meter
in accordance with the regulations of CEA. Further, CEA may direct installation of meters at any
stage of generation, transmission or distribution or trading of electricity as it may deem fit.
Metering at different stages would ensure that risks related to data uncertainty (base line data
pertaining to T&D losses etc. like in the case of Orissa and Delhi) due to unmetered supply and
thefts shall be mitigated. Once the metering at all stages is achieved it would result in transparency
in the sector due to availability of better information/effective monitoring of operations of the
utility which in turn would lead to a more transparent tariff regime and consumers shall benefit
from better quality and reliability of supply and in the long run help state governments in reducing
subsidy and charging tariff reflective of costs. Distribution licensee is empowered to recover
charges/expenses/security and disconnect supply for non-payment of dues. Distribution losses are
mainly due to high component of theft, the exact amount of which cannot be determined due to
lack of metering. Prior to this Act, disconnection of supply even in case of non-paying customers
could not be administered due to political influence on SEBs. The Act explicitly provides for
stringent disconnection provisions which coupled with independent State Commissions should
help utilities cut their losses and improve quality and reliability of supply to paying customers.
The anti theft provisions, however, ensure that honest consumers are not unnecessarily harassed.

( Page No. 54 )
Tariff Principles:

Hitherto the tariff was computed using cost plus methodology – approach following standard rate
of return on capital base. However, the Electricity Act, 2003 makes a departure and does not
mandate any specific method for tariff determination. The determination of terms and conditions
of tariff has been left to the realm of the Regulatory Commission and only guiding principle have
been stipulated which inter-alia include performance based regulations, the multi-year tariff
principles. The Act mandates that the Regulatory Commission ensure that the tariff reflects the
cost of supply of electricity and also reduces cost subsidies within a specified time period. As
regards tariff determination, the law empower the Regulatory Commissions to fix tariff for – (i)
supply of electricity by a generating company to a distribution licensee through long term
agreement; (ii) transmission of electricity; (iii) wheeling of electricity and (iv) retail sale of
electricity. However, the Act envisages in case of shortage of electricity the appropriate
Commission may fix the minimum and maximum ceiling of tariff for sale or purchase of
electricity in pursuance of an agreement, entered into between a generating company and a
licensee for a period not exceeding one year to ensure reasonable price of electricity. Further, tariff
determined through competitive bidding is also not to be regulated and where more than one
licensee operates in the same area of supply, the Regulatory Commission may fix maximum
ceiling of tariff and the distribution licensees shall be free to adjust their tariff within the ceiling.

Trading and Marketing Development.

The Electricity Act, 2003 recognizes trading as an independent licensed activity. Trading has
been defined as an activity of purchase of electricity for sale thereof. The Act mandates that for
undertaking trading in electricity, licenses shall be granted by the Regulatory Commissions -
Central Commission for inter-state trading and the State Commissions for intra-state trading. The
Regulatory Commissions are required to specify the technical requirements, requirement of capital
adequacy and credit worthiness for being electricity trader, duties and obligations of the traders
and also to fix trading margins, if considered necessary. CERC has already notified such
regulations for inter-state trading. The Act permits generating companies and distribution
licensees to engage in trading, however, the transmission utilities and transmission licensees have
not been allowed to trade in electricity.

As regards development of power market a cautious approach towards development of fully

fledged market of electricity has been envisioned keeping in view the present scenario of
shortages prevalent in the sector. The responsibility of development of such markets vests jointly
with both the Government and the Regulatory Commissions. The Government is to define a road
map through the National Electricity Policy based on which the Regulatory Commissions shall
guide the development of the power market.

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Regulatory Commission:

Independent regulator which has been introduced through the enactment of the Electricity
Regulatory Commissions Act, 1998 has grown into a very dominant institution under the
Electricity Act, 2003. The ERC Act, 1998 empowered the Regulatory Commissions for only tariff
fixation whereas the Act, 2003, bestows all regulatory responsibilities on this institution. The role
of regulator is very crucial for the development of free and open market structure, promoting
competition and protecting the interest of all stakeholders. The enactment of 2003 Act distances
Government from regulation and transfers all regulatory responsibilities to independent
Regulatory Commissions. The Act mandates setting up of a Regulatory Commissions at both the
central as well as state level and in order to ensure uniformity in approach it has been provided
that the principles and methodologies specified by CERC for determination of tariff for generating
companies and transmission licensees are the guiding principles for State Commission. Central
Government as per the provisions of the Act has formulated the National Electricity Policy and
Tariff Policy and Regulatory Commissions would be guided by these policies in discharge of their
functions. Regulatory Commissions are required to grant license, amend, revoke and suspend
licensee, regulate the performance of the licensee, adjudicate upon disputes, regulate phasing out
of open access in distribution and determine open access surcharge etc. Facilitation of open access
in transmission has to be ensured by the CERC whereas the open access in distribution is the
responsibility of the State Commission. It is a well known principle that in order to ensure
viability of the sector and at the same time protecting the interest of the consumers one has to
allow for all “efficiently incurred costs” (with realistic and uniformly applicable efficiency
benchmarks) in tariff setting but disallowing inefficiencies being passed on to the consumers.
Regulatory Commissions would, therefore, play crucial role in tariff fixation where the tariff has
to be reflective of the cost and cross subsidy has to be progressively reduced. The challenge being
more severe in view of the fact that agriculture is the back bone of Indian economy and has till
date enjoyed highly subsidized flat tariff. Another issue which would require urgent attention of
the regulator is determination of minimum level of transmission and distribution losses. The
regulator have also to ensure that the operating and financial norms for tariff fixation take into
account the fair assessment of the risks involved in the electricity sector.

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Consumer Protection:

Before the enactment of the Electricity Act, 2003 the sector has been driven by populist measures
which were politically motivated, promoted subsidization regimes and has led to inefficient
operations of the utilities resulting in poor quality and reliability of power supply to consumers.
It is a general belief that once the unbundling of the sector takes place and privatization is
introduced the quality and reliability and availability of power in the country would improve.
However, the same is not a certainty as has been the case in the Australian Power Sector
Restructuring Programme (Sharma, 2003). The Act mandates creation of Grievance Redressal
Forum for redressal of grievances of consumers in a time bound manner. The guidelines for the
formulation of Redressal Forum have to be specified by the State Commission. Appeal against the
Redressal Forum lies before an Ombudsman to be appointed/designated by State Commission.
The Act provides protection to the consumers with reference to standard of performance. Failure
of compliance of the performance standard makes the licensee liable to pay compensation to the
affected person. Licensee is required to periodically submit information to the Regulatory
Commission about the compliance of performance standard. The Act also provide for specific
penalty and punishment such as imprisonment for electricity theft or theft of electrical lines,
tampering of meters or deliberate or negligent wastage of electrical energy. The Act further
provides that no sum due from consumers can be recovered after a period of two years unless the
same was continuously shown as recoverable. The Act provides for a constitution of District
Level Committee by the State Government inter-alia to review the quality of power supply and
consumer satisfaction. The Act has also made it the policy of the Government to endeavor to
provide electricity to all areas thereby ensuring power supply to all .

Appellate Tribunal:

The Electricity Act, 2003 mandates establishment of the Appellate Tribunal for Electricity for
hearing appeals against the orders of the Regulatory Commission and adjudicating officers by
notification by the Central Government. Hitherto appeals against the orders of the Regulatory
Commissions had to be filed in the High Court. The Appellate Tribunal has been constituted to
provide technical expertise in decision making and has the same powers as vested in a Civil
Court. An order made by the Appellate Tribunal shall be executable as a decree by the Civil Court.
It is a specialized tribunal which shall look into the cases of the electricity and energy sectors and
has led to speedy disposal of cases. Apart from hearing appeals, the Tribunal ensures that the
Regulatory Commissions discharge their statutory functions. An appeal against orders of the
Appellate Tribunal lies before the Supreme Court. In a short period of its existence, the Appellate
Tribunal has disposed of over four hundred appeals from various stakeholders such as generators,
transmission and distribution licensees, traders etc.

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 An overview on Tariff Fixation Process in the Electricity Sector
The key issues before the Commission and also presents the Commission’s preliminary views on
tariff determination requires the :

2. Brief Overview of Electrical Industries.

3 Status of Reforms in State and State Policies:

4. Objectives of tariff setting

Tariff determination is the primary tool available with the Commission for creating an enabling
environment to fulfill its mandate under the ERC Act. The Commission proposes to use tariff as a
measure to achieve multiple objectives, which are listed below:

1. To balance the interest of the consumers and the utilities in the sector.
2. To promote competition, efficiency and economy in the activities of the industry.
3. To provide incentives for optimum invest
4. To provide incentives for good performance and for improving the quality of supply and
service to the consumers.
5. To ensure that electricity generation, transmission and distribution are conducted on
commercial principles.
6. To ensure planning, evaluation and implementation of a programme for reduction of
T&D losses.
7. To facilitate utilization of environmentally sound options.
8. To provide incentives for efficient utilization and conservation of electricity.
4 Principles of tariff setting

Section 29 of the ERC Act provides the basic guidelines in respect of determination of tariff by
the Commission. These are enumerated below.

The principles and their applications provided in Sections 46, 57 and 57A of the Electricity
(Supply) Act, 1948 and the Sixth Schedule thereto;

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 i. In the case of the Utility or its successor entities, the principles under Section 59 of the
Electricity (Supply) Act, 1948;
ii. That the tariff progressively reflects the cost of supply of electricity at an adequate and
improving level of efficiency;
iii. The factors which would encourage efficiency, economical use of the resources, good
performance, optimum investments, and other matters which the State Commission
considers appropriate for the purpose of the ERC Act;
iv. The interests of the consumers are safeguarded and at the same time, the consumers pay for
the use of electricity in a reasonable manner based on the average cost of supply of energy;
v. The electricity generation, transmission, distribution and supply are conducted on
commercial principles;
vi. National power plans formulated by the Central Government.
The Commission in addition to these may keep in view a number of other parameters. Some of
these are listed below:

1. The need to rationalize the tariff structure on the basis of benchmarked and performance
based cost of supply at different voltage levels and also to reflect the difference in cost of
supply during different seasons, during different hours of the day and at different locations.
2. To unbundle the tariff structure to reflect the cost of providing different services so as to
enable rational allocation of costs.
3. To link the rationalization in tariff structure with the productivity in capital employed
manpower resources and quality of supply so as to protect the interests of the consumers.
4. The need to transparently provide the appropriate incentives in a non discriminatory
manner, for a continuous enhancement in the efficiency of generation, transmission and
distribution and up gradation in the level of service.
5. That the tariff should be fair, just and non-discriminatory.
6. That the tariff, to the extent possible, should be simple with fewer rates and slabs and easy
to implement.
7. That sudden shocks in tariff structure need to be avoided

5. Determination of revenue requirement

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The first step in the process of tariff determination by the Commission is the calculation of the
total revenue to which the entity will be entitled. The revenue requirement includes the costs,
which are incurred prudently in operating and maintaining the system and a return on the
investment. These costs need to pass the test of usefulness and should be verifiable by the
consumers.

There are two broad options to determine revenue requirement for generation, transmission, and
distribution sectors, which are discussed below.

1. Historic cost approach

2. Marginal cost approach
5.1 Historic cost approach

Under the historic cost methodology, the calculation of revenue requirement is based on the actual
accounting costs expected to be incurred by the entity during a particular year in providing service
to its consumers. The calculation of revenue requirement is based on a test year, which is generally
the last financial accounting year for which all relevant information is available. For determination
of tariff, the test-year costs are adjusted to reflect the expected changes in the cost of supply during
the year.

The main components of accounting costs under the regulatory review include

a) Power purchase and generation costs

b) Employee costs
c) Operation and maintenance costs
d) Administration costs
e) Interest costs
f) Depreciation
The advantage of this methodology is that it is fairly simple, easily understood and
implementable, and provides steady returns for the entities.

The main disadvantages associated with the historic cost methodology are as follows.

a) It does not provide correct signals for efficient investment and consumption
decisions. For efficient resource allocation, it is the actual resource used or saved by

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 consumer decisions that is important and hence the prices should reflect the cost of
supplying each incremental unit of output. The historic cost approach does not capture this
important principle. Further, it is possible, especially in a market constrained by supply,
that the tariff based on historic cost may not provide sufficient resources for future
investments.

b) Only limited attention to the quality of service is possible under this approach. Hence,
while the regulator may try to ensure through the price that only reasonable profits are
generated, it is still not possible to ensure that the consumers would get the quality of
service commensurate with the prices. Since poor service is equivalent to high prices, there
are possibilities that the regulated utility may still exploit the monopoly power.

The alternative to the historic cost methodology is the pricing methodology based on the marginal
cost.

5.2 Marginal cost approach

The primary difference between the historic costs and the marginal cost is that the marginal cost
concept is forward looking i.e. is based on supplying an additional unit of supply, while the
historic costs are backward looking. Marginal cost is the system cost incurred in meeting the
demand for an incremental unit of electricity (supplying one additional kWh). It can also be
envisaged as the cost that would be saved by producing one unit less. In a supply constrained
system, the cost of supplying electricity increases whenever the existing consumers increase their
demand or when new consumers are added to the grid? Hence, the prices should reflect the
economic value of the future resources. The use of marginal cost based pricing is consistent with
this objective as it provides clear signals to both producers and the consumers on the true value of
the electricity consumed. In contrast, the use of historic cost approach assumes that future
resources are as cheap as in the past. Pricing below the marginal cost results in wasted resources
since the cost of producing some units exceeds their value to the consumers. The marginal cost
thus provides a good benchmark in measuring the efficiency of the existing tariffs.

The other advantage with use of long run marginal cost (LRMC) approach is that it facilitates
structuring of the tariff to reflect the cost of serving; (a) different consumer categories; (b) in
different seasons; (c) at different hours of the day; (d) by different voltage levels; (e) in different
geographical areas; etc. The use of marginal cost approach also results in a fair tariff as the costs

( Page No. 61 )
are allocated among the consumers as far as possible according to the costs imposed by them on
the system. The use of marginal cost based pricing results in a distributed and homogenous use of
electricity by consumers as is evident from the example of France.

It is however important to recognize that the use of marginal cost approach involves a number of
practical difficulties, which are discussed below along with possible means to resolve them. First,
marginal-cost-based pricing of electricity does not necessarily result in optimal prices and can
create market distortions if it is not applied uniformly to the energy sector. For example, in rural
areas, subsidized kerosene might be available for lighting purposes. In such cases, deviations from
marginal cost may be justified to prevent distortions like excessive use of alternative sources.

Since calculation of the marginal cost is based on the cost of supplying one incremental unit, it is
likely that the revenue realized from charging marginal-cost-based prices may differ significantly
from the financial requirements of the entity. This could either result in threatening the financial
viability of the entity or providing it with windfall profits. It is possible to overcome this problem
by either taxing of the profits by the State or by utilizing the revenues for socio-political objectives
like providing subsidized block of tariff to meet minimum needs or to subsidize connection
charges to meet the objective of expanding the supply.

The estimation of the marginal cost involves several assumptions like the demand forecast the
corresponding investment plan, elasticity’s of demand etc makes the estimation inherently
uncertain. In theory, it is possible to build least cost expansion models with different scenarios
and follow an iterative exercise to set the price at the optimum level of reliability. However, in
practice, the price would be set by judgment on a particular set of numbers and subsequently; the
tariff may be revised based on the consumption pattern and other changes. The use of marginal
cost also entails a relatively high degree of regulatory monitoring in the context of developing
countries.

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5.3 Tariff setting methodologies

Once the revenue requirement is estimated on the basis of the approach discussed above, the next
step is to determine the tariff. There are two broad methodologies for tariff setting and these are
discussed below.

5.3.1 Rate-of-return tariff setting

The rate-of-return tariff setting is based on the determination of revenue requirement, which
include the permissible expenditure, a rate base on which the entity will be allowed to earn the
return, and an appropriate rate of return. This method is also sometimes known as the cost-plus
approach or the cost of service regulation.

This methodology has been typically used in the India and is specified with minor differences in
various statutes such as Schedule VI to the Electricity (Supply) Act, [E (S) A] 1948. It is also
known as the cost plus approach or cost of service regulation and is based on determination of
revenue requirement, which includes the permissible expenditure, a rate base on which the entity
will be allowed to earn the return and an appropriate rate of return.

The revenue requirement of the entity under this approach is calculated using the following
formula:

Rev Req = Copm + Cd + (RB x R) + T

Where

Copm is the annual expenditure on operation and maintenance.

Cd is the annual expenditure on account of depreciation.

RB is the rate base on which the entity will be allowed to earn a return.

R is the allowed rate of return.

T is the annual tax, which the entity has to pay.

This approach has several advantages. First, while it leads to stable returns for the entity on one
hand it also provides consumers with stable tariff till the next regulatory review. Second, the
method is fairly simple and is familiar to the entities, as it has been applied over many years.

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Further, it is relatively easy to factor in non-economic goals like providing subsidized tariff to
some consumer categories.

The main disadvantage of this approach is that it provides little incentive to the entity to minimize
its cost because the allowable return that an entity can earn is fixed and any efficiency gains which
result from better performance are passed on to the consumers. Further, because all costs are
passed through to the consumers, there is a tendency by the entities to overinvest. Accordingly the
methodology requires detailed and extensive regulatory review at frequent intervals to ensure that
undue profits are not being generated.

Besides the above cost elements, two important parameters, which have a significant impact on
tariff in the cost plus system, are the rate base and the allowed rate of return on the rate base. The
Commission is of the view that both of them are of equal importance and require deliberation as
they can significantly affect the level of tariff.

i. Allowed rate of return

The economic theory recommends that the rate of return should compensate the investor for the
risks undertaken. The entities in power sector in India are permitted to earn return either as per the
E (S) A. There are broadly two kind of organizations in the State power sector:

a) the State Electricity Boards

b) the licensees

While the methodology and the quantum of rate of return for the SEB’s is prescribed in the Sec
59 of the E (S) A, in case of licensees, the same is detailed under the Schedule VI of the E (S) Act.
While both of these follow the cost plus approach, there are some differences in the approach.

The SEB’s are allowed to earn 3% or a higher return as specified by the State Government on the
value of net fixed assets i.e. the gross assets less the accumulated depreciation.

The licensees earn a return on what is called the capital base, which represents the capital net of
depreciation and loans. The details are as following:

a. For the capital base as on March 31, 1956 - a rate of return of

7%.

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 b. For capital base as between 1956 and October 15, 1991 - a rate
of return of RBI rate plus 2% premium.
c. For capital base as between October 15, 1991 and March 31, 1999
- a rate of return of RBI rate plus 5% premium.
d. For capital base after March 31, 1999 earn a rate of return of
16%.

These levels of returns are administratively determined and not explicitly related to the risk of
investment undertaken. With the returns on long term risk free Government of India securities
ranging around 10%-11%, it is not known if these rates provide sufficient incentive to the
investors in the sector. It is evident that if the returns were perceived to be inadequate, then the
investors would not put in the required capital, which is important for continued growth and
improvement of the power sector.

Further, it is commonly recognized that the generation, transmission and distribution businesses
are characterized by different risk profiles. The current approach apparently does not reflect this
fact and may lead to a distortion in the investment trend.

While the Commission has been provided authority to depart from the above methodology, the
issue before the Commission is to decide on a methodology and the approach which will best
serve to achieve the objectives under the ERC Act.

ii. Value of plant for the purpose of the rate base

The cost plus regulation is based on permitting the entities to earn a rate of return on their asset
base. The methodology prescribed in the E (S) A is based on using the net fixed assets i.e. original
cost of assets less depreciation. Other options in this regard are as following:

a. Replacement cost less depreciation

b. Market value
It has been argued that the original cost methodology does not provide correct economic signals
and does not adequately compensate the investors. The original cost methodology is, however,
characterized by easy measurability and produces stable and predictable results. While there is
some economic merit associated with the use of replacement cost method, it does not in itself
leads to efficient economic prices i.e. to reflect the marginal cost of supply and has several

( Page No. 65 )
practical problems associated with it. The assessment of market value for the purpose of price
setting is characterized with inherent circularity because the market value is deduced from the
earnings potential of the firm

There has been some degree of debate on the subject in the recent past especially in case of Orissa
where the Government revalued the assets as a part of the restructuring of the industry. However,
the policy prescriptions on the issue vary and the Commission would review and understand the
implications of various options in context of the Himachal Pradesh.

5.3.2 Performance - based rate making

The alternative to using the cost plus approach is the performance based rate (PBR) making. The
performance based rate making strives to eliminate the control aspects of regulation and replace
them with a system of incentives and penalties. It weakens the link between the utilities cost and
the prices by employing external measures of cost. PBR system provides distinct benefits because
it provides incentive to the utilities to reduce costs and improve efficiency Another distinct
advantage of PBR system is that it also reduces the regulatory costs by reducing the frequency of
rate filings. PBR also eliminates the tendency of utilities under the cost plus regulation to be more
capital intensive, known as the Averch-Johnson effect, than they would be in competitive
environment. PBR hence provides incentives similar to those that would exist in a competitive
market place and such a system rewards efficient management while inefficient ones would sooner
or later be thrown out .

PBR systems can be designed in several forms. The most common among these is the price cap
formula where the prices are set for sufficiently long periods without regard to the utility cost. The
cap is generally indexed over a period of time using retail price index (RPI) and offset by a
productivity gain factor (X). This form of tariff setting has bounced extensively in the UK
electricity industry and is commonly known as the RPI – X approach. Another variant of the PBR
system is the revenue cap mechanism where the total revenue that the regulated entity is allowed
to earn is capped and utility is allowed to maximise its profit by minimising its total costs.
Such form of tariff setting has been extensively used in the electricity industry in U.K. and there
is a distinct trend towards it in other parts of the world also. Productivity in the UK electric power
industry, for example, has increased from around £ 40,000 per employee in 1980 to £170,000 in
1998 in constant 1995 prices. It is useful to note that with the manpower efficiency being

( Page No. 66 )
approximately at one employee per 45 consumers served, there is considerable scope for
improving the productivity in Himachal Pradesh. The regulatory reform programme is expected to
facilitate the process of improving the efficiencies and also the quality of services provided by the
Board.
There is also clear evidence of the fact that the Commissions are not only aware of the advantages
of PBR over COS but are actively adopting it. The UP commission benchmarked the
administrative and overhead costs of the utility to the national average as a target and on that basis
reduced the allowable expenditure. Transmission and distribution loss has been used by a number
of State Commissions as a parameter for the purposes of measuring and indexing performance. In
Orissa, for example, the Commission allowed a higher rate of return for achieving reduction in
transmission and distribution beyond the target level prescribed by it.

There are several mechanisms and parameters such as the generating plant reliability, transmission
and distribution losses, outages at customer level, customer complaint handling and satisfaction
etc. around which a PBR system can be designed. The HPSEB has signed a Memorandum of
Understanding with the Government of HP and agreed to improve its efficiency and performance.
While the Commission does not intend to get directly involved with the implementation of the
agreed parameters, it would like to monitor the performance of HPSEB. The objective of the
Commission would be to ensure that the consumers are provided with the electricity in an efficient
and economical manner.

Availability of quality data is an essential requirement for design of good PBR system. However,
most of the entities operating in power sector in the country are characterised by lack of a proper
MIS system and reliable data to design a good PBR system. However, it may be possible to
implement a simple PBR system in the near future and in the long term as the data systems evolve,
more parameters can be included in the PBR system.

The Commission has already directed the HPSEB to prepare the codes and guidelines for service
standards. It is expected that they would be filed in the near future. The Commission would
consult the State Advisory Committee and also conduct public hearings on the subject. The
Commission would also consider appropriate mechanisms, including implementation of a token
penalty system, for failure to deliver services in order to provide signals to the management and to
protect the interests of the consumers.

( Page No. 67 )
6. Tariff Design
6.1 Financial viability and subsidy support
The Commission is charged with the responsibility of balancing the interests of the consumer and
the entities in the power sector. Securing financial viability of the entities is of critical importance
to ensure growth of the industry and to bring about improvements in the standard of supply.
A prime area of concern to the Commission is the fact that with the existing tariff structure, the
Himachal Pradesh State Electricity Board, which is the primary supplier of electricity in the State
is unable to meet its expenditure and there is a substantial amount of uncovered deficit. There are a
number of reasons for the deficit, which include the increase in the costs, inefficiencies in the
system, non-availability of subsidy support etc.

The Commission is concerned with the increasing deficit and would like to initiate steps including
ways to reduce costs and improve efficiency, seeking support from the Government of Himachal
Pradesh for supporting transition to a more viable operation etc. in order to secure financial
viability of the entities in the sector.

6.2 Cross subsidy within consumer categories

The existing tariff structure in the State is characterized by presence of significant amount of
cross-subsidy within different consumer classes. Cross subsidization occurs when one category of
consumers pays a part or in full the costs caused by another category of consumers. It is
commonly recognized that underpricing encourages consumers to place little value on saving
energy and results in inefficient consumption pattern. While the agricultural load in Himachal
Pradesh is negligible, the low tension domestic consumers are cross-subsidized to a substantial
extent mainly by Industrial Consumers, who pay more than the cost of supply. The electricity
utilized by the Industrial Consumer is for the productive purpose whereas the electricity utilized
by domestic consumers is for non productive usage as such the practice throughout the developed
nations is to keep the Industrial tariff on the lower side to that of domestic tariff. This assumes
greater importance in the globalization of the markets.

Further, irrestible inference from the above charts is that while the per capita income in this
country may be far lesser than in developed and other developing countries, the electricity prices
are quite comparable which cuts into the capacity to pay of Indian consumers.

( Page No. 68 )
The tariff structure has evolved as a part of the expedient policy option chosen by the
Government. Under the guiding principles prescribed under the ERC Act, the Commission is
required to ensure that the consumers pay a reasonable amount based on the average cost of
supply. Further, the Act also requires the State Government to compensate the entities if it requires
grant of subsidy to any consumer or class of consumers.

Due to the development policy or due to other non-economic goals, it may be necessary to provide
subsidized tariff to certain consumer categories. The Commission is, however, of the view that the
same need to be provided in a transparent manner and should not unnecessarily burden the other
consumers. It is also to be ensured that the need for subsidy is properly assessed rather than just
being assumed and that the subsidies are targeted to minimize the unintended beneficiaries. Since
the Commission is now charged with the responsibility of determination of tariff in the State, it
would like to consult all stakeholders including the consumers, Government and the entities on the
subject.

1.5.3 Simplification of the tariff structure

The tariff structure should be as simple as possible and within a voltage level, the categories need
to be minimized. While simplification is a desired objective it needs to be ensured that it does not
result in tariff shock to certain consumers. The Commission intends to gradually simplify the tariff
structure over a medium term time frame.

1.5.4 Unbundling of the cost and the tariff structure

The Commission has the responsibility to determine the tariff for wholesale, bulk, grid and retail
tariff. Accordingly it is important for the Commission to understand the cost as well as the revenue
structure of the different businesses of the entities in the power sector. The unbundling of the cost
and the tariff structure is hence critical to fulfill the mandate given to the Commission. An
unbundled tariff structure is one where the charges for different services are broken down into
individual components and shown separately. While this information may not be directly useful to
the consumers buying bundled services, it does provide a clear signal regarding the cost of
different services. Further, for the consumers who buy only a part of the service, for example, the
self generators who would be interested in the tariff for wheeling of energy, an unbundled tariff
structure reflecting the cost provides correct economic signals, thereby leading to optimum

( Page No. 69 )
decisions. The unbundling of the tariff structure is also crucial from the perspective of providing
information to the potential investors to know the financial viability of each of the businesses and
make appropriate decisions. It will also facilitate any restructuring exercise that the State
Government or the HPSEB may intend to initiate to move towards viable and dynamic industry.

As the first step, the Commission is inclined to require the entities to unbundle their cost structure.
The Commission would also propose to determine the unbundled tariff structure.

1.5.5 Seasonal tariff and time of the day tariff.

The generation of electricity is predominantly hydro with no or very limited storage capacity.
During summer months the system is characterized by surplus availability of energy and a
significant amount of energy is exported to the northern grid and fed to states like Haryana, Punjab
and Delhi. In contrast, during the winter months, the availability of energy reduces considerably
due to reduced inflow of water and the requirement is met by importing energy from the northern
grid. While ideally barter contracts would ensure a fair deal to the consumers in Himachal
Pradesh, the existing bilateral contracts require HPSEB to pay a higher price for the imported
energy. This results in a significantly higher power purchase costs during the winter months. With
this background, the Commission would like to explore the possibility of introducing a seasonal
tariff whereby in winter months, the consumers are required to pay an additional amount to reflect
the higher costs of power purchase. The Commission is also of the view that introduction of time
of day tariff would send correct signals to the consumers and would hence consider the possibility
of its introduction after analyzing the possible financial impact as well as availability of suitable
metering systems and other administrative aspects.

1.5.6 Development of a database

The process of tariff determination by the regulator is a data-intensive process requiring

information on various aspects of a utility’s operations. While the data requirements may differ on
the basis of approach to be adopted by the regulator, efficient tariff setting without good data is not
possible. It is also important to note that the availability of data would also influence the choice of
approach for tariff determination.

In most states in India, the availability and quality of monitoring systems and reporting is often
low. It is important that as a part of the reform exercise, appropriate systems would need to be put

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in place to ensure that the process of tariff setting is not distorted by lack of information and data.
The Commission is concerned with the issue of availability of adequate and quality information
and would require that a long-term strategy be charted out detailing the steps required to achieve
the required level of information systems along with a committed time frame to achieve the same.

The regulatory process

The ERC Act, 1998 envisages the Commission to be the apex body responsible for regulating and
determining the tariff in the State. The Commission has to issue of the Conduct of Business
Regulations (CBR) on 31st March, of the year and the Guidelines for Revenue and Tariff Filing
on Feb . of the year in this context.

The expected regulatory process associated with filing of tariff with the Commission is detailed
below:

1. Step-1: Filing of a tariff proposal:

The Utility shall be required to submit to the Commission, at least 3months before the ensuing
financial year or part thereof, full details of its calculations of their revenue requirement for the
ensuing financial year. A tariff revision proposal, if an amendment in the tariff is sought, can also
be filed along with the revenue requirement statement. The tariff proposals containing the details
of technical, operational and financial parameters, will have to be based as per the procedure and
methodology laid down in the “Guidelines for Revenue and Tariff Filing”.

2. 2. Step-2: Review of tariff proposal by the Commission:

The Commission will examine and analyze in detail the proposals submitted by the Utility. The
Commission has the authority to ask for further information and also to require the utility to
produce such documentary or other evidence, as it may consider necessary.

After being satisfied that all relevant information as required has been provided, the Commission
shall issue a public notice in the newspaper, giving in brief the salient features of tariff petition and
proposed tariff, calling for objections and comments from the public. Normally, the Commission
will give a time of 3-4 weeks for inviting public objections/comments on the tariff filing.

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The respondents to the tariff proposal are required to submit a copy of their comments to the
Regulatory Commission as well as to the Utility. Before the Commission can take up the public
hearings, the Utility is required to prepare answers to the comments provided by the respondents.

3. 3. Step-3: Public hearings

The Commission will conduct public hearings on the tariff filing made by the Utility after
receiving the responses from the public and subsequent replies from the concerned entity. The
hearings provide different section of consumers, an opportunity and a forum to express their views
and concerns on the subject.

The Commission has the authority to determine the stages, the manner, the place, the date and the
time of the hearing, as it may consider appropriate.

The public hearings can last for 3 - 8 days depending on the number of respondents and the
process adopted by the Commission.

4. Step-4: Issue of the tariff order

The Commission will after taking into consideration the facts presented in the tariff filing by the
Utility and the submissions made to the Commission in the public comments and during the public
hearings shall provide its judgment on the matter. The Commission has the authority to pronounce
the judgment at once after the hearing or on some future date as may be practical. The judgment
will have to be pronounced in open court and shall contain counter statements of facts in brief, the
points or issues for determination, decision thereon and the reasons for such decisions. The
Commission is expected to provide a detailed written order along with the judgment containing the
facts of the case, the Commission’s analysis and the reasons for the decisions.

The Commission is expected to complete the process of award of tariff order within 3-4 months of
receiving all information required for determination of tariff i.e. completion of

Step-5

The Utility is required to publish the tariff as approved by the Commission and any entity found
to be charging a tariff different from the one approved by the Commission shall be liable to
penalties under Section 45 of the Electricity Regulatory Commissions Act, 1998. The Utility is
also required to submit periodic returns as may be prescribed, containing operational and cost data

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to enable the Commission to monitor the implementation of its order and reassess the basis on
which tariff was approved.

The order of the Commission is binding on the Utility and the consumers and the appeal against
the order of the Commission can be filed in the High Court

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 Tariff Policy and Procedures
Introduction

Accelerated growth of the generation capacity sector is essential to meet the estimated growth in
demand. Adequacy of generation is also essential for efficient functioning of power markets. At
the same time, it is to be ensured that new capacity addition should deliver electricity at most
efficient rates to protect the interests of consumers. The national tariff policy is accordingly
developed for meeting these objectives.

The Electricity Act 2003 empowers the Central Government to formulate, to review or revise the
tariff policy from time to time. The Act also requires that the Central Electricity Regulatory
Commission (CERC) and State Electricity Regulatory Commissions (SERCs) be guided by the
tariff policy in discharging their functions including framing the regulations under section 61 of
the Act. Section 61 of the Act provides that Regulatory Commissions shall be guided by the
principles and methodologies specified by the Central Commission for determination of tariff
applicable to generating companies and transmission licensees.

The Forum of Regulators has been constituted by the Central Government under the provisions
of the Act which would facilitate consistency in approach specially in the area of distribution.

Over viewing Tariff Process

Before the advent of the RCs, the respective State governments handled the functions of
formulating the tariff guidelines and setting the tariff. In States where RCs are functional, they
have taken up the role of tariff setting under the policy guidelines of the respective States.
CERC has been setting the tariff for central utilities. E-Act formalizes the approach to tariff and
procedure for tariff setting.

For tariff revision or determination of the tariff, the licensee is to make an application to the RC.
The application can be reviewed by the public and comments submitted to the RC. After
reviewing the comments, RC would pass the tariff order. The RC is mandated to pass the order
within 120 days of accepting the tariff application. Although E-Act does not explicitly mention
the need of a public hearing before deciding on tariff, it is now a well-laid precedence to have
public hearings. Typically tariff is expected to be set once a year.

In case of multiple distribution licensees in the same area, RC would set the ceiling on tariff. For
traders, the trade margins are to be decided by RC. In case of competitively bid projects
(generation or transmission), the resultant tariff shall be accepted by RC.

Tariff is to progressively reflect the cost of supply and cross subsidy is to be eliminated within a
certain time period. A multi-year tariff principle (where tariff is set for a few years ahead) is to
be adopted. For tariff revision or determination of the tariff, the licensee is to make an

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application to the RC. The application can be reviewed by the public and comments submitted
to the RC. After reviewing the comments, RC would pass the tariff order. Typically tariff is
expected to be set once a year.

The tariff is to be aligned to the cost of supply. If this is done, the tariff for the HT industry will
reduce substantially – the cost of long LT network will not be charged to these customers.
Moreover, HT industry generally have flatter load curve hence demand less of costly peaking
power. While, the tariff for LT users, especially the residential and the rural consumers would
increase. The residential consumption is predominantly at the peak time and costs more to
provide, and the rural consumers need large extension of network. For the agricultural
consumers, the tariff would be below the average cost of supply, as these consumers are the first
to be cut off in case of load shedding.

The Objectives of the Tariff Policy

The objectives of this tariff policy are to:

 Ensure availability of electricity to consumers at reasonable and competitive rates;

 Ensure financial viability of the sector and attract investments;

 Promote transparency, consistency and predictability in regulatory approaches across

jurisdictions and minimize perceptions of regulatory risks;

 Promote competition, efficiency in operations and improvement in quality of supply.

General Approach to Tariff

Introducing competition in different segments of the electricity industry is one of the key
features of the Electricity Act, 2003. Competition will lead to significant benefits to consumers
through reduction in capital costs and also efficiency of operations. It will also facilitate the price
to be determined competitively. National Tariff policy lays down a framework for performance
based cost of service regulation in respect of aspects common to generation, transmission as well
as distribution. These do not however apply to competitively bid projects

Multi Year Tariff: 1) Section 61 of the Act states that the Appropriate Commission, for
determining the terms and conditions for the determination of tariff, shall be guided inter-alia, by
multi-year tariff principles. The MYT framework is to be adopted for any tariffs to be
determined from April 1, 2006. The framework should feature a five-year control period. The
initial control period may however be of 3 year duration for transmission and distribution if
deemed necessary by the Regulatory Commission on account of data uncertainties and other
practical considerations. In cases of lack of reliable data, the Appropriate Commission may state
assumptions in MYT for first control period and a fresh control period may be started as and
when more reliable data becomes available.

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Benchmarking: In cases where operations have been much below the norms for many previous
years the initial starting point in determining the revenue requirement and the improvement
trajectories should be recognized at “relaxed” levels and not the “desired” levels. Suitable
benchmarking studies may be conducted to establish the “desired” performance standards.
Separate studies may be required for each utility to assess the capital expenditure necessary to
meet the minimum service standards.

Once the revenue requirements are established at the beginning of the control period, the
Regulatory Commission should focus on regulation of outputs and not the input cost elements.
At the end of the control period, a comprehensive review of performance may be undertaken.

Uncontrollable costs should be recovered speedily to ensure that future consumers are not
burdened with past costs. Uncontrollable costs would include (but not limited to) fuel costs, costs
on account of inflation, taxes and cess, variations in power purchase unit costs including on
account of hydro-thermal mix in case of adverse natural events.

Renovation and modernization (it shall not include periodic overhauls) for higher efficiency
levels needs to be encouraged. A multi-year tariff (MYT) framework may be prescribed which
should also cover capital investments necessary for renovation and modernization and an
incentive framework to share the benefits of efficiency improvement between the utilities and the
beneficiaries with reference to revised and specific performance norms to be fixed by the
Appropriate Commission. Appropriate capital costs required for pre-determined efficiency gains
and/or for sustenance of high level performance would need to be assessed by the Appropriate
Commission.

Power procurement for future requirements should be through a transparent competitive bidding
mechanism using the guidelines issued by the Central Government. These guidelines provide for
procurement of electricity separately for base load requirements and for peak load requirements.
This would facilitate setting up of generation capacities specifically for meeting peak.

Operating Norms: Suitable performance norms of operations together with incentives and dis-
incentives would need be evolved along with appropriate arrangement for sharing the gains of
efficient operations with the consumers. The operating parameters in tariffs should be mostly at
“normative levels” only and not at “lower of normative and actuals”. This is essential to
encourage better operating performance. The norms should be efficient, relatable to past
performance, capable of achievement and progressively reflecting increased efficiencies and may
also take into consideration the latest technological advancements, fuel, vintage of equipments,
nature of operations, level of service to be provided to consumers etc. Continued and proven
inefficiency must be controlled and penalized. Procurement of power: All future requirement of
power should be procured competitively by distribution licensees except in cases of expansion of
existing projects or where there is a state controlled/owned company as an identified developer
and where regulators will need to resort to tariff determination based on norms provided that

( Page No. 76 )
expansion of generating capacity by private developers for this purpose would be restricted to
one time addition of not more than 50% of the existing capacity. The tariff of all new generation
and transmission projects including for the public sector projects, should be decided on the basis
of competitive bidding after a period of five years or when the Regulatory Commission is
satisfied that the situation is ripe to introduce such competition.

 The Central Commission would, in consultation with the Central Electricity Authority,
notify operating norms from time to time for generation and transmission. The SERC
would adopt these norms. In cases where operations have been much below the norms for
many previous years, the SERCs may fix relaxed norms suitably and draw a transition
path over the time for achieving the norms notified by the Central Commission.

 Operating norms for distribution networks would be notified by the concerned SERCs.
For uniformity of approach in determining such norms for distribution, the Forum of
Regulators should evolve the approach including the guidelines for treatment of state
specific distinctive features.

Return on Investment Balance needs to be maintained between the interests of consumers and
the need for investments while laying down rate of return. Return should attract investments at
par with, if not in preference to, other sectors so that the electricity sector is able to create
adequate capacity. The rate of return should be such that it allows generation of reasonable
surplus for growth of the sector.

 The Central Commission would notify, from time to time, the rate of return on equity for
generation and transmission projects keeping in view the assessment of overall risk and
the prevalent cost of capital which shall be followed by the SERCs also. The rate of
return notified by CERC for transmission may be adopted by the State Electricity
Regulatory Commissions (SERCs) for distribution with appropriate modification taking
into view the higher risks involved. For uniform approach in this matter, it would be
desirable to arrive at a consensus through the Forum of Regulators.

 While allowing the total capital cost of the project, the Appropriate Commission would
ensure that these are reasonable and to achieve this objective, requisite benchmarks on
capital costs should be evolved by the Regulatory Commissions.

 The Central Commission may adopt either Return on Equity approach or Return on
Capital approach whichever is considered better in the interest of the consumers.

Distribution Margin: The State Commission may consider ‘distribution margin’ as basis for
allowing returns in distribution business at an appropriate time. The Forum of Regulators should
evolve a comprehensive approach on “distribution margin” within one year. The considerations
while preparing such an approach would, inter-alia, include issues such as reduction in

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Aggregate Technical and Commercial losses, improving the standards of performance and
reduction in cost of supply.

Equity Norms: For financing of future capital cost of projects, a Debt : Equity ratio of 70:30
should be adopted. Promoters would be free to have higher quantum of equity investments. The
equity in excess of this norm should be treated as loans advanced at the weighted average rate of
interest and for a weighted average tenor of the long term debt component of the project after
ascertaining the reasonableness of the interest rates and taking into account the effect of debt
restructuring done, if any. In case of equity below the normative level, the actual equity would be
used for determination of Return on Equity in tariff computations.

Depreciation: The Central Commission may notify the rates of depreciation in respect of
generation and transmission assets. The depreciation rates so notified would also be applicable
for distribution with appropriate modification as may be evolved by the Forum of Regulators.
The rates of depreciation so notified would be applicable for the purpose of tariffs as well as
accounting. There should be no need for any advance against depreciation. Benefit of reduced
tariff after the assets have been fully depreciated should remain available to the consumers.

Cost of Debt: Structuring of debt, including its tenure, with a view to reducing the tariff should
be encouraged. Savings in costs on account of subsequent restructuring of debt should be
suitably incentives by the Regulatory Commissions keeping in view the interests of the
consumers.

Tariff structuring and associated issues

 Availability Based Tariff: A two-part tariff structure should be adopted for all long term
contracts to facilitate Merit Order dispatch. According to National Electricity Policy, the
Availability Based Tariff (ABT) is to be introduced at State level by April 2006. This
framework would be extended to generating stations (including grid connected captive
plants of capacities as determined by the SERC). The Appropriate Commission may also
introduce differential rates of fixed charges for peak and off peak hours for better
management of load.

 Power Purchase Agreement should ensure adequate and bankable payment security
arrangements to the Generating companies. In case of persisting default in spite of the
available payment security mechanisms like letter of credit, escrow of cash flows etc. the
generating companies may sell to other buyers.

 The E-Act expects RCs to align tariff to the cost of supply. If this is done, the tariff for
the HT industry will reduce substantially – the cost of long LT network will not be
charged to these customers. Moreover, HT industry generally have flatter load curve
hence demand less of costly peaking power. While, the tariff for LT users, especially the
residential and the rural consumers would increase. The residential consumption is

( Page No. 78 )
 predominantly at the peak time and costs more to provide, and the rural consumers need
large extension of network. For the agricultural consumers, the tariff would be below the
average cost of supply, as these consumers are the first to be cut off in case of load
shedding. The utility can use the cross-subsidy cess in the transition period to support the
cross-subsidy. In the long run, the government will have to shell out

Harnessing captive generation

Appropriate Commission should create an enabling environment that encourages captive power
plants to be connected to the grid. Such captive plants could inject surplus power into the grid
subject to the same regulation as applicable to generating companies. The prices should be
differentiated for peak and off-peak supply and the tariff should include variable cost of
generation at actual levels and reasonable compensation for capacity charges. Alternatively, a
frequency based real time mechanism can be used and the captive generators can be allowed to
inject into the grid under the ABT mechanism. Wheeling charges and other terms and conditions
for implementation should be determined in advance by the respective State Commission, duly
ensuring that the charges are reasonable and fair.

Grid connected captive plants could also supply power to non-captive users connected to the grid
through available transmission facilities based on negotiated tariffs. Such sale of electricity
would be subject to relevant regulations for open access.

Non-conventional sources of energy generation including Co-generation:

 The Appropriate Commission shall fix a minimum percentage for purchase of energy
from such sources taking into account availability of such resources in the region and its
impact on retail tariffs. Procurement by distribution companies shall be done at
preferential tariffs determined by the Appropriate Commission. In the long-term, these
technologies would need to compete with other sources in terms of full costs.

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Transmission pricing

The National Electricity Policy mandates that the national tariff framework implemented should
be sensitive to distance, direction and related to quantum of power flow. This would be
developed by CERC taking into consideration the advice of the CEA.

 Transmission charges, under this framework, can be determined on MW per circuit

kilometer basis, zonal postage stamp basis, or some other pragmatic variant, the ultimate
objective being to get the transmission system users to share the total transmission cost in
proportion to their respective utilization of the transmission system. The overall tariff
framework should be such as not to inhibit planned development/augmentation of the
transmission system, but should discourage non-optimal transmission investment.

 The Central Commission would establish norms for capital and operating costs, operating
standards and performance indicators for transmission lines at different voltage levels.
Appropriate baseline studies may be commissioned to arrive at these norms.

 Investment by transmission developer other than CTU/STU would be invited through

competitive bids. The Central Government will issue guidelines in three months for
bidding process for developing transmission capacities. The tariff of the projects to be
developed by CTU/STU after the period of five years or when the Regulatory
Commission is satisfied that the situation is right to introduce such competition (as
referred to in para 5.1) would also be determined on the basis of competitive bidding.

 After the implementation of the proposed framework for the inter-state transmission, a
similar approach should be implemented by SERCs in next two years for the intra-State
transmission, duly considering factors like voltage, distance, direction and quantum of
flow.

 Metering compatible with the requirements of the proposed transmission tariff framework
should be established on priority basis. The metering should be compatible with ABT
requirements, which would also facilitate implementation of Time of Day (ToD) tariffs.

Approach to transmission loss allocation

 Transactions should be charged on the basis of average losses arrived at after

appropriately considering the distance and directional sensitivity, as applicable to
relevant voltage level, on the transmission system. Based on the methodology laid down
by the CERC in this regard for inter- state transmission, the Forum of Regulators may
evolve a similar approach for intra-state transmission.

 The loss framework should ensure that the loss compensation is reasonable and linked to
applicable technical loss benchmarks. The benchmarks may be determined by the
Appropriate Commission after considering advice of CEA. It would be desirable to move

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 to a system of loss compensation based on incremental losses as present deficiencies in
transmission capacities are overcome through network expansion.

Distribution

Supply of reliable and quality power of specified standards in an efficient manner and at
reasonable rates is one of the main objectives of the National Electricity Policy. The State
Commission should determine and notify the standards of performance of licensees with respect
to quality, continuity and reliability of service for all consumers. It is desirable that the Forum of
Regulators determines the basic framework on service standards. A suitable transition framework
could be provided for the licensees to reach the desired levels of service as quickly as possible.
Penalties may be imposed on licensees in accordance with section 57 of the Act for failure to
meet the standards.

Making the distribution segment of the industry efficient and solvent is the key to success of
power sector reforms and provision of services of specified standards. Therefore, the Regulatory
Commissions need to strike the right balance between the requirements of the commercial
viability of distribution licensees and consumer interests. Loss making utilities need to be
transformed into profitable ventures which can raise necessary resources from the capital
markets to provide services of international standards to enable India to achieve its full growth
potential. Efficiency in operations should be encouraged. Gains of efficient operations with
reference to normative parameters should be appropriately shared between consumers and
licensees.

Distribution

E-Act brings in a few major changes in the distribution sector.

 Allowing more than one licensee to operate in the same area

 Open access is to be introduced by the State RCs in a time bound manner (consumers with load
greater than 1 MW have to be given open access in less than 5 years)

 Plan to allow stand-alone generation/distribution systems – without a need for license. Local
distribution system in rural areas can be managed by panchayats, user associations, co-
operative societies, non-governmental organisations or franchises [4, 5]. In some areas this may
not need License [14]

 The distribution company can appoint NGO, co-operative or even private person as a franchisee
to act on its behalf. This can increase the contracting out of retail sales and bill collection
activity.

Implementation of Multi-Year Tariff (MYT) framework

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  Multi-Year Tariff (MYT) framework would minimize risks for utilities and consumers,
promote efficiency and appropriate reduction of system losses and attract investments
and would also bring greater predictability to consumer tariffs on the whole by restricting
tariff adjustments to known indicators on power purchase prices and inflation indices.
The framework should be applied for both public and private utilities.

 The State Commissions should introduce mechanisms for sharing of excess profits and
losses with the consumers as part of the overall MYT framework .In the first control
period the incentives for the utilities may be asymmetric with the percentage of the
excess profits being retained by the utility set at higher levels than the percentage of
losses to be borne by the utility. This is necessary to accelerate performance improvement
and reduction in losses and will be in the long term interest of consumers by way of
lower tariffs.

 Licensees may have the flexibility of charging lower tariffs than approved by the State
Commission if competitive conditions require so without having a claim on additional
revenue requirement on this account in accordance with Section 62 of the Act .

 At the beginning of the control period when the “actual” costs form the basis for future
projections, there may be a large uncovered gap between required tariffs and the tariffs
that are presently applicable. The gap should be fully met through tariff charges and
through alternative means that could inter-alia include financial restructuring and
transition financing.

 Incumbent licensees should have the option of filing for separate revenue requirements
and tariffs for an area where the State Commission has issued multiple distribution
licenses.

 Appropriate Commissions should initiate tariff determination and regulatory scrutiny on a

suo moto basis in case the licensee does not initiate filings in time. It is desirable that
requisite tariff changes come into effect from the date of commencement of each
financial year and any gap on account of delay in filing should be on account of licensee.

Framework for revenue requirements and costs

The following aspects would need to be considered in determining tariffs:

 All power purchase costs need to be considered legitimate unless it is established that the
merit order principle has been violated or power has been purchased at unreasonable
rates. The reduction of Aggregate Technical & Commercial (ATC) losses needs to be
brought about but not by denying revenues required for power purchase for 24 hours
supply and necessary and reasonable O&M and investment for system upgradation.
Consumers, particularly those who are ready to pay a tariff which reflects efficient costs

( Page No. 82 )
 have the right to get uninterrupted 24 hours supply of quality power. Actual level of retail
sales should be grossed up by normative level of T&D losses as indicated in MYT
trajectory for allowing power purchase cost subject to justifiable power purchase mix
variation (for example, more energy may be purchased from thermal generation in the
event of poor rainfall) and fuel surcharge adjustment as per regulations of the SERC.

 ATC loss reduction should be incentivized by linking returns in a MYT framework to an

achievable trajectory. Greater transparency and nurturing of consumer groups would be
efficacious. For government owned utilities improving governance to achieve ATC loss
reduction is a more difficult and complex challenge for the SERCs. Prescription of a
MYT dispensation with different levels of consumer tariffs in succeeding years linked to
different ATC loss levels aimed at covering full costs could generate the requisite
political will for effective action to reduce theft as the alternative would be stiffer tariff
increases. Third party verification of energy audit results for different areas/localities
could be used to impose area/locality specific surcharge for greater ATC loss levels and
this in turn could generate local consensus for effective action for better governance. The
SERCs may also encourage suitable local area based incentive and disincentive scheme
for the staff of the utilities linked to reduction in losses. The SERC shall undertake
independent assessment of baseline data for various parameters for every distribution
circle of the licensee and this exercise should be completed latest by March, 2007.

 The SERC shall also institute a system of independent scrutiny of financial and technical
data submitted by the licensees.

 It should be possible to segregate technical losses. Accordingly technical loss reduction

under MYT framework should then be treated as distinct from commercial loss reduction
which requires a different approach.

 Section 65 of the Act provides that no direction of the State Government regarding grant
of subsidy to consumers in the tariff determined by the State Commission shall be
operative if the payment on account of subsidy as decided by the State Commission is not
made to the utilities and the tariff fixed by the State Commission shall be applicable from
the date of issue of orders by the Commission in this regard. The State Commissions
should ensure compliance of this provision of law to ensure financial viability of the
utilities. To ensure implementation of the provision of the law, the State Commission
should determine the tariff initially, without considering the subsidy commitment by the
State Government and subsidised tariff shall be arrived at thereafter considering the
subsidy by the State Government for the respective categories of consumers.

 Pass through of past losses or profits should be allowed to the extent caused by
uncontrollable factors. During the transition period controllable factors should be to the
account of utilities and consumers in proportions determined under the MYT framework.

( Page No. 83 )
  (6) The contingency reserves should be drawn upon with prior approval of the State
Commission only in the event of contingency conditions specified through regulations by
the State Commission. The existing practice of providing for development reserves and

Tariff design: Linkage of tariffs to cost of service

It has been widely recognized that rational and economic pricing of electricity can be one of the
major tools for energy conservation and sustainable use of ground water resources. In terms of
the Section 61 (g) of the Act, the Appropriate Commission shall be guided by the objective that
the tariff progressively reflects the efficient and prudent cost of supply of electricity.

The State Governments can give subsidy to the extent they consider appropriate as per the
provisions of section 65 of the Act. Direct subsidy is a better way to support the poorer
categories of consumers than the mechanism of cross-subsidizing the tariff across the board.
Subsidies should be targeted effectively and in transparent manner. As a substitute of cross-
subsidies, the State Government has the option of raising resources through mechanism of
electricity duty and giving direct subsidies to only needy consumers. This is a better way of
targeting subsidies effectively.

Accordingly, the following principles would be adopted:

 In accordance with the National Electricity Policy, consumers below poverty line who
consume below a specified level, say 30 units per month, may receive a special support
through cross subsidy. Tariffs for such designated group of consumers will be at least
50% of the average cost of supply. This provision will be re-examined after five years.

 For achieving the objective that the tariff progressively reflects the cost of supply of
electricity, the SERC would notify roadmap within six months with a target that latest by
the end of year 2010-2011 tariffs are within ± 20 % of the average cost of supply. The
road map would also have intermediate milestones, based on the approach of a gradual
reduction in cross subsidy.

 For example if the average cost of service is Rs 3 per unit, at the end of year 2010-2011
the tariff for the cross subsidised categories excluding those referred to in para 1 above
should not be lower than Rs 2.40 per unit and that for any of the cross-subsidising
categories should not go beyond Rs 3.60 per unit.

 While fixing tariff for agricultural use, the imperatives of the need of using ground water
resources in a sustainable manner would also need to be kept in mind in addition to the
average cost of supply. Tariff for agricultural use may be set at different levels for
different parts of a state depending of the condition of the ground water table to prevent
excessive depletion of ground water. Section 62 (3) of the Act provides that geographical
position of any area could be one of the criteria for tariff differentiation. A higher level of

( Page No. 84 )
 subsidy could be considered to support poorer farmers of the region where adverse
ground water table condition requires larger quantity of electricity for irrigation purposes
subject to suitable restrictions to ensure maintenance of ground water levels and
sustainable ground water usage.

 Extent of subsidy for different categories of consumers can be decided by the State
Government keeping in view various relevant aspects. But provision of free electricity is
not desirable as it encourages wasteful consumption of electricity besides, in most cases,
lowering of water table in turn creating avoidable problem of water shortage for irrigation
and drinking water for later generations. It is also likely to lead to rapid rise in demand of
electricity putting severe strain on the distribution network thus adversely affecting the
quality of supply of power. Therefore, it is necessary that reasonable level of user charges
are levied. The subsidized rates of electricity should be permitted only up to a pre-
identified level of consumption beyond which tariffs reflecting efficient cost of service
should be charged from consumers. If the State Government wants to reimburse even part
of this cost of electricity to poor category of consumers the amount can be paid in cash or
any other suitable way. Use of prepaid meters can also facilitate this transfer of subsidy to
such consumers.

 Metering of supply to agricultural / rural consumers can be achieved in a consumer

friendly way and in effective manner by management of local distribution in rural areas
through commercial arrangement with franchisees with involvement of panchayat
institutions, user associations, cooperative societies etc. Use of self closing load limitors
may be encouraged as a cost effective option for metering in cases of “limited use
consumers” who are eligible for subsidized electricity.

Definition of tariff components and their applicability

1. Two-part tariffs featuring separate fixed and variable charges and Time
differentiated tariff shall be introduced on priority for large consumers (say,
consumers with demand exceeding 1 MW) within one year. This would also help
in flattening the peak and implementing various energy conservation measures.

2. The National Electricity Policy states that existing PPAs with the generating
companies would need to be suitably assigned to the successor distribution
companies. The State Governments may make such assignments taking care of
different load profiles of the distribution companies so that retail tariffs are
uniform in the State for different categories of consumers. Thereafter the retail
tariffs would reflect the relative efficiency of distribution companies in procuring
power at competitive costs, controlling theft and reducing other distribution
losses.
3. The State Commission may provide incentives to encourage metering and billing
based on metered tariffs, particularly for consumer categories that are presently

( Page No. 85 )
 unmetered to a large extent. The metered tariffs and the incentives should be
given wide publicity.
4. The SERCs may also suitably regulate connection charges to be recovered by
the distribution licensee to ensure that second distribution licensee does not resort
to cherry picking by demanding unreasonable connection charges. The connection
charges of the second licensee should not be more than those payable to the
incumbent licensee

Cross-subsidy surcharge and additional surcharge for open access

 National Electricity Policy lays down that the amount of cross-subsidy surcharge and the
additional surcharge to be levied from consumers who are permitted open access should
not be so onerous that it eliminates competition which is intended to be fostered in
generation and supply of power directly to the consumers through open access.

 A consumer who is permitted open access will have to make payment to the generator,
the transmission licensee whose transmission systems are used, distribution utility for the
wheeling charges and, in addition, the cross subsidy surcharge. The computation of cross
subsidy surcharge, therefore, needs to be done in a manner that while it compensates the
distribution licensee, it does not constrain introduction of competition through open
access. A consumer would avail of open access only if the payment of all the charges
leads to a benefit to him. While the interest of distribution licensee needs to be protected
it would be essential that this provision of the Act, which requires the open access to be
introduced in a time-bound manner, is used to bring about competition in the larger
interest of consumers.

 Accordingly, when open access is allowed the surcharge for the purpose of sections
38,39,40 and sub-section 2 of section 42 would be computed as the difference between (i)
the tariff applicable to the relevant category of consumers and (ii) the cost of the
distribution licensee to supply electricity to the consumers of the applicable class. In case
of a consumer opting for open access, the distribution licensee could be in a position to
discontinue purchase of power at the margin in the merit order. Accordingly, the cost of
supply to the consumer for this purpose may be computed as the aggregate of (a) the
weighted average of power purchase costs (inclusive of fixed and variable charges) of top
5% power at the margin, excluding liquid fuel based generation, in the merit order
approved by the SERC adjusted for average loss compensation of the relevant voltage
level and (b) the distribution charges determined on the principles as laid down for intra-
state transmission charges.

Surcharge formula:

S = T – [ C (1+ L / 100) + D ]

( Page No. 86 )
Where

S is the surcharge

T is the Tariff payable by the relevant category of consumers;

C is the Weighted average cost of power purchase of top 5% at the margin excluding liquid
fuel based generation and renewable power

D is the Wheeling charge

L is the system Losses for the applicable voltage level, expressed as a percentage

The cross-subsidy surcharge should be brought down progressively and, as far as possible, at
a linear rate to a maximum of 20% of its opening level by the year 2010-11.

The surcharge may be collected either by the distribution licensee, the transmission licensee,
the STU or the CTU, depending on whose facilities are used by the consumer for availing
electricity supplies. In all cases the amounts collected from a particular consumer should be
given to the distribution licensee in whose area the consumer is located. In case of two
licensees supplying in the same area the licensee from whom the consumer was availing
supply shall be paid the amounts collected.

The additional surcharge for obligation to supply as per section 42(4) of the Act should
become applicable only if it is conclusively demonstrated that the obligation of a licensee, in
terms of existing power purchase commitments, has been and continues to be stranded, or
there is an unavoidable obligation and incidence to bear fixed costs consequent to such a
contract. The fixed costs related to network assets would be recovered through wheeling
charges.

Wheeling charges should be determined on the basis of same principles as laid down for
intra-state transmission charges and in addition would include average loss compensation of
the relevant voltage level.

The E-Act expects RCs to align tariff to the cost of supply. If this is done, the tariff for the
HT industry will reduce substantially – the cost of long LT network will not be charged to
these customers. Moreover, HT industry generally have flatter load curve hence demand less
of costly peaking power. While, the tariff for LT users, especially the residential and the rural
consumers would increase. The residential consumption is predominantly at the peak time
and costs more to provide, and the rural consumers need large extension of network. For the
agricultural consumers, the tariff would be below the average cost of supply, as these
consumers are the first to be cut off in case of load shedding.

( Page No. 87 )
.

( Page No. 88 )
 National TARIFF POLICY
1.0 INTRODUCTION

1.1. In compliance with section 3 of the Electricity Act 2003 the Central Government hereby
notifies the Tariff policy in

FINANCIAL PRINCIPLES of ARR

Capital Cost and capital structure

Capital cost for a project shall include:

(a) the expenditure incurred or projected to be incurred, including interest during construction
and financing charges, any gain or loss on account of foreign exchange risk variation on the loan
during construction up to the date of commercial operation of the project, as admitted by the
Commission, after prudence check;
(b) capitalised initial spares subject to the ceiling rates specified in this Regulation; and
(c) additional capital expenditure determined under Regulation 28:

Provided that the assets forming part of the project but not put to use or not in use, shall be taken
out of the capital cost.

1. The capital cost admitted by the Commission after prudence check shall form the basis
for determination of tariff:

2. Provided that prudence check may include scrutiny of the reasonableness of the capital
expenditure, financing plan, interest during construction, use of efficient technology,
MYT Regulations 2011 cost over-run and time over-run, and such other matters as may
be considered appropriate by the Commission for determination of tariff.

3. The approved Capital Cost shall be considered for determination of tariff and if sufficient
justification is provided for any escalation in the Project Cost, the same may be
considered by the Commission subject to the prudence check:

4. Provided that in case the actual capital cost is lower than the approved capital cost, then
the actual capital cost shall be considered for determination of tariff of the Generating
Company or Transmission Licensee or Distribution Licensee.

5. The actual capital expenditure on COD for the original scope of work based on audited
accounts of the Company limited to original cost may be considered subject to the
prudence check by the Commission.

( Page No. 89 )
 6. The Commission may approve for each year of the Control Period, an additional amount
equivalent to 20% of the total capital expenditure approved for respective financial year
of the Control Period towards unplanned capital expenditure or the capital expenditure
that is included under the Business Plan but is yet to be approved by the Commission.

7. Where power purchase agreement or bulk power transmission agreement provides for a
ceiling of capital cost, the capital cost to be considered shall not exceed such ceiling.

8. The capital cost may include capitalised initial spares for a maximum of first five years of
operation as follows:

(a) upto 2.5% of original capital cost in case of coal based/lignite fired Generating
Stations,
(b) upto 4.0% of original capital cost in case of gas turbine/combined cycle Generating
Stations,
(c) upto 1.5% of original capital cost in case of Hydro Generating Stations, and
(d) in case of Transmission Licensees - upto 0.75% for Transmission Line - upto 2.5%
for Transmission Substation - upto 3.5% for series compensation and HVDC
Station

Scrutiny of the cost estimates by the Commission shall be limited to the reasonableness of the
capital cost, financing plan, interest during construction, use of efficient technology, and such
other matters for determination of tariff.

Revaluation of assets shall be permitted during the Control Period provided it does not affect
tariff adversely. Any benefit from such revaluation shall be passed on to persons sharing the
capacity charge in case of a Generating Company and to long-term intra-State open access
customers of Transmission Licensee or Distribution Licensee, or retail supply consumers in case
of Distribution Licensees, at the time of Mid-term Performance Review and final truing up of
second Control Period.

Any expenditure on replacement, renovation and modernization or extension of life of old fixed
assets, as applicable to Generating Companies, Transmission Licensees and Distribution
Licensees, shall be considered after writing off the net value of such replaced assets from the
original capital cost and shall be calculated as follows: MYT Regulations 2011

Net Value of Replaced Assets = OCFA – AD; Where; OCFA: Original Capital Cost of Replaced
Assets; AD: Accumulated depreciation pertaining to the Replaced Assets.

Explanation – for the purpose of this Regulation, the term renovation and modernization shall
have the same meaning as in Section 80 IA of the Income-Tax Act, 1961.

Additional capitalisation

The following capital expenditure, actually incurred or projected to be incurred, on the following

( Page No. 90 )
counts within the original scope of work, after the date of commercial operation and up to the
cut-off date may be admitted by the Commission, subject to the prudence check:

(a) Due to Un-discharged liabilities within the original scope of work

(b) On works within the original scope of work, deferred for execution
(c) To meet award of arbitration and satisfaction of final and unappealable order or
decree of a court arising out of original capital cost,
(d) On account of change in law,
(e) On procurement of initial spares included in the original project costs subject to the
ceiling norm laid down in Regulation 27.7;
(f) Any additional works/services, which have become necessary for efficient and successful
operation of a Generating Station or a transmission project but not included in the original scope
of work.

Provided that original scope of work along with estimates of expenditure shall be submitted
along with the application for provisional tariff. Provided further that a list of the deferred
liabilities and works deferred for execution shall be submitted along with the application for final
tariff after the date of commercial operation of the Generating Unit/Station or transmission
system.

Impact of additional capitalisation on tariff, if any, shall be considered during Mid-term

Performance Review and tariff determination of third Control Period starting from April 1, 2016.

Consumer contribution, Deposit work and Grant

The following nature of work carried out by the Transmission Licensee or Distribution Licensee
shall be classified under this category:
(a) Works after obtaining a part or all of the funds from the users in the context of deposit works.
(b) Capital works undertaken by utilising grants received from the State and Central
Governments, including funds under RGGVY, APDRP, etc.
MYT Regulations 2011 Page 38 of 100

(c) Any other grant of similar nature and such amount received without any obligation to return
the same and with no interest costs attached to such subvention.

29.2 Principles for treatment of the expenses on such capital expenditure shall be as follows:
(a) Normative O&M expense as specified in these Regulations shall be allowed.
(b) Provisions related to Depreciation, as specified in Regulation 31.
(c) Provisions related to Return on Equity Capital, as specified in Regulation 32.

Debt-equity ratio

For a project declared under commercial operation on or after April 1, 2011, if the equity

( Page No. 91 )
actually deployed is more than 30% of the capital cost, equity in excess of 30% shall be treated
as normative loan for the Generating Company, Transmission Licensee and Distribution
Licensee:

Provided that where equity actually deployed is less than 30% of the capital cost of the
capitalised asset, the actual equity shall be considered for determination of tariff:
Provided further that the equity invested in foreign currency shall be designated in Indian rupees
on the date of each investment.

Explanation.- The premium, if any, raised by the Generating Company or the Transmission
Licensee or the Distribution Licensee, as the case may be, while issuing share capital and
investment of internal resources created out of its free reserve, for the funding of the project,
shall be reckoned as paid up capital for the purpose of computing return on equity, provided such
premium amount and internal resources are actually utilised for meeting the capital expenditure
of the Generating Station or the transmission system or the distribution system.
30.2 In case of the Generating Company, Transmission Licensee and Distribution Licensee, if
any fixed asset is capitalised on account of capital expenditure project prior to April 1, 2011,
debt-equity ratio allowed by the Commission for determination of tariff for the period ending
March 31, 2011 shall be considered:

Provided that in case of retirement or replacement of the assets, the equity capital approved as
mentioned above, shall be reduced to the extent of 30% (or actual equity component based on
documentary evidence, if it is lower than 30%) of the original cost of the retired or replaced
asset:

Provided further that for the Generating Company or the Transmission Licensee or the
Distribution Licensee formed as a result of a transfer scheme, the date of the transfer scheme
shall be the effective date instead of April 1, 2011 for the determination of equity capital.
30.3 Any expenditure incurred or projected to be incurred on or after April 1, 2011, as may be
admitted by the Commission as additional capital expenditure for determination of tariff, and
renovation and modernisation expenditure for life extension, shall be serviced in the manner
specified in this Regulation. MYT Regulations 2011

Depreciation

The value base for the purpose of depreciation shall be the Capital Cost of the asset admitted by
the Commission.

The Generation Company and Transmission Licensee or Distribution Licensee shall be permitted
to recover depreciation on the value of fixed assets used in their respective Business computed in
the following manner:

(a) The approved original cost of the project/fixed assets shall be the value base for calculation of
depreciation:

Provided that the depreciation shall be allowed on the entire capitalised amount of the new assets

( Page No. 92 )
after reducing the approved original cost of the project/fixed assets of retired or replaced assets.

(b) Depreciation shall be computed annually based on the straight line method at the rates
specified in the Annexure I to these Regulations:

Provided that the Generating Company or Transmission Licensee or Distribution Licensee shall
ensure that once the individual asset is depreciated to the extent of seventy (70) percent,
remaining depreciable value as on 31st March of the year closing shall be spread over the
balance useful life of the asset, as provided in these Regulations. Provided that the Generating
Company or Transmission Licensee or Distribution Licensee, shall submit all such details or
documentary evidence, as may be required under this Regulation and as stipulated by the
Commission, from time to time, to substantiate the above claims.

(c) The salvage value of the asset shall be considered at 10 per cent of the allowable capital cost
and depreciation shall be allowed upto a maximum of 90 per cent of the allowable capital cost of
the asset.
Land other than the land held under lease and the land for reservoir in case of hydro Generating
Station shall not be a depreciable assets and its cost shall be excluded from the capital cost while
computing depreciable value of the assets.

In case of the existing projects, the balance depreciable value as on April 1, 2011, shall be
worked out by deducting the cumulative depreciation as admitted by the Commission upto
March 31, 2011, from the gross depreciable value of the assets.

Provided that depreciation shall be chargeable from the first year of commercial operation.

In case of projected commercial operation of the assets for part of the year, depreciation shall be
calculated based on the average of opening and closing value of assets, approved by the
Commission.

Provided that depreciation shall be re-calculated for assets capitalised at the time of Mid-term
Performance Review or at the time of final truing up during determination of tariff for third
Control Period, based on documentary evidence of assets capitalised by the applicant, subject to
the prudence check of the Commission, such that the depreciation is calculated proportionately
from the date of capitalisation. MYT Regulations 2011

( Page No. 93 )
Return on Equity Capital

Generation

Return on equity capital shall be computed on the equity capital determined in accordance with
Regulation 30 at the rate of 15.5 per cent per annum in Indian Rupee terms:
Provided that in case of projects commissioned on or after 1st April, 2011, an additional return of
0.5% shall be allowed if such projects are completed within the timeline specified in Annexure-
III:

Provided further that the additional return of 0.5% shall not be admissible if the project is not
completed within the timeline specified above for reasons whatsoever.

Transmission Licensee and Distribution Licensee

Return on equity capital for the Transmission Licensee and Wires Business of Distribution
Licensee shall be computed on the equity capital determined in accordance with Regulation 30 at
the rate of 15.5 % per cent per annum, and for the Retail Supply of Electricity of Distribution
Licensee, Return on equity capital shall be allowed a return at the rate of 17.5 % per cent per
annum, in Indian Rupee terms, on the amount of equity capital determined in accordance with
Regulation 30.

The return on equity capital shall be computed in the following manner:

(a) Return at the allowable rate as per this Regulation above, applied on the amount of equity
capital at the commencement of the financial year; plus
(b) Return at the allowable rate as per this Regulation above, applied on 50 per cent of the equity
capital portion of the allowable capital cost, for the investments put to use in transmission
business or distribution business, calculated in accordance with Regulation 27, Regulation 28
and Regulation 29 above, for such financial year.

Interest on loan capital

The loans arrived at in the manner indicated in Regulation 30 shall be considered as gross
normative loan for calculation of interest on loan.

Provided that in case of retirement or replacement of assets, the loan capital approved as
mentioned above, shall be reduced to the extent of 70% (or actual loan component based on
documentary evidence, if it is higher than 70%) of the original cost of the retired or replaced
assets.

The normative loan outstanding as on April 1, 2011, shall be worked out by deducting the
cumulative repayment as admitted by the Commission up to March 31, 2011, from the gross
normative loan.

The repayment for the year of the tariff period FY 2011-12 to FY 2015-16 shall be deemed to be

( Page No. 94 )
equal to the depreciation allowed for that year:

Notwithstanding any moratorium period availed by the Generating Company or the

Transmission Licensee or the Distribution Licensee, as the case may be, the repayment of loan
shall be considered from the first year of commercial operation of the project and shall be equal
to the annual depreciation allowed, MYT Regulations 2011

The rate of interest shall be the weighted average rate of interest calculated on the basis of the
actual loan portfolio at the beginning of each year applicable to the Generating Company or the
Transmission Licensee or the Distribution Licensee:

Provided that if there is no actual loan for a particular year but normative loan is still
outstanding, the last available weighted average rate of interest shall be considered:

Provided further that if the Generating Company or the Transmission Licensee or the
Distribution Licensee, as the case may be, does not have actual loan, then the weighted average
rate of interest of the Generating Company or the Transmission Licensee or the Distribution
Licensee as a whole shall be considered.

The interest on loan shall be calculated on the normative average loan of the year by applying the
weighted average rate of interest.

Tax on Income

The Commission, in its MYT Order, shall provisionally approve Income Tax payable for each
year of the Control Period, if any, based on the actual income tax paid on permissible return as
allowed by the Commission relating to the electricity business regulated by the Commission, as
per latest Audited Accounts available for the applicant, subject to prudence check:

Provided that no Income Tax shall be considered on the amount of efficiency gains and incentive
earned by the Generating Companies, Transmission Licensees and Distribution Licensees.

Provided further that the Generating Company, Transmission Licensee and Distribution Licensee
shall bill the Income Tax under a separate head called "Income Tax Reimbursement" in their
respective bills.

Variation between Income Tax actually paid and approved, if any, on the income stream of the
regulated business of Generating Companies, Transmission Licensees and Distribution Licensees
shall be reimbursed to/recovered from the Generating Companies, Transmission Licensees and
Distribution Licensees, based on the documentary evidence submitted at the time of Mid-term
Performance Review and MYT Order of third Control Period, subject to prudence check.

Under-recovery or over-recovery of any amount from the beneficiaries or the consumers on

account of such income tax having been passed on to them shall be on the basis of income-tax
assessment under the Income-Tax Act, 1961, as certified by the statutory auditors. The
Generating Company, or the Transmission Licensee or Distribution Licensee, as the case may be,

( Page No. 95 )
may include this variation in its Mid-term Performance Review Petition and MYT Petition of
third Control Period:

Provided that tax on any income stream from other than the business regulated by the
Commission shall not constitute a pass through component in tariff and tax on such other income
shall be borne by the Generating Company or Transmission Licensee or the Distribution
Licensee, as the case may be. MYT Regulations 2011

Interest on Working Capital

Generation:

(a) In case of coal based/oil-based/lignite-fired Generating Stations, working capital shall cover:
(i) Cost of coal or lignite for one and half months (1½) for pit-head Generating Stations and two
(2) months for non-pit-head Generating Stations, corresponding to target availability;
(ii) Cost of oil for two (2) months corresponding to target availability;
(iii) Cost of secondary fuel oil for two (2) months corresponding to target availability;
(iv) Operation and Maintenance expenses for one (1) month;
(v) Maintenance spares at one (1) per cent of the historical cost; and
(vi) Receivables for sale of electricity equivalent to two (2) months of the sum of annual fixed
charges and energy charges calculated on target availability; minus
(vii) Payables for fuel (including oil and secondary fuel oil) to the extent of one (1) month of the
cost of fuel calculated on target availability.
(b) In case of Gas Turbine/Combined Cycle Generating Stations, working capital shall cover:
(i) Fuel cost for one (1) month corresponding to target availability duly taking into account the
mode of operation of the Generating Station on gas fuel and / or liquid fuel;
(ii) Liquid fuel stock for fifteen (15) days corresponding to target availability;
(iii) Operation and maintenance expenses for one (1) month;
(iv) Maintenance spares at one (1) per cent of the historical cost; and
(v) Receivables for sale of electricity equivalent to two (2) months of the sum of annual fixed
charges and energy charges calculated on target availability, minus
(vi) Payables for fuel (including liquid fuel stock) to the extent of one (1) month of the cost of
fuel calculated on target availability.
(c) In case of Hydro power Generating Stations, working capital shall cover:
(i) Operation and maintenance expenses for one (1) month;
(ii) Maintenance spares at one (1) per cent of the historical cost; and
(iii) Receivables for sale of electricity equivalent to two (2) months of the annual fixed charges
calculated on normative capacity index.

( Page No. 96 )
(d) In case of own Generating Stations, no amount shall be allowed towards receivables, to the
extent of supply of power by the Generation Business to the
MYT Regulations 2011

Retail Supply Business, in the computation of working capital in accordance with these
Regulations.

(e) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.

Transmission:

(a) The Transmission Licensee shall be allowed interest on the estimated level of working capital
for the financial year, computed as follows:
(i) One-twelfth (1/12) of the amount of operation and maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) One and half (1½) months equivalent of the expected revenue from transmission charges at
the prevailing tariff;minus
(iv) Amount, if any, held as security deposits from Transmission System Users.
(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from Transmission System
Users at the Bank Rate as at the date on which the application for determination of tariff is made.

Distribution Wires Business

(a) The Distribution Licensee shall be allowed interest on the estimated level of working capital
for the Distribution Wires Business for the financial year, computed as follows:
(i) One-twelfth (1/12) of the amount of Operation and Maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) Two (2) months equivalent of the expected revenue from charges for use of Distribution
Wires at the prevailing tariff; minus
(iv) Amount held as security deposits from Distribution System Users.
(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for

( Page No. 97 )
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from Distribution System
Users at the Bank Rate as on the date on which the application for determination of tariff is
made.

Retail Supply of Electricity

(a) The Distribution Licensee shall be allowed interest on the estimated level of working capital
for the financial year, computed as follows:
(i) One-twelfth (1/12) of the amount of Operation and Maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) Two (2) months equivalent of the expected revenue from sale of electricity at the prevailing
tariff; minus

(iv) Amount held as security deposits under clause (a) and clause (b) of sub-section (1) of
Section 47 of the Act from retail supply consumers; minus

(v) One (1) month equivalent of cost of power purchased, based on the annual power
procurement plan:

Provided that in case of power procurement from own Generating Stations, no amount shall be
allowed towards payables, to the extent of supply of power by the Generation Business to the
Retail Supply Business, in the computation of working capital in accordance with these
Regulations.

(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from retail supply consumers
at the Bank Rate as on the date on which the application for determination of tariff is made.

Contribution to contingency reserves

Where the Transmission Licensee or Distribution Licensee has made an appropriation to the
Contingency Reserve, a sum not less than 0.25 per cent and not more than 0.5 per cent of the
original cost of fixed assets shall be allowed annually towards such appropriation in the
calculation of aggregate revenue requirement:

Provided that where the amount of such Contingencies Reserves exceeds five (5) per cent of the
original cost of fixed assets, no such appropriation shall be allowed which would have the effect
of increasing the reserve beyond the said maximum:

Provided further that the amount so appropriated shall be invested in securities authorised under

( Page No. 98 )
the Indian Trusts Act, 1882 within a period of six months of the close of the financial year.

The Contingency Reserve shall not be drawn upon during the term of the licence except to meet
such charges as may be approved by the Commission as being: MYT Regulations 2011

(a) Expenses or loss of profits arising out of accidents, strikes or circumstances which the
management could not have prevented;
(b) Expenses on replacement or removal of plant or works other than expenses requisite for
normal maintenance or renewal;
(c) Compensation payable under any law for the time being in force and for which no other
provision is made:

Provided that such drawal from Contingency Reserve shall be computed after making due
adjustments for any other compensation that may have been received by the Licensee as part of
an insurance cover.

No diminution in the value of contingency reserve as mentioned above shall be allowed to be

the
adjusted as a part of tariff. Continuation of the National Electricity Policy (NEP) notified on 12
February 2005.

1.2. The National Electricity Policy has set the goal of adding new generation capacity of more
th th
than one lakh MW during the 10 and 11 Plan periods to have per capita availability of over 1000
units of electricity per year and to not only eliminate energy and peaking shortages but to also
have a spinning reserve of 5% in the system. Development of the power sector has also to meet
the challenge of providing access for electricity to all households in next five years.

1.3. It is therefore essential to attract adequate investments in the power sector by providing
appropriate return on investment as budgetary resources of the Central and State Governments are
incapable of providing the requisite funds. It is equally necessary to ensure availability of
electricity to different categories of consumers at reasonable rates for achieving the objectives of
rapid economic development of the country and improvement in the living standards of the
people.

1.4. Balancing the requirement of attracting adequate investments to the sector and that of
ensuring reasonability of user charges for the consumers is the critical challenge for the regulatory
process. Accelerated development of the power sector and its ability to attract necessary
investments calls for, inter alia, consistent regulatory approach across the country. Consistency in
approach becomes all the more necessary considering the large number of States and the
diversities involved.

2.0 LEGAL POSITION

( Page No. 99 )
2.1 Section 3 (1) of the Electricity Act 2003 empowers the Central Government to formulate the
tariff policy. Section 3 (3) of the Act enables the Central Government to review or revise the tariff
policy from time to time.

2.2 The Act also requires that the Central Electricity Regulatory Commission (CERC) and State
Electricity Regulatory Commissions (SERCs) shall be guided by the tariff policy in discharging
their functions including framing the regulations under section 61 of the Act.

2.3 Section 61 of the Act provides that Regulatory Commissions shall be guided by the principles
and methodologies specified by the Central Commission for determination of tariff applicable to
generating companies and transmission licensees.

2.4 The Forum of Regulators has been constituted by the Central Government under the
provisions of the Act which would, inter alia, facilitate consistency in approach especially in the
area of distribution.

3.0 EVOLUTION OF THE POLICY

The tariff policy has been evolved in consultation with the State Governments and the Central
Electricity Authority (CEA) and keeping in view the advice of the Central Electricity Regulatory
Commission and suggestions of various stakeholders.

4.0 OBJECTIVES OF THE POLICY

The objectives of this tariff policy are to:

(a) Ensure availability of electricity to consumers at reasonable and competitive rates;

(b) Ensure financial viability of the sector and attract investments;

(c) Promote transparency, consistency and predictability in regulatory approaches across

jurisdictions and minimize perceptions of regulatory risks;

(d) Promote competition, efficiency in operations and improvement in quality of supply.

5.0 GENERAL APPROACH TO TARIFF

5.1 Introducing competition in different segments of the electricity industry is one of the key
features of the Electricity Act, 2003. Competition will lead to significant benefits to consumers
through reduction in capital costs and also efficiency of operations. It will also facilitate the price
to be determined competitively. The Central Government has already issued detailed guidelines
for tariff based bidding process for procurement of electricity by distribution licensees for medium
th
or long-term period vide gazette notification dated 19 January, 2005.

( Page No. 100 )

All future requirement of power should be procured competitively by distribution licensees except
in cases of expansion of existing projects or where there is a State controlled/owned company as
an identified developer and where regulators will need to resort to tariff determination based on
norms provided that expansion of generating capacity by private developers for this purpose
would be restricted to one time addition of not more than 50% of the existing capacity.

Even for the Public Sector projects, tariff of all new generation and transmission projects should
be decided on the basis of competitive bidding after a period of five years or when the Regulatory
Commission is satisfied that the situation is ripe to introduce such competition.

5.2 The real benefits of competition would be available only with the emergence of appropriate
market conditions. Shortages of power supply will need to be overcome. Multiple players will
enhance the quality of service through competition. All efforts will need to be made to bring
power industry to this situation as early as possible in the overall interests of consumers.
Transmission and distribution, i.e. the wires business is internationally recognized as having the
characteristics of a natural monopoly where there are inherent difficulties in going beyond
regulated returns on the basis of scrutiny of costs.

5.3 Tariff policy lays down following framework for performance based cost of service regulation
in respect of aspects common to generation, transmission as well as distribution. These shall not
apply to competitively bid projects as referred to in Para 6.1 and Para 7.1 (6). Sector specific
aspects are dealt with in subsequent sections.

a) Return on Investment

Balance needs to be maintained between the interests of consumers and the need for investments
while laying down rate of return. Return should attract investments at par with, if not in preference
to, other sectors so that the electricity sector is able to create adequate capacity. The rate of return
should be such that it allows generation of reasonable surplus for growth of the sector.

The Central Commission would notify, from time to time, the rate of return on equity for
generation and transmission projects keeping in view the assessment of overall risk and the
prevalent cost of capital which shall be followed by the SERCs also. The rate of return notified by
CERC for transmission may be adopted by the State Electricity Regulatory Commissions (SERCs)
for distribution with appropriate modification taking into view the higher risks involved. For
uniform approach in this matter, it would be desirable to arrive at a consensus through the Forum
of Regulators.

While allowing the total capital cost of the project, the Appropriate Commission would ensure that
these are reasonable and to achieve this objective, requisite benchmarks on capital costs should be
evolved by the Regulatory Commissions.

( Page No. 101 )

Explanation: For the purposes of return on equity, any cash resources available to the company
from its share premium account or from its internal resources that are used to fund the equity
commitments of the project under consideration should be treated as equity subject to limitations
contained in (b) below.

The Central Commission may adopt the alternative approach of regulating through return on
capital. The Central Commission may adopt either Return on Equity approach or Return on
Capital approach whichever is considered better in the interest of the consumers.

The State Commission may consider ‘distribution margin’ as basis for allowing returns in
distribution business at an appropriate time. The Forum of Regulators should evolve a
comprehensive approach on “distribution margin” within one year. The considerations while
preparing such an approach would, inter-alia, include issues such as reduction in Aggregate
Technical and Commercial losses, improving the standards of performance and reduction in cost
of supply.

b) Equity Norms

For financing of future capital cost of projects, a Debt : Equity ratio of 70:30 should be adopted.
Promoters would be free to have higher quantum of equity investments. The equity in excess of
this norm should be treated as loans advanced at the weighted average rate of interest and for a
weighted average tenor of the long term debt component of the project after ascertaining the
reasonableness of the interest rates and taking into account the effect of debt restructuring done, if
any. In case of equity below the normative level, the actual equity would be used for
determination of Return on Equity in tariff computations.

c) Depreciation

The Central Commission may notify the rates of depreciation in respect of generation and
transmission assets. The depreciation rates so notified would also be applicable for distribution
with appropriate modification as may be evolved by the Forum of Regulators.

The rates of depreciation so notified would be applicable for the purpose of tariffs as well as
accounting.

There should be no need for any advance against depreciation.

Benefit of reduced tariff after the assets have been fully depreciated should remain available to the
consumers.

d) Cost of Debt

Structuring of debt, including its tenure, with a view to reducing the tariff should be encouraged.
Savings in costs on account of subsequent restructuring of debt should be suitably incentives by
the Regulatory Commissions keeping in view the interests of the consumers.
( Page No. 102 )
e) Cost of Management of Foreign Exchange Risk

Foreign exchange variation risk shall not be a pass through. Appropriate costs of hedging and
swapping to take care of foreign exchange variations should be allowed for debt obtained in
foreign currencies. This provision would be relevant only for the projects where tariff has not been
determined on the basis of competitive bids.

f) Operating Norms

Suitable performance norms of operations together with incentives and dis-incentives would need
to be evolved along with appropriate arrangement for sharing the gains of efficient operations with
the consumers. Except for the cases referred to in Para 5.3 (h)(2), the operating parameters in
tariffs should be at “normative levels” only and not at “lower of normative and actual”. This is
essential to encourage better operating performance. The norms should be efficient, relatable to
past performance, capable of achievement and progressively reflecting increased efficiencies and
may also take into consideration the latest technological advancements, fuel, vintage of
equipments, nature of operations, level of service to be provided to consumers etc. Continued and
proven inefficiency must be controlled and penalized.

The Central Commission would, in consultation with the Central Electricity Authority, notify
operating norms from time to time for generation and transmission. The SERC would adopt these
norms. In cases where operations have been much below the norms for many previous years, the
SERCs may fix relaxed norms suitably and draw a transition path over the time for achieving the
norms notified by the Central Commission.

Operating norms for distribution networks would be notified by the concerned SERCs. For
uniformity of approach in determining such norms for distribution, the Forum of Regulators
should evolve the approach including the guidelines for treatment of state specific distinctive
features.

g) Renovation and Modernatisation

Renovation and modernization (it shall not include periodic overhauls) for higher efficiency levels
needs to be encouraged. A multi-year tariff (MYT) framework may be prescribed which should
also cover capital investments necessary for renovation and modernization and an incentive
framework to share the benefits of efficiency improvement between the utilities and the
beneficiaries with reference to revised and specific performance norms to be fixed by the
Appropriate Commission. Appropriate capital costs required for pre-determined efficiency gains
and/or for sustenance of high level performance would need to be assessed by the Appropriate
Commission.

(h) Multi Year Tariff

( Page No. 103 )

1) Section 61 of the Act states that the Appropriate Commission, for determining the terms and
conditions for the determination of tariff, shall be guided inter-alia, by multi-year tariff principles.
The MYT framework is to be adopted for any tariffs to be determined from April 1, 2006. The
framework should feature a five-year control period. The initial control period may however be of
3 year duration for transmission and distribution if deemed necessary by the Regulatory
Commission on account of data uncertainties and other practical considerations. In cases of lack of
reliable data, the Appropriate Commission may state assumptions in MYT for first control period
and a fresh control period may be started as and when more reliable data becomes available.

2) In cases where operations have been much below the norms for many previous years the initial
starting point in determining the revenue requirement and the improvement trajectories should be
recognized at “relaxed” levels and not the “desired” levels. Suitable benchmarking studies may be
conducted to establish the “desired” performance standards. Separate studies may be required for
each utility to assess the capital expenditure necessary to meet the minimum service standards.

3) Once the revenue requirements are established at the beginning of the control period, the
Regulatory Commission should focus on regulation of outputs and not the input cost elements. At
the end of the control period, a comprehensive review of performance may be undertaken.

4) Uncontrollable costs should be recovered speedily to ensure that future consumers are not
burdened with past costs. Uncontrollable costs would include (but not limited to) fuel costs, costs
on account of inflation, taxes and cess, variations in power purchase unit costs including on
account of hydro-thermal mix in case of adverse natural events.

5) Clear guidelines and regulations on information disclosure may be developed by the Regulatory
Commissions. Section 62 (2) of the Act empowers the Appropriate Commission to require
licensees to furnish separate details, as may be specified in respect of generation, transmission and
distribution for determination of tariff.

(i) Benefits under CDM

Tariff fixation for all electricity projects (generation, transmission and distribution) that result in
lower Green House Gas (GHG) emissions than the relevant base line should take into account the
benefits obtained from the Clean Development Mechanism (CDM) into consideration, in a manner
so as to provide adequate incentive to the project developers.

5.4 While it is recognized that the State Governments have the right to impose duties, taxes, cess
on sale or consumption of electricity, these could potentially distort competition and optimal use
of resources especially if such levies are used selectively and on a non- uniform basis.

In some cases, the duties etc. on consumption of electricity is linked to sources of generation (like
captive generation) and the level of duties levied is much higher as compared to that being levied
on the same category of consumers who draw power from grid. Such a distinction is invidious and

( Page No. 104 )

inappropriate. The sole purpose of freely allowing captive generation is to enable industries to
access reliable, quality and cost effective power. Particularly, the provisions relating to captive
power plants which can be set up by group of consumers has been brought in recognition of the
fact that efficient expansion of small and medium industries across the country will lead to faster
economic growth and creation of larger employment opportunities. For realizing the goal of
making available electricity to consumers at reasonable and competitive prices, it is necessary that
such duties are kept at reasonable level.

5.5 Though, as per the provisions of the Act, the outer limit to introduce open access in
distribution is 27.1.2009, it would be desirable that, in whichever states the situation so permits,
the Regulatory Commissions introduce such open access earlier than this deadline.

6.0 GENERATION

Accelerated growth of the generation capacity sector is essential to meet the estimated growth in
demand. Adequacy of generation is also essential for efficient functioning of power markets. At
the same time, it is to be ensured that new capacity addition should deliver electricity at most
efficient rates to protect the interests of consumers. This policy stipulates the following for
meeting these objectives.

6.1 Procurement of power

As stipulated in Para 5.1, power procurement for future requirements should be through a
transparent competitive bidding mechanism using the guidelines issued by the Central
th
Government vide gazette notification dated 19 January, 2005. These guidelines provide for
procurement of electricity separately for base load requirements and for peak load requirements.
This would facilitate setting up of generation capacities specifically for meeting peak.

6.2 Tariff structuring and associated issues

(1) A two-part tariff structure should be adopted for all long term contracts to facilitate Merit
Order dispatch. According to National Electricity Policy, the Availability Based Tariff (ABT) is to
be introduced at State level by April 2006. This framework would be extended to generating
stations (including grid connected captive plants of capacities as determined by the SERC). The
Appropriate Commission may also introduce differential rates of fixed charges for peak and off
peak hours for better management of load.

(2) Power Purchase Agreement should ensure adequate and bankable payment security
arrangements to the Generating companies. In case of persisting default in spite of the available
payment security mechanisms like letter of credit, escrow of cash flows etc. the generating
companies may sell to other buyers.

( Page No. 105 )

 (3) In case of coal based generating stations, the cost of project will also include reasonable cost
of setting up coal washeries, coal beneficiation system and dry ash handling & disposal system.

6.3 Harnessing captive generation

Captive generation is an important means to making competitive power available. Appropriate

Commission should create an enabling environment that encourages captive power plants to be
connected to the grid.

Such captive plants could inject surplus power into the grid subject to the same regulation as
applicable to generating companies. Firm supplies may be bought from captive plants by
distribution licensees using the guidelines issued by the Central Government under section 63 of
the Act.

The prices should be differentiated for peak and off-peak supply and the tariff should include
variable cost of generation at actual levels and reasonable compensation for capacity charges.

Alternatively, a frequency based real time mechanism can be used and the captive generators can
be allowed to inject into the grid under the ABT mechanism.

Wheeling charges and other terms and conditions for implementation should be determined in
advance by the respective State Commission, duly ensuring that the charges are reasonable and
fair.

Grid connected captive plants could also supply power to non-captive users connected to the grid
through available transmission facilities based on negotiated tariffs. Such sale of electricity would
be subject to relevant regulations for open access.

( Page No. 106 )

6.4 Non-conventional sources of energy generation including Co-generation:

(1) Pursuant to provisions of section 86(1)(e) of the Act, the Appropriate Commission shall fix a
minimum percentage for purchase of energy from such sources taking into account availability of
such resources in the region and its impact on retail tariffs. Such percentage for purchase of energy
should be made applicable for the tariffs to be determined by the SERCs latest by April 1, 2006.

It will take some time before non-conventional technologies can compete with conventional
sources in terms of cost of electricity. Therefore, procurement by distribution companies shall be
done at preferential tariffs determined by the Appropriate Commission.

(2) Such procurement by Distribution Licensees for future requirements shall be done, as far as
possible, through competitive bidding process under Section 63 of the Act within suppliers
offering energy from same type of non-conventional sources. In the long-term, these technologies
would need to compete with other sources in terms of full costs.

(3) The Central Commission should lay down guidelines within three months for pricing non-firm
power, especially from non–conventional sources, to be followed in cases where such
procurement is not through competitive bidding.

7.0 TRANSMISSION

The transmission system in the country consists of the regional networks, the inter-regional
connections that carry electricity across the five regions, and the State networks. The national
transmission network in India is presently under development. Development of the State networks
has not been uniform and capacity in such networks needs to be augmented. These networks will
play an important role in intra-State power flows and also in the regional and national flows. The
tariff policy, insofar as transmission is concerned, seeks to achieve the following objectives:

1. Ensuring optimal development of the transmission network to promote efficient utilization of

generation and transmission assets in the country;

2. Attracting the required investments in the transmission sector and providing adequate returns.

7.1 Transmission pricing

(1) A suitable transmission tariff framework for all inter-State transmission, including
transmission of electricity across the territory of an intervening State as well as conveyance within
the State which is incidental to such inter-state transmission, needs to be implemented with the
objective of promoting effective utilization of all assets across the country and accelerated
development of new transmission capacities that are required.

(2) The National Electricity Policy mandates that the national tariff framework implemented
should be sensitive to distance, direction and related to quantum of power flow. This would be

( Page No. 107 )

developed by CERC taking into consideration the advice of the CEA. Such tariff mechanism
st
should be implemented by 1 April 2006.

(3)Transmission charges, under this framework, can be determined on MW per circuit kilometer
basis, zonal postage stamp basis, or some other pragmatic variant, the ultimate objective being to
get the transmission system users to share the total transmission cost in proportion to their
respective utilization of the transmission system. The overall tariff framework should be such as
not to inhibit planned development/augmentation of the transmission system, but should
discourage non-optimal transmission investment.

(4) In view of the approach laid down by the NEP, prior agreement with the beneficiaries would
not be a pre-condition for network expansion. CTU/STU should undertake network expansion
after identifying the requirements in consonance with the National Electricity Plan and in
consultation with stakeholders, and taking up the execution after due regulatory approvals.

(5) The Central Commission would establish, within a period of one year, norms for capital and
operating costs, operating standards and performance indicators for transmission lines at different
voltage levels. Appropriate baseline studies may be commissioned to arrive at these norms.

(6) Investment by transmission developer other than CTU/STU would be invited through
competitive bids. The Central Government will issue guidelines in three months for bidding
process for developing transmission capacities. The tariff of the projects to be developed by
CTU/STU after the period of five years or when the Regulatory Commission is satisfied that the
situation is right to introduce such competition (as referred to in Para 5.1) would also be
determined on the basis of competitive bidding.

(7) After the implementation of the proposed framework for the inter-State transmission ,a similar
approach should be implemented by SERCs in next two years for the intra-State transmission,
duly considering factors like voltage, distance, direction and quantum of flow.

(8) Metering compatible with the requirements of the proposed transmission tariff framework
should be established on priority basis. The metering should be compatible with ABT
requirements, which would also facilitate implementation of Time of Day (ToD) tariffs.

7.2 Approach to transmission loss allocation

(1) Transactions should be charged on the basis of average losses arrived at after appropriately
considering the distance and directional sensitivity, as applicable to relevant voltage level, on the
transmission system. Based on the methodology laid down by the CERC in this regard for inter-
state transmission, the Forum of Regulators may evolve a similar approach for intra-state
transmission.

( Page No. 108 )

The loss framework should ensure that the loss compensation is reasonable and linked to
applicable technical loss benchmarks. The benchmarks may be determined by the Appropriate
Commission after considering advice of CEA. It would be desirable to move to a system of loss
compensation based on incremental losses as present deficiencies in transmission capacities are
overcome through network expansion.

(2) The Appropriate Commission may require necessary studies to be conducted to establish the
allowable level of system loss for the network configuration, and the capital expenditure required
to augment the transmission system and reduce system losses. Since additional flows above a level
of line loading leads to significantly higher losses, CTU/STU should ensure upgrading of
transmission systems to avoid the situations of overloading. The Appropriate Commission should
permit adequate capital investments in new assets for upgrading the transmission system.

7.3 Other issues in transmission

(1) Financial incentives and disincentives should be implemented for the CTU and the STU
around the key performance indicators (KPI) for these organizations. Such KPIs would include
efficient network construction, system availability and loss reduction.

(2) All available information should be shared with intending users by the CTU/STU and the load
dispatch centers, particularly information on available transmission capacity and load flow studies.

8.0 DISTRIBUTION

Supply of reliable and quality power of specified standards in an efficient manner and at
reasonable rates is one of the main objectives of the National Electricity Policy. The State
Commission should determine and notify the standards of performance of licensees with respect to
quality, continuity and reliability of service for all consumers. It is desirable that the Forum of
Regulators determines the basic framework on service standards. A suitable transition framework
could be provided for the licensees to reach the desired levels of service as quickly as possible.
Penalties may be imposed on licensees in accordance with section 57 of the Act for failure to meet
the standards.

Making the distribution segment of the industry efficient and solvent is the key to success of
power sector reforms and provision of services of specified standards. Therefore, the Regulatory
Commissions need to strike the right balance between the requirements of the commercial
viability of distribution licensees and consumer interests. Loss making utilities need to be
transformed into profitable ventures which can raise necessary resources from the capital markets
to provide services of international standards to enable India to achieve its full growth potential.
Efficiency in operations should be encouraged. Gains of efficient operations with reference to
normative parameters should be appropriately shared between consumers and licensees.

8.1 Implementation of Multi-Year Tariff (MYT) framework

( Page No. 109 )

1) This would minimize risks for utilities and consumers, promote efficiency and appropriate
reduction of system losses and attract investments and would also bring greater predictability to
consumer tariffs on the whole by restricting tariff adjustments to known indicators on power
purchase prices and inflation indices. The framework should be applied for both public and private
utilities.

2) The State Commissions should introduce mechanisms for sharing of excess profits and losses
with the consumers as part of the overall MYT framework .In the first control period the
incentives for the utilities may be asymmetric with the percentage of the excess profits being
retained by the utility set at higher levels than the percentage of losses to be borne by the utility.
This is necessary to accelerate performance improvement and reduction in losses and will be in the
long term interest of consumers by way of lower tariffs.

3) As indicated in Para 5.3 (h), the MYT framework implemented in the initial control period
should have adequate flexibility to accommodate changes in the baselines consequent to metering
being completed.

4) Licensees may have the flexibility of charging lower tariffs than approved by the State
Commission if competitive conditions require so without having a claim on additional revenue
requirement on this account in accordance with Section 62 of the Act .

5) At the beginning of the control period when the “actual” costs form the basis for future
projections, there may be a large uncovered gap between required tariffs and the tariffs that are
presently applicable. The gap should be fully met through tariff charges and through alternative
means that could inter-alia include financial restructuring and transition financing.

6) Incumbent licensees should have the option of filing for separate revenue requirements and
tariffs for an area where the State Commission has issued multiple distribution licenses, pursuant
to the provisions of Section 14 of the Act read with Para 5.4.7 of the National Electricity Policy.

7) Appropriate Commissions should initiate tariff determination and regulatory scrutiny on a sue
motto basis in case the licensee does not initiate filings in time. It is desirable that requisite tariff
changes come into effect from the date of commencement of each financial year and any gap on
account of delay in filing should be on account of licensee.

8.2 Framework for revenue requirements and costs

8.2.1 The following aspects would need to be considered in determining tariffs:

(1) All power purchase costs need to be considered legitimate unless it is established that the merit
order principle has been violated or power has been purchased at unreasonable rates. The
reduction of Aggregate Technical & Commercial (ATC) losses needs to be brought about but not
by denying revenues required for power purchase for 24 hours supply and necessary and
reasonable O&M and investment for system up gradation. Consumers, particularly those who are

( Page No. 110 )

ready to pay a tariff which reflects efficient costs have the right to get uninterrupted 24 hours
supply of quality power. Actual level of retail sales should be grossed up by normative level of
T&D losses as indicated in MYT trajectory for allowing power purchase cost subject to justifiable
power purchase mix variation (for example, more energy may be purchased from thermal
generation in the event of poor rainfall) and fuel surcharge adjustment as per regulations of the
SERC.

(2) ATC loss reduction should be incentives by linking returns in a MYT framework to an
achievable trajectory. Greater transparency and nurturing of consumer groups would be
efficacious. For government owned utilities improving governance to achieve ATC loss reduction
is a more difficult and complex challenge for the SERCs. Prescription of a MYT dispensation with
different levels of consumer tariffs in succeeding years linked to different ATC loss levels aimed
at covering full costs could generate the requisite political will for effective action to reduce theft
as the alternative would be stiffer tariff increases. Third party verification of energy audit results
for different areas/localities could be used to impose area/locality specific surcharge for greater
ATC loss levels and this in turn could generate local consensus for effective action for better
governance. The SERCs may also encourage suitable local area based incentive and disincentive
scheme for the staff of the utilities linked to reduction in losses. The SERC shall undertake
independent assessment of baseline data for various parameters for every distribution circle of the
licensee and this exercise should be completed latest by March, 2007.

The SERC shall also institute a system of independent scrutiny of financial and technical data
submitted by the licensees.

As the metering is completed up to appropriate level in the distribution network, latest by March,
2007, it should be possible to segregate technical losses. Accordingly technical loss reduction
under MYT framework should then be treated as distinct from commercial loss reduction which
requires a different approach.

(3) Section 65 of the Act provides that no direction of the State Government regarding grant of
subsidy to consumers in the tariff determined by the State Commission shall be operative if the
payment on account of subsidy as decided by the State Commission is not made to the utilities and
the tariff fixed by the State Commission shall be applicable from the date of issue of orders by the
Commission in this regard. The State Commissions should ensure compliance of this provision of
law to ensure financial viability of the utilities. To ensure implementation of the provision of the
law, the State Commission should determine the tariff initially, without considering the subsidy
commitment by the State Government and subsidized tariff shall be arrived at thereafter
considering the subsidy by the State Government for the respective categories of consumers.

(4) Working capital should be allowed duly recognizing the transition issues faced by the utilities
such as progressive improvement in recovery of bills. Bad debts should be recognized as per
policies developed and subject to the approval of the State Commission.

( Page No. 111 )

(5) Pass through of past losses or profits should be allowed to the extent caused by uncontrollable
factors. During the transition period controllable factors should be to the account of utilities and
consumers in proportions determined under the MYT framework.

(6) The contingency reserves should be drawn upon with prior approval of the State Commission
only in the event of contingency conditions specified through regulations by the State
Commission. The existing practice of providing for development reserves and tariff and dividend
control reserves should be discontinued.

8.2.2. The facility of a regulatory asset has been adopted by some Regulatory Commissions
in the past to limit tariff impact in a particular year. This should be done only as exception,
and subject to the following guidelines:

a. The circumstances should be clearly defined through regulations, and should only include
natural causes or force majeure conditions. Under business as usual conditions, the opening
balances of uncovered gap must be covered through transition financing arrangement or capital
restructuring;

b. Carrying cost of Regulatory Asset should be allowed to the utilities;

c. Recovery of Regulatory Asset should be time-bound and within a period not exceeding three
years at the most and preferably within control period;

d. The use of the facility of Regulatory Asset should not be repetitive.

e. In cases where regulatory asset is proposed to be adopted, it should be ensured that the return on
equity should not become unreasonably low in any year so that the capability of the licensee to
borrow is not adversely affected.

8.3 Tariff design: Linkage of tariffs to cost of service

It has been widely recognized that rational and economic pricing of electricity can be one of the
major tools for energy conservation and sustainable use of ground water resources.

In terms of the Section 61 (g) of the Act, the Appropriate Commission shall be guided by the
objective that the tariff progressively reflects the efficient and prudent cost of supply of electricity.

The State Governments can give subsidy to the extent they consider appropriate as per the
provisions of section 65 of the Act. Direct subsidy is a better way to support the poorer categories
of consumers than the mechanism of cross-subsidizing the tariff across the board. Subsidies
should be targeted effectively and in transparent manner. As a substitute of cross-subsidies, the
State Government has the option of raising resources through mechanism of electricity duty and
giving direct subsidies to only needy consumers. This is a better way of targeting subsidies
effectively.

( Page No. 112 )

Accordingly, the following principles would be adopted:

1. In accordance with the National Electricity Policy, consumers below poverty line who consume
below a specified level, say 30 units per month, may receive a special support through cross
subsidy. Tariffs for such designated group of consumers will be at least 50% of the average cost of
supply. This provision will be re-examined after five years.

2. For achieving the objective that the tariff progressively reflects the cost of supply of electricity,
the SERC would notify roadmap within six months with a target that latest by the end of year
2010-2011 tariffs are within ± 20 % of the average cost of supply. The road map would also have
intermediate milestones, based on the approach of a gradual reduction in cross subsidy.

For example if the average cost of service is Rs 3 per unit, at the end of year 2010-2011 the tariff
for the cross subsidized categories excluding those referred to in Para 1 above should not be lower
than Rs 2.40 per unit and that for any of the cross-subsidizing categories should not go beyond Rs
3.60 per unit.

3. While fixing tariff for agricultural use, the imperatives of the need of using ground water
resources in a sustainable manner would also need to be kept in mind in addition to the average
cost of supply. Tariff for agricultural use may be set at different levels for different parts of a state
depending on the condition of the ground water table to prevent excessive depletion of ground
water. Section 62 (3) of the Act provides that geographical position of any area could be one of the
criteria for tariff differentiation. A higher level of subsidy could be considered to support poorer
farmers of the region where adverse ground water table condition requires larger quantity of
electricity for irrigation purposes subject to suitable restrictions to ensure maintenance of ground
water levels and sustainable ground water usage.

4. Extent of subsidy for different categories of consumers can be decided by the State Government
keeping in view various relevant aspects. But provision of free electricity is not desirable as it
encourages wasteful consumption of electricity besides, in most cases, lowering of water table in
turn creating avoidable problem of water shortage for irrigation and drinking water for later
generations. It is also likely to lead to rapid rise in demand of electricity putting severe strain on
the distribution network thus adversely affecting the quality of supply of power. Therefore, it is
necessary that reasonable level of user charges is levied. The subsidized rates of electricity should
be permitted only up to a pre-identified level of consumption beyond which tariffs reflecting
efficient cost of service should be charged from consumers. If the State Government wants to
reimburse even part of this cost of electricity to poor category of consumers the amount can be
paid in cash or any other suitable way. Use of prepaid meters can also facilitate this transfer of
subsidy to such consumers.

5. Metering of supply to agricultural / rural consumers can be achieved in a consumer friendly way
and in effective manner by management of local distribution in rural areas through commercial
arrangement with franchisees with involvement of panchayat institutions, user associations,

( Page No. 113 )

cooperative societies etc. Use of self closing load limitors may be encouraged as a cost effective
option for metering in cases of “limited use consumers” who are eligible for subsidized electricity.

8.4 Definition of tariff components and their applicability

1. Two-part tariffs featuring separate fixed and variable charges and Time differentiated tariff
shall be introduced on priority for large consumers (say, consumers with demand exceeding 1
MW) within one year. This would also help in flattening the peak and implementing various
energy conservation measures.

2. The National Electricity Policy states that existing PPAs with the generating companies would
need to be suitably assigned to the successor distribution companies. The State Governments may
make such assignments taking care of different load profiles of the distribution companies so that
retail tariffs are uniform in the State for different categories of consumers. Thereafter the retail
tariffs would reflect the relative efficiency of distribution companies in procuring power at
competitive costs, controlling theft and reducing other distribution losses.

3. The State Commission may provide incentives to encourage metering and billing based on
metered tariffs, particularly for consumer categories that are presently unmetered to a large extent.
The metered tariffs and the incentives should be given wide publicity.

4. The SERCs may also suitably regulate connection charges to be recovered by the distribution
licensee to ensure that second distribution licensee does not resort to cherry picking by demanding
unreasonable connection charges. The connection charges of the second licensee should not be
more than those payable to the incumbent licensee.

8.5 Cross-subsidy surcharge and additional surcharge for open access

8.5.1 National Electricity Policy lays down that the amount of cross-subsidy surcharge and the
additional surcharge to be levied from consumers who are permitted open access should not be so
onerous that it eliminates competition which is intended to be fostered in generation and supply of
power directly to the consumers through open access.

A consumer who is permitted open access will have to make payment to the generator, the
transmission licensee whose transmission systems are used, distribution utility for the wheeling
charges and, in addition, the cross subsidy surcharge. The computation of cross subsidy surcharge,
therefore, needs to be done in a manner that while it compensates the distribution licensee, it does
not constrain introduction of competition through open access. A consumer would avail of open
access only if the payment of all the charges leads to a benefit to him. While the interest of
distribution licensee needs to be protected it would be essential that this provision of the Act,
which requires the open access to be introduced in a time-bound manner, is used to bring about
competition in the larger interest of consumers.

( Page No. 114 )

Accordingly, when open access is allowed the surcharge for the purpose of sections 38,39,40 and
sub-section 2 of section 42 would be computed as the difference between (i) the tariff applicable
to the relevant category of consumers and (ii) the cost of the distribution licensee to supply
electricity to the consumers of the applicable class. In case of a consumer opting for open access,
the distribution licensee could be in a position to discontinue purchase of power at the margin in
the merit order. Accordingly, the cost of supply to the consumer for this purpose may be computed
as the aggregate of (a) the weighted average of power purchase costs (inclusive of fixed and
variable charges) of top 5% power at the margin, excluding liquid fuel based generation, in the
merit order approved by the SERC adjusted for average loss compensation of the relevant voltage
level and (b) the distribution charges determined on the principles as laid down for intra-state
transmission charges.

Surcharge formula:

S = T – [ C (1+ L / 100) + D ]

Where

S is the surcharge

T is the Tariff payable by the relevant category of consumers;

C is the Weighted average cost of power purchase of top 5% at the margin excluding liquid fuel
based generation and renewable power

D is the Wheeling charge

L is the system Losses for the applicable voltage level, expressed as a percentage

The cross-subsidy surcharge should be brought down progressively and, as far as possible, at a
linear rate to a maximum of 20% of its opening level by the year 2010-11.

8.5.2 No surcharge would be required to be paid in terms of sub-section (2) of Section 42 of the
Act on the electricity being sold by the generating companies with consent of the competent
government under Section 43(A)(1)(c) of the Electricity Act, 1948 (now repealed) and on the
electricity being supplied by the distribution licensee on the authorization by the State
Government under Section 27 of the Indian Electricity Act,

1910 (now repealed), till the current validity of such consent or authorizations.

8.5.3 The surcharge may be collected either by the distribution licensee, the transmission licensee,
the STU or the CTU, depending on whose facilities are used by the consumer for availing

( Page No. 115 )

electricity supplies. In all cases the amounts collected from a particular consumer should be given
to the distribution licensee in whose area the consumer is located. In case of two licensees
supplying in the same area the licensee from whom the consumer was availing supply shall be
paid the amounts collected.

8.5.4 The additional surcharge for obligation to supply as per section 42(4) of the Act should
become applicable only if it is conclusively demonstrated that the obligation of a licensee, in terms
of existing power purchase commitments, has been and continues to be stranded, or there is an
unavoidable obligation and incidence to bear fixed costs consequent to such a contract. The fixed
costs related to network assets would be recovered through wheeling charges.
8.5.5 Wheeling charges should be determined on the basis of same principles as laid down for
intra-state transmission charges and in addition would include average loss compensation of the
relevant voltage level.
8.5.6 In case of outages of generator supplying to a consumer on open access, standby
arrangements should be provided by the licensee on the payment of tariff for temporary
connection to that consumer category as specified by the Appropriate Commission.

9.0 Trading Margin

The Act provides that the Appropriate Commission may fix the trading margin, if considered
necessary. Though there is a need to promote trading in electricity for making the markets
competitive, the Appropriate Commission should monitor the trading transactions continuously
and ensure that the electricity traders do not indulge in profiteering in situation of power
shortages. Fixing of trading margin should be resorted to for achieving this objective.

( Page No. 116 )

 Financial Principles of ARR

Capital Cost and capital structure

Capital cost for a project shall include:

(a) the expenditure incurred or projected to be incurred, including interest during construction
and financing charges, any gain or loss on account of foreign exchange risk variation on the loan
during construction up to the date of commercial operation of the project, as admitted by the
Commission, after prudence check;
(b) capitalised initial spares subject to the ceiling rates specified in this Regulation; and
(c) additional capital expenditure determined under Regulation 28:

Provided that the assets forming part of the project but not put to use or not in use, shall be taken
out of the capital cost.

1. The capital cost admitted by the Commission after prudence check shall form the basis
for determination of tariff:

2. Provided that prudence check may include scrutiny of the reasonableness of the capital
expenditure, financing plan, interest during construction, use of efficient technology,
MYT Regulations 2011 cost over-run and time over-run, and such other matters as may
be considered appropriate by the Commission for determination of tariff.

3. The approved Capital Cost shall be considered for determination of tariff and if sufficient
justification is provided for any escalation in the Project Cost, the same may be
considered by the Commission subject to the prudence check:

4. Provided that in case the actual capital cost is lower than the approved capital cost, then
the actual capital cost shall be considered for determination of tariff of the Generating
Company or Transmission Licensee or Distribution Licensee.

5. The actual capital expenditure on COD for the original scope of work based on audited
accounts of the Company limited to original cost may be considered subject to the
prudence check by the Commission.

6. The Commission may approve for each year of the Control Period, an additional amount
equivalent to 20% of the total capital expenditure approved for respective financial year
of the Control Period towards unplanned capital expenditure or the capital expenditure
that is included under the Business Plan but is yet to be approved by the Commission.

7. Where power purchase agreement or bulk power transmission agreement provides for a
ceiling of capital cost, the capital cost to be considered shall not exceed such ceiling.

( Page No. 117 )

 8. The capital cost may include capitalised initial spares for a maximum of first five years of
operation as follows:

(a) upto 2.5% of original capital cost in case of coal based/lignite fired Generating
Stations,
(b) upto 4.0% of original capital cost in case of gas turbine/combined cycle Generating
Stations,
(c) upto 1.5% of original capital cost in case of Hydro Generating Stations, and
(d) in case of Transmission Licensees - upto 0.75% for Transmission Line - upto 2.5%
for Transmission Substation - upto 3.5% for series compensation and HVDC
Station

Scrutiny of the cost estimates by the Commission shall be limited to the reasonableness of the
capital cost, financing plan, interest during construction, use of efficient technology, and such
other matters for determination of tariff.

Revaluation of assets shall be permitted during the Control Period provided it does not affect
tariff adversely. Any benefit from such revaluation shall be passed on to persons sharing the
capacity charge in case of a Generating Company and to long-term intra-State open access
customers of Transmission Licensee or Distribution Licensee, or retail supply consumers in case
of Distribution Licensees, at the time of Mid-term Performance Review and final truing up of
second Control Period.

Any expenditure on replacement, renovation and modernization or extension of life of old fixed
assets, as applicable to Generating Companies, Transmission Licensees and Distribution
Licensees, shall be considered after writing off the net value of such replaced assets from the
original capital cost and shall be calculated as follows: MYT Regulations 2011

Net Value of Replaced Assets = OCFA – AD; Where; OCFA: Original Capital Cost of Replaced
Assets; AD: Accumulated depreciation pertaining to the Replaced Assets.

Explanation – for the purpose of this Regulation, the term renovation and modernization shall
have the same meaning as in Section 80 IA of the Income-Tax Act, 1961.

Additional capitalisation

The following capital expenditure, actually incurred or projected to be incurred, on the following
counts within the original scope of work, after the date of commercial operation and up to the
cut-off date may be admitted by the Commission, subject to the prudence check:

(a) Due to Un-discharged liabilities within the original scope of work

(b) On works within the original scope of work, deferred for execution
(c) To meet award of arbitration and satisfaction of final and unappealable order or
decree of a court arising out of original capital cost,

( Page No. 118 )

 (d) On account of change in law,
(e) On procurement of initial spares included in the original project costs subject to the
ceiling norm laid down in Regulation 27.7;
(f) Any additional works/services, which have become necessary for efficient and successful
operation of a Generating Station or a transmission project but not included in the original scope
of work.

Provided that original scope of work along with estimates of expenditure shall be submitted
along with the application for provisional tariff. Provided further that a list of the deferred
liabilities and works deferred for execution shall be submitted along with the application for final
tariff after the date of commercial operation of the Generating Unit/Station or transmission
system.

Impact of additional capitalisation on tariff, if any, shall be considered during Mid-term

Performance Review and tariff determination of third Control Period starting from April 1, 2016.

Consumer contribution, Deposit work and Grant

The following nature of work carried out by the Transmission Licensee or Distribution Licensee
shall be classified under this category:
(a) Works after obtaining a part or all of the funds from the users in the context of deposit works.
(b) Capital works undertaken by utilising grants received from the State and Central
Governments, including funds under RGGVY, APDRP, etc.
MYT Regulations 2011 Page 38 of 100

(c) Any other grant of similar nature and such amount received without any obligation to return
the same and with no interest costs attached to such subvention.

29.2 Principles for treatment of the expenses on such capital expenditure shall be as follows:
(a) Normative O&M expense as specified in these Regulations shall be allowed.
(b) Provisions related to Depreciation, as specified in Regulation 31.
(c) Provisions related to Return on Equity Capital, as specified in Regulation 32.

Debt-equity ratio

For a project declared under commercial operation on or after April 1, 2011, if the equity
actually deployed is more than 30% of the capital cost, equity in excess of 30% shall be treated
as normative loan for the Generating Company, Transmission Licensee and Distribution
Licensee:

Provided that where equity actually deployed is less than 30% of the capital cost of the
capitalised asset, the actual equity shall be considered for determination of tariff:
Provided further that the equity invested in foreign currency shall be designated in Indian rupees
on the date of each investment.

( Page No. 119 )

Explanation.- The premium, if any, raised by the Generating Company or the Transmission
Licensee or the Distribution Licensee, as the case may be, while issuing share capital and
investment of internal resources created out of its free reserve, for the funding of the project,
shall be reckoned as paid up capital for the purpose of computing return on equity, provided such
premium amount and internal resources are actually utilised for meeting the capital expenditure
of the Generating Station or the transmission system or the distribution system.
30.2 In case of the Generating Company, Transmission Licensee and Distribution Licensee, if
any fixed asset is capitalised on account of capital expenditure project prior to April 1, 2011,
debt-equity ratio allowed by the Commission for determination of tariff for the period ending
March 31, 2011 shall be considered:

Provided that in case of retirement or replacement of the assets, the equity capital approved as
mentioned above, shall be reduced to the extent of 30% (or actual equity component based on
documentary evidence, if it is lower than 30%) of the original cost of the retired or replaced
asset:

Provided further that for the Generating Company or the Transmission Licensee or the
Distribution Licensee formed as a result of a transfer scheme, the date of the transfer scheme
shall be the effective date instead of April 1, 2011 for the determination of equity capital.
30.3 Any expenditure incurred or projected to be incurred on or after April 1, 2011, as may be
admitted by the Commission as additional capital expenditure for determination of tariff, and
renovation and modernisation expenditure for life extension, shall be serviced in the manner
specified in this Regulation. MYT Regulations 2011

Depreciation

The value base for the purpose of depreciation shall be the Capital Cost of the asset admitted by
the Commission.

The Generation Company and Transmission Licensee or Distribution Licensee shall be permitted
to recover depreciation on the value of fixed assets used in their respective Business computed in
the following manner:

(a) The approved original cost of the project/fixed assets shall be the value base for calculation of
depreciation:

Provided that the depreciation shall be allowed on the entire capitalised amount of the new assets
after reducing the approved original cost of the project/fixed assets of retired or replaced assets.

(b) Depreciation shall be computed annually based on the straight line method at the rates
specified in the Annexure I to these Regulations:

Provided that the Generating Company or Transmission Licensee or Distribution Licensee shall
ensure that once the individual asset is depreciated to the extent of seventy (70) percent,
remaining depreciable value as on 31st March of the year closing shall be spread over the

( Page No. 120 )

balance useful life of the asset, as provided in these Regulations. Provided that the Generating
Company or Transmission Licensee or Distribution Licensee, shall submit all such details or
documentary evidence, as may be required under this Regulation and as stipulated by the
Commission, from time to time, to substantiate the above claims.

(c) The salvage value of the asset shall be considered at 10 per cent of the allowable capital cost
and depreciation shall be allowed upto a maximum of 90 per cent of the allowable capital cost of
the asset.
Land other than the land held under lease and the land for reservoir in case of hydro Generating
Station shall not be a depreciable assets and its cost shall be excluded from the capital cost while
computing depreciable value of the assets.

In case of the existing projects, the balance depreciable value as on April 1, 2011, shall be
worked out by deducting the cumulative depreciation as admitted by the Commission upto
March 31, 2011, from the gross depreciable value of the assets.

Provided that depreciation shall be chargeable from the first year of commercial operation.

In case of projected commercial operation of the assets for part of the year, depreciation shall be
calculated based on the average of opening and closing value of assets, approved by the
Commission.

Provided that depreciation shall be re-calculated for assets capitalised at the time of Mid-term
Performance Review or at the time of final truing up during determination of tariff for third
Control Period, based on documentary evidence of assets capitalised by the applicant, subject to
the prudence check of the Commission, such that the depreciation is calculated proportionately
from the date of capitalisation. MYT Regulations 2011

Return on Equity Capital

Generation

Return on equity capital shall be computed on the equity capital determined in accordance with
Regulation 30 at the rate of 15.5 per cent per annum in Indian Rupee terms:
Provided that in case of projects commissioned on or after 1st April, 2011, an additional return of
0.5% shall be allowed if such projects are completed within the timeline specified in Annexure-
III:

Provided further that the additional return of 0.5% shall not be admissible if the project is not
completed within the timeline specified above for reasons whatsoever.

Transmission Licensee and Distribution Licensee

Return on equity capital for the Transmission Licensee and Wires Business of Distribution
Licensee shall be computed on the equity capital determined in accordance with Regulation 30 at
the rate of 15.5 % per cent per annum, and for the Retail Supply of Electricity of Distribution

( Page No. 121 )

Licensee, Return on equity capital shall be allowed a return at the rate of 17.5 % per cent per
annum, in Indian Rupee terms, on the amount of equity capital determined in accordance with
Regulation 30.

The return on equity capital shall be computed in the following manner:

(a) Return at the allowable rate as per this Regulation above, applied on the amount of equity
capital at the commencement of the financial year; plus
(b) Return at the allowable rate as per this Regulation above, applied on 50 per cent of the equity
capital portion of the allowable capital cost, for the investments put to use in transmission
business or distribution business, calculated in accordance with Regulation 27, Regulation 28
and Regulation 29 above, for such financial year.

Interest on loan capital

The loans arrived at in the manner indicated in Regulation 30 shall be considered as gross
normative loan for calculation of interest on loan.

Provided that in case of retirement or replacement of assets, the loan capital approved as
mentioned above, shall be reduced to the extent of 70% (or actual loan component based on
documentary evidence, if it is higher than 70%) of the original cost of the retired or replaced
assets.

The normative loan outstanding as on April 1, 2011, shall be worked out by deducting the
cumulative repayment as admitted by the Commission up to March 31, 2011, from the gross
normative loan.

The repayment for the year of the tariff period FY 2011-12 to FY 2015-16 shall be deemed to be
equal to the depreciation allowed for that year:

Notwithstanding any moratorium period availed by the Generating Company or the

Transmission Licensee or the Distribution Licensee, as the case may be, the repayment of loan
shall be considered from the first year of commercial operation of the project and shall be equal
to the annual depreciation allowed, MYT Regulations 2011

The rate of interest shall be the weighted average rate of interest calculated on the basis of the
actual loan portfolio at the beginning of each year applicable to the Generating Company or the
Transmission Licensee or the Distribution Licensee:

Provided that if there is no actual loan for a particular year but normative loan is still
outstanding, the last available weighted average rate of interest shall be considered:

Provided further that if the Generating Company or the Transmission Licensee or the
Distribution Licensee, as the case may be, does not have actual loan, then the weighted average
rate of interest of the Generating Company or the Transmission Licensee or the Distribution
Licensee as a whole shall be considered.

( Page No. 122 )

The interest on loan shall be calculated on the normative average loan of the year by applying the
weighted average rate of interest.

Tax on Income

The Commission, in its MYT Order, shall provisionally approve Income Tax payable for each
year of the Control Period, if any, based on the actual income tax paid on permissible return as
allowed by the Commission relating to the electricity business regulated by the Commission, as
per latest Audited Accounts available for the applicant, subject to prudence check:

Provided that no Income Tax shall be considered on the amount of efficiency gains and incentive
earned by the Generating Companies, Transmission Licensees and Distribution Licensees.

Provided further that the Generating Company, Transmission Licensee and Distribution Licensee
shall bill the Income Tax under a separate head called "Income Tax Reimbursement" in their
respective bills.

Variation between Income Tax actually paid and approved, if any, on the income stream of the
regulated business of Generating Companies, Transmission Licensees and Distribution Licensees
shall be reimbursed to/recovered from the Generating Companies, Transmission Licensees and
Distribution Licensees, based on the documentary evidence submitted at the time of Mid-term
Performance Review and MYT Order of third Control Period, subject to prudence check.

Under-recovery or over-recovery of any amount from the beneficiaries or the consumers on

account of such income tax having been passed on to them shall be on the basis of income-tax
assessment under the Income-Tax Act, 1961, as certified by the statutory auditors. The
Generating Company, or the Transmission Licensee or Distribution Licensee, as the case may be,
may include this variation in its Mid-term Performance Review Petition and MYT Petition of
third Control Period:

Provided that tax on any income stream from other than the business regulated by the
Commission shall not constitute a pass through component in tariff and tax on such other income
shall be borne by the Generating Company or Transmission Licensee or the Distribution
Licensee, as the case may be. MYT Regulations 2011

( Page No. 123 )

Interest on Working Capital

Generation:

(a) In case of coal based/oil-based/lignite-fired Generating Stations, working capital shall cover:
(i) Cost of coal or lignite for one and half months (1½) for pit-head Generating Stations and two
(2) months for non-pit-head Generating Stations, corresponding to target availability;
(ii) Cost of oil for two (2) months corresponding to target availability;
(iii) Cost of secondary fuel oil for two (2) months corresponding to target availability;
(iv) Operation and Maintenance expenses for one (1) month;
(v) Maintenance spares at one (1) per cent of the historical cost; and
(vi) Receivables for sale of electricity equivalent to two (2) months of the sum of annual fixed
charges and energy charges calculated on target availability; minus
(vii) Payables for fuel (including oil and secondary fuel oil) to the extent of one (1) month of the
cost of fuel calculated on target availability.
(b) In case of Gas Turbine/Combined Cycle Generating Stations, working capital shall cover:
(i) Fuel cost for one (1) month corresponding to target availability duly taking into account the
mode of operation of the Generating Station on gas fuel and / or liquid fuel;
(ii) Liquid fuel stock for fifteen (15) days corresponding to target availability;
(iii) Operation and maintenance expenses for one (1) month;
(iv) Maintenance spares at one (1) per cent of the historical cost; and
(v) Receivables for sale of electricity equivalent to two (2) months of the sum of annual fixed
charges and energy charges calculated on target availability, minus
(vi) Payables for fuel (including liquid fuel stock) to the extent of one (1) month of the cost of
fuel calculated on target availability.
(c) In case of Hydro power Generating Stations, working capital shall cover:
(i) Operation and maintenance expenses for one (1) month;
(ii) Maintenance spares at one (1) per cent of the historical cost; and
(iii) Receivables for sale of electricity equivalent to two (2) months of the annual fixed charges
calculated on normative capacity index.
(d) In case of own Generating Stations, no amount shall be allowed towards receivables, to the
extent of supply of power by the Generation Business to the
MYT Regulations 2011

Retail Supply Business, in the computation of working capital in accordance with these
Regulations.

(e) Rate of interest on working capital shall be on normative basis and shall be equal to the State

( Page No. 124 )

Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.

Transmission:

(a) The Transmission Licensee shall be allowed interest on the estimated level of working capital
for the financial year, computed as follows:
(i) One-twelfth (1/12) of the amount of operation and maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) One and half (1½) months equivalent of the expected revenue from transmission charges at
the prevailing tariff;minus
(iv) Amount, if any, held as security deposits from Transmission System Users.
(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from Transmission System
Users at the Bank Rate as at the date on which the application for determination of tariff is made.

Distribution Wires Business

(a) The Distribution Licensee shall be allowed interest on the estimated level of working capital
for the Distribution Wires Business for the financial year, computed as follows:
(i) One-twelfth (1/12) of the amount of Operation and Maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) Two (2) months equivalent of the expected revenue from charges for use of Distribution
Wires at the prevailing tariff; minus
(iv) Amount held as security deposits from Distribution System Users.
(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from Distribution System
Users at the Bank Rate as on the date on which the application for determination of tariff is
made.

Retail Supply of Electricity

(a) The Distribution Licensee shall be allowed interest on the estimated level of working capital
for the financial year, computed as follows:

( Page No. 125 )

(i) One-twelfth (1/12) of the amount of Operation and Maintenance expenses for such financial
year; plus
(ii) One-twelfth (1/12) of the sum of the book value of stores, materials and supplies including
fuel on hand at the end of each month of such financial year; plus
(iii) Two (2) months equivalent of the expected revenue from sale of electricity at the prevailing
tariff; minus

(iv) Amount held as security deposits under clause (a) and clause (b) of sub-section (1) of
Section 47 of the Act from retail supply consumers; minus

(v) One (1) month equivalent of cost of power purchased, based on the annual power
procurement plan:

Provided that in case of power procurement from own Generating Stations, no amount shall be
allowed towards payables, to the extent of supply of power by the Generation Business to the
Retail Supply Business, in the computation of working capital in accordance with these
Regulations.

(b) Rate of interest on working capital shall be on normative basis and shall be equal to the State
Bank Advance Rate (SBAR) of State Bank of India as on the date on which the application for
determination of tariff is made.
(c) Interest shall be allowed on the amount held as security deposit from retail supply consumers
at the Bank Rate as on the date on which the application for determination of tariff is made.

Contribution to contingency reserves

Where the Transmission Licensee or Distribution Licensee has made an appropriation to the
Contingency Reserve, a sum not less than 0.25 per cent and not more than 0.5 per cent of the
original cost of fixed assets shall be allowed annually towards such appropriation in the
calculation of aggregate revenue requirement:

Provided that where the amount of such Contingencies Reserves exceeds five (5) per cent of the
original cost of fixed assets, no such appropriation shall be allowed which would have the effect
of increasing the reserve beyond the said maximum:

Provided further that the amount so appropriated shall be invested in securities authorised under
the Indian Trusts Act, 1882 within a period of six months of the close of the financial year.

The Contingency Reserve shall not be drawn upon during the term of the licence except to meet
such charges as may be approved by the Commission as being: MYT Regulations 2011

(a) Expenses or loss of profits arising out of accidents, strikes or circumstances which the
management could not have prevented;
(b) Expenses on replacement or removal of plant or works other than expenses requisite for

( Page No. 126 )

normal maintenance or renewal;
(c) Compensation payable under any law for the time being in force and for which no other
provision is made:

Provided that such drawal from Contingency Reserve shall be computed after making due
adjustments for any other compensation that may have been received by the Licensee as part of
an insurance cover.

No diminution in the value of contingency reserve as mentioned above shall be allowed to be

adjusted as a part of tariff.

( Page No. 127 )

 Steps to be followed by UTILITIES for preparation of

Tariff Petition and Submission to SERC

1. Compilation of the required data in the Data Formats stipulated by the SERC, by
collating data/information from various functional departments
2. Preparation & submission of Petition for Truing Up of expenses and revenue for previous
year based on audited accounts; and sharing of efficiency gains & losses
3. Assessment of impact of any APTEL/SC Judgments on Appeals filed against earlier
SERC Orders
4. Preparation of Petition for determination of ARR and Tariff for ensuing year/MYT period
a. Sales & demand projection
b. Projection of Transmission losses & distribution losses
c. Projection of energy requirement
d. Preparation of power purchase plan - quantum available/required from various
sources and corresponding cost
e. Projection of other operating expenses - O&M expenses, interest on working
capital, provision for bad debts, etc.
f. Projection of capital expenditure & capitalisation
g. Projection of capex related expenses/returns - interest on loans, depreciation, and
Return on Equity/Capital Employed
h. Total Aggregate Revenue Requirement
i. Revenue from existing tariff
j. Revenue Gap/(Surplus) with existing tariff
k. Tariff Increase/(Reduction) required - amount and average percentage
l. Calculation of average cost of supply/voltage-level cost of supply/ category-wise
cost of supply
m. Prevalent level of cross-subsidy between categories
n. Proposed category-wise tariffs
o. Compliance with directives
5. Submission of ARR & Tariff Petition

( Page No. 128 )

6. Replies to be submitted by DISCOM to comments/suggestions/objections by
stakeholders, with copy to SERC
7. Prepare and submit replies/clarifications/additional data to SERC
8. Implementation of revised category-wise tariffs & compliance with directives
9. Prepare draft Petition for approval of competent authority
10. Submission of Petition to SERCs with all enclosures and numbers of copies required by
SERCs

( Page No. 129 )

 Process of Tariff Determination for Generation

S R Karkhanis

Section 62 of the Electricity Act has mandated the Electricity Regulatory Commissions to frame
detailed tariff Regulations and determine the Generation tariff. While the Central Commission
determines the Tariff of Generating plants in the Central sector and those supplying electricity to
inter-state consumers, the State Regulators determine the tariffs applicable to In-State Generating
plants supplying power within the respective states.

Power generating plants are built for specific generating capacity (MW) while they may generate
energy (MWh) at Plant load factors (PLF) lower than 100% as per requirement of their
consumers. The Generation tariff is determined on Annual basis. However in cases where the
Regulatory Commission has issued and adopted Multi Year Tariff Regulations, the tariff is
determined for a control block of 5 years. In such cases, the Generating company needs to
present to the Commission, its Business Plan for approval, prior to the Tariff Determination
exercise.

Generation tariff comprises of two parts. The Fixed costs portion is levied as per the MW
capacity of the plants, contracted by the Consumer and the variable cost portion is based on the
fuel costs. The Fixed costs are based on the Capital cost of the plant (Depreciation, ROE),
Financial costs (Interest on debts/ loans) and Operation and Maintenance costs. The variable
costs are dependant on the cost of fuel used and these are levied as per the energy purchased by
the consumer (Discom) over a given period.

During the Tariff Determination process, the Regulatory Commission examines all the Fixed and
Variable costs projected by the Generator over one year period, scrutinizes and ensures that the
projections are justified and correct, and then accords its approval through a Tariff Order. The
Purchasers need to enter into Long term, Medium term or Short term power supply agreements
with the Generating companies for their power and energy requirements.

In the Multi Year Tariff regime, while the Commission determines the tariff for the first year,
certain parameters of the tariff are indexed with standard price indices so that corrections, if any,
are implemented automatically over future years of the control block. MYT principle also allows
for mid-term performance review so that any large gaps or surplus earnings of revenue can be
suitably adjusted.

( Page No. 130 )

 Power Procurement by DISCOMs and its impact on Tariff

S R Karkhanis

Electricity is considered a “Marketable Commodity” and this permits application of common

marketing principles or trading in Electricity. However, subtle differences in Electrical energy
and any other marketable commodity are evident when the cost of electricity fails to follow
established marketing principles.

Electricity market is still evolving and throughout the world it is transiting from License Raj to
Regulatory era and further into wholesale competitive and Retail competitive era. Experience of
the advanced nations has indicated that the leap from Regulatory era to competitive era needs
substantial amount of maturity in all walks of social, political, commercial and legal outlooks
and transactions of the society, with technical nitty gritty to match the same.

In a “cost plus” regime such as in India, the generation tariff and Transmission tariff are
separately determined and finally, the Cost of supply (CoS) to the power distributor is
determined by taking cognizance of all these costs. When close examination of the proportions
of various attributed to the cost of supply is carried out, it is evident that various factors,
individually and collectively affect the final cost. It is theoretically well understood that, entering
into Long term power supply contracts and purchasing power from the cheapest sources would
bring down the Cost of supply and consequentially the Distribution Tariff. However, in reality, it
is found that it may not be always possible for the Distribution company to get cheap power in
all the time blocks of the day. Exact match between load curve and power generation curve, non
availability of cheaper hydro power for peaking purposes, non effective DSM measures also go a
long way to inflate the power bills. Further, the management styles and management skills of
running the Distribution company and factors such as internal cross subsidies of tariff may also
affect the tariff structures substantially. The escape routes such as Z factor charge or PPAC may
also bring additional burden to consumers.

Finally, it can be concluded that not only smart grids but business savvy and deep foresight into
consumer requirements would be required to bring about expenditure-revenue balance in a
satisfactory manner.

( Page No. 131 )

 Availability Based Tariff

Power generation and distribution in India started towards the end of the nineteenth century.
However, it was only after our independence in 1947 that the power sector got the required
momentum and power generation was identified as a key area for our development. With
sustained efforts over the decades, the power generation scenario in India presents a rich and
composite mixture of hydro, nuclear, thermal, wind and solar generation. Our installed capacity
across the nation well exceeds 100,000 MW, a major share of which is derived from thermal
sources (coal/lignite, gas, and diesel). Though rich and diverse, the thrust on the power generation
sector so far has been on capacity addition and our power sector has not really kept pace with the
emerging technologies on the power management front, especially in leveraging the tremendous
potential unleashed by information technology (IT). Power generation in India has been largely
state owned and like so many other public enterprises donned a traditional outlook and lagged in
extracting the benefits offered by digitization and automation owing mainly to a lack of economy
centric approach.

How well we can manage this vast infrastructure and how close it can keep pace with our
increasing energy demands will be a crucial deciding factor in achieving our dream of an annual
double digit growth. And in the wake of opportunities thrown up by liberalization and
deregulations, the state machinery started mooting on introducing these effects to the power sector
also. ABT (Availability Based Tariff) along with the Electricity Act of 2003 is perhaps the most
significant and definitive step taken in the Indian power sector so far to bring more efficiency and
focus to this vital infrastructure. The fact that the ABT regime was introduced to replace the
Electricity Supplies Act of 1948 would perhaps be an indicator of how overdue reforms were. This
document is an attempt to introduce the significant clauses and implications of ABT in a concise
manner.

Salient clauses of ABT

ABT concerns itself with the tariff structure for bulk power and is aimed at bringing about more
responsibility and accountability in power generation and consumption through a scheme of
incentives and disincentives. As per the notification, ABT is applicable to only central generating
stations having more than one SEB/State/Union Territory as its beneficiary. Through this scheme,
the CERC (Central Electricity Regulatory Commission) looks forward to improve the quality of
power and curtail the following disruptive trends in power sector: i) Unacceptably rapid and high
frequency deviations (from 50 Hz) causing damage and disruption to large scale industrial
consumers

ii) Frequent grid disturbances resulting in generators tripping, power outages and power grid
disintegration

This objective is to be brought about by encouraging generators to produce more during peak load
hours and curtail generation adequately during off-peak hours on one hand and discouraging
consumers from overdrawing on the other hand. The new tariff regime aims at inducing this

( Page No. 132 )

discipline at the generation and consumption end through adequate monetary incentives. The most
significant aspect of ABT is the splitting of the existing monolithic energy charge structure into
three components viz. capacity charges (fixed), energy charges (variable) and UI (unscheduled
interchange) charges. It is the last component that is expected to bring about the desired grid
discipline. Splitting of the tariff into fixed and variable cost components is meant to act as an
incentive for power trading which shall (ideally) conclude in a self-regulating power market
regime. It is also expected to promote the concept of ELD (Economic Load Dispatch) among
power generators. Let us now look at these tariff components in a bit more detail:

Capacity charges: Fixed charges are payable to the generating station, by the intended
beneficiaries of the generation facility (state governments of the region in most cases). In the
present tariff regime, capacity charges are payable against the (deemed) PLF (Plant Load Factor)
of the station. Full fixed charges are payable at achieving a PLF of 68.49%, and incentive is
payable for each unit of electricity generated above this PLF. Under the ABT regime, fixed
charges are payable against the availability (declared capacity) of the generating facility. Fixed
charges excluding ROE is payable on a prorated basis for 0-30% availability. Prorated ROE is
payable from 30-70% availability. Incentive is payable to the generating station for availability
beyond 70%. The incentive is pegged at 0.4% of equity for each percent increase in availability in
the 70-85% range. Thereafter, the incentive falls to 0.3%. This decrease in incentive after 85% is
aimed at discouraging the generating facility from overloading the units at the cost of maintenance
and equipment life. ABT also contains provision for penalizing the generating utility for
over/under declaration of the availability. Fixed charges are payable by the beneficiaries in
proportion to the allocated capacity and does not depend on the actual consumption. Variable
charges: Under the present tariff regime, there is no bifurcation between fixed and variable
charges. Both are bundled together and payable in proportion to the actual energy drawn by the
consumer. As we have seen already, under ABT fixed charges vary with the allocated capacity and
has nothing to do with actual energy consumed. In contrast, variable charges are to be paid against
the actual energy consumed. This splitting is expected to promote power trading.

UI charges: In the present regime, there is no penalty for deviation from the generating/drawl
schedule by an entity. The ABT regime stipulates that UI (Unscheduled Interchange) charges are
payable under the following conditions:

a) A generator generates more/less than the schedule causing grid frequency to deviate
upwards/downwards
b) A beneficiary draws more/less than the schedule causing grid frequency to deviate
downwards/upwards The penalty imposed varies with the grid condition at the time of the
indiscipline and the magnitude increases with the severity of the frequency deviation caused.
Apart from this tariff structure, ABT provides for

a) Implementation in a phased manner

b) Generation and drawl schedules to be managed in 15 minute blocks (96 blocks per day)
c) Mechanism for communication and co-ordination of the schedules and how rescheduling is
to be done in case of a generator/beneficiary being unable to meet the schedule

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d) Role of regional load dispatch centers (RLDC) in managing and coordinating the schedule
and managing the schedule in the event of grid disturbances

e) Methodology for calculating the capabilities for different types of power stations (such as
hydro, thermal, nuclear) and for demonstrating the same

f) Details on metering, accounting, billing and payment of energy charges under the ABT
regime

g) How disputes arising under ABT shall be resolved

Benefits professed by ABT

By ushering in the Availability Based Tariff, the CERC looks to bring forth the following positive
changes in the Indian power sector:

1. Enhanced grid discipline that will pave the way for higher quality power with more reliability
and availability. Grid disturbances and frequency fluctuations as occur in our power system today
are serious problems and would be considered unacceptable in any advanced economy. The
system of incentives and disincentives allow for penalization of the party responsible for any
disruption. This will serve all participating bodies in a power grid to be self-disciplined ensuring
quality power supply for all consumers.

2. A more economically viable power scenario that alleviates some of nagging problems of the
power sector such as outdated technology, poor management and maintenance, cross
subsidization, over staffing, poor accounting practices etc. In breaking the tariff into fixed and
variable components and making the fixed charges depend on the declared availability of a plant
(subject to demonstration), there is a lot of reason for generators to bring in efficiency. The current
diktat at most of the public sector generating station is “to produce as much as you can”. Under
the influence of ABT, this will change to produce only as much is needed i.e. supply will need to
closely follow the projected demand schedule. Also there is a lot of reason for the generators to
usher in the latest technology to ensure that the power generation is predicable, controllable and
can be monitored easily. At the consumption end also there is scope for technology investment
now in terms of load forecasting and monitoring.

3. Promote competition, efficiency and economy leading to power trading which shall ultimately
pave way (step-by-step) for a self-regulating power market. The variable cost component for the
energy consumed is the first step for facilitating trading of power. Also, since the fixed charges are
now payable based on declared availability rather than actual power consumed, there is a lot of
reason for beneficiaries to trade in capacity as well. And this kind of trading will automatically
induce competition and efficiency into the power scenario. In fact it is hoped that ABT will prove
to be the first step for Indian power industry towards a completely market oriented regime which
is self-regulating and does not need the tariffs or other parameters to be regulated externally.
Adequate transmission capacity (so that there is no bottleneck in terms of purchase or delivery) is
the most important infrastructure requirement to support such a market regime.

( Page No. 134 )

4. Introduce and encourage MOD (Merit Order Dispatch) in the Indian power scene. In the current
scenario, the generators tend to produce as much as they can irrespective of the demand side of the
power equation. Under ABT, generators will need to ramp up and ramp down generation based on
the declared generation schedule given by the RLDC (Regional Load Dispatch Center). Thus
when the plant (or a cluster of generating stations owned by a single entity) will need to use the
power generation combination that will incur the least cost for all loads below the maximum load.
This exactly is the formulation of the MOD, which is an optimization problem. MOD is used by
modern power plants to save
millions of dollars in generating cost every year. Thus introduction of MOD is expected to benefit
the power industry greatly.

Concerns on ABT

While ABT is acknowledged to be a welcome measure to tackle the major problems in our power
scenario and is expected to be the welcome step towards a self-regulating market, there are a lot of
concerns that need to be addressed by this new system. We will, in this document, concern
ourselves only with issues of a technical nature and not with those having political or statutory
implications (such as whether a particular clause of ABT is within the jurisdiction of CERC). For
information regarding these and detailed information on the clauses of ABT, the reader is referred
to the full text of the ABT notification. Some of the important technical concerns to be addressed
by ABT are:

a) What happens to the schedule and UI charges in instances of the grid disruption beyond the
control of generator or consumer? ABT delegates the responsibility of resolving such instances to
the RLDC. However more clarity needs to be brought forth on this issue as this point can
potentially cause a lot of contention regarding the UI charges.
b) A fundamental concern on ABT is whether it is the right measure to be introduced. While
the spirit and intention of the act is widely appreciated, there is serious concern that it introduces
elaborate and complicated procedures that shall give rise to a lot of contentions between involved
parties on their interpretation. Some of these aspects include the declaration and demonstration of
availability by a generating station, computation of variable and UI charges, rescheduling of
generation and consumption etc. It may be required to evolve the current proposals to a more
simplified and transparent system over a period of time.

c) Acceptable availability may vary depending on the energy source of the generating station.
And in some cases, such as hydro and wind stations the availability may not be accurately
predictable except in the very short term. This will pose problems in calculation of fixed charges
based on availability

d) Plants commissioned in different times tend to use vastly varying technology and thus tend
to differ a lot in efficiency and cost of production. Since revenue for the generator vary
significantly with efficient and controlled operation, old (though fully functional) plants may be at
a disadvantage. The investment required to bring them to par with their modern counterparts may
not be justified by the professed returns. On the other hand if CERC relents to discriminate
between plants based on this factor, it will just add to the opacity of the proposed system

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e) Another significant concern on ABT is the possibility of gaming (deliberate manipulation of
availability, daily demand and capacity schedules etc.) by the involved parties to derive undue
benefit from the UI charges. ABT system introduces clauses meant to discourage gaming through
severe penalties. Whether this will prove a sufficient enough deterrent and whether the checks and
balances prove adequate to detect gaming need to be ascertained

f) Another interesting concern is the CERC diktat that any revision in schedule by the RLDC will
deemed to be effective irrespective of the successful communication of the same too concerned
parties. As has already been pointed out, most of the concerned parties being PSUs lagging on the
technology front are yet to have fool-proof or redundant communication infrastructure in place.
Thus rescheduling may fail to reach concerned parties in a timely manner and if somebody is
caught unawares on the wrong side of the UI charges, they are not going to be pleased about ABT.

Implications for different industry players

Put succinctly ABT requires all the actors in the great power drama to get their technology act
right. There is no room for laxity on control or efficiency fronts. The technology dependency is
going to be more on the generation side. Capital cost of the generating facility being redeemable
only against declared availability and successful demonstration of the same will require the
generators to really have a tight rein on their complete infrastructure. All the generators will now
need to set a target of 85% availability to ensure that complete capital costs, ROE and incentives
are available to them. And the provision for surprise audit to demonstrate the availability will need
to them to monitor all the equipments and ensure adequate and timely maintenance of their overall
infrastructure. This will usher a modern outlook and calls for the latest and best technology in
performance calculations, efficiency and IT. Variable costs and UI charges will require the
generators to closely match their output with the demand curve and the ability to take corrective
actions in the shortest possible time. ABT also calls for elaborate computation of the payable
tariffs and close monitoring of the cost of production. Ushering in of MOD is going to be a
positive development for all generators enabling them to make huge savings on cost. All these
factors will involve a good amount of technology investment but will set the right background for
an efficient power structure and the right launching pad for a market oriented approach. This will
naturally result in higher reliability and increased customer confidence giving the right impetus for
more industrialization and enhancing our development process. At the consumption end also there
is going to be the need to forecast demands as accurately as is possible and to follow the strictest
possible grid discipline. This again will prove vastly beneficial to the power industry as a whole.

( Page No. 136 )

Conclusion

All the apprehensions regarding the new system notwithstanding, ABT is still a welcome and
necessary development. Next step is for the concerned authorities to ensure the necessary
infrastructure to remove all the bottlenecks on the transmission side. Once this is done, the path
should be clear to a completely market driven scenario with much better systems and
infrastructure in place. The culminating point shall be an elaborate and efficient system with much
more reliance on distributed power systems as well. This will iron out any monopoly tendencies in
the system delivering maximum benefits to the consumers. This will also prove beneficial to the
environment since “green power” norms are much more effectively implemented in a distributed
and deregulated power scenario. i ABT notification defines availability for any specific time-
period as the ratio of the average send out capability (SOC) for all time blocks of the time-period
to the rated SOC.

( Page No. 137 )

 Power Purchase Agreement
Power Purchase Agreements are contracts between two parties, one who generates electricity for
the purpose of sale (the seller) and one who is looking to purchase electricity (the buyer). There
are various forms of Power Purchase Agreements; these are differentiated by the source of energy
harnessed (Thermal, solar, wind, etc.). Financing for the project is delineated in the contract,
which also specifies relevant dates of the project coming into effect, when the project will begin
commercial operation, and a termination date for which the contract may be renewed or
abandoned. All sales of electricity are metered to provide both seller and buyer with the most
accurate information about the amount of electricity generated and bought. Rates for electricity are
agreed upon in the contract between both parties to provide an economic incentive to being a

Power Purchase Agreement

In other words , a Power Purchase Agreement (PPA) is a legal contract between an electricity
generator (provider) and a power purchaser (buyer). Contractual terms may last anywhere between
1-15 or 20 years, and during this time the power purchaser buys energy, and sometimes also
capacity and/or ancillary services, from the electricity generator. Such agreements play a key role
in the financing of independently owned (i.e. not owned by a utility) electricity generating assets.
The seller under the PPA is typically an independent power producer, or Energy sales by
regulated utilities are typically highly regulated by local or state government, so that no PPA is
required or appropriate. Commercial PPA providers can enable businesses, schools, governments,
and utilities to benefit from predictable, energy.

Parties Involved

The Seller

Under a PPA, the seller is often the developer and owner of the technology that generates
electricity. The seller may also be someone who buys electricity from another supplier for resale.
Under these circumstances, another PPA may be established but will usually contain similar
contractual agreements as already proclaimed in the original PPA, with the exception of some
pricing mechanisms that would be redefined.

The Buyer

Under a PPA, the buyer is often a utility company that purchases the electricity generated from the
seller. In some circumstances, a company may be trying to meet energy portfolio standards and would
be considered a retail purchaser. Under this condition, the retail purchaser may resell the electricity to
another entity under a new PPA. Typically, a PPA is established between the primary seller and a utility
company who is regulated to buy the electricity.

( Page No. 138 )

Regulation

There are regulatory concerns associated with the implementation of renewable technologies and
the agreement on contracts for producing and purchasing power. The CERC/SERC determines
which facilities are considered to be exempt wholesale generators or qualifying facilities and are
applicable for PPAs under the Electricity Act, 2003

Financing

The PPA is often regarded as the central document in the development of independent electricity
generating assets (power plants), and is a key to obtaining project financing for the project. Under
the PPA model, the PPA provider would secure funding for the project, maintain and monitor the
energy production, and sell the electricity to the host at a contractual price for the term of the
contract. The term of a PPA generally lasts between 5 and 25 years. In some cases energy
contracts, the host has the option to purchase the generating equipment from the PPA provider at
the end of the term, may renew the contract with different terms, or can request that the equipment
be removed. One of the key benefits of the PPA is that by clearly defining the output of the
generating assets (such as a solar electric system) and the credit of its associated revenue streams.

Contract Timeline

Effective Date

The PPA is considered contractually binding on the date that it is signed, also known as the
effective date. Once the project has been built, the effective date ensures that the purchaser will
buy the electricity that will be generated and that the supplier will not sell its output to anyone else
except the purchaser

Commercial Operation

Before the seller can sell electricity to the buyer, the project must be fully tested and
commissioned to ensure reliability and comply with established commercial practices. The
commercial operation date is defined as the date after which all tested and commissioning has
been completed and is the initiation date to which the seller can start producing electricity for sale
(i.e. when the project has been substantially completed). The commercial operation date also
specifies the period of operation, including an end date that is contractually agreed upon..

Preemptive Termination Date

Typically, termination of a PPA ends on the agreed upon commercial operation period. A PPA
may be terminated if abnormal events occur or circumstances result that fail to meet contractual
guidelines. The seller has the right to curtail the deliverance of energy if such abnormal
circumstances arise, including natural disasters and uncontrolled events. The PPA may also allow
the buyer to curtail energy in circumstances where the after-tax value of electricity changes. When
energy is curtailed, it is usually because one of the parties involved was at fault, which results in
paid damages to the other party. This may be excused in extraordinary circumstances such as

( Page No. 139 )

 natural disasters and the party responsible for repairing the project is liable for such damages. In
situations where liability is not defined properly in the contract, the parties may negotiate force
majeure to resolve these issues
Operation and Metering

Maintenance and operation of a renewable technology project is the responsibility of the seller.
This includes regular inspection and repair, if necessary, to ensure prudent practices. Liquidated
damages will be applied if the seller fails to meet these circumstances. Typically, the seller is also
responsible for installing and maintaining a meter to determine the quantity of output that will be
sold. Under this circumstance, the seller must also provide real-time data at the request of the
buyer, including atmospheric data relevant to the type of renewable technology installed [3].
Sales

Delivery Point

The PPA will distinguish where the sale of electricity takes place in relation to the location of the
buyer and seller. If the electricity is delivered in a bushbar sale, the delivery point is located on the
high side of the transformer adjacent to the project. In this type of transaction, the buyer is
responsible for transmission of the energy from the seller. Otherwise, the PPA will distinguish
another delivery point that was contractually agreed on by both parties [3].

Pricing

Electricity rates are agreed upon as the basis for a PPA. Prices may be flat, escalate over time, or
be negotiated in any other way as long as both parties agree to the negotiation. A PPA will often
specify how much energy the supplier is expected to produce each year and any excess energy
produced will have a negative impact on the sales rate of electricity that the buyer will be
purchasing. This system is intended to provide an incentive for the seller to properly estimate the
amount of energy that will be produced in a given period of time.

Billing and Payments

The PPA will also describe how invoices are prepared and the time period of response to those
invoices. This also includes how to handle late payments and how to deal with invoices that
became final after periods of inactivity regarding challenging the invoice. The buyer also has the
authority to audit those records produced by the supplier in any circumstance.

Performance initiatives

The buyer will typically require the seller to guarantee that the project will meet certain
performance standards. Performance guarantees let the buyer plan accordingly when developing
new facilities or when trying to meet demand schedules, which also encourages the seller to
maintain adequate records. In circumstances where the output from the supplier fails to meet the
contractual energy demand by the buyer, the seller is responsible for retribution such costs. Other
guarantees may be contractually agreed upon, including availability guarantees and power-curve
guarantees. These two types of guarantees are more applicable in regions where the energy
harnessed by the renewable technology is more volatile

( Page No. 140 )

 Renewable Energy
The Ministry

The Ministry of New and Renewable Energy (MNRE) is the nodal Ministry of the Government
of India for all matters relating to new and renewable energy. The broad aim of the Ministry is to
develop and deploy new and renewable energy for supplementing the energy requirements of the
country

Vision

To develop new and renewable energy technologies, processes, materials, components, sub-
systems, products & services at par with international specifications, standards and performance
parameters in order to make the country a net foreign exchange earner in the sector and deploy
such indigenously developed and/or manufactured products and services in furtherance of the
national goal of energy security

The Ministry of New and Renewable Energy (MNRE) is the nodal Ministry of the Government
of India for all matters relating to new and renewable energy. The broad aim of the Ministry is to
develop and deploy new and renewable energy for supplementing the energy requirements of the
country

The role of new and renewable energy has been assuming increasing significance in recent times
with the growing concern for the country’s energy security. Energy ‘self-sufficiency’ was
identified as the major driver for new and renewable energy in the country in the wake of the two
oil shocks of the 1970s. The sudden increase in the price of oil, uncertainties associated with its
supply and the adverse impact on the balance of payments position led to the establishment of
the Commission for Additional Sources of Energy in the Department of Science & Technology
in March 1981. The Commission was charged with the responsibility of formulating policies and
their implementation, programmes for development of new and renewable energy apart from
coordinating and intensifying R&D in the sector. In 1982, a new department, i.e., Department of
Non-conventional Energy Sources (DNES), that incorporated CASE, was created in the then
Ministry of Energy. In 1992, DNES became the Ministry of Non-conventional Energy Sources.
In October 2006, the Ministry was re-christened as the Ministry of New and Renewable Energy.

Role

Facilitate research, design, development, manufacture and deployment of new and renewable
energy systems/devices for transportation, portable and stationary applications in rural, urban,
industrial and commercial sectors through:

Technology Mapping and Benchmarking;

Identify Research, Design, Development and Manufacture thrust areas and facilitate the same;

( Page No. 141 )

Lay down standards, specifications and performance parameters at par with international levels
and facilitate industry in attaining the same;Align costs of new and renewable energy products
and services with international levels and facilitate industry in attaining the same;

Appropriate international level quality assurance accreditation and facilitate industry in obtaining
the same;

Provide sustained feed-back to manufacturers on performance parameters of new and renewable

energy products and services with the aim of effecting continuous upgradation so as to attain
international levels in the shortest possible time span;

Facilitate industry in becoming internationally competitive and a net foreign exchange earner
especially through (ii) to (v) above and related measures;

Resource Survey, Assessment, Mapping and Dissemination.

Identify areas in which new and renewable energy products and services need to be deployed in
keeping with the goal of national energy security and energy independence;

Deployment strategy for various indigenously developed and manufactured new and renewable
energy products and services; and Provision of cost-competitive new and renewable energy
supply options

Mission

The Mission of the Ministry is to ensure

Energy Security: Lesser dependence on oil imports through development and deployment of
alternate fuels (hydrogen, bio-fuels and synthetic fuels) and their applications to contribute
towards bridging the gap between domestic oil supply and demand;

Increase in the share of clean power: Renewable (bio, wind, hydro, solar, geothermal & tidal)
electricity to supplement fossil fuel based electricity generation;

 Energy Availability and Access: Supplement energy needs of cooking, heating, motive
power and captive generation in rural, urban, industrial and commercial sectors;
 Energy Affordability: Cost-competitive, convenient, safe, and reliable new and renewable
energy supply options; and
 Energy Equity: Per-capita energy consumption at par with the global average level by
2050, through a sustainable and diverse fuel- mix.

Key Performance Indicators of the Ministry

Research, Design, Development and Manufacture (RDDM)

The aim of RDDM activity is to make industry competitive in new and renewable energy sector
covering technologies, processes, materials, components, sub-systems, products and services.

( Page No. 142 )

The key overall performance indicator for this activity is net foreign exchange earning in the
NRE sector.

Deployment effort to be gauged through

A.Macro Indicators

 Share of renewable energy in energy-mix;

 Share of alternate fuels in liquid fuel-mix; and
 Iii Share of renewable electricity in electricity-mix.

B.Micro Indicators

 Percentage electrification / lighting of un-electrified census villages/ hamlets which are

not likely to receive grid-connectivity under RGGVY;
 Percentage of solar water heater potential tapped.
 Percentage of agro-industrial/ commercial bio-waste to energy potential tapped;
 Percentage of MSW to energy potential tapped;
 Share of vehicles using alternate fuels; and
 Share of pump-sets using bio-fuels.

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 Regulatory Framework & Polices for Renewables Energy

S R Karkhanis

The lead taken by the Ministry of New and Renewable energies, the pragmatic policies of the
Central government and by most of the State governments have provided impetus for accelerated
development of generation and utilization of electricity from the Renewable energy sources.

Section 86 (1) (e) of the Electricity Act 03 has mandated the Electricity Regulatory Commissions
to issue Regulations and Orders to promote Renewable Energy, to determine its tariff and to
specify the Renewable Purchase Obligations on the part of the consumers as a percentage of the
total Electrical energy consumed by them. The Regulations issued by the Central Electricity
Regulatory Commission as well as the State Commissions specify Eligibility criteria (list of
eligible projects) and Useful life of eligible RE projects, Tariff validity (Number of years), Type
of projects eligible for determining “Project specific tariff”, General as well as Financial
principles of Tariff, Tariff structure and Technology specific parameters for the eligible
Technologies.

Unlike the conventional Thermal or Hydro Energy sources the Renewable energy plants may not
strictly conform to specific or standard technologies and hence, it is not easy to frame the
Technical and Regulatory standards of performance, which would be applicable equally to all
plants, even belonging to an RE sub-group. Further, the local specific conditions, such as cost of
raw material (mainly for bio mass fuel), the seasonal availability of high winds and sunlight, etc.,
may vary from region to region and which would need to be considered while issuing the Tariff
Orders due to their influence on generating cost.

The modality of tariff fixation followed by the Regulators is as follows. First, the Regulatory
Commissions issue the Tariff Regulations for generation from Renewable energy sources,
generally valid for a specific time block, say 5 years. The Regulations are then followed by
Generic Tariff Order and Project specific Tariff orders, valid for specified periods.

Use of Renewable Energy Certificates (REC) is an internationally acceptable solution to tide

over the regional mis-match between the generation of Renewable energy and total consumer
base in the area, which would otherwise counter the viability of enforcing Renewable Purchase
Obligations or Renewable Portfolio Standards. The detailing regarding the Rules and
Regulations pertaining to REC, varies from country to country and within the States of the same
country as well.

Finally, it is not just the will of the citizens or the legal compulsions, but the pressing need to
retain the natural Albedo of earth and safeguard the eco-system of the planet, which would
propel the Renewable energy sources to the rank of the most favoured energy sources on earth.

( Page No. 144 )

Steps to be followed by SERC for determination of Tariff and issue of Tariff Order
1. Assessment of compliance with statutory framework in Petition submitted
2. Data gaps/requirement to be fulfilled for admission of Petition
3. Technical Validation Session, if required
4. Admission of Petition & issue of Public Notice in newspapers - English and local
language - time stipulated (usually 3 weeks) for submission of
comments/suggestions/objections
5. Submission of comments/suggestions/objections by stakeholders
6. Analysis & seeking additional data/clarifications from DISCOM
7. Analysis of truing up requirement for previous year based on audited accounts &
prudence check
8. Assessment of impact of any APTEL/SC Judgments on Appeals filed against earlier
SERC Orders
9. Analysis and preparation of financial model for determination of ARR and Tariff for
ensuing year/MYT period - same steps as 4(a) to 4(m) above from SERC side, based
on prudence check
10. Assessment of alternatives for bridging the revenue gap - efficiency improvement, etc
11. Need for creation of Regulatory Asset - extent, period of amortisation & carrying cost
12. Determination of revised category-wise tariffs to meet objectives of recovery of cost in a
reasonable manner and reduction of cross-subsidies
13. Consideration of State Government subsidy, if any - revenue subsidy and targeted
subsidy
14. Revised category-wise tariffs, with and without targeted subsidy
15. Drafting of detailed Tariff Order elucidating all the above giving detailed justification
16. Finalisation of Tariff Order and issuance of the same

( Page No. 145 )

 Salient features of some key aspects involved in the tariff determination by UTILITIES
and SERCs:

1. Estimates of the demand/Sales for each consumer category

 Metered and Unmetered Sales based on past performance in case of following

parameters:

o Connected load/Contract demand

o Number of consumers

o Energy consumed

 Assessment of Un-metered consumption, if any

2. Estimates of Transmission Losses and Distribution Losses

 Technical Losses - Approved vs. Actual/estimated

 Commercial losses - Approved vs. Actual/estimated

 Reduction proposed in losses – Target set by the Commission vs. actual vs. proposed

target

3. Power Purchase Quantum and Power Purchase Cost

 Determining estimated availability from various sources of power:

o thermal (coal and gas), hydro

o Central Sector, State sector, IPP, bilateral and Exchange

o based on allocated/tied-up generation capacity

o Renewable Energy, based on RPO specified by SERC

o Cost of Renewable Energy Certificates

 Determination of power purchase cost based on tariff of generating companies (Fixed

and variable cost)

( Page No. 146 )

 o Central Sector Generators

o State sector Generators

o Private/IPP/CPP Generators

o bilateral contracts/prevailing prices on Exchange

4. Capital Investment and Capital related expenses

 Capital investments required for maintaining, improving and expanding existing

distribution system including expenditure envisaged for distribution projects currently
under the process of execution like RGGVY schemes, etc.

 Depreciation

 Return on Capital (RoE/RoCE)

 Interest on loan – actual/normative

5. Operation and Maintenance expenses

 Employee Expenses

 A&G Expenses

 R&M Expenses

6. Other Items

 Interest on working capital

 Non-Tariff Income

 Income from Other Business

7. Estimation of consumer category wise retail tariffs -

 Category wise and slab wise sales, number of consumers and connected load, demand

 Categorisation of fixed and variable cost to assess the cost of supply

 Existing and proposed category-wise and slab-wise tariff components, revenue realization

from existing and expected demand

( Page No. 147 )

 Category-wise cross subsidy movement with respect to average/voltage/categorry-wise

cost of supply

 Extent of recovery from fixed charges

 Tariff rationalization and Cross subsidy reduction

 Extent of tariff increase

( Page No. 148 )

 The 10 Questions to be ask Series : Framework for Designing Good Electricity Policy

By Dixit, S., A. Chitnis, Wood, D., B. Jairaj, and S. Martin. 2014. “10 Questions to Ask About
Electricity Tarifs.” Working Paper. Washington, D.C.: World Resources Institute

Working Papers contain preliminary research, analysis, findings, and recommendations. They
are circulated to stimulate timely discussion and critical feedback and to influence ongoing
debate on emerging issues. Most working papers are eventually published in another form and
their content may be revised.

The 10 Questions to Ask Series, or the 10Q Series, is an initiative of the World Resources
Institute’s (WRI) Electricity Governance Initiative (EGI) and Prayas, Energy Group. It aims to
build the capacity of electricity sector stakeholders—government agencies, regulators, utilities, the
private sector, civil society, and others— to design and participate in policy making and
implementation processes. Each paper in the series asks a set of 10 questions relevant to a
particular topic within the broader electricity sector. The series pays particular attention to public
interests—interests in which society has a stake and that warrant government recognition,
promotion, and protection. These interests may include decisions concerning public expenditures,
affordability, service quality, and impact on local and global resources. We consider “good”
electricity policy to be policies designed to improve effectiveness of public expenditures, reduce
unnecessary costs, raise the quality of service, and minimize social and environmental impacts
while seeking to reach specific policy objectives. “Good” also references “good governance” as
laid out in EGI’s flagship publication, the “Electricity Governance Initiative Assessment Toolkit”
(EGI Assessment Toolkit) (see Box

Key Principles of Good Governance

 Transparency and Access to Information: Transparency is the process of revealing actions

and information so that outsiders can scrutinize them. Attributes of transparency include the
comprehensiveness, timeliness, availability, comprehensibility of information, and whether efforts
are made to make sure information reaches affected and vulnerable groups as appropriate.
 Accountability and Redress Mechanisms: Access to justice and redress are necessary to
hold governments and actors in the private and public sector accountable. Accountability
includes the extent to which there is clarity about the role of various institutions in sector
decision making; there is systematic monitoring of sector operations and processes; the basis for
basic decisions is clear or justified; and legal systems are in place to uphold public interests.
 Participation: Diverse and meaningful public input helps decision-makers consider
different issues, perspectives, and options when defining a problem. Elements of access to
participation include formal space for participation in relevant forums, the use of appropriate or
sufficient mechanisms to invite participation, the inclusiveness and openness of such processes,
and the extent to which the gathered input is taken into account.

( Page No. 149 )

 Capacity: Capacity refers to the government’s social, educational, technological, legal, and
institutional ability to practice good governance, and the ability of civil society to engage in
decision making. This includes the capacity of government and official institutions to act
autonomously and independently, the availability of resources (both human and financial) to
provide access, and the capacity of civil society.

(Source: Dixit, S., N.K. Dubash, C. Maurer, & S. Nakhooda. 2007. The Electricity Governance
Initiative Toolkit: Benchmarking Best Practices and Promoting Accountability in the Electricity
Sector. Washington DC & Pune: WRI & Prayas, Energy Group)

INTRODUCTION TO ELECTRICITY TARIFFS

Tariff determination–the process of determining the price of electricity to consumers–has far-

reaching impacts throughout the electricity sector. It not only affects the financial viability of the
sector and the quality and affordability of consumer services, but it also raises social and
environmental concerns. “10 Questions to Ask about Electricity Tariffs” attempts to capture some
of the critical dimensions of tariff determination, primarily in regulated markets.

Some countries and regions rely on regulated monopolies to deliver electricity to customers while
others have created competitive wholesale and retail marketplaces where electricity is traded. In
regulated markets, utilities face little or no competition on generation, and rely on power purchase
agreements with generators and their own generation fleet. This is the most common model found
in developing countries and several U.S. States.

Similarly, some countries rely on vertically integrated electricity markets, where a single firm
owns assets and is responsible for all aspects of production, sale, and delivery of electricity (to
include generation, transmission, distribution, and retail), while other countries rely on an
unbundled market where those services are disaggregated. Where there has been unbundling of the
sector, the user of this 10Qs framework should be aware that different tariff processes can apply
for both distribution and transmission services and can have different impacts on electricity tarifs.2
The user should also be aware that the use of the terms “tariff” and “rate” differs depending on the
jurisdiction that one is in and can be used interchangeably for the purpose of this tool.

Figure 1 identifies 10 elements for good tariff determination. Each element is presented as a
question that decision-makers and stakeholders should explore. Each question is followed by a
short explanation of its significance and issues that merit consideration. Key analysis issues are
highlighted at the end of each question as action items.

The questions raised here can serve multiple functions. For example, utilities can use them to
design technical work-shops and public consultations that seek innovative ways of, for example,
better targeting subsidies. Civil society groups can use these questions to prepare for public
consultations and assess various aspects of a utility’s tariff proposal

( Page No. 150 )

Q1. WHAT IS THE TARIFF DETERMINATION PROCESS?

Electricity rates, or tariffs, best serve the public interest when established through a process that is
transparent, accountable, and participatory. Procedural clarity involve identifying legal
frameworks, key decision-makers and procedures for setting and revising tariffs, and procedures
and forums allowing consumers and other stakeholders to participate in decisions, appeal
decisions and seek redress of grievances. Entities responsible for determining tariffs differ from
country to country. They include regulatory commissions (at the national or state level),
government ministries, and parliament. In some countries, more than one institution

is involved. In Pakistan, for example, the Oil and Gas Regulatory Authority sets fuel tariffs, which
are considered by the National Electric Power Regulatory Authority in determining consumer
tariffs. The role of electric utilities also differs from country to country. Where tariffs are
influenced by multiple entities, procedural clarity requires that the functioning of these entities,
their jurisdiction, and how they interact is explicitly articulated. Tariff determination processes
vary by country, can include various points of intervention, and can include multiple documents
that influence tariffs set. South Africa’s Multi Year Price Determination (MYPD), which describes
electricity prices decided by the National Electricity Regulator, NERSA, includes capital
expenditures that have been approved for capacity expansion by generation, transmission, and
distribution. Capital expenditure for transmission requirements included are based on the national
utility’s (Eskom) approved Transmission Development Plan.3 In some countries, an electric utility
submits an application, usually to increase tariffs, to a regulatory commission, which applies a set

( Page No. 151 )

of criteria (tariff methodology, see Q3) to decide whether the application should be granted. In
India, an application for tariff revision is called an Annual Revenue Requirement (ARR). A
utility’s submission of an ARR to the regulatory commission triggers a two-step process. In the
first

step, the commission analyzes the application for technical completeness and consistency. At this
stage, some commissions allow consumer representatives to participate in this “technical
validation” exercise. After issues that arise in the first step are resolved, the second step involves
the entire application and supporting data being made public, followed by public hearings.
Review periods for tariff determinations vary. Some countries have an annual review period,
whereas others have a multi-year determination period but allow for intermediate adjustments. In
either case, audits of the tariff adjustment can resolve differences between the estimated and the
actual costs. Because electricity tariffs affect different sections of society—including households,
small businesses, and industries—in different ways, tariff determination processes should mandate
a clear mechanism of participation. These should allow for written submissions and public
hearings that permit oral evidence. Mechanisms should include equal opportunity for consumers
and other stakeholders to participate, and documentation of authorities’ responses to public inputs
should be publicly available. A tariff determination process should include clearly defined
channels for review and appeal, and mechanisms to address consumer grievances. An appeals
process can allow stakeholders to question decision-makers (e.g. regulatory commissions or
ministries) on broad grounds of law as well as substance (i.e., facts, analysis, interpretation).
Appeals processes can provide “checks and balances” to prevent inefficient or wrong decisions.
Mechanisms to address consumer grievances about the service of the utility are also valuable. For
example, if a utility bill does not reflect the appropriate tariff, a consumer can file a grievance with
the regulatory body. But other forums might be better suited for appeals against orders by tariff
determining entities. The appeals process should also allow participation by all stakeholders.

Q2. WHAT ARE THE OBJECTIVES OF THE TARIFF DETERMINATION?

The objectives for setting tariffs should be clearly stated. Tariff-setting bodies have multiple
objectives: promoting investment, improving utility performance, improving service quality,
enhancing energy security, improving the financial health of electric utilities, promoting energy
efficiency, expanding services, and alleviating poverty (see Box 2). A clear statement of
objectives helps all stakeholders assess the appropriateness of tariff proposals and of the tariff that
is set. Thailand’s Power Development Fund, which is partially funded by consumer tariffs, is
based on a clear set of objectives that help justify tariff decisions. These objectives include: an
increase in expansion of electrification in rural areas, and subsidization of electricity services for
underprivileged consumers.4 Clear objectives establish predictability and improve stakeholder
confidence in the regulatory process.

The next step is to set specific, measurable, achievable, realistic, and time-bound (SMART) targets
to achieve the objectives. For example, to improve consumer service by increasing investments in

( Page No. 152 )

the transmission and distribution network, a target might guide analysis of the investment needed
and document how the proposed tariff will recover the investments. A “tariff philosophy
document” containing objectives as well as targets and the methodology (see Q3) used to
determine a tariff can contribute to greater clarity and accountability.

Achieving the objectives will be easier with appropriate mechanisms to monitor and enforce
targets and impose penalties on defaulters. Furthermore, impacts of tariff revisions are important
to evaluate over a broad time frame in order to understand the long-term effects on consumers, and
to assess whether overall tariff objectives are being achieved. These mechanisms should generate
evidence that can be used to improve future tariff determination processes. They should be
periodically evaluated to assess whether they are functioning as planned.

Principles of Tariff Design

Objectives of a sound rate structure often follow a suite of principles called “Bonbright’s Principles”
and are related to revenue, cost, and practicality. These principles include:

1. Effectiveness of yielding total revenue

2. Stability and predictability of revenue
3. Stability and predictability of rates
4. Discouraging wasteful use of services
5. Understanding of present and future private and social costs and benefits of service provided
6. Fairness of rates in the apportionment of total costs of service among different consumers
7. Avoidance of discrimination in rates
8. Promotion of innovation and cost-effectiveness in the face of changing demand and supply
patterns
9. Simplicity, understandability, public acceptability, and feasibility
10. Freedom from controversies as to proper interpretation
(Source: Bonbright, J.C., A. L. Danielsen and D.R. Kamerschen. 1988. Principles of Public Utility
Rates, Second Edition. Arlington: Public Utilities Reports, Inc.)

Analysis Highlights–Objectives of Tariff Determination

LOOK FOR:

 Clearly defined objectives of tariff determination

 Establishment of specific, measurable, achievable, realistic and time-bound (SMART) targets
 Existence of specific mechanisms for monitoring and achieving objectives

( Page No. 153 )

 Evaluation of long term impacts of tariff revision salutation of long term impacts of tariff

Q3. WHAT IS THE TARIFF DETERMINATION METHODOLOGY?

The method by which tariffs are determined is also important from a public interest perspective.
Methods might include cost-plus (a process of balancing costs incurred by utilities and future
estimated revenues) or performance-based regulation (an extension of the cost-plus approach that
provides incentives for improving efficiency and reducing costs). Each method has advantages for
achieving specific objectives in a given context. Box 3 introduces common methods for tariff
determination. Guidelines for electricity tariffs in South Africa are set out in the country’s
Electricity Pricing Policy and determined by the independent regulator, NERSA, using the rate of
return methodology.5 On the one hand, this methodology allows for the utility to recover its costs,
however, the methodology raises questions about what the allowable rate of return should be and
how those costs should be distributed

The tariff determination process should specify the method used to determine the tariff, as well as
the reasons for this choice. This clarity enables stakeholders to assess whether the selected method
is appropriate, and whether any shortcomings are adequately addressed. For example, the
performance-based approach may provide more flexibility to utilities to improve performance.
However, awards can be misused and financial or operational performance could be improved at
the cost of service quality.

( Page No. 154 )

Tariff Determination Methodology

Various methods are used to regulate electricity prices. Factors such as the scale of the electricity
sector, its sophistication in terms of technology use, and the availability of pertinent data can
influence the choice of method. Methods include:

 Rate of return, which is based on operating costs and cost of capital. In most cases,
regulators (or others charged with determining tariffs) review the tariff in response to a claim by the
utility that its rate of return is less than its cost of capital, or in response to a consumer group’s claim
that the actual rate of return is greater than the cost of capital.
 Price cap, which allows the utility to change its tariff according to an index typically,
composed of an inflation measure and a “productivity offset” (Jamison, et al.). The tariffs are
adjusted according to a price cap index that reflects the overall rate of inflation in the economy, the
ability of the operator to gain efficiencies, and the inflation in the operator’s input prices.
 Performance-based approach, a comparative competition in which the operator’s
performance is compared with other operators’ performance and penalties or awards are assessed
based on an operator’s relative performance, for example on cost efficiency. This approach
recognizes the revenue requirements of the utility and simultaneously encourages efficiency
improvements and cost reductions (Jamison et al.; Ahluwalia).
 Cost-Plus method/cost of service, which balances future estimated revenues with costs
incurred by the utility. The disadvantage of this approach is the difficulty in correctly establishing
costs that reflect efficient performance and preventing excessive costs (operating or investment)
being reported by utilities.

(Source: Ahluwalia, S., and G. Bhatiani. 2000. “Tariff Setting in the Electricity Power Sector: Base
Paper on Indian Case Study.” Paper presented at the TERI Conference on Regulation in Infrastructure
Services, New Delhi, Nov 14–15. Jamison, M.A. and S.V. Berg. 2008. Annotated Reading List for a
Body of Knowledge on Infrastructure Regulation. Washington, D.C.: World Bank.)

Analysis Highlights–Tariff Determination Methodology:

LOOK FOR:

 Transparency about methodology of tariff determination

 Assessment of strengths and weaknesses of the chosen method
 Mitigation measures to overcome weaknesses of the chosen method for achieving
objectives of tariff determination

( Page No. 155 )

Q4. HOW ARE THE UTILITY’S COSTS CONSIDERED IN THE TARIFF?

Electricity tariffs often depend on a utility’s costs, which can include costs related to generation,
distribution, and/ or transmission. How these costs shape the tariff depends on the methodology used
to determine the tariff, the structure of the electricity sector, and the efficiency and performance of
the utility. An example of how structure affects tariffs is seen in vertically integrated utilities, where
costs related to power generation, transmission, and distribution can be separated, but ultimately are
determined by one or more regulators and become defined tariffs. Conversely, for utilities that are
not vertically integrated, costs may be easier to identify and can be determined in different ways. In
any case, entities engaged in tariff determination should disclose information about utility costs to
all stakeholders (see Box 4).

The nature and extent of the disclosure of utility costs depends on the methodology of tariff
determination. For example, if a cost-plus method is adopted, all details about the costs of
generation (such as fuel and maintenance); transmission and distribution; finance (e.g., quantum and
terms of loan, loan repayment costs, depreciation); and human resources should be disclosed. This
disclosure enables the public, regulators, and independent experts to identify areas for improvement
and judge the appropriateness of tariff proposals.

Several utilities assess surcharges for energy efficiency measures, renewable energy, or improved
services (see Q7 and Q8). In some cases, however, the revenue generated by these additional
charges may, or may not be used optimally. For example, in the Indian state of Maharashtra, a
distribution company levied additional charges on certain consumers to help minimize power cuts
and improve service quality. However, investigations by civil society groups found that this
additional revenue was not being used efficiently other examples of additional charges include fuel
cost increases and power purchase charges. Tariff-setting authorities and utilities may be called on to
document the justification and impact of these charges.

The nature of the costs—whether they are internal and controllable, or external and non-
controllable—is relevant when evaluating how costs shape the electricity tariff. For example, costs
associated with employee wage increases are controllable because they can be planned for. In
contrast, costs associated with an increase in international market prices for fuels, general inflation,
or currency depreciation is non-controllable. However, the risks associated with uncontrollable costs
can be anticipated and reduced through better planning.

For stakeholders to hold utilities to account for efficient performance and appropriate planning, they
must be able to assess the nature of the utilities’ costs. Financial costs, such as return on equity,
profitability, working capital requirements, and debt service should also be analyzed to ensure fiscal
responsibility
Box 4 | Range of common utility costs associated with power projects

Utility costs associated with power projects can be classified as fixed or variable, and are
recovered from consumers through tariffs.
( Page No. 156 )
Fixed Costs:

 Operations and Maintenance (O&M): O&M costs cover the cost of repairs of lines,
transformers, or power stations.
 Salaries and human resources: Salaries, pensions and benefits for utility personnel, as well
as the cost of outsourced labor for O&M functions, form part of a utility’s fixed costs.
 Return (profit) on equity: It is legitimate for the project owner to seek a profit that is
justifiable and transparent.
 Income Tax: Income tax of the utility is recovered from the tariff.
 Interest on Loan: Project owners have to pay the interest on the loan taken out to construct
the project.
 Repayment of loan/Depreciation: Depreciation measures the reduction of the value of an
asset due to aging and use. Depreciation is recovered through the life of the equipment.

Variable costs: Fuel based power projects are dependent on the unit price of fuel and the actual
generation of the plant, a variable cost. The risks associated with variable costs can be anticipated
and reduced through appropriate planning processes.

(Source: Sreekumar, N., and G. Sant. 2004. Know Your Power: A Citizen’s Primer on the
Electricity Sector. Pune: Prayas Energy Group. )

Q4. Analysis Highlights–Utility Costs

 Availability of adequate and reliable information about different costs of utility

Transparency about taxes, surcharges, other components that affect tariffs.
 Clarity about the nature of costs (i.e., whether they are controllable or uncontrollable by the
utility)

Q5. HOW DOES THE UTILITY’S PERFORMANCE AFFECT THE TARIFF?

A utility’s performance—in terms of energy services, environmental and social impacts, finances,
and operations—affects consumer tariffs.

A utility’s energy performance depends on its plants’ fuels (nuclear, coal, oil, natural gas, wind);
their technology and vintage;8 their heat rates, load factors, and availability; and how often they
are refurbished. For example, as the heat rate (efficiency of generation) attained by a coal plant
increases, the fuel costs can fall, thus theoretically decreasing the electricity tariff. At the same
time, technology that is efficient and has a better heat rate could be expensive and thus increase the

( Page No. 157 )

capital cost of a plant. It is critical that the tariff design recognize that capital and operating
performance norms and hence, costs, is interdependent.

Other energy performance parameters include transmission and distribution losses, metering
efficiency, and network reliability. It is essential that reliable data about such performance
parameters is made available as part of the tariff process. If performance norms are controversial
or disputed, independent studies, possibly with involvement of independent civil society,
consumer groups, or academics, may be conducted before the tariff-setting process begins. Since
2010, electricity companies in Kyrgyzstan have agreed to accurately report on technical losses.
Such public disclosure has resulted in significant drops in electricity distribution losses and has
become an important aspect in ensuring appropriate electricity tariffs are set.

A utility’s environmental and social performance can be measured by its power plants’ emissions,
waste water treatment, and pollution control measures, and by the utility’s involvement in
community development, its provision of compensation for land acquisition, and its labor
management plans. Such performance parameters can affect the tariff.

A utility’s financial performance can be measured by indicators of efficiency in managing

working capital and cost of capital.

In operations, performance parameters that include mandated improvements, reliability and

service standards, timely metering and bill collections, and commercial and technical losses in the
system, are key to assessing how performance impacts tariffs.

Because utility performance affects the tariff for consumers, performance information should be
disclosed and scrutinized as part of the tariff determination process. For public scrutiny to be most
effective, regulators or other agencies responsible for setting tariffs should make comprehensive
data for performance indicators publicly available.

Regulators might also establish clear targets and norms for performance indicators and carry out
periodic utility performance comparisons (among similar utilities, within or outside the country).
Whether plans are in place to improve utility performance if it falls below mandated standards is
also relevant.

( Page No. 158 )

Analysis Highlights—Utility Performance

LOOK FOR:

 Transparency of performance parameters presented by the utility (energy services,

environmental and social impacts, finances, and operations)
 Evaluation of impact of performance norms on overall tariff as well as tariff for different
consumer categories Assessment of potential improvement in performance norms
 Clarity on performance norms and targets to be achieved by the utility

Q6. HOW HAS THE TARIFF STRUCTURE BEEN DETERMINED?

Another element in the tariff determination process is the tariff structure (or rate design). A tariff
structure is a set of rules and procedures that determine how many different categories of
consumers are charged. The prices customers pay for utility services can vary from category to
category and from utility to utility.

The tariff structure for residential consumers has three essential elements:

1. The fixed charge per billing period must be low, at least for small-use customers, to ensure
that access to essential levels of electric service is affordable.

2. Different tariffs are charged for different levels of energy consumption. Most countries have
“increasing block tariffs,” in which essential needs service is priced at a low rate, and incremental
and discretionary usage is priced at a higher rate.
3. Differential rates are set for seasonality and times of-use that closely align prices with costs,
and are explained clearly.

The tariff structure should be simple to implement, but should also ensure accountability for the
use of electricity and adequate recovery of revenue for the utility.

Depending on the objectives of the tariff determination and needs of the utility, different tariff
structures can be adopted (see Box 5). In South Africa, an inclining block tariff is used as a form
to subsidize poorer domestic consumers.11 Brazil applies a two-part tariff in part to control peak
and off-peak demand.12 The most common tariff structure is a two-part tariff, in which each
consumer is required to pay a fixed charge (or several fixed charges) per billing period (for
example, minimum consumption charges, load charges, or connection fees) and additional charges
based on actual consumption. Other tariff structures include single-part tariffs, block tariffs,
seasonal tariffs, and time-of-use (time-of-day) tariffs. The tariff structure can have a significant
impact on crucial issues of public interest, such as achieving the stated objectives of the tariff

( Page No. 159 )

revision, improving the performance and efficiency of the utility, and enhancing accountability to
consumers. For example, if an objective is to improve bill collection efficiency, then the tariff
might offer a discount to consumers who pay on time to incentivize timely bill payment and thus
reduce revenue losses to the utility

Multiple types of tariff structures can be applied; these are not mutually exclusive and can be
applied in conjunction with one another. Common tariff structures include:

Single-part tariffs: The operator charges a single price per unit of electricity for the entire amount
of electricity consumed by the consumer. Though simple to administer and understand, single-part
tariffs do not reflect electricity companies’ cost structure, which may include significant fixed costs
(i.e. costs which may not vary depending on electricity generation). Hence a single-part tariff may
lead to inefficient operation of generation assets or inadequate revenues for the electricity company.

Multi-part/two-part tariffs: The operator charges separate prices for different elements of the
service. For example, a customer may pay a monthly fee for access to electricity services plus a per
unit charge for the electricity consumed. Multi-part tariffs can better reflect a utility’s costs and
performance. Multi-part tariffs are also often differentiated by season and daily time of use.

Block tariffs (increasing, decreasing): “Decreasing block tariffs” decrease in price as larger
amounts of electricity are consumed because it is assumed that the utility’s marginal cost of
producing electricity is cheaper than the average cost. Conversely, “increasing block tariffs” increase
as larger amounts of electricity are consumed. Increasing tariffs discourage consumption and
encourage conservation more than decreasing tariffs and also allow better targeting of subsidies for
poor consumers.

Time-of-day tariffs (TOD, peak-load): Rates vary depending on when the service is being used. For
example, the operator would charge higher prices during peak use hours and lower prices during off-
peak hours to reflect the cost of generation. This structure requires sophisticated measurement of
customer usage, such as metering technologies. It encourages consumers to use less power during
peak hours. With decreasing costs of ToD meters, use of the ToD tariff structure is becoming more
common.

Seasonal tariffs: These rates allow higher charges for electricity in summer and winter when demand
for cooling or heating is higher. Typically they are used in climates where utilities experience
significant seasonal cost differences. With traditional regulation, seasonal rates reduce net revenue
stability for utilities by concentrating revenue into the weather-sensitive seasons.

( Page No. 160 )

Analysis Highlights—Tariff Structure

LOOK FOR:

 Clarity and simplicity of tariff structure

 Tariff structure ensures accountability and adequate recovery of revenues for utility
Appropriateness of tariff structure to achieve tariff objectives

Q7. HOW DOES THE TARIFF SUPPORT RENEWABLE ENERGY?

Tariff determination can promote and support renewable energy (RE) in two ways. First, by
introducing policies such as feed-in tariffs (FIT), net energy metering, renewable portfolio
obligations, or subsidies to renewable project developers, policymakers can encourage penetration
of renewable energy on the supply side. Second, by providing incentives (such as rebates for use of
renewable energy technologies like solar water heating and solar home systems) or by allowing
consumers to buy only renewable energy, policymakers can promote renewable energy on the
consumer demand side. Thailand’s National Energy Policy Commission has approved a FIT
program that encourages power generation from RE by providing RE power producers with a
variety of price premiums including a generation-based technology adder.

The costs of renewable energy technologies are decreasing at an encouraging rate. However, many
sources of renewable energy are still more costly than conventional energy sources. Thus,
promoting renewable energy sources can have tariff impacts. For example, the tariff determination
may stipulate or incentivize a certain percentage of renewable energy, which may cost more than
conventional fuel. Similarly, some utilities provide preferential tariffs to renewable energy sources
to encourage deployment of clean energy. These measures increase the costs of power
procurement for the utility. Subsidies and rebates given to consumers to install solar home
systems, water heaters, and similar technologies also increase the operational costs of utilities.
Some utilities levy a surcharge on electricity consumers to generate revenue for supporting
renewable energy projects. Such an increase in utility costs or taxes levied on consumers to
promote renewable energy can drive up the tariffs for electricity consumers.

As an increasing number of consumers install renewable energy systems at their homes or

businesses, the role of the utility may gradually change from “power supplier” to “grid manager,”
coordinating thousands of points of supply to provide reliable service. The tariff structure may
need to include a separate set of reliability service products, paid for by all beneficiaries. If
renewable resources significantly decrease the use of grid-supplied power, revenue regulation14 or
decoupling schemes15 may be needed in the tariff structure to assure the financial health of the
electric utility.

Of course, utilities should promote renewable energy, which ameliorates local pollution,
diversifies the energy portfolio, and creates domestic jobs. However, stakeholders should assess

( Page No. 161 )

how any additional costs of renewable energy might affect consumer tariffs especially for
marginalized consumers. Such an analysis can also lead to innovative approaches that balance
multiple objectives.

Q7. Analysis Highlights—Tariff For Supporting Renewable Energy

LOOK FOR:

 Supply-side and demand-side elements of tariff that support renewable energy

 Transparency about cost impacts of renewable energy supportive tariffs
o Overall
o By consumer category
o Availability of data that documents different cost impacts

Q8. HOW DOES THE TARIFF SUPPORT ENERGY EFFICIENCY, DEMAND-SIDE

MANAGEMENT, AND DEMAND-RESPONSE MEASURES?

Tariff structure can play an important role in capturing savings by promoting energy efficiency,
demand-side management, and demand-response measures, which allow end-use electric
customers to reduce their electricity usage in a given time period or shift that usage to another time
period in response to a price signal. Such tariff designs include time-of-day tariffs, block tariffs,
and demand-response tariffs. To mitigate power shortages, a main concern in China, the
government has adopted a variety of tariff design measures and incentives to promote energy
conservation, including time-of day tariffs, seasonal tariffs in areas where seasonal demand
fluctuation is evident, and compensation for users who avoid peak hour consumption.

Under a time-of-day tariff, electricity consumed during peak hours is charged at a higher rate than
electricity consumed during off-peak hours. This tariff encourages consumers to use electricity
prudently during peak hours. Not only does it encourage overall energy efficiency, but it also
leads to better peak load management, savings from avoided generation of costly peak-load power
plants, and defers investments in new power plants. As described in Box 4, increasing block rates
charge a progressively higher tariff for higher consumption of electricity, assuring each consumer a
low-cost source of power for essential needs while discouraging waste. Similarly, real-time or
demand-response pricing give consumers hourly information about the cost of electricity, allow
them to schedule usage during periods of low demand to pay cheaper rates and, therefore, signal
consumers to reduce loads. Peak-time rebates can incentivize large consumers (such as hotels,
office buildings, and industries) to use methods that reduce their load during peak hours or when
the reliability of the grid is at stake. Load-reducing measures include the adoption of energy
efficient appliances and/or thermal energy storage systems and household appliances, such as
water heaters and air-conditioning systems that can be cycled on and off. Utilities could also levy
surcharges on electricity tariffs that support energy efficiency measures. For example, a utility can

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collect a charge per kWh and use it exclusively to fund EE projects.Supply-side improvements can
also promote energy efficiency. Measures such as mandates for utilities to conduct power factor
assessments17 and maintaining infrastructure can help reduce transmission and distribution losses.
It is important to recognize that reducing electricity sales through energy efficiency measures can
reduce revenues for utilities if their profits are linked to sales. Governments may also lose revenue
if taxes on electricity use contribute significantly to their revenue stream. Disincentives such as
these can be addressed through “decoupling” mechanisms—tariff structures or other measures that
allow utilities and governments to recover foregone profits and taxes on reduced sales.

The tariff-setting process should quantify and clearly communicate the benefits of energy
efficiency and demand-side management measures. This communication could serve two purposes:
it could help consumers understand that energy efficiency and demand-side management can lead
to lower tariffs in the long run, and it could allow increased transparency about whether the
benefits of energy efficiency and demand-side management are being achieved.
Analysis Highlights—Tariff for Supporting Energy Efficiency, Demand-Side
Management, Demand Response
LOOK FOR:

Supply-side and demand-side tariff elements that support energy efficiency, demand-side
management, and demand response Measures to decouple utility profits or government revenue as
improvements in efficiency lower energy use Clearly quantified and explained costs and benefits of
energy efficiency and demand-side management measures covered in the tariff

Q 9. HOW DOES THE TARIFF SUPPORT MARGINALIZED SECTORS OF SOCIETY

AND BROADER NATIONAL GOALS?

Because electricity has become an essential service, it is important to consider the impact of tariffs
on poor and remotely located residents, who spend a relatively large percentage of their income on
electricity. Subsidies and cross-subsidies of consumed electricity are the most common forms of
support and can include subsidies for free connections and “lifeline” amounts of electricity for
very poor consumers as well as provision of of-grid goods and services such as solar lanterns.18
Pakistan has adopted an inclining block tariff structure designed to protect lifeline consumers by
minimizing per kWh user charges for residential consumers who utilize less than 50kWh of
electricity per month (see Table 1). The “lifeline” tariff rate has been criticized, however, since a
minimum charge for lifeline users has been implemented making the average cost of electricity for
many lifeline users far higher than other users. 19 Periodic evaluations and reviews of lifeline
tariffs are important to ensure that their intended benefits are being delivered and tariff objectives
are being met. Trade- between grid access and financial viability should be kept in mind. For
example, while access to electricity in remote areas might be a priority, extending the grid could
be weighed against cost-effective alternatives, such as providing of-grid electricity services or set-

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ting up a decentralized system. Where of-grid electricity services are offered, regulators can
monitor and evaluate tariffs paid by off-grid consumers to ensure equitable tar-ifs are in place.
Even so, the choice of option need not be dominated by short-term financial considerations.

The tariff determination process is important in achieving broader national goals, such as energy
security, access to electricity, poverty alleviation, food security, delivery of basic health and
education services, economic development, and environmental protection. The tariff determination
process and tariff proposals should include clear analyses of the impacts of tariffs on sector
objectives and national goals. For example, if achieving food security is a national development
priority, then electricity tariff supports might favor the agricultural sector

Q9. Analysis Highlights—Marginalized Sectors and National Goals

LOOK FOR:

Analysis of adverse impacts of tariff determination on marginalized sectors

Analysis of options and implementation of specific measures for supporting marginalized sectors
Analysis of impacts on broader national goals (e.g. economic development, food security)

Q10. WHAT ARE THE SUBSIDIES IN THE TARIFF?

The electricity sector is capital intensive and natural resources intensive. Several countries use
preferential pricing (e.g., selective access to lower-cost resources) or overt subsidies to assist low-
income groups to access electricity. Subsidies are sometimes offered to electricity generators to
encourage them to deploy new technologies, and to energy-related sectors such as coal mining,
water supply, and fuel transportation. Subsidies may also be offered to industries to encourage
investment, and to farmers to promote food production. Further, many countries cross-subsidize
electricity, whereby one group of consumers pays higher rates for electricity to cover or subsidize
lower rates for other consumers. This could include lower tariffs for residential use by low-income
or vulnerable residential consumers and higher tariffs on industrial or commercial consumers (see
Box 6. Tariff Subsidies).

Subsidies are sometimes criticized for jeopardizing the financial viability of utilities, for being
subject to capture by unintended groups, and for leading to inefficient use

Of natural resources. An example of a subsidy captured by an unintended group comes from India
where subsidies were given to agricultural consumers to protect the interests of small farmers.
However, since many smaller farmers did not have access to electric pumps or electricity services,
these subsidies were captured by larger farmers who did not require them. 21 poorly designed
subsidies can also lead to the inefficient use of natural resources. In the Indian example, electricity

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subsidies exacerbated farmers’ indiscriminate use of groundwater, speeding the depletion of
aquifers. Moreover, poorly designed or implemented subsidies can have perverse effects. For
example, cross-subsidies resulting in very high electricity tariffs for industrial users can lead those
users to opt for alternative sources, such as captive power,22 which could financially strain electric
utilities, increase pollution, and diminish system reliability. In order to minimize negative effects
of subsidies, and to ensure that the objectives of the subsidies are being met, periodic reviews of
the subsidy, its benefits, beneficiaries, and outcomes is a crucial exercise to be completed by
regulators.

A tariff determination process that provides a transparent view of subsidies and cross-subsidies is
more likely to be aligned with the public interest. Periodic review and analysis of the outcomes of
subsidy allocations can prompt measures to prevent perverse impacts. While evaluating the
implementation of subsidies, groups can also consider issues of transparency and accountability.

Box 6 | Tariff Subsidies

Electricity Tariff Subsidies are policies that decrease energy prices or production costs through some
form of unrequited value transfer to economic agents (individuals, firms, or other institutions; public
or private). The financing of subsidies can take place in a number of ways, including explicit
subsidies, implicit subsidies, and cross-subsidies.

Explicit subsidies are transfers from the government budget to the producer or consumer that is
receiving the subsidy, and are transparently reflected in the budget.

Implicit subsidies occur where there is no immediate transfer from the government to the company
to cover the shortfall in revenue caused by the presence of the subsidy.

Cross-subsidies are policies that reduce costs to particular types of customers or regions by
increasing charges to other customers or regions.

(Source: Bacon, R. et al. 2010. Subsidies in the Energy Sector: An Overview. World Bank Group
Energy Sector Strategy.)

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Analysis Highlights—Subsidies and Cross-Subsidies

LOOK FOR:
 Transparency about various subsidies and cross-subsidies embedded in tariffs
 Periodic analysis and review of beneficiaries, benefits, and outcomes of subsidies
 Specific measures to prevent excessive perverse impacts of subsidies and cross-subsidies on
different stakeholders

ABOUT THE AUTHORS and Source

 Shantanu Dixit is the Coordinator of Prayas, Energy Group.

 Ashwini Chitnis is a Senior Research Associate with Prayas, Energy Group.
 Davida Wood is a Senior Associate at the World Resources Institute.
 Bharath Jairaj is a Senior Associate at the World Resources Institute.
 Sarah Martin is a Research Analyst at the World Resources Institute.

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 Qualities That Make a Good Regulator/Leader
Having a great idea and assembling a team to bring that concept to life is the first step in creating a
successful business venture. While finding a new and unique idea is rare enough; the ability to
successfully execute this idea is what separates the dreamers from the entrepreneurs. However you
see yourself, whatever your age may be, as soon as you make that exciting first hire, you have
taken the first steps in becoming a powerful leader. When money is tight, stress levels are high,
and the visions of instant success don’t happen like you thought, it’s easy to let those emotions get
to you, and thereby your team. Take a breath, calm yourself down, and remind yourself of the
leader you are and would like to become. Here are some key qualities that every good
Regulator/leader should possess, and learn to emphasize.

Honesty

Whatever ethical plane you hold yourself to, when you are responsible for a team of people, it’s
important to raise the bar even higher. Your business and its employees are a reflection of
yourself, and if you make honest and ethical behaviour a key value, your team will follow suit.

Ability to Delegate

Finessing your brand vision is essential to creating an organized and efficient business, but if you
don’t learn to trust your team with that vision, you might never progress to the next stage. It’s
important to remember that trusting your team with your idea is a sign of strength, not weakness.
Delegating tasks to the appropriate departments is one of the most important skills you can
develop as your business grows. The emails and tasks will begin to pile up, and the more you
stretch yourself thin, the lower the quality of your work will become, and the less you will
produce.

The key to delegation is identifying the strengths of your team, and capitalizing on them. Find out
what each team member enjoys doing most. Chances are if they find that task more enjoyable,
they will likely put more thought and effort behind it. This will not only prove to your team that
you trust and believe in them, but will also free up your time to focus on the higher level tasks,
that should not be delegated. It’s a fine balance, but one that will have a huge impact on the
productivity of your business.

Communication

Knowing what you want accomplished may seem clear in your head, but if you try to explain it to
someone else and are met with a blank expression, you know there is a problem. If this has been
your experience, then you may want to focus on honing your communication skills. Being able to
clearly and succinctly describe what you want done is extremely important. If you can’t relate
your vision to your team, you won’t all be working towards the same goal.

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 Training new members and creating a productive work environment all depend on healthy lines of
communication. Whether that stems from an open door policy to your office, or making it a point
to talk to your staff on a daily basis, making yourself available to discuss interoffice issues is vital.
Your team will learn to trust and depend on you, and will be less hesitant to work harder.

Sense of Humour

If your website crashes, you lose that major client, or your funding dries up, guiding your team
through the process without panicking is as challenging as it is important. Morale is linked to
productivity, and it’s your job as the team leader to instil a positive energy. That’s where your
sense of humour will finally pay off. Encourage your team to laugh at the mistakes instead of
crying. If you are constantly learning to find the humour in the struggles, your work environment
will become a happy and healthy space, where your employees look forward to working in, rather
than dreading it. Make it a point to crack jokes with your team and encourage personal discussions
of weekend plans and trips. It’s these short breaks from the task at hand that help keep
productivity levels high and morale even higher.

Confidence

There may be days where the future of your brand is worrisome and things aren’t going according
to plan. This is true with any business, large or small, and the most important thing is not to panic.
Part of your job as a Regulator / leader is to put out fires and maintain the team morale. Keep up
your confidence level, and assure everyone that setbacks are natural and the important thing is to
focus on the larger goal. As the Regulator / leader, by staying calm and confident, you will help
keep the team feeling the same. Remember, your team will take cues from you, so if you exude a
level of calm damage control, your team will pick up on that feeling. The key objective is to keep
everyone working and moving ahead.

Commitment

If you expect your team to work hard and produce quality content, you’re going to need to lead by
example. There is no greater motivation than seeing the boss down in the trenches working
alongside everyone else, showing that hard work is being done on every level. By proving your
commitment to the brand and your role, you will not only earn the respect of your team, but will
also instil that same hardworking energy among your staff. It’s important to show your
commitment not only to the work at hand, but also to your promises. If you pledged to host a
holiday party, or uphold summer Fridays, keep your word. You want to create a reputation for not
just working hard, but also be known as a fair Regulator / leader. Once you have gained the
respect of your team, they are more likely to deliver the peak amount of quality work possible.

Positive Attitude

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 You want to keep your team motivated towards the continued success of the company, and keep
the energy levels up. Whether that means providing snacks, coffee, relationship advice, or even
just an occasional beer in the office, remember that everyone on your team is a person. Keep the
office mood a fine balance between productivity and playfulness.

If your team is feeling happy and upbeat, chances are they won’t mind staying that extra hour to
finish a report, or devoting their best work to the brand.

Creativity
Some decisions will not always be so clear-cut. You may be forced at times to deviate from your
set course and make an on the fly decision. This is where your creativity will prove to be vital. It is
during these critical situations that your team will look to you for guidance and you may be forced
to make a quick decision. As a Regulator / leader, it is important to learn to think outside the box
and to choose which of two bad choices the best option is. Don’t immediately choose the first or
easiest possibility; sometimes it’s best to give these issues some thought, and even turn to your
team for guidance. By utilizing all possible options before making a rash decision, you can
typically reach the end conclusion you were aiming for.
Intuition

When leading a team through uncharted waters, there is no roadmap on what to do. Everything is
uncertain, and the higher the risk, the higher the pressure. That is where your natural intuition has
to kick in. Guiding your team through the process of your day-to-day tasks can be honed down to
a science. But when something unexpected occurs, or you are thrown into a new scenario, your
team will look to you for guidance. Drawing on past experience is a good reflex, as is reaching out
to your mentors for support. Eventually though, the tough decisions will be up to you to decide
and you will need to depend on your gut instinct for answers. Learning to trust yourself is as
important as your team learning to trust you.

Ability to Inspire

Creating a business often involves a bit of forecasting. Especially in the beginning stages of a
start-up, inspiring your team to see the vision of the successes to come is vital. Make your team
feel invested in the accomplishments of the organization. Whether everyone owns a piece of
equity, or you operate on a bonus system, generating enthusiasm for the hard work you are all
putting in is so important. Being able to inspire your team is great for focusing on the future goals,
but it is also important for the current issues. When you are all mired deep in work, morale is low,
and energy levels are fading, recognize that everyone needs a break now and then. Acknowledge
the work that everyone has dedicated and commend the team on each of their efforts. It is your job
to keep spirits up, and that begins with an appreciation.

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