General Principles of

Tariff

Presentation Outlines
Introduction
Tariff Principles
Power Tariff Evolution
ABT
Conclusion

Introduction

What is Regulation
Regulation is defined as
The act of regulating;

A rule or order prescribed for

management or government;
A regulating principle;

A percept, rule or order prescribed

by superior or competent authority
relating to action of those under its
control

Blacks Law
Dictionary

Basic Legal Framework

Electricity a concurrent subject as per

Constitution of India
Both Centre and States can legislate
In case of repugnancy or conflict, Central
legislation prevails

STAKEHOLDERS REGULATORY
FRAMEWORK

GOVT.
GENERATORS

REGULATOR

REGULATOR

TRANSMITTERS

TRADER

PX

TRANSMITTERS

DISTRIBUTORS
REGULATOR
CPPs

CONSUMER

History of Electricity Regulation in

India
The Electricity supply industry was earlier
governed by three Acts i.e. before enactment of
the Electricity Act- 2003, namely
Indian Electricity Act, 1910
Electricity (Supply) Act, 1948
Electricity Regulatory Commissions Act, 1998
The above three Acts now repealed in Electricity
Act, 2003

Indian Electricity Act, 1910

Indian Electricity Act 1910 laid down basic framework
for the power sector in the country along with all the
policies governing the electricity supply in India
o Growth of the sector through private licensees
o Licence by State Govt.
o Provision for licence for supply of electricity in a
specified area
o Legal framework for laying down of wires and other
works
o Provisions laying down relationship between
licensee and consumer

Indian Electricity Act, 1910

The supply of electricity was limited to urban
areas and most of the country was deprived of
electricity
The situation was so grim that after
independence not a single private organization
was competent to administer the power supply
in the country, thereby, making way for state
participation in the power sector

Electricity (Supply) Act, 1948

Post-Independence Policy
The Act concentrated on increasing state monopoly
over the sector by
Mandated creation of SEBs
Establishment of CEA
Need for the State to step in (through SEBs) to extend
electrification (so far limited to cities) all across the country
especially in rural areas
As a result of this, 19 SEBs (State Electricity Boards)
were formed under the Act which enjoyed monopoly over
generation, transmission and distribution at intra-state level
However the power situation lacked in quality, security and
reliability

Legal Framework Old Laws

Main amendments to the existing Acts
1956 Amendment- to increase role of State Govt to monitor
SEBs
Amendment in 1964 to enable REBs
Amendment in 1975 to enable generation in Central sector
Amendment to bring in commercial viability in the
functioning of SEBs
Section 59 amended to make the earning of a minimum return of 3%
on fixed assets a statutory requirement (w.e.f 1.4.1985)

Amendment in 1991 to open generation to private sector (for

additional capacity requirement) and establishment of RLDCs
Amendment in 1998 to provide for private sector
participation in transmission and also provision relating to
Transmission Utilities

Electricity Regulatory Commission

Act, 1998
In order to strictly implement reforms and rationalizing of the
tariff structure, second generation reforms were introduced
In 1998 the GOI implemented The Electricity Regulatory
Commission Act, 1998
It emphasized on the establishment of state and central level
electricity regulatory commissions (ERCs) (independent
regulatory bodies) for rationalizing the tariff structure, creating
transparency in policy formulation, to frame and promote
efficient and environmentally benign policies and for greater
involvement of private participation
Objective distancing of Govt./Govt. organization from
functioning of SEBs i.e. regulation and tariff determination

Resultant Industry Structure

Need for New Legislation

Requirement of harmonizing and rationalizing the provisions in the

existing laws to a self-contained comprehensive legislation
Create competitive environment which would result in enhancing
quality and reliability of services to consumers
Distancing of Govt. from regulatory responsibilities

Obviating need for individual States to enact their own reform laws

Requirement of introducing newer progressive concepts like power

trading, open access, Appellate Tribunal etc.

Special provision for the Rural areas

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

Electricity Regulation in India

Regulatory Milestones
IE Act

1910

Country
Status

Sectoral
Makeu
p
Institutional
Structure

ES Act

Central Utilities

ERC ACT

1948

1975

1998

British Indiaagglomeration of provinces

Isolated Private Licensees

Early British Model

EA

2003

Indian Union

Isolated
SEBs

State Govt

Regional
System

Central Utilities

Central Utilities, IPPs,

CTU, SEBs

Central Govt

Regulator

Legal Framework
Electricity Act-2003
Electricity Act, 2003 - enacted June 10th 2003, envisages
development in an open, nondiscriminatory, competitive, market
driven environment in the interest of the consumers/ suppliers of
power
This Act seeks to consolidate
The laws relating to generation, transmission, distribution, trading and use
of electricity
Taking measures conducive to development of electricity industry,
promoting competition
Protecting interest of consumers and supply of electricity to all areas,
Rationalization of electricity tariff ensuring transparent policies regarding
subsidies
Promotion of efficient and environmentally benign policies
Constitution of Electricity Regulatory Commissions to rationalize electricity
tariff and establishment of Appellate Tribunal and for matters connected

Liberal
Framework
Competitive
Bidding

Competitive
Environment

Private
Investments

Trading

Open
Access

Objectives
of
Electricity
Act
2003

Regulatory
Commission/
Appellate
Tribunal

Delicenses
Generation

Rural
Distribution
Delicenced

Restructure
Electricity
Boards

Controlling
Theft of
Electricity

Industry Structure After Electricity Act 2003

Role of Government
National Electricity Policy and Plan
Central Govt. to prepare National Electricity Policy and Tariff
Policy in consultation with State Govt. and CEA Feb 05
National Electricity Plan for a period of 5 years issued by CEA
in accordance with National Electricity Policy Aug 07
National Policy on rural electrification including stand alone
systems (including renewable and non-conventional energy
sources) to be issued by Central Government in consultation
with State Government Aug 06
Policy for electrification and distribution in rural distribution
Panchayats, Co-operatives, NGOs, franchisees
Rule Making through Notifications for carrying out various
provisions of the Act
Powers to issue directions to the Regulatory Commissions on
issues involving public interest

National Electricity Policy

Total village electrification by year 2010
By year 2012 :
Per capita availability 1000 units
Installed capacity over 200,000 MW
Spinning reserves 5%
Minimum lifeline consumption of 1 unit per household
per day

Inter-regional transmission capacity 37,000 MW

Energy efficiency/ conservation savings about 15%

Tariff policy - Jan 06

Mandates competitive procurement of power and
transmission services transitional window of 5 years period
given to public sector companies
Encourage efficiency in operations by sharing of gains between
licensees and consumers
Promote Multi-Year Tariff (MYT) framework
Encourage loss reduction Strategies
Tariff design : Linkage of tariffs to cost of service
gradual reduction in cross subsidy (+/- 20% of average cost
of supply)
Progressive reduction in Cross-subsidy surcharge
access

for open

Tariff Principles

Features of Electricity
o Electricity Provides consumers with the ability to
realize numerous conveniences in their everyday
lives

One does not buy electricity as an end product

o One buys electricity as an input which is then utilize
to produce consumable goods or services or to enjoy
domestic comforts

23

Features of Electricity
Electricity is different from other commodity
o
o
o
o

o
o
o
o
o
o

Electricity is not Visible

It can not be touched
It can not be stored
Production & Consumption of
electricity inseparable
Can only be sent through wires
Travels at a speed of light
Can not carry a brand mark
Transfer of ownership is not possible
It obeys laws of physics
Electricity has demand side flaws
24

Tariff Principles
Tariff should provide correct pricing signals to
investors as well as consumer
Protection of consumer interest and also
investors risk by Stable and predictable over a
period of time
Appropriate
incentive
for
efficiency
enhancement and rational use of energy by
suppliers and consumers

25

Tariff Principles
Economic conservation of societal resources,
i.e. scarce national economic resources must
be allocated efficiently
Socio-economic need of the country, i.e. tariff
must be made affordable to all sectors of the
economy and minimum level of service even
to the low income group of the society
Transparency and simplicity in determination
of tariff
Encourage market determination of prices
26

Tariff Principles

Institutional Arrangement Options

Government monopoly
Private monopoly without regulation
Private monopoly with (National, Regional
or Local) regulation
Two Basic Regulatory Forms
Rate-of Return (ROR) also known as Cost-ofService (COS)
Performance Based Ratemaking (PBR)
27

Tariff Principles ROR

In ROR regulations, role of regulation is to
encourage enough investment to meet
customer demand and to compensate investors
with a reasonable rate of return
Under ROR or COS regulation, regulator
determines
The value of invested capital
The allowed rate of return on invested capital
Appropriate expenses

Required Revenue = Expenses + {allowed rate

of return x (Allowed Investment)}
28

Tariff Principles PBR

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

The return to the utility depends upon

performance, over achievement of the
performance criteria can increase returns for the
utility while underachievement will decrease
returns
"Light Handed" regulation i.e. least interference
by the regulators
29

Tariff Principles PBR

Establishment of extensive data base for
benchmarking performance criteria on the basis
of industry best practices, historic data etc. are
essential component for effective regulation
under this method

A form of PBR is in actual use in India, where

tariffs are based on normative parameters
PBR weakens the link between a utilitys
regulated tariff and its costs by increasing
regulatory lags which also provides incentives
for cost reduction
30

Tariff Principles
Regulation is intended to serve as an offset to
the monopoly situation

Regulatory agencies are charged with

responsibilities to balance the interest of both
customer and utility
Regulation strives to keep price as low as
possible for consumers while allowing the
utility to earn a fair return on its investment

31

Electricity Pricing

To achieve this balance, regulator generally

operate from a position that prices should be
based upon costs
o Cost plus mechanism
To bring accountability and performance
enhancement PBR element is introduced in the
cost plus structure

32

Power Tariff Evolution In

India

Evolution of Power Tariff

Single part

Mutually Agreed

Market Based
Competitive Bidding

Two part- K P Rao

Govt. of India
ABT
Regulatory Commission

34

Single Part Tariff

Pricing of power prior to 1992 in India
The rate of power was fixed by GOI on the basis of
reasonable ROE at the then operating PLF level
Both Fixed Charges and Variable Charges realized in
one part as energy charge
Existed before NTPC
Initially adopted for NTPC

The rates were very liberal and in favor of generators

Tariff was not related to availability or frequency
Calculated so as to cover both the fixed cost as well as
variable (energy) cost at a certain (normative)
generation level
35

Single Part Tariff

36

Shortcomings of Single Part Tariff

Single Part Tariff was conducive neither to

economic generation of power and its
absorption by boards as per merit order, nor to
satisfactory operation of regional grid
Distorts Economic Dispatch (Merit Order Operation)

SEBs found that total cost to be paid to GENCOs

was higher than the marginal cost of their
station
Under drawal accrues monetary benefit to
beneficiaries
37

Shortcomings of Single Part Tariff

With Actual Generation Level much higher than

normative, collection of fixed charges was much
higher than the fixed charges agreed

GENCOs resorted to dumping power even when

frequency was high
Led to sharp difference between Central Sector
Gencos & SEBs on who should back down

38

K. P. Rao Committee
The Central Government constituted a Committee in 1989 to
go into the issues of Power Sector and recommend a tariff
structure
The Committee submitted its report on Principles and Norms
for Tariff Fixation of Central Sector Generating Stations in
June 1990
GOI adopted a Two Part Tariff formula for NTPC stations in
1992 based on K. P. Rao Committee recommendations
Fixed Charges and Variable Charges computed separately
Fixed Charges compensate for the cost of capacity,
including investment cost
Variable Charges compensates for cost of energy
Laid down fairly sound costing principles
39

Recommendations
Fixed charges

Recovery of charges

Return on equity
O&M charges
Interest on loans

Interest on working
capital

Depreciation

Fixed charges recoverable at

62.8% PLF (i.e. actual generation
plus deemed generation)
Incentive at the rate of 1
paisa/kWh for every 1% increase
in PLF above 68.5%
Disincentive at graded reduction
in fixed charges below 62.8%
subject to a minimum of 50% of
Variable Charge
fixed charges at nil generation
Primary fuel (Coal/Gas) Fixed charges and incentives/
disincentive
are
paid
by
Secondary fuel Oil
beneficiaries in proportion to
their energy drawals
Variable charges in paisa/kWh
subject to fuel price adjustment
40

Two Part Tariff

41

Shortcomings of K. P. Rao
Committee Recommendations
Did nothing for promoting grid discipline
Low frequency during peak hours
High frequency during off-peak hours
Rapid changes in frequency and fluctuating voltages

Reasons

K. P. Rao Committee tackled only Central Generating Stations

Conflicting commercial interest of stakeholders- SEBs/CGS
50% FC is assured to generating stations even at 0% PLF
Lack of generating capacity and transmission systems
No penalty for jeopardizing the GRID
Over-drawals by SEBs during peak-load hours and underdrawals during off-peak hours continued unabated, causing
serious frequency excursions
42

Did not encourage grid discipline

Peak
Off-Peak

SEBs/CGs have conflicting commercial interests

Absence of direct incentives or penalties to control this

Lack of generating capacity and transmission systems

One SEB suffers for nonperformance of other

43

Problems in grid operation

Peak
Freq.
(Hz)
Load
(MW)

Off-Peak
Time (hours)

1 Low frequency: 2 High frequency: 3 Rapid change:

48 48.5 Hz
50.5 51 Hz
1 Hz in 5 10
minutes;
many hours everyday
4 Frequent grid disturbances:
Generator tripping,
supply interruptions,
grid disintegration
44

Availability Based Tariff

The Central Government considered further structural
reforms in bulk power and transmission tariff to induce
better system operation and grid discipline through a
mechanism of commercial incentives and disincentives
M/S ECC of USA were commissioned under a grant from
ADB to undertake comprehensive study of Indian power
system and recommend a suitable tariff structure
ECC submitted its report in February, 1994, recommended
Availability Tariff for generating stations, which was
accepted in principle by GOI in November, 1994
A National Task Force (NTF) was constituted by MoP in
February, 1995 to oversee the implementation of ECCs
recommendations
Based on NTF deliberations between 1995 and 1998, MoP
notified a draft notification of ABT in 1999
45

Availability Based Tariff

Electricity Regulatory Commissions Act, 1998 Provides
for establishment of CERC at Central level and SERC at
State levels
CERC was formed in May,1999
Date of implementation of ABT
o Western region:
1.7.2002
o Northern region:
1.12.2002
o Southern region:
1.1.2003
o Eastern region:
1.4.2003
o North Eastern region:
1.11.2003

46

Relevant Terms
o

Installed Capacity

Aux Power (%)

Declared Capability

NAPAF (%)

Scheduled
Generation

AFC (Rs.)

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

30 MWe

ISGS 500 MWe

Aux
470 MWe ex-bus
loss is distributed to
all the constituents in
proportion to
schedule

SEB1

SEB2

GHR (kcal/kWh)
47

Some Definitions
Auxiliary power consumption or AUX is the quantum of energy
consumed by auxiliary equipment and transformer losses within
the generating station, expressed as a percentage of the sum of
gross energy generated at the generating terminals of all the
units of the generating station
Declared capacity (DC) means the capability of the generating
station to deliver ex-bus electricity in MW declared by the
Genco in relation to reference period considering availability of
Fuel/ water
Plant Availability Factor (PAF) means the average of the daily
declared capacities (DCs) expressed as a % of the installed
capacity in MW reduced by the normative auxiliary energy
consumption
Scheduled Generation (SG) with reference to any period is the
schedule of generation in MW ex bus as given by Load Dispatch
Centre
48

Some Definitions..
Gross Station Heat Rate means the heat energy input
in kcal required to generate one kWh of electrical
energy at generator terminals of a thermal generating
station In case of coal stations:
(i) Coal consumed in kg/kWh is converted into kcal by
multiplying with GCV of coal
(ii) Heat due to oil consumption in kcal
Gross Calorific Value means the heat produced in
kcal by complete combustion of one kilogram of solid
fuel or one litre of liquid fuel or one standard cubic
meter of gaseous fuel, as the case may be;
49

Components of Tariff
For Thermal generating station
o Capacity Charge (for recovery of annual fixed cost)
linked to availability and are recovered at Normative
availability & pro-rata recovery below norm
o Energy charges (for recovery of primary fuel cost)
linked to scheduled generation and are based on
actual fuel cost and normative operating parameters
o UI charges (real time pricing) are linked to frequency
and are levied on deviations from schedules

50

Availability Based Tariff concept

UNSCHEDULED INTERCHANGE (UI) CHARGES
o Variation between actual generation or actual drawal
and scheduled generation or scheduled drawal
accounted for through Unscheduled Interchange (UI)
Charges
o UI for a generating station shall be equal to its actual
generation minus its scheduled generation
o UI for a beneficiary shall be equal to its total actual
drawal minus its total scheduled drawal
o UI worked out for each 15 minute time block
o Charges for all UI transactions shall be based on
average frequency of the time block
51

UI Charges (Paisa)

Unscheduled Interchange (UI)

Charges

Frequency (Hz)
52

UI Charges
For

beneficiary: UI = Import Scheduled drawal

For

CGs: UI = Actual sent out Scheduled generation

Import = Load - Gen

Beneficiary

Gen

Load

53

ABT Rational Tariff Structure

Import = Load Gen

Encourage merit order

Beneficiary

generation

Save natural resources

Help protect environment

Establish a level playing field

for all the constituents

No conflicting commercial

interests

Ensure grid stability

Protect equipments

Gen

Load

States additional power

requirement can be met by its

reserved generating stations
(DG, Pump storage, GT etc. or
import from CGs)
54

Deviation from Schedule

Energy is metered in 15 min Time Block

UI (Metered Scheduled) energy payments are made into and

from UI pool account operated by the concerned RLDC
55

Decentralised Scheduling

Time

Availability
Declaration

08:00

Entitlements

10:00

Requisition &
Bilateral Agreements

15:00
18:00
22:00

I
S
G
S

Injection Schedule
Revision in DC

23:00

Final
Injection Schedule

0 to 24
hours

Revisions during
Current day

R
L
D
C

S
L
D
C

Drawal Schedule
Revision in Requisition

Final
Drawal Schedule
Revisions during
Current day

56

Day by Day Scheduling

The station foresees a capability to deliver 900 MW
(ex-bus) on the next day, and advises the same to the
RLDC by 8 AM
The RLDC would break it up, and advise the SLDCs by
10 AM that their entitlements in the CGS for the next
day

Entitlements in the other Central stations would also

be advised by RLDC to the SLDCs similarly
Simultaneously, the SLDCs would receive availability
status from their intra - state stations as well

57

Daily Scheduling Process

They would then carry out a detailed exercise as to
how best to meet the expected consumer demand in
their respective States
For this, they would compare the variable costs of
various intra - state power stations, and with energy
charge rates of the CGS

The total dispatch schedule for the CGS of 900 MW

during the day time and 740 MW during the night
hours

58

Daily Scheduling Process

This would be issued by the RLDC by 5 PM, and
would be effective from the following midnight
unless modified in the intervening hours
States A, B and C shall pay CC for the whole day
corresponding to DC of 270, 270 and 360 MW and
the GS would get CC corresponding to 900 MW

EC payments by the three States would be for 270 x

24 MWh, 270 x 24 MWh, and (200 x 24 + 160 x 16)
MWh at the specified EC rate of the generating
station

59

Daily Scheduling Process

60

Options for Generating Stations

The two areas marked X represent the off-peak
hour capability of the Central generating station
Back down the station during off-peak hours
The station gets CC for the day corresponding to
its DC (900 MW), and EC to fully recover its fuel
cost for generating the scheduled quantum of
energy
61

Trading Opportunity for Generating

Stations
Find a buyer (other than State - C)
As long as the energy sale rate agreed upon is
higher than the fuel cost per kWh of the station
It would also reduce the technical problems
associated with backing down of the station and
improve the stations efficiency
The agreement has to be non-firm or interruptible
Low price

62

Options for Generating Stations

The station may accept the schedule given by the

RLDC, but generate power to its full capability of

900 MW even during off-peak hours
Earn UI*

63

Options for States

The options for the generating station arise only in case
a State has not requisitioned its full entitlement

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

before they get passed on to the Central station
Requisition power from the Central station only as per
its own requirement, and draw power as per the
resulting schedule
64

Trading Opportunity for States

Requisition full entitlement of 360 MW from the
Central station for the entire 24 - hour period, find a
buyer for the off-peak surplus, and schedule a
bilateral sale
This would make sense as long as the sale rate
per kWh is more than the energy charge rate of
the Central station
65

Options for States

Requisition the full entitlement for the entire 24 -

hour period, but draw power only according to its

actual requirement
Earn UI*
Availability of various and similar options, both for
the beneficiaries and for the generating companies,
means that the mechanism is sound and equitable
66

System Marginal Price Pattern

A frequency pattern would emerge depending on the daily

profile of the total system load and the generation mix

The corresponding UI rate profile shall reflect the daily pattern of

the system marginal cost
67

UI Rate Vs System Marginal Cost

LC

PH

UI rate paise/kWh

900
800
700
600
500
400
300
200

279, 49.92

100

132, 50.04

Unit load (%)

1000

Frequency (Hz)

States marginal gen cost will move down towards the

prevailing UI rate
Gen station will maximize its gen as long f < its threshold f

68

49.50
49.52
49.54
49.56
49.58
49.60
49.62
49.64
49.66
49.68
49.70
49.72
49.74
49.76
49.78
49.80
49.82
49.84
49.86
49.88
49.90
49.92
49.94
49.96
49.98
50.00
50.02
50.04
50.06
50.08
50.10
50.12
50.14
50.16
50.18
50.20
50.20

Frequency Based Dispatch

1000

900

800

700

600

500

400

300

200

100

69

70