CERC
Terms and Conditions of Tariff
This presentation will only highlight the relevant financial principles
and operation norms. APERC would like to put forward for the
consideration of CERC in the Policy paper to be issued on “Terms &
Conditions of Tariff”
Written response was sent to the Commission vide letter
APERC/SECY/D.No. CERC-3/2003- 2.8.2003
The norms are based on the experience of APERC, however ERC’s
are open to improve these norms
1
Clarification on Intervening Transmission
facilities
View of CERC is sought on “intervening transmission
facility” and why a separate treatment has been
provided for in the Act when there is open access.
2
Financial Principles
3
Tariff Setting
Financial Principles
Advocates forward looking principles
The rate of return must be commensurate the risks
involved in the business and the macro economic
environment.
Moving forward is critical
Compensate the developer for the risks incurred by
allowing a margin over and above the current bank
rate. The margin be open for negotiation.
The consumer to benefit from prevailing falling
interest rate regime.
4
Tariff Setting
Financial Principles
Cost of Capital
• CERC to determine the rate base (either debt or equity or
both) for computing returns
• Interest shall be benchmarked to Prime Lending Rate plus
debt margin to reflect credit worthiness
• Return on Equity shall be pegged at Bank Rate plus a
margin to reflect the investment risk in the power sector
Foreign Exchange Risk Variation
• Foreign component may be converted into rupee terms at
the Commissioning date
5
Tariff Setting
Financial Principles
APERC accepts the suggestion of CERC that ROCE
can be evolved by bench marking the debt equity
ratio.
Debt to be pegged at PLR + margin
Equity to be pegged at Bank Rate + margin
The return should recognize the concept of time
value of money and it should be ensured that only the
approved return (IRR) should be permitted to the
investor on annual basis
This should be applied uniformly for existing and
new generation projects.
6
Tariff Setting
Financial Principles
Depreciation
• Depreciation rate should be linked to the life of the asset
• To avoid front loading of tariffs by way of advance against
depreciation, benchmarking the term of debt (12 yrs as followed
earlier by CERC) could be considered, irrespective of tenure of
debt.
• The current practice of Short-Term Loans being utilised for
funding the assets needs a re-look.
• To explore Rolling of Debt by way of “Call and Put options”
should be encouraged.
Treatment of Tax
• Post Tax return shall be provided to protect the investors from
changes in the law of land
• However, adjustments shall be made in the revenue requirement
to reflect actual outflow of taxes paid. 7
Tariff Setting
Financial Principles –response to specific suggestions
CERC Suggestions APERC Response
1. Aggregated rate base v/s 1. Aggregated rate base total Fixed assets
disaggregated Rate Base as per the balance sheet, less assets not
related regulated business.
2. Initial capital expenditure will be the
2. Initial capital expenditure will be
capital cost. But preferable to to include
the capital cost
township rather than take it as additional
capital expenditure. – Maintenance of
‘Asset Register’ should be mandatory.
3. Norms on capitalized initial spares 3. Capitalizing of initial spares should be
as a percentage of approved allowed on recommendations by the
project costs or actual expenditure expert group
whichever is lower.
8
Tariff Setting
O&M
For new projects, the current CERC norm of O&M be capped at 2.5%
(Thermal) and 1.5% (Hydro) of the approved project cost at the start of a
control period may be continued. The same may be reviewed at the end of
the control period to check if the level of O & M expenses.
For existing projects the O&M cost for the first year of control period should
be based on the average annual actual expenditure (excluding abnormal
expenses) for the past five years.
The existing formula for escalation (60% WPI and 40% CPI) be continued
for the generation sector. For transmission sector the CPI weight age may be
increased.
Benchmarking the O&M expenditure to the approved project cost and in a
situation of the project being awarded through competitive bidding route
reduces the risk of over capitalisation. O&M being computed based on
macro numbers like RS Crs per MW etc will not provide a true reflection of
the project cost and instead might involve many assumptions like separate
numbers based on the fuel type, type of hydro project etc.
9
Tariff Setting
Working Capital
Continue with the existing arrangement.
Some of the Electricity Boards made have
made the point that working capital should
not include one months’ O&M expenses. But
the existing procedure of offering rebate of
2.5% for payment through LC and 1% for
payment within the due date addressed this
issue.
10
Tariff Setting
Development Surcharge
There is no linkage between development surcharge
and depreciation as the latter is meant to compensate
for the wear and tear of existing projects and at best
the repayment of loans. Whereas the development
surcharge is intended to be used for setting up
Central Generating Projects in future.
In future with the liberalisation of the generation
sector (and consequent availability from IPPs and
state generation) the requirement of power from
Central Generating Stations may be reduced. Hence
blocking the funds through such contributions will
further deteriorate the financial health of the Utilities.
11
Tariff Setting
Control Period
The tariff period may be kept as five years with a
provision for review of the norms during the period
to reflect improvements in technology and general
macro economic environment.
However any changes in the norms must only be
done with prospective effect.
The tariff for generation should be station specific.
12
Tariff Setting
Availability Based Tariff
The implementation of separate tariffs for peak and
off peak generation will be contingent upon the
metering infrastructure, the ability of the constituents
to manage their respective demand and also its co-
ordination with ABT regime. Given the nascent
stage of implementation of the ABT regime it is
advised to have time differentiated generation tariffs
at a later date.
The capacity should be declared ex-bus in MW terms
The auxiliary energy consumption should not include
the supply for construction power and residential
townships and must be computed station wise.
13
THANK You
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