Tariff determination with respect to supply of electricity by a generating company to a distribution licensee, transmission of electricity; wheeling and retail sale of electricity are the main functions of the Commission. In doing so, the Commission obtains and analyses the annual revenue requirement of the licensee or the generating company as the case may be, and thereafter determine the charges to be levied. Thus, the function of the Commission covers the entire spectrum of tariff to be charged by the generating company, intra state transmission licensee, wheeling charges to be paid by the users of intra-state transmission/distribution network including open access customers. Section 62(2) of the Electricity Act, 2003 stipulates that a licensee/generating company shall provide details as may be specified in respect of generation, transmission and distribution to determine the tariff. The broad guiding principle in determining tariff is to encourage efficiency and economy in the use of resources and ensure financial viability of the utilities. Consequently, the interest of the consumers as well as the consideration that the supply and distribution cannot be maintained unless the charges for the electricity supplied are adequately levied and duly collected is ensured while designing tariff. The tariff, based on multi-year tariff principles, shall progressively reflect the cost of electricity and also reduce and eliminate cross – subsidies.
The objectives of designing an appropriate tariff structure are many; the important among these are sustainability, efficiency and equity. The responsibility of the Haryana Electricity Regulatory Commission (HERC) is to ensure that the regulated utilities are able to finance its operations, and any required investment, so that it can continue to operate in the future. Consequently, the stakeholders are able to earn what it considers minimally acceptable rate of return. Thus the rate of return would have to equal at least the interest and cost of capital. However, it has to be ensured that no group of consumers are burdened with a disproportionately large part of payments to the utility, relative to the costs they impose upon it. Tariff design should also take care of productive efficiency i.e. optimisation of resource mix, so as to produce or make available goods or services of a given quality at the least possible cost. Promotion of Co-generation and generation of electricity from renewable sources of energy.
In order to achieve the above-mentioned objectives, the Commission approaches the tariff issues from the consumers as well as the regulated utilities point of view so as to ensure safeguarding of consumers interest and at the same time, recovery of the cost of electricity in a reasonable manner. All these are set in the perspective of the Electricity Act, 2003.
In pursuance of the objective of promoting productive and allocative efficiency reduction of technical and non-technical losses assumes prime significance. The Commission considers the existing losses to be significantly higher than the losses that should occur in a well performing transmission and distribution system.
Transmission loss has two components i.e. inter-state transmission losses (incurred in wheeling power from out of state generating sources) and intra state transmission losses (losses taking place within the state). The Commission is primarily concerned with intra-state transmission losses to determine the volume of power available for sale to the distribution licensees in the state. At all the 383 interface points identified earlier between HVPN and the distribution companies Special Energy Meters (SEMs) are now installed. The intra-state transmission losses are based on metered data.
As regards to Distribution losses, the Commission in its order dated December 22, 2000 on ARR application of Distribution and Retail Supply licensee recognised a loss level of 35.77%. The Commission however, is of the firm view that such a high level of distribution losses is unsustainable and puts un-necessary and avoidable burden on the consumers.
The energy metering in the state also deserves exclusive attention. A large number of consumers at the low voltage level have defective meters or none at all. The bills are prepared for non metered consumption based on estimates of consumption using parameters such as horse power rating of the hydraulic pumps, load factor or connected load. These do not reflect the actual consumption of un-metered consumers due to aberrations such as consumers replacing pumps with higher rating, others frequently exceed the connected load or load factor used for calculating bills. Section 55 (1) of the Electricity Act 2003 provides that no licensee shall supply electricity, after the expiry of two years from the appointed date, except through installation of a correct meter.
The above deadline needs to be adhered to; the Commission is firmly of the view that there cannot be any substitute to the installation of meters.
The tariff should essentially be cost based without any cross subsidisation (an important element of achieving ‘equity’ in tariff setting). The prevailing levels of electricity tariff in Haryana contain a large degree of cross subsidy, with some categories of consumers paying well above the economic cost of supply. It has to be recognised that low and subsidised tariff initiate inefficient high demand for power, which puts pressure on the system capacity and the quality of service. As per Section 61 (g) of the Electricity Act 2003 the Commission shall endeavor to eliminate the incidence of cross-subsidy in the ‘tariff rate’ in the due course of time.
The paradox often faced is that while efficiency criterion calls for a cost based tariff, the social criteria may at times call for relief to certain consumers e.g. low-income group.
However, subsidised tariff should not distort the general tariff structure by imposing burden on another set of consumers. Consequently, subsidised tariff should be financed from government's general budget, because raising funds through a general tax system imposes lower cost on the society than creating a sector specific levies.
The Commission considers that subsidy meant for a particular consumer group should be reflected in the accounts of the distribution business. The subsidy should not be diluted and distributed to all consumers.
The Commission is addressing the above issues to improve the financial health of the sector as well as promote efficiency, and economy in the use of resources. The two tasks before the Commission in this respect are :
Determine Consumer Category-wise ‘Cost of Serve’ to quantify and gradually eliminate cross subsidy in electricity tariff in Haryana.
Quantify cross subsidies and the short fall in revenue caused by charging subsidised tariff.
The Commission would like to study steps to initiate elimination of cross-subsidies in view of the long term effect of the system remaining economically viable and efficient. The social and political objectives for cross subsidies needs to be addressed.
The options available to deal with the task number one is same as mentioned in the earlier issue. The second task calls for a thorough examination by the Commission because of its financial impact on the licensee and the transfer from the state government. The licensees are required to quantify cross subsidies and revenue shortfall caused by the subsidised tariff. Quantification of cross subsidies may be done by comparing the prevailing tariffs with the economic costs of the licensee. Similarly, revenue shortfall caused by subsidised tariff may be estimated by comparing the prevailing tariffs with the cost based ones. While the prevailing tariffs are known, the cost and cost based tariff must be determined by using one of the following –
Embedded cost.
Marginal cost.
Marginal cost plus efficient share of revenue gap.
The task needs to be further refined in the light of the manner of sharing of system peak by different consumer categories. The cost including ‘losses’ it causes or ‘does not cause’ should be the backbone of rate design as soon as the supporting data is available.
The Commission shall decide the regulatory framework it will use to regulate the price of Haryana licensees in conformity with the Act i.e. Section 62, 63, 64 and 65 of the Electricity Act, 2003.
The Commission has a few options in regulating electricity prices of the licensees i.e.:
1. Rate of Return based Regulation (Cost of Capital).
2. RPI – X Regulation.
3. Profit Sharing Regulation.
4. Revenue Cap.
5. Others include price caps, hybrid mixed -controls and trigger points.
1. The Rate of Return is the traditional form of regulation that remained dominant regulatory tool for many years. In this approach at short intervals a company’s historic costs are reviewed. The price is set to allow profits that delivers the required rate of return if not so i.e. prices move out of line with the company’s cost, the company could ask for new set of prices. This is considered to be relatively risk free, as it allows the company to be financed at a lower required rate of return than under any other approaches. However, in this form the regulation becomes intrusive as costs are assessed on their prudence and investments are assessed as to their ‘used and useful status’, further, the company has no reason to seek efficiency savings.
2. The idea behind RPI – X (retail price index or consumer price index in the Indian context) is to formalise regulatory lags, so that the companies get some incentive to operate efficiently in the interval between reviews. The company is required to keep the weighted increase in a basket of its price to less than the increase in a specified price index i.e. consumer price index, less X percent, so that the price decline by X percent in a year in real terms. In this form of regulation X is set to pass the expected growth in productivity back to consumer. However, if the company did not expect the price control to be changed in the future, its price would be independent of its action and it would have enough incentive to reduce its cost. On the flip side most price control last for a few year, so any reduction in cost cannot be passed through in the price control for sometime, thereby allowing company to receive a higher profit in the interim. Then once price is reset, they may not fall to level of firm’s cost immediately, hence firms are adequately rewarded for their cost reduction. This kind of price control regime provides the option of setting price based on the cost of an efficient firm as against firm’s actual cost under rate of return regulation.
3. In the profit sharing kind of regulation, within a band say A to B, the company keeps what it earns, below A, the company is allowed to achieve a greater return and above B, the company is forced to share some of the profit. However, determining the size of the band, degree of sharing and source of sharing becomes contentious issues (should the excess fund be placed in an account that can then be drawn in bad years or customers immediately pay or receive the amount).
4. Revenue cap method of regulation attempts to establish a fixed revenue profile for the life of the price control instead of setting a price path for the next 3 to 5 years. This removes any incentive to under forecast demand and limits the upside potential to the company to those cost aspects that are actually under the control of the company. However, it requires a correction factor in the formula so that any over recovery of revenue can be corrected within the life of the price control. The Commission is examining all the established methods of regulation in the light of the unique situation prevailing in the electricity sector in the state of Haryana to arrive at an appropriate methodology.
The issue of revenue requirement and allowed revenue determination are closely interlinked. Determination of utility’s costs is the first step in tariff determination. The second step is design of tariff structure, costs when multiplied by sales, produce the allowed revenue that must be equal to the revenue requirement. Consequently, both costs and associated energy sales must be estimated. In the case of generation companies the revenue requirement is based on the financial and technical parameters specific to a generating unit disaggregated into fuel or variable cost and fixed cost.
The various approaches in determining the revenue requirement and the allowed revenue that have been identified are as following:
1. Actual historic costs and sales volumes (embedded cost).
2. Estimated future accounting costs and forecast loads.
3. Estimated marginal costs (usually long-run incremental costs) and forecast loads.
The main difference between these approaches is in the choice of a "test year" i.e. the period over which the regulators measure utility’s costs and sales.
Under the traditional ROR regulation, asset value directly affects the revenue requirement, and therefore consumer tariffs of a licensee. The allowed return is a multiple of the rate base and the appropriate rate of return, which is one component of the revenue requirement of a licensee. The rate base represents value of assets used in provision of electricity service to the consumers. Consequently, asset valuation is an important part of the regulatory tariff making process.
The methods that could be applied for measuring asset value in the calculation of the rate base are as following:
1. Original cost of capital less depreciation.
2. Reproduction of replacement cost of assets less depreciation.
3. Asset value assigned by the Government when the assets were transferred to the utilities.
4. Certified values being produced under the Companies Act less depreciation since the transfer.
5. Market value of assets as determined by an independent assessor.
RoR regulation of tariffs sets the appropriate rate of return on capital (both debt and Equity funds). This rate of return should adequately compensate investors for the risks they assume by committing capital to the power sector or an individual utility. Thus the return, which investors require on their investment, should at least be equal to return on other investments with comparable risk factor.
The license conditions of the licensees in the state require them to unbundle the costs of transmission and bulk supply from the costs of distribution and retail supply. The Commission considers the following two alternatives:
1. HVPNL shall prepare and file separate tariffs for bulk supply and transmission as long as the Electricity Act, 2003 permits. Thereafter, as a pure wire company, it shall file only transmission/wheeling tariff.
2. The distribution and retail supply licensee shall prepare and file separate tariff for retail supply and distribution in their respective licensed area.
3. The generation companies shall prepare and file unit wise generation tariff and may also file provisional generation tariff for the project likely to be commissioned during the financial year.
In the case of bulk supply, distribution and retail supply tariff, once the total revenue requirement of the regulated entity is determined, it is necessary to distribute the total load to the various classes of service, and to tariff schedule within those classes. This distribution can be done with or without a basis in cost in the following three options:
1. Social Tariff making.
2. Embedded cost based tariffs.
3. Marginal cost based tariff.
To some extent, it may also be possible to combine the options. For example, the total revenue requirement can be allocated to service classes on the basis of embedded costs, with tariff structure within a service class based on marginal cost relationships, and adjustments made to achieve social objectives.
The licensee has to adopt a proper system of accounts and accounting procedures that will allow detailed and accurate financial, cost, and consumption data on their operations. In addition the licensees must develop proper techniques to measure power losses, supply interruptions, voltage and frequency variations and other parameters of power supply.
To facilitate proper documentation and formatting of information that the utilities shall furnish to the commission, the Commission has laid down detail guidelines for filing of tariff proposals.
The process of tariff determination is done keeping in view the overall objective of infusing economy and efficiency in the electricity sector. To achieve this objective the Commission makes an effort to formulate least cost mix of power purchases by the bulk supply licensee, and all other major costs are objectively scrutinized. The Commission also endeavors to bring about a shift from a regime of tariff based on ‘consumers category’ classified according to the nature and purpose of usage i.e. agriculture, industry, domestic etc. to the quality of supply i.e. voltage levels. This in turn would give a fair view of the actual cost of supply at different voltage levels. Consequently, gradual process of eliminating ‘below cost’ supply and cross subsidies / subsidy could be set in.
Tariff to reflect true cost cannot be viewed in isolation; hence the Commission has put great emphasis on efficiency of operations so that costs are continuously brought down. The commission, on numerous occasions has shown its unwillingness to accept high levels of technical and commercial losses. The utilities have been directed to reduce this to an acceptable level within the given time frame. These inefficiencies are in turn passed down to the captive retail consumers hence reducing this and metering all un-metered supply have been given top priority.
The Commission is required to obtain and analyse the annual revenue requirement of the licensee and determine the charges to be levied all types of consumers. While doing so the Commission is essentially governed by the basic principles laid out in the Section 61 of the Electricity Act, 2003 In exercise of tariff the Commission is in the process of finalizing a detailed terms and conditions and guidelines for tariff filing. The basic principle being a move away from tariff based on nature and purpose of use to voltage base tariff which should reflect the actual cost.
A number of issues are being resolved in order to make the tariff setting just, fair and transparent. A few among them are related to the accounting policies, reduction and elimination of cross subsidy and subsidy, determination of revenue requirement, tariff filing requirement and fuel surcharge adjustment requirements.
In the filing for proposed tariff or tariff amendment, the licensee is required to furnish details as laid out in the various forms designed and approved by the commission. The details include a statement of current tariff rates and all applicable terms and conditions, and the expected full year revenue from the current tariff rates in the year in which the new tariff is to be implemented.
A statement of the proposed tariff rate prices and changes, including full statement of all applicable terms and conditions.
A statement of full year revenue of the proposed tariff for the year in which the tariff is to be implemented. If the proposed tariff is to be introduced after the start of the financial year, a statement of the proportion of expected revenue and quantities supplied under each proposed rate during remaining months of the financial year needs to be included. A statement of the estimated change in annual expected revenues that would result from the proposed tariff changes in rupee and percentage change.
Further, an embedded cost detailing functionalization, classification, and allocation of the revenue requirement into consumer classes, and determination of embedded cost-based tariffs, free of external subsidies and cross subsidies should be provided in the given format. In addition to this a study of marginal cost of the licensee’s business, including time differentiated short term marginal cost by voltage levels and a written explanation of the methods used to calculate marginal costs needs to be provided to the commission.
It is the goal of the Commission to eliminate cross subsidies in licensee’s tariff. Cross subsidies take the form of tariff differentials between classes of consumers that do not reflect differences in the circumstances of supply or sale to such classes. These differences include quantity, load factors, power factors, level and timing of peak demand, condition of interruptability, location of premises being supplied, date and duration of any other relevant factors. The Commission may by order allow a licensee to phase out existing cross subsidies over an appropriate period of time to be determined by the commission.
The tariff filing shall include a statement that calculates the amount of cross subsidies in the existing tariff and in the proposed tariff. It shall also include full details of any subsidy received, due or assumed to be due from the state government, the consumers to whom it is directed, and documentation showing how the subsidy is reflected in the current and proposed tariff applicable to those customers. This statement shall also include the tariff calculated without consideration of the subsidy for those customers.
