Terms and Conditions of Tariff

1. Terms and Conditions of Tariff MPERC Comments on CERC Discussion Paper

2. In this presentation • Market Development • Transmission and wheeling charges for Transmission Lines • Transmission and wheeling charges for Inter-regional Lines • Tariff Setting • Rate of return methodology • Depreciation • Development Surcharge • Rate base • Interest on working capital • Operational norms • Other Discussion Points

3. Market Development

4. Market DevelopmentTransmission and Wheeling Charges Comments Open Access mechanism of Regional Incremental Postage Stamp Comments Expansion of network should be done on the basis of a Long-Term Transmission Capacity Demand Forecast (Example: 7-Year Plan in UK) Commission must regulate the level of investment by CTU / STU and ensure that it is at a certain margin above strictly required. Pan Caking (2.3.3.2) • Definition: Term used to describe stacking up of charges in a transmission system due to repeated application of charges for different regions • Mechanism of charging • Original Beneficiaries cover full cost • Reimbursed by income from Open Access Charges and from Traded Power • Implications • Increase in the landed cost of power • Discouragement to inter regional exchange of power

5. Market DevelopmentTransmission and Wheeling Charges for Inter-Regional Lines Present system of sharing of costs of Inter-regional assets is 50:50 between Regions. Method of charging should be changed to allocated usage basis. Provisional fixed costs may be charged based on Allocation of Capacity in Agreement between CTU and Beneficiaries Adjustments to be made at the month-end based on actual allocation. These adjustments may be billed in next months bill Charging of Fixed Costs Sharing of Income from Open Access / Traded Power • Should be adjusted on a monthly basis • Should be returned to Firm Users in the proportion of costs paid in that month

6. Tariff Setting

7. Tariff SettingRate of Return Options ROE Return to equity investment is measured ROCE (= ROI) Return on total investment is measured Measured against WACC Incentive for optimization by financial engineering / refinancing – incentive to investors No FERV Beneficial to consumers ROCE may be adopted ROCE, ROE and Return on Debt Existing methodology • Cost-plus approach • ROE: • Interest rates have reduced • Escrows and LC’s are established • Suggestion: Government Bond Return + 5% = say 11% • Margin to cover: • Risk premium • Investment incentive • Return on Debt @ PLR • Normative Debt Equity Ratio: 80:20 • ROCE = 11*80/100 + 11*20/100 = 11% • Annual revision, retrospective-forward compensation or through VCA

8. Tariff SettingDepreciation, Development Surcharge Purpose of depreciation Wear and tear Repayment of loan Comments Allow to explicitly charge loan repayment After full loan repayment, balance depreciation may be charged on SLM till useful life of the plant Develop norms for loan repayment Rate = PLR Term of loan = Moratorium + Minimum 10 years Buyers must be protected by ensuring term of PPA is for the fair life of the plant. If such an assurance is not given, then depreciate at the current rates Instead, a Developmental Charge may be levied for a "Universal Service Obligation" Fund USO Fund can be used for improving access to all Rural electrification programs Promotion to non-conventional sources Off-grid generation Depreciation Development Surcharge • There should not be any such surcharge on the beneficiaries for the purpose of creation of corpus for investment in generation • Reasonable return is being provided

9. Tariff SettingRate Base, Interest on Working Capital Rate Base Asset-side NFA approach Interest on Working Capital • Allow interest portion as pass-through on net Normative Working Capital • Net of working capital may be derived after deduction of fuel costs Initial Capital Expenditure • Initial Capex: • In case a prior order exists: As per the order • In case prior order does not exist: Should be determined by competitive bidding. • Norms must be developed by the CERC / CEA for setting up of projects for quality of equipment, costs, gestation, competitive bidding processes for EPC etc • Additional Capex: • Allow subject to prior approval by the CERC • Or, norms may be developed for this

10. Tariff SettingOperating Norms Operating Norms Define operational norms; this should consider technology in place, inflation, age of the plant / equipment Generation – Gross Calorific Value Price of coal is notified based on UHV and coal consumed is determined based on GCV There is a need of fixing norms for linking UHV with GCV. Norms for stacking and transit losses should also be fixed based on transport mode and distance Operation and Maintenance Expenses • Pass-through on actuals subject to a limit as a percentage of capital costs • Allow a portion of the savings to be retained Generation – Specific Oil Consumption • Norms should be reduced to 2 ml/kwh from the current 3.5 ml/kwh if the target PLF is above normative • At low PLF Specific Oil Consumption is higher to keep the furnace stable. Higher Sp.oil consumption can be allowed at low targeted PLF Generation – SHR • Should be linked with guaranteed heat rate. A reasonable margin should be provided above this which should keep in view the age of the plant

11. Other Issues

12. Other Issues Tariff Period MPERC suggestion 5-year period, which is a business planning cycle May be reviewed before in case of drastic change Peak and Off-peak Tariff for Hydel MPERC suggestion Apply to depreciated hydel plants for peak period Off-peak tariff need not be changed Surplus income may be paid into a "Universal Service Obligation" fund for to provide access to all Declared Capacity • Current Definition / Analysis • One MWh ex-bus capacity • Scheduling is on MW basis • MPERC suggestion • Change definition to MW basis Single Regional Tariff • MPERC’s views • Promotes generation from lower cost stations, since they now earn more, but an expensive generator will not generate • Not recommended • Individual tariff setting is preferable

13. Other Issues Auxiliary Consumption Current [Σ KWH Generator terminal – Σ KWH delivered at station switchyard] AxC = [Σ Gross generator terminal] [Σ KWH Generator terminal – NET Σ KWH exported ex-bus] AxC = [Σ Gross generator terminal] • Proposed • MPERC suggestion • Do not adopt the proposed change. A change will result in beneficiaries bearing the cost of losses between switchyard and bus

14. MPERC

15. Pan caking WC = 12.5 212.5 200 TC = 10 TC = 10 TC = 10 WC = 12.5 242.5 255 Exporting Region Rourkela ER Raipur Chandrapur SR Ramagundam TNEB Selling price = 200 P/U Landed cost = 255 P/U Thus, pan caking is a major disincentive to inter regional sale Numbers are purely for the purpose of illustrating the concept and may not be correct

16. Transmission / OA Charges Inter-Regional Lines

17. Tariff SettingOperating Norms