CERC Terms and Conditions of Tariff

1. 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

2. 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.

3. Financial Principles

4. 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.

5. 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

6. 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.

7. 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.

8. Tariff Setting Financial Principles –response to specific suggestions • CERC Suggestions • Aggregated rate base v/s disaggregated Rate Base • Initial capital expenditure will be the capital cost • Norms on capitalized initial spares as a percentage of approved project costs or actual expenditure whichever is lower. • APERC Response • Aggregated rate base total Fixed assets as per the balance sheet, less assets not related regulated business. • Initial capital expenditure will be the capital cost. But preferable to to include township rather than take it as additional capital expenditure. – Maintenance of ‘Asset Register’ should be mandatory. • Capitalizing of initial spares should be allowed on recommendations by the expert group

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. THANK You