CHAPTER 1

1. ELECTRICITY TARIFF - HISTORY AND CRITIQUE

1.1 Introduction

This chapter traces the changes in the legal provisions governing electric power tariffs and discusses the processes and methodologies adopted over time for tariff setting till the formulation of the Electricity Regulatory Commissions Act. 1998 (ERC Act).

1.2 Indian Electricity Act, 1910

The legal provisions for the regulation of tariffs of power utilities can be traced to the Indian Electricity Act 1910 (IE Act). However, in keeping with the perceptions of the times there was no attempt at being prescriptive by specifying, either the principles, or the methodology to be followed for tariff setting, beyond enjoining that tariffs must be non discriminatory and allow a reasonable return to the licensee.

1.3 Electricity (Supply) Act, 1948

1.3.1 The first attempt to closely regulate monopolistic power utilities by defining the basis on which tariffs could be charged was made in the Electricity (Supply) Act, 1948 (E(S) Act). At the time there were two types of entities in the power sector; Licensees under the IE Act and State Electricity Boards (SEBs) created by the E (S) Act.

1.3.2 Schedule VI of the E (S) Act prescribed the methodology to be followed for the determination of the tariffs of power utilities which were Licensees under the IE Act. This is a detailed cost plus methodology where the rate of return on the capital invested is regulated and a cap is imposed on the clear profit of the licensee. A detailed explanation is provided in Annexure I. In the case of Licensees it has worked satisfactorily from the viewpoint of financial viability of the utility.

1.3.3 The SEBs were expected to supplement the efforts of the private Licensees. Section 59 of the E (S) Act therefore provided for the basis of tariff determination of the SEBs. As originally formulated, it simply enjoined the SEBs to adjust their charges from time to time so as not to conduct their business at a loss after accounting for subventions received from government. It also envisaged that there may be need to meet expenses on operation an maintenance from capital to be sanctioned by the state government. This was clearly in sharp contrast to the existing provisions for Licensees who were left free to recover charges as appropriate from the consumers. Act 23 of 197 amended Section 59 of the E (S) Act to specify that the tariff was to be so adjusted so that SEBs earned at least a surplus, after accounting for all subventions and costs, including tax. The rate at which such surplus (defined as income less expenditure, including interest and depreciation) was to be recovered was left to be specified by the state government. Act 16 of 1983 further amended the section to the form in which it stands till today. SEBs were required to so adjust tariffs so as to earn a surplus (defined as income less all costs, including interest on debt) of at least 3%. This floor rate for the generation of a surplus was possibly necessary to safeguard against the continuing deterioration of the financial conditions of the SEBs. Surplus is defined as a return on the value of the fixed assets of the SEBs in service at the beginning of the year. State governments could also specify a higher rate for the generation of surplus. Generally states did not actually do so and SEBs have been unable even to generate the specified minimum surplus.