1.6 Transmission Tariffs

Separate provisions for transmission tariff do not explicitly exist in any the electricity laws. This is not surprising since unbundled transmission did not exist till the establishment of POWERGRID in 1989. In fact POWERGRID treated as a generation company under the definition provided in the E (S) Act. The assets of POWERGRID, the sole central government transmission company, were transferred to it from NTPC and NHPC. Tariffs have been notified by the central government on the basis of techno economic approvals of investment given by the CEA. Consequently the notification dated December 17, 1997 was the first attempt to formalise the methodology of tariff setting. It prescribes a single part tariff comprising all costs on account of interest on outstanding loans and working capital, return on equity, depreciation, O&M expenses as per norms and income tax. The full cost is recoverable at an availability of 95%. An incentive is given in the form of increase in ROE at the rate of upto 1% point for every 1% point increase in availability. A debt equity ratio within the norm of 80% maximum and 20% minimum has been used for POWERGRID while the rate of ROE is the same as for generation.

1.7 Conclusion

The cost plus approach has been predominant in tariff setting in India. A significant departure was seen in 1991 with the part adoption of the recommendations of the K. P. Rao committee, which introduced the concept of performance based rate making and bench marking of operational standards. This approach has helped to induce the regulated entities under this regime to significantly improve their performance and reduce operational costs. Unlike the international experience of such schemes, the tariff regime has been very stable. Some may comment that the tariff regime should have been reviewed more frequently than was done to ensure that the resultant efficiency gains are shared with the consumers. In 1998, prior to the coming into effect of the ERC Act five sets of norms for tariff setting were in force. One set of norms, specified by schedule VI of the E (S) Act, determines the tariff of Licensees under the IE Act which are all in the private sector. The second set of norms under section 59 of the E (S) Act determines the tariff of SEBs. The third set of norms specified by the central government under section 43 A(2) of the E (S) Act determines the tariff of central stations. The fourth set of norms under the section 43 A(2) specifies the tariff for IPPs. The fifth set of norms specifies the tariff for POWERGRID the sole central transmission company. There is a fair degree of commonality in all the five sets of norms though they are not identical. The effectiveness of all the five sets of norms, in providing incentives for continuous improvements in performance standards, can be questioned. Their relevance in the light of changes in the macro environment and the rapid evolution of the Indian Power Industry may also be in doubt. However it is well established that each represents an evolutionary stage which improved the effectiveness of the regulatory regime in place at the time that these norms were formulated. It is just as clear that significant adjustments are now required if the positive trend, in evidence since 1948, in the evolution of tariff regulation in India is to be maintained.