4.9.8 Efficiency of Operational and Cost Norms

Under a regulated tariff regime, how can a regulator ensure that the norms being used for judging performance and thus allowing incentives or imposing disincentives, are challenging, without being burdensome for the utility? How should incentives be set, so that they induce continuous improvements in the efficiency of supply and demand?

4.9.9 Treatment of Depreciation and Asset Life

The depreciation rates currently in use are relatively high. Considering accepted asset life, the depreciation rates in use in India have the effect of front loading the tariff. Typical asset lives used internationally¹¹ are:

Hydro power unit 30-40 years
Thermal (coal) unit 25-30 years
Transmission lines 25-35 years

This would indicate that depreciation rates in the range 3-4% would be appropriate based on straight line depreciation, versus the 7-8% now used in India. Adoption of more realistic asset lives, linked to the corresponding depreciation rates, would have a downward effect on tariffs. Adoption of more realistic asset lives might also provide pressure to maintain assets in a better condition to achieve such asset life. It may be useful, to review actual asset life of various types of plant in India, as opposed to the notional asset life indicated by the depreciation rates. If asset life in India is actually lower than the international norms, this indicates that the asset replacement is taking place far more frequently than the norms of good utility practice would allow.

4.9.10 Allocation of Common Overheads

Correct allocation of and accounting for overheads and common services is required to ensure that there are no cross subsidies between stations or between plants, of different vintages and technologies. Similar concerns apply to cross regional allocation of overheads for the transmission network. The Commission proposes to address this issue, by calling for detailed operational data in the annual filing, and using this data for estimating cross subsidies of this nature.

4.9.11 Treatment of Taxes

The current practice is to allow rates of return on a post-tax basis. This leads to retroactive adjustment to the tariff to provide the prescribed rate of return. The Commission will consider the possibility of establishing a pre-tax rate of return. which would eliminate this need for adjustment. Such an approach would also be consistent with the treatment of other corporate entities in India.

4.9.12 Linkages between Tariff and Payments

A very significant problem today is delayed or non-payment by state level utilities against energy supplied by generators. While the unremunerative retail tariff structure may be one of the causes, this cost cannot be passed backwards to the generators or the transmission utilities. With the changes taking place at the State level, including the introduction of State level regulation, the Commission expects that along with the rationalisation of retail tariff, additional pressure will be brought to bear on the SEBs to pay on time for the power purchased by them. This is necessary to reduce the overall perceptions of risk and hence, the cost of capital and increase the volume of capital supply, for the power sector. The Commission intends to adopt a comprehensive view of its powers to regulate tariff, so as to include, the entire cycle of commercial transactions. The transaction of selling and consuming electric power should be seen as completed only when the power is generated, transmitted, consumed and paid for. This issue must be addressed.

4.9.13 Adoption of multiple Tariff Setting Methodologies

The Commission does not intend to be rigid in its choice of regulation method. It intends to use tariff setting methodologies in the context of their workability and appropriateness. It is possible that different methodologies may be adopted for separate sets of services or segments of the industry. As has been stated earlier the Mega Power Policy of the central government prescribes competitive bidding for the sale price of bulk power. In one proposal for a mega generation station in the private sector, which predates the policy, a negotiated approach has been adopted by the central government. The tariff of private transmission licensees may also be decided using the competitive bidding approach. The tariff of Central Stations and POWERGRID may however continue to be regulated using the RoR, its variants or the RPI minus X methodology. Clearly, the adoption of multiple methodologies raises issues concerning the consistency of principles and their applications, across all methodology. The Commission will endeavor to assure a level playing field, consistency in the applications of basic principles of tariff determination and a non distortionary tariff regime, which maximises efficiency and pays due regard to the interest of the consumer.

4.10 Conclusion

The provisions of the ERC Act provide sufficient flexibility to the Commission to determine the nature and type of tariff regulation to be followed. The endeavor of the Commission is to use the process of tariff setting to achieve the goals of competition, efficiency and economy. The Commission is conscious, however, of the need for stability and predictability, in the tariff regime. Ensuring the financial viability of efficient and proactive utilities, will be a prime concern. At the same time safeguarding the interests of the consumers becomes a major responsibility of the Commission, particularly, when the market structure and system conditions do not support competition. The Commission is to play a balancing role. It intends to discharge this responsibility, transparently, through a consultative mode. It expects that participative decision making will lighten the burden of transiting, to a more efficient system, for all stakeholders.

11 The quoted figures provide the range of values for utilities in the USA and Canada.