6.6 Strategies in Tariff Setting for Transmission

The rationale for a single part average regional tariff has been that it is not cost effective or technically possible to segregate the various cost elements. Unbundling tariffs will require system load studies on a dynamic basis to identify the nature and direction of flows to various constituents of the system. However, a rudimentary form of unbundling can not only allocate costs better but also result in efficient outcomes. The following are some such initiatives.

6.6.1 In an integrated grid system it may not always be cost effective to attempt such segregation in some cases. Wherever specific users of a segment of the grid system cannot be identified there is no alternative to using a pooled price for the use of such assets. However the pooled price can be segregated into fixed and variable costs. All users of the grid who have contracted for firm transaction capacity should pay a connection charge which should comprise of the following.

a) The costs incurred in the RLDC for scheduling, despatch and accounting for power flows proportionate to the allocated/contracted load of the constituent.
b) A share in the pooled regional fixed costs on the basis of allocated/contracted load.
c) The costs attributed to metering and billing the constituent.

The connection charge, payable on the basis of connected load to POWERGRID by users (other than generators), could be linked to target availability, fixed at a sufficiently high level which will have to be assured by POWEPGRID. Availability below the target could be penalised through under recovery of the fixed cost. In addition users will pay a variable charge calculated by pooling the regional variable costs.

6.6.2 Holders of non firm power transfer contracts may be required to pay only a part of the connection charge relating to the costs incurred in metering and billing and not the other components of fixed charge. They may be exempted from these costs because these costs were not incurred to service their load. They are serviced by the utility only when surplus capacity is available and hence should not be asked to share in the fixed cost. In addition to the connection charge, such users could pay an average variable charge calculated by pooling the regional variable cost. Since the transmission utility will need to be incentivised to service such non-firm transactions some incentive will have to be built into the variable charge

6.6.3 In the case of all assets where the costs are attributable to specific users the intended beneficiaries should pay the fixed costs. Typically, such beneficiaries would have contracts for the supply of firm capacity. Evacuation lines, which link generating stations to the grid, or other lines, which transfer power between identifiable entities, are some examples. In such cases the beneficiaries would pay the specific tariff for that line. This tariff could be a two-part tariff. The fixed cost would be recoverable through the fixed charge, at a target level of availability. The variable cost, comprising primarily transmission loss, on the basis of norms, and any other variable charge could be recoverable through a charge linked to energy transfer.

6.7 Issues in Transmission Pricing

The Commission seeks consultations on the following issues. Some of these are philosophical in that they relate to the directions in tariff design in the medium term. However many others are of immediate relevance and relate to putting in place an efficient tariff regime immediately.

6.7.1 What is the appropriate methodology of tariff setting for transmission? Should the existing ROR methodology be continued? Can the PBR elements be incorporated on a larger scale? Would the adoption of the RPI minus X approach yield additional dividends?

6.7.2 The "Postage stamp" method of averaging regional costs does not acknowledge the route or distance involved in the power wheeling or the type of facilities involved in the power wheeling. All the users assume a portion of the cost of a transmission transaction, even when they are neither party to that transaction nor responsible for the costs related to the wheeling of power associated to this transaction. How can the extent of usage of an integrated system be reflected in the tariff regime?

6.7.3 Where a transmission transaction takes place, it removes the opportunity of that transmission capacity being used by someone else. This lost opportunity could be valued in terms of the foregone revenue and the incremental costs if any imposed by a transaction. This calculated value would represent the true cost of the transaction. How can such costs be reflected in the tariff regime?

6.7.4 Where excess transmission capacity has been built, as in the case of North-East, how should the costs be allocated to tariff?

6.7.5 How should the RLDC charge be calculated? Should the cost of capital allowed for the RLDCs be the same as the cost of capital for transmission? What is the nature of incentives, which can be built into the charge to ensure the efficient operation of the RLDCs?

6.7.6 POWERGRID is likely to use the transmission set up to provide telecom services. What is the methodology to be adopted for segregating the capital costs and the operating costs of these two activities? Ring fencing is imperative for transparency. If access to transmission towers and rights of way are leased to a telecom subsidiary of POWERGRID, which principles of transfer pricing are to be followed?

6.8 Conclusion

The relatively low incidence of transmission tariff has traditionally resulted in the application of the simple methods for tariff design. However in the simplicity of design the power of tariff design to efficiently allocate capital andresources also gets diluted. The transmission sector is fairly efficient and well managed However significant improvements are required in system control scheduling and despatch. While most of the solutions lie in more disciplined use of the grid there are possibilities for the inclusion of price based incentives to ensure such grid discipline. The Commission is already considering the proposal for implementation of the frequency-based charge for unscheduled interchange. This proposes to reward users of the grid who maintain discipline in their drawls of energy and penalise those who do not. The need for rapid expansions of the inter-state grid requires the allocation of the costs of such expansion to appropriate users so that expansions are cost efficient and only occur where there is demand. Simultaneously, there is the need to integrate private licensees into the existing interstate system. Tariff determination in their case could possibly be done, using the competitive bidding route. In general, there is a need to segregate the fixed costs of the system, which should only be borne by those users who have contracted for firm capacity, variable costs, which should be allocated to the tariff to be charged on all users proportional to the energy or load imposed and the costs of system control, scheduling and despatch, which should be allocated to all users of the inter state grid. More advanced techniques, incorporating the cost of congestion on particular lines, would require greater degrees of sophistication in monitoring load flows and may only be possible in the medium term after the system has stabilised.