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Terms and Conditions of Tariff. MPERC Comments on CERC Discussion Paper. In this presentation. Market Development Transmission and wheeling charges for Transmission Lines Transmission and wheeling charges for Inter-regional Lines Tariff Setting Rate of return methodology Depreciation

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Terms and conditions of tariff

Terms and Conditions of Tariff

MPERC Comments on CERC Discussion Paper

In this presentation
In this presentation

  • Market Development

    • Transmission and wheeling charges for Transmission Lines

    • Transmission and wheeling charges for Inter-regional Lines

  • Tariff Setting

    • Rate of return methodology

    • Depreciation

    • Development Surcharge

    • Rate base

    • Interest on working capital

    • Operational norms

  • Other Discussion Points

  • Market development transmission and wheeling charges
    Market DevelopmentTransmission and Wheeling Charges


    Open Access mechanism of Regional Incremental Postage Stamp


    Expansion of network should be done on the basis of a Long-Term Transmission Capacity Demand Forecast (Example: 7-Year Plan in UK)

    Commission must regulate the level of investment by CTU / STU and ensure that it is at a certain margin above strictly required.

    Pan Caking (

    • Definition: Term used to describe stacking up of charges in a transmission system due to repeated application of charges for different regions

    • Mechanism of charging

      • Original Beneficiaries cover full cost

      • Reimbursed by income from Open Access Charges and from Traded Power

    • Implications

      • Increase in the landed cost of power

      • Discouragement to inter regional exchange of power

    Market development transmission and wheeling charges for inter regional lines
    Market DevelopmentTransmission and Wheeling Charges for Inter-Regional Lines

    Present system of sharing of costs of Inter-regional assets is 50:50 between Regions.

    Method of charging should be changed to allocated usage basis.

    Provisional fixed costs may be charged based on Allocation of Capacity in Agreement between CTU and Beneficiaries

    Adjustments to be made at the month-end based on actual allocation. These adjustments may be billed in next months bill

    Charging of Fixed Costs

    Sharing of Income from Open Access / Traded Power

    • Should be adjusted on a monthly basis

    • Should be returned to Firm Users in the proportion of costs paid in that month

    Tariff setting rate of return
    Tariff SettingRate of Return



    Return to equity investment is measured

    ROCE (= ROI)

    Return on total investment is measured

    Measured against WACC

    Incentive for optimization by financial engineering / refinancing – incentive to investors

    No FERV

    Beneficial to consumers

    ROCE may be adopted

    ROCE, ROE and Return on Debt

    Existing methodology

    • Cost-plus approach

    • ROE:

      • Interest rates have reduced

      • Escrows and LC’s are established

      • Suggestion: Government Bond Return + 5% = say 11%

    • Margin to cover:

      • Risk premium

      • Investment incentive

    • Return on Debt @ PLR

    • Normative Debt Equity Ratio: 80:20

    • ROCE = 11*80/100 + 11*20/100 = 11%

    • Annual revision, retrospective-forward compensation or through VCA

    Tariff setting depreciation development surcharge
    Tariff SettingDepreciation, Development Surcharge

    Purpose of depreciation

    Wear and tear

    Repayment of loan


    Allow to explicitly charge loan repayment

    After full loan repayment, balance depreciation may be charged on SLM till useful life of the plant

    Develop norms for loan repayment

    Rate = PLR

    Term of loan = Moratorium + Minimum 10 years

    Buyers must be protected by ensuring term of PPA is for the fair life of the plant. If such an assurance is not given, then depreciate at the current rates

    Instead, a Developmental Charge may be levied for a "Universal Service Obligation" Fund

    USO Fund can be used for improving access to all

    Rural electrification programs

    Promotion to non-conventional sources

    Off-grid generation


    Development Surcharge

    • There should not be any such surcharge on the beneficiaries for the purpose of creation of corpus for investment in generation

    • Reasonable return is being provided

    Tariff setting rate base interest on working capital
    Tariff SettingRate Base, Interest on Working Capital

    Rate Base

    Asset-side NFA approach

    Interest on Working Capital

    • Allow interest portion as pass-through on net Normative Working Capital

    • Net of working capital may be derived after deduction of fuel costs

    Initial Capital Expenditure

    • Initial Capex:

      • In case a prior order exists: As per the order

      • In case prior order does not exist: Should be determined by competitive bidding.

    • Norms must be developed by the CERC / CEA for setting up of projects for quality of equipment, costs, gestation, competitive bidding processes for EPC etc

    • Additional Capex:

      • Allow subject to prior approval by the CERC

      • Or, norms may be developed for this

    Tariff setting operating norms
    Tariff SettingOperating Norms

    Operating Norms

    Define operational norms; this should consider technology in place, inflation, age of the plant / equipment

    Generation – Gross Calorific Value

    Price of coal is notified based on UHV and coal consumed is determined based on GCV

    There is a need of fixing norms for linking UHV with GCV.

    Norms for stacking and transit losses should also be fixed based on transport mode and distance

    Operation and Maintenance Expenses

    • Pass-through on actuals subject to a limit as a percentage of capital costs

    • Allow a portion of the savings to be retained

    Generation – Specific Oil Consumption

    • Norms should be reduced to 2 ml/kwh from the current 3.5 ml/kwh if the target PLF is above normative

    • At low PLF Specific Oil Consumption is higher to keep the furnace stable. Higher Sp.oil consumption can be allowed at low targeted PLF

    Generation – SHR

    • Should be linked with guaranteed heat rate. A reasonable margin should be provided above this which should keep in view the age of the plant

    Other issues1
    Other Issues

    Tariff Period

    MPERC suggestion

    5-year period, which is a business planning cycle

    May be reviewed before in case of drastic change

    Peak and Off-peak Tariff for Hydel

    MPERC suggestion

    Apply to depreciated hydel plants for peak period

    Off-peak tariff need not be changed

    Surplus income may be paid into a "Universal Service Obligation" fund for to provide access to all

    Declared Capacity

    • Current Definition / Analysis

      • One MWh ex-bus capacity

      • Scheduling is on MW basis

    • MPERC suggestion

      • Change definition to MW basis

    Single Regional Tariff

    • MPERC’s views

      • Promotes generation from lower cost stations, since they now earn more, but an expensive generator will not generate

      • Not recommended

      • Individual tariff setting is preferable

    Other issues2
    Other Issues

    Auxiliary Consumption


    [Σ KWH Generator terminal –

    Σ KWH delivered at station switchyard]

    AxC =

    [Σ Gross generator terminal]

    [Σ KWH Generator terminal –

    NET Σ KWH exported ex-bus]

    AxC =

    [Σ Gross generator terminal]

    • Proposed

    • MPERC suggestion

      • Do not adopt the proposed change. A change will result in beneficiaries bearing the cost of losses between switchyard and bus

    Pan caking
    Pan caking

    WC = 12.5



    TC = 10

    TC = 10

    TC = 10

    WC = 12.5



    Exporting Region








    Selling price = 200 P/U

    Landed cost = 255 P/U

    Thus, pan caking is a major disincentive to inter regional sale

    Numbers are purely for the purpose of illustrating the concept and may not be correct

    Transmission oa charges inter regional lines
    Transmission / OA Charges Inter-Regional Lines

    Tariff setting operating norms1
    Tariff SettingOperating Norms