Presentation on CERC Discussion Paper on Tariff Norms By powergrid

 The electricity Act, 2003 provides for open access.  This would create demand from third party for wheeling of Power.  No additional wheeling charges unless any new system is added. TRANSMISSION & WHEELING CHARGES

POWERGRID views:  Transmission systems associated with Central Sector energy:  Central generation shall have priority.  Beneficiaries to pay full transmission charges.  Wheeling parties to settle / share transmission charges amongst themselves. to absorb the incremental transmission losses. to pay fee to RLDCs for the extra efforts.  Transmission elements not associated with Central generation:  Central generation shall not be assigned a priority  Transmission charges may be shared by all the beneficiaries. Cont…

METHODOLOGY FOR SHARING OF TRANSMISSION CHARGES  Charges for inter-regional lines may be shared by two contiguous regions on 50 : 50 basis. may not be pooled in the respective regions.  Charges for the regional assets may be shared by the regional beneficiaries.  If an inter regional asset is used for wheeling by a third party the balance transmission charges may be shared by the beneficiaries of the contiguous region on 50 : 50 basis.

METHODOLOGY FOR SHARING OF TRANSMISSION CHARGES POWERGRID views:  It will not affect POWERGRID as to how the tariff is shared. However, in the present scenario, it would increase the burden of the ER beneficiaries.  Inter-regional links are established for transfer of power both ways. Ideally, tariff for such assets should be shared 1/3 rd, 1/3 rd by the beneficiaries of both regions and remaining 1/3rs as per use.  Charges should not be pooled in the respective regions. Cont…

RATE OF RETURN  Return on Capital Employed (ROCE), i.e. Return on Total Investment; or  Return on Equity (ROE) i.e. Return on Total Investment less the borrowings. The interest on borrowing is separately payable on actual basis along with FERV.

RATE OF RETURN POWERGRID Views: Fairness to the investor  Profit making PSUs have to pay dividend at least 30% of Net Profit or 20% of the equity, whichever is higher.  Thus, investor ’ s expectation is at least 20%.  As such, 16% ROE falls short of that requirement.  ROR of 16% entails IRR of 15. 5% if the ROE is capitilised during construction  In case ROE capitalisation is not allowed, the IRR falls to 12.4% approx. Fairness to consumer  High credit risk  16% does not appear to be unfair to the consumer for quality service.

RATE OF RETURN (Contd ….) The need to attract capital  During X Plan period:. Planed Capital investment on transmission- Rs 21,370 Crore Required Internal Resource(IR) generation - Rs 6,000 Crore  16% ROE is not sufficient for targeted amount.  Present policy / environment not able to attract new investments.  As a result tremendous shortfall in planned capacity addition.  Returns needs to be attractive and comparable with alternative investments avenues.

RATE OF RETURN (Contd ….) Administrative simplicity ROCE approach:  Simple to administer in case implemented on balance sheet basis.  In case of project-wise basis, normative D:E ratio may skew the tariff with respect to actual D:E ratio as ROE is higher than prevailing rate of IOL.  Uncertainty and instability in the debt market.  Till the market gets stabilized and is predictable, the ROCE concept may not be feasible / practical.

RATE OF RETURN (Contd ….) Administrative simplicity ROE approach :  ROE approach taking actual equity is more scientific.  Present method of 16% (post tax) and IOL as per actual may be continued.  Gross Fixed Asset basis may be considered, because, the Net Worth in the balance sheet does not depreciate.  Thus return on Net Fixed Asset basis pulls down the Return on Net Worth and sends adverse signals to the lenders and investors (at the time of disinvestments).

RATE BASE POWERGRID Views:  Retain the existing approach of ROE.  Tariff to be fixed in two stages; Provisional tariff- based on estimated completion cost Final tariff- final cost including remaining minor works completed after COD.  Any expenditure on new works/services not included in the approved cost or replacement of assets/works arising out of contingencies/accident may be admitted as additional capitalization.

FOREIGN EXCHANGE RATE VARIATION  Payment of FERV, arising on account of interest payments and payments of installments of loan, at actuals, on quarterly or yearly basis.  Payment of FERV in accordance with Accounting Standard-11 (AS-11)of Institute of Chartered Accountants of India.  Payment of FERV in accordance with AS-11 of Institute of Chartered Accountants of India after dividing the FERV component into normative Debt and Equity. POWERGRID views:  FERV as per existing CERC norms for principal repayment.  FERV on Interest payment may be made pass through in the same financial year as against the provision in existing tariff norms i.e. payment in subsequent financial year.

INTEREST ON WORKING CAPITAL  Working Capital covers: 1 month Operation and maintenance of the capital cost less 1/5th of the initial capitalized spares. 2 months Receivables  As per Tripartite Agreements (TPA) signed with States under Securitisation Scheme, current dues payable in not later than 60 days from the date of billing, or within 45 days of their receipt, whichever is later. POWERGRID views: Working Capital should cover 3 months receivables.

OPERATION AND MAINTENANCE CHARGES  As percentage of capital cost OR  As a bench mark cost per bay / per Ckt. KM for a typical installation based on either average normative O&M charges of all the regions or normative O&M charges of the most efficient region. POWERGRID views. Most efficient region as norms would not reflect the difficulties being faced in different regions. Present methodology of CERC takes care of the actual expenses and technological advances with time. Frequent failure of Converter Transformers needs to be taken care of through appropriate provision towards insurance for converter transformers and related HVDC equipments.

DEPRECIATION  CERC vide its tariff notification dated , have revised the depreciation rate to around 3%. POWERGRID views.  Depreciation rate should be as per the Schedule XIV of Companies Act  All power sector entities should be treated as ‘ continuous process plant ’.  Advance against depreciation (AAD) should also be allowed so as to cover loan repayment.

INCENTIVE  Incentive beyond availability of 98%. POWERGRID Views.  Transmission system is ageing.  Availability of sub station equipments is comparable to that of generating plant, for which the availability level is 85%.  Average total system availability should be 95% as threshold.  Normative availability of converter transformers should be fixed based on average availability over last five years.  Concept of incentive is a time-tested phenomenon.  Provisions for dis-incentive may be removed.

DEVELOPMENT SURCHARGE  Development Surcharge to be used for new projects on regional basis upto maximum one third of equity. POWERGRID views.  Should be allowed for use on national basis for system strengthening and inter-regional projects without any conditionality.  Depreciation should be allowed on investment made through development surcharge  ROE should be allowed on Development surcharge  The ROE should be post tax.

TARIFF PERIOD & SURCHARGE  TARIFF PERIOD  stable over a longer period of time, preferably for 5 years period  INTEREST ON DELAYED PAYMENT OF TRANSMISSION CHARGES  Present norm is per annum, simple interest.  In view of the TPA signed with status under Securitisation Scheme, per annum, compounded quarterly should be introduced to match with TPA provisions.

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