POWERGRID CORPORATION OF INDIA LTD.

Commercial and Tariff Management

By

CWA. Manthan Dave

Executive Trainee (Finance)

Emp No. 02364

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CONTENTS

Topic Page No.

1. Introduction................................................................................................................3
2. Rationale of Study.......................................................................................................3
3. Central Electricity Regulatory Commission.................................................................5
4. Powers and Functions of CERC....................................................................................5
5. Tariff............................................................................................................................6
6. Salient Features of Tariff.............................................................................................6
7. Tariff Policy Objectives................................................................................................6
8. Tariff Regulations.........................................................................................................6
9. Determination of Tariff by CERC..................................................................................7
10. Tariff determination process........................................................................................7
11. Stages of Tariff Fixation................................................................................................7
12. Components of Tariff...................................................................................................9
13. Conclusion...................................................................................................................12

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Commercial & Tariff Management

 Introduction:

Every business must design its own system, and its own pace of change, by creating
the vision and then carrying it out.

It is believed that, in any country economic growth is not possible without the active
cooperation of people. People cannot be enthused to participate for development
unless they have a reasonable assurance that they will share the fruits of growth.
Thus the urge of social justice is widespread and universally accepted. Business
organizations are creatures of society and must respond to social demands.

But as it is a fact that business is an economic institution and economic values

should be the sole determinant of its performance. The basic argument is that if price
of a product in the market does not truly reflect the relative cost of producing it, but
includes cost for social action, the allocative mechanism of market price is distorted.
The major thrust of Government is to provide full and sufficient electricity basically to
industrial and agricultural sector, although demand of power continued to rise
steadily in all sectors of the economy but the generation capacity is not matching with
demand. For the development of power sector it needs large amount of capital. It is
very much important that Tariff must be rational and reasonable in view of the
investment cost. It is very crucial issue because power tariff become a reason losing
of political power. Hence, power regulatory authorities have some socio-cultural
responsibilities and accountability in designing of tariff.

The practice of management is a dynamic process which is charged with the

responsibility of optimizing the utilization of resources of an organisation for achieving
goals. It involves balancing of financial and social objectives, animate and inanimate
factors, internal and external forces, national and international pressures. The
management of tariff in commercial way without ignoring the welfare motive of the
state is a complicated affair on part of Government. The Government is committed
for power sector reform but success of government efforts would depend upon how
innovative and modern methods adopted. Power is backbone of industrial and
agricultural development. Hence, attention is needed to make India self-sufficient in
power sector.

 Rationale of Study:

The fundamental purpose of business is to produce and distribute goods and

services in such a manner that income exceeds costs. With changing social and
economic values and with increasing expectations of society from corporate
business, the companies that adjust to the rational changes and help in pioneering
such changes are likely to survive and flourish and those which oppose, block or

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restrict the changes may find it difficult to survive in future. The corporate business
has become an integral part of the functioning of any society. Now a days, society
expects that business is conducted in a socially responsible manner. Therefore, the
basic idea of economic goals of corporate business can no longer be separated from
social goals.

In this context Power Grid Corporation of India Ltd, the Central Transmission Utility of
the country and one of the largest transmission utilities in the world, is playing role in
Indian Power Sector and is considered as the nerve centre of Power Sector. As of
now, Powergrid is operating about 77000 ckt kms of High Voltage Transmission
Lines and around 130 sub-stations having transmission capacity of 89000MVA and
carries about 45% of total power generated. The transmission system availability is
maintained more than 99% by developing best operation and maintenance practices
as per international utilities.

The Power Grid Corporation has to recognize its due responsibilities to society and
be regulated by Ministry of Power (MOP) of Central Government, Central
Government Institutions like Central Electricity Regulatory Commission (CERC),
Central Electricity Authority (CEA) etc to fix its transmission tariff in such a manner so
that the tariff rate be more authentic and judicious and the ultimate cost burden to the
society/consumer is very less. The corporation has earn profit and simultaneously
regulate the electricity rate/tariff having minimum paying capacity burden on part of
consumer. The Electricity Act 2003 has been enacted having its wide implications on
regulation and development of power sector in India.

Power or electricity energy undergoes three stages i.e. generation, transmission and
distribution. In Central sector, generation is being done by companies like NTPC,
NHPC, NPC, DVC etc and distribution is carried out by State Electricity Boards/State
Government corporations. It is only POWERGRID a Central Government enterprise
which has the exclusive right of doing transmission of electricity business and it acts
as a link between generating companies and distributing agencies. The concept,
work and coverage of each stage of power itself are very huge or vast but it is self-
administered/ self-contained/ self-balanced. Here the study is confined to the
commercial management of transmission tariff of Power in “POWERGRID”.

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 The Central Electricity Regulatory Commission

Promotes
Efficiency, Economy and Competition in bulk electricity supply.

Regulates
The tariff of generating companies, owned or controlled by the Government of India,
any other generating company, which have a composite scheme for generation and
sale of electricity in more than one state and the inter-state transmission of energy,
including the tariff of transmission utilities.

The Central Electricity Regulatory Commission shall consist of the following

members:

a) A Chairman and three other members.

b) The Chairman of the Central Electricity Authority shall be the member, Ex-
officio.
c) The Central commission may appoint a secretary to exercise and perform
under control of the Chairperson.
d) Establishment of Central Advisory Committee to advise the Central
Commission.
e) The Central Commission was established on 24.07.1998.

 The Powers and Functions of CERC:

As per Chapter III Section 13 of the Electricity Regulatory Commission Act the
Powers and Functions of CERC inter alia include the following:

a) To regulate the inter-state transmission of energy including tariff of

transmission utilities.
b) To promote competition, efficiency and economy in the activities of the
electricity industry.
c) To aid and advise the Central Government in the formation of tariff policy
which shall be:
i. Fair to consumers and
ii. Facilitate mobilization of adequate resources for the power sector.
d) To associate with the environmental regulatory agencies to develop
appropriate policies and procedures for environmental regulation of the
power.
e) To frame guidelines in matters relating to electricity tariff.
f) To arbitrate or adjudicate upon disputes involving generating companies or
transmission utilities in regard to matters connected with (a) to (c) above.

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g) To aid and advise the Central Government or any other matter related to
Central Commission.

 Tariff:

The tariff is a charge for a particular service. It is different for different type of
businesses. In Power Sector there are three types of tariff:

a) Tariff for Generating companies viz. NTPC, NHPC, NPC, DVC etc.
b) Tariff for Transmission company i.e. POWERGRID.
c) Tariff for Distribution companies i.e. the SEBs and other agencies.

The tariff for POWERGRID was previously done by MOP/CEA. In pursuant to

enactment of Electricity Regulatory Commission Act 1998, the tariff shall now be
fixed by CERC.

 Salient features of Tariff:

a) Adequate returns without exploitation.

b) Encourage efficiency, economy, good performance & optimum investment.
c) Formulation of National Power Plans; Financial principles & its application.

 Tariff Policy Objectives:

a) Fare to Consumer.
b) To facilitate mobilization of adequate resources for Power Sector.
c) To promote competition, efficiency and economy in Power Sector.

 Tariff Regulations:

1. Prior to constitution of CERC tariff was notified by Ministry of Power for a five
year block. The tariff notifications for major part of POWERGRID transmission
system in Northern, Western, Southern and Eastern regions for the block of five
years i.e. 01.04.1997 to 31.03.2002 were notified during July 1998 to December
1998. The Ministry of Power had defined the normative factors for calculation of
transmission charges leviable by POWERGRID to the electricity boards for five
year block 1997-2002.
2. The CERC was established with the promulgation of The Electricity Regulatory
Commission Act 1998, for rationalization of electricity tariff, transparent policy
regarding subsidies, promotion of efficient and environmentally benign policies
and matters connected therewith or incidental thereto.

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3. It determines the norms for electricity tariffs, guided by the tariff policy issued by
GOI and the provisions of the Electricity Act 2003.
4. It has issued the regulations setting forth certain parameters for generation and
transmission tariffs.
5. Tariff is set at a level intended to compensate the licensee for the construction of
the project and for operating the project thereafter.

 Determination of Tariff by CERC:

Tariff is fixed based on the petition as per CERC guidelines. The determination of
tariff by CERC shall be based on the following:

a) The generating companies and transmission entities shall adopt such

principles in order that they may earn an adequate return and at the same
time they do not exploit their dominant position in the generation, sale of
electricity or in inter-state transmission of electricity.
b) The factors which would encourage efficiency, economical use of the
resources, good performance, optimum investments and other matters which
the CERC considers appropriate.
c) National power plans formulated by the Central Government.
d) Such financial principles and their applications contained in Schedule VI to
the Electricity (Supply) Act 1948 as the Commission considers appropriate.

 Tariff Determination Process:

1. The Central Electricity Regulatory Commission (Terms and Conditions of Tariff)

Regulations 2009- applicable for a period of 5 years with effect from April 1,
2009.
2. The process by which a tariff is set is public and follows established procedures
and interested parties can challenge the level of tariff they seek.
3. CERC issues a tariff order, which stipulates an annual transmission charge
(‘ATC’) that may be levied in the relevant region each year for a predetermined
block of time.

 Stages of Tariff Fixation:

There are two stages of fixing of tariff i.e. Provisional Tariff fixation and Final Tariff
fixation. In an ideal situation the final tariff should be approved by the time of
commercial operation. As the revenue realization has to start from the date of
commercial operation, the tariff has to be fixed on stages so that POWERGRID will

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receive provisional tariff from the date of commercial operation till the final tariff is
noticed.

1. Procedure for Provisional Tariff Fixation.

The provisional tariff would be based on auditor’s certificate of actual expenditure

upto three months prior to commercial operation and certified estimate of the
balance expected expenditure. The exercise for the finalization of provisional
tariff should start at least nine months prior to the expected date of commercial
operation so as to have the provisional tariff approved by the time of commercial
operation. It is important that the estimated cost is as close to final cost as
possible so that there is no significant change of the final tariff.
The detail procedure for Provisional tariff fixation are as follows:
i. Regional Project Monitoring Group is to identify and include in
monitoring network the transmission assets those are likely to be
declared in commercial operation.
ii. PMG is to inform the likely date and details of assets to the following:
iii. Regional head of finance to furnish asset-wise audited capital cost,
three months in advance to Corporate Finance/Commercial in the
CERC format with likely date of commercial operation.
iv. Corporate Finance is to check the details and prepare the funding
details for furnishing the same to Corporate Commercial department.
v. Then Corporate Commercial has to calculate the transmission tariff.
vi. Further Corporate Commercial has to prepare the draft petition and
put up for approval for filing the petition with CERC.
vii. Approval note is seen by law, finance and discussed with advocate
engaged for CERC assistance and approved by the competent
authority.
viii. Petition along with the required fee is filed with CERC for approval of
Provisional Tariff.
ix. After admitting the petition, CERC directs to circulate the copies to
beneficiaries and fix a date for reply by them and rejoinder by
POWERGRID and date of hearing in the matter.
x. Copy of petition circulated to the law/finance/corporate
planning/operation services departments at Corporate Center and
Head of Commercial in Region under intimation to Regional Heads.

2. Procedure for Final Tariff Fixation.

After filing the petition for final tariff with the CERC it may not be possible to
approach them again for inclusion of assets not taken into consideration while
computing the final tariff. As a result POWERGRID will be at risk of losing tariff
perpetually on expenditure not included in Final Tariff. It is in interest of

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POWERGRID that the total project is completed within shortest possible time
after the commercial operation and the final tariff fixed at earliest. In all future
projects it is decided that the final tariff petition will be filed six months after the
assets has been put into commercial operation and all the expenditure on the
project completed by that time.

There would be certain balance payments like cases for additional compensation
pending in courts and arbitration cases. CERC could be convinced on such
issues; however reasonable provisions should be made for such liabilities also.
For arriving at the final project cost the following are required to be completed:

a) Completion of all balance works in a time bound schedule.

b) Closing of project accounts in a time bound manner.

The detail procedures for final tariff fixation are as follows:

i. Final cost is determined after completion of remaining left over works,

closing of contracts and auditing of accounts.
ii. Audited completion cost of assets to be furnished in the prescribed
format of CERC by the Head of Regional Finance.
iii. Corporate Finance to check the cost details and provide the funding
details for the final cost.
iv. Corporate Commercial to calculate the transmission tariff and prepare
draft petition/application for approval of final tariff by CERC and put up
for approval of the competent authority.
v. After approval of competent authority, petition/amended petition for
final tariff is filed with CERC.
vi. CERC after examination of the petition/application issues orders for
circulation of the petition to respondents and date is fixed for
furnishing reply the respondents and rejoinders by the POWERGRID
along with date of hearing.
vii. Copy of petition circulated to the law/finance/corporate
planning/operation services departments at Corporate Centre and
Head of Commercial in regions under intimation to Regional Heads.
viii. The petition/application is heard by CERC and order for approval is
issued.

 Components of Tariff:

1. The tariff for transmission of electricity on inter-State transmission system shall

comprise transmission charge for recovery of annual fixed cost consisting of the
components specified in regulation 14.
2. The Annual Fixed cost of a transmission system shall consist of the following
components:-
i. Return on Equity

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ii. Interest on loan capital

iii. Depreciation
iv. Operation and Maintenance Expenses
v. Interest on Working Capital.

 Return on Equity:
a) ROE shall be pre-tax basis at base rate of 15.5% to be grossed up with
the normal tax rate applicable to the utility.
b) For POWERGRID, ROE(post tax) shall be 17.481%/18.674% considering
present level of MAT of 11.33/16.995%.
c) ROE to be reviewed on the basis of actual during the next tariff block
based on actual tax rate applicable in line with Finance Act of respective
years.
d) For projects commissioned on or after 01.04.09, additional ROE of 0.5%
to be allowed for projects within time line stipulated by CERC.
e) The return on equity with respect to the actual tax rate applicable to the
generating company or the transmission licensee, as the case may be, in
line with the provisions of the relevant Finance Acts of the respective year
during the tariff period shall be trued up separately for each year of the
tariff period along with the tariff petition filed for the next tariff period.
 Interest on Loan Capital:
a) As per the norms the projects should be financed with 30% Equity
deployment and 70% Loan capital. Equity deployed in excess of 30% will
be treated as normative loan.
b) In case of loan deployment being more than 70%, actual loan deployed is
to be considered for the purpose of calculation of interest on loan.
c) The rate of interest shall be weighted average rate of interest calculated
on the basis of the actual loan portfolio at the beginning of each year
applicable to the project.
d) Every efforts should be made by transmission licensee to re-finance the
loan as long as it results in net savings on interest and in that event the
costs associated with such re-financing shall be borne by the beneficiaries
and the net savings shall be shared between the beneficiaries and the
transmission licensee in the ratio of 2:1.
 Depreciation:
a) The value base for purpose of depreciation shall be capital cost of the
asset admitted by the Commission.
b) The salvage value of the asset shall be considered as 10% and
depreciation shall be allowed up to maximum of 90% of the capital cost of
the asset.
c) Depreciation shall be calculated annually based on Straight Line Method
at the rates specified as under:

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Asset Existing New

Transmission Lines 2.57% 5.28%
Sub Station 3.60% 5.28%
Land Under Lease 0.00% 3.34%
Civil Works 1.80% 3.34%
Communication Equipments 6.00% 6.33%
Wt Avg. Rate of Dep. 3.00% 5.25%

 Operation and Maintenance:

a) Unit O&M rates have been specified for different configuration of lines
(S/C or D/C, with single, double, triple or quadruple conductor) and
voltage level of substation (bays).
b) Unit O&M rates for 2009-10 escalated @5.72% per year to arrive at the
rates of subsequent years.
c) Rates have been enhanced to take care of wage hike for PSU employees.

 Interest on Working Capital:

a) The Working Capital shall cover:
i. Receivables equivalent to two months fixed cost.
ii. Maintenance spares @15% of operation and maintenance
expenses.
iii. Operation and maintenance expenses for one month.
b) Rate of interest on Working Capital shall be normative basis and shall be
equal to the short term Prime Lending Rate of SBI as on 01.04.2009 or on
1st April of the year in which the transmission system is declared under
commercial operation, whichever is later.
c) Interest on working capital shall be payable on normative basis
notwithstanding that the transmission licensee has not taken loan for
working capital from any outside agency.
3. The tariff also include other charges i.e. Incentives. The incentive billing is
allowed as a part of monthly transmission charge based on monthly availability
certified by RPC. As per norms the Normative Annual Availability shall be:

Existing New
AC System 98% 98%
HVDC Bi-pole Link 95% 92%
HVDC Back-to-back station 95% 95%

4. The tariff regulation also allows hedging of foreign currency loans in parts or full,
with cost of hedging being pass through. To the extent the utility is not able to
hedge, extra rupee liability towards interest payment and loan repayment will be
pass through.
5. For the payment of bills of transmission licensee through letter of credit on
presentation a rebate of 2% shall be allowed and when the payments are made

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other than through letter of credit within a period of month of presentation of bills
by the transmission licensee, a rebate of 1% shall be allowed.
6. In case the payment of any bill for charges payable under these regulations is
delayed by a beneficiary beyond a period of 60 days from the date of billing of
late payment surcharge at the rate of 1.25% per month shall be levied by the
generating company or the transmission licensee, as the case may be.

 Conclusion:

Since the initiation of economic reforms in India in 1991, there has been a growing
acceptance of the need for deepening these reforms in several sectors of the
economy which were essentially in the hands of Government for several decades. It
is also now realised that if substance has to be provided to microeconomic policy
reform, then it must be based on reforms that concern the functioning of several
critical sectors of the economy, among which the infrastructure sectors in general
and the energy sector in particular are paramount. The inadequate response of the
private sector in the energy sector over the last decade has to led to the widespread
recognition of the need for reforms and the public at large. The Government has
taken in hand the restructuring the legal and regulatory framework governing the
operation and management of power industry along with its tariff structure so that,
the strong frame-work of the energy sector is put in place.

On the other hand, as a consumer of electricity, one may be concerned the rates that
one pay. The reliability of the utility services or the efficiency with which the electricity
is supplied and consumed is also a concern.
It is the industry, which is dominated by “economies of scale”, that is the unit cost of
production or delivery decreases as the total demand increases. This means that one
large firm can provide the goods or services at a lower cost than two or more firms.
The justification for regulating this business is that they are “natural monopolies”. In
other words, certain characteristics of the electricity business have made a monopoly
market structure the most efficient way of providing these services. While the
monopoly market structure theoretically can lead to cost advantages to the public, it
also poses potential risks from abuse of monopoly power. That may be the reason,
the Government have taken two basic approaches to regulating electricity utility to
ensure that they do not abuse their monopoly power.

Power is vital for development of any country and management of commercial

transmission tariff of power definitely helps in mobilization of adequate resources in
building of further infrastructure in power sector. With more positive attitudes
developing in future, the development of techniques for fixation of transmission tariff
of power and verifying the commercial/social performance of the infrastructure
promoting industry may get the much needed impetus. To what extent society and its
institutions exert pressure on industry to undertake social programmes will also be an

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influencing factor in fixation of tariff. Industrial growth is necessary for economic well
being of society but simultaneously social responsibility of industry is to be ensured.
However, it must also be ensured that tariff must be rational and reasonable in view
of its investment cost. As energy sources are the prime movers of all the forms of
economic activity, the country as a whole should work continuously for its growth,
use judiciously; commitment to discharge liability for energy consumed and also
conserves energy which is national and scarce resources.

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