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Issue 1: System of Accounts Issue 2: Reduction of Subsidy and Cross
Subsidy Issue 3: Determination of
Revenue Requirement Issue 4: Appropriate Price
Regulation Issue 5: Tariff Filing
Requirements Issue 6: Basis of Asset
Valuation Issue 7: Unbundling of
Tariff Issue 8: Assignment of
Revenue Requirement in Tariff Design Issue 9: Requirement of
Fuel and Power Purchase Adjustment Issue 10: Differential Tariff on
Zonal Basis Issue 11: Seasonal and
Time-of-Use Tariff Issue1: The licensees have to adopt a proper system of accounts and accounting procedures based on international standard which will help developing operational economic and financial data on cost, consumption and other relevant variables. These data shall enable the Commission to regulate the tariffs of the licensees effectively, while protecting consumers interest. The Commission prepared and
issued an extensive set of filing requirements entitled "Guidelines for Revision of
Tariffs"0">
Issue 1: System of Accounts Issue 2: Reduction of Subsidy and Cross
Subsidy Issue 3: Determination of
Revenue Requirement Issue 4: Appropriate Price
Regulation Issue 5: Tariff Filing
Requirements Issue 6: Basis of Asset
Valuation Issue 7: Unbundling of
Tariff Issue 8: Assignment of
Revenue Requirement in Tariff Design Issue 9: Requirement of
Fuel and Power Purchase Adjustment Issue 10: Differential Tariff on
Zonal Basis Issue 11: Seasonal and
Time-of-Use Tariff Issue1: Issue 2: While the Commission could
develop ideal standards of performance and impose them on the licensee, it is incumbent on
the latter to develop appropriate plans and present them to the Commission for
consideration. Such an approach sharpens the licensee's expertise and experience in these
areas and brings it to the Commission's scrutiny and also assures the consumers about the
steps taken or contemplated to be taken on the matter. The ( Commission therefore,
provided in a tariff guidance document that the licensee develops a plan for reduction of
losses within a specified time period and file it with the Commission for review and
possible revision. Efficiency criterion requires that tariff
should be cost-based without any cross-suhsidisation. It also has minimum T&D loss and
effective metering as the base. Gridco has agreed to reduce the level of
cross-subsidisation over a period of time and should file a loss reduction programme. It
has already submitted the performance standards for the approval of the C Commission.
Gridco however, feels that upgrading the status of metering to efficient levels will take
time and require considerable amount of investment. In any ease the consumers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
e annual budget. Issue 3: Issue 2: While the Commission could
develop ideal standards of performance and impose them on the licensee, it is incumbent on
the latter to develop appropriate plans and present them to the Commission for
consideration. Such an approach sharpens the licensee's expertise and experience in these
areas and brings it to the Commission's scrutiny and also assures the consumers about the
steps taken or contemplated to be taken on the matter. The ( Commission therefore,
provided in a tariff guidance document that the licensee develops a plan for reduction of
losses within a specified time period and file it with the Commission for review and
possible revision. Efficiency criterion requires that tariff
should be cost-based without any cross-suhsidisation. It also has minimum T&D loss and
effective metering as the base. Gridco has agreed to reduce the level of
cross-subsidisation over a period of time and should file a loss reduction programme. It
has already submitted the performance standards for the approval of the C Commission.
Gridco however, feels that upgrading the status of metering to efficient levels will take
time and require considerable amount of investment. In any ease the consumers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
l a licensee's basic overall revenue requirements be determined? However, since tariffs are
set to be effective in some future time period and the level of costs incurred in a past
test period may not correspond with costs expected to be incurred during that future
period, it may be more appropriate to use a forward-looking Test Year as the basis for
revenue requirement determination. The Test Year revenue requirement is estimated based
upon actual past cost levels adjusted for inflation and known and measurable changes in
the future. In a competitive market all
participants receive total revenues based upon the marginal costs of the marginal
producer. No guarantee is made that any participant will be able to earn its total costs
as is generally the case under regulation. Thus efficient regulation would require use of
marginal costs in setting revenue requirements. However, use of marginal costs for this
purpose raises a number of practical problems. Revenue derived by charging full marginal
costs as prices can significantly fluctuate from year to year and consumers may find the
resulting fluctuation in the tariff difficult to understand. Secondly estimation of
marginal costs is itself a difficult task and requires time. While the Commission recognizes the benefits
of tariffs that reflect current costs. either through the use of a Future Test Year or
marginal costs, it appreciates the desirability of being able to audit historical
accounting costs and the stability of the resulting tariffs Therefore, the Commission
proposes to utilize the current Sixth Schedule RoR methodology and the requirements to
meet specified performance standards. Gridco agrees with the conclusion reached by the
Commission to utilize the current Sixth Schedule RoR methodology to determine revenue
requirements. In any case revenue required is a function of variables like fixed and
variable costs, taxes, rate base and rate of return. Issue 4: Section 26(2)(a) of the OER
Act umers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
sets sections 57 and 57-A of the Electricity(Supply) Act, 1948 and its Sixth Schedule
as the baseline for Orissa Tariff regulation. The Act also allows the Commission to depart
from that baseline on valid reasons in determining allowed revenues(Section 26(3)).
Clearly if the stated objective of the Act is to be better achieved by departure from this
baseline regime, then the Commission has a duty to make such changes and explain the
reasons for the same in writing. The best solution to the
problem of electricity pri revenue determination . However, since tariffs are
set to be effective in some future time period and the level of costs incurred in a past
test period may not correspond with costs expected to be incurred during that future
period, it may be more appropriate to use a forward-looking Test Year as the basis for
revenue requirement determination. The Test Year revenue requirement is estimated based
upon actual past cost levels adjusted for inflation and known and measurable changes in
the future. In a competitive market all
participants receive total revenues based upon the marginal costs of the marginal
producer. No guarantee is made that any participant will be able to earn its total costs
as is generally the case under regulation. Thus efficient regulation would require use of
marginal costs in setting revenue requirements. However, use of marginal costs for this
purpose raises a number of practical problems. Revenue derived by charging full marginal
costs as prices can significantly fluctuate from year to year and consumers may find the
resulting fluctuation in the tariff difficult to understand. Secondly estimation of
marginal costs is itself a difficult task and requires time. While the Commission recognizes the benefits
of tariffs that reflect current costs. either through the use of a Future Test Year or
marginal costs, it appreciates the desirability of being able to audit historical
accounting costs and the stability of the resulting tariffs Therefore, the Commission
proposes to utilize the current Sixth Schedule RoR methodology and the requirements to
meet specified performance standards. Gridco agrees with the conclusion reached by the
Commission to utilize the current Sixth Schedule RoR methodology to determine revenue
requirements. In any case revenue required is a function of variables like fixed and
variable costs, taxes, rate base and rate of return. Issue 4: Section 26(2)(a) of the OER
Act umers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
cing may lie with the market forces. However, the electricity
industry is being characterised as a natural monopoly. There is, therefore, a need for a
regulatory framework to achieve natural efficiency in the industry. Such efficiency may
result in competitive pricing identical to what would have been achieved by market forces.
The Commission's goal then is to achieve such low cost competitive prices through the
regulatory framework. The traditional framework for
setting electricity prices is governed by the Rate-of-Return (RoR) regulation. The Sixth
Schedule of Electricity (Supply) Act, 1948 is one such methodology. It is sometimes
referred to as cost-plus pricing because the regulatory entity is able to collect all its
cost plus a regulated return on its investment from the customers. In general this method
sets the total allowed revenues of the utility according to the following formula: RR = [RB X RoR] + ED +
EO&M + T Where: RR = the total annual revenue requirement of
the utility RB = the rate base (required investment) of
the utility RoR = the allowed rate of return (debt and
equity) on investment. ED = annual depreciation expense EO&M = annual operation & maintenance
(O&M) expense T = annual taxes paid by the utility Under this general framework
the utility has the responsibility of proving to the regulatory body's satisfaction that
each proposed element of the revenue required is prudent. for instance, investments made
in capital plant must be shown to be useful in the provision of electric service in order
to be included in the RB term of the formula. Similarly, individual operating expense
items must be shown to be necessary in order to be included in the EO&M term. The revenue requirements of
the regulated company are fixed and based upon the values of the terms in the formula
during a Test Year (see discussion on cost basis in Issue 5), usually adjusted for known
and measurable changes so as to reflect conditions expected to prevail during the time the
proposed tariff will be in effect. Each term of revenue requirement formula is usually
subjected to intense regulatory scrutiny and many are extensively contested by parties to
the regulatory proceeding. There are several advantages
of RoR regulation. First, the system limits prices based upon a test year and they are
unchangeable until the next tariff proceeding. After prices arc set. the regulated
entity's rate-of-return varies depending upon many seemingly uncontrollable aspects of
cost andumers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
its ability to control those costs which can be controlled. Second. and as a
result of the first, there is some incentive for the utility to minimize cost between
tariff proceedings. Third, the close administration of prices by the regulator enables it
to specify the exact form prices must take. Fourth, non-economic goals such as price
relief for some sections of consumers are easier to meet using this system. Last, the
hearings on tariff' changes provide consumers a forum to present their views regarding the
performance of the regulated utility. RR = [RB X RoR] + ED +
EO&M + T Where: RR = the total annual revenue requirement of
the utility RB = the rate base (required investment) of
the utility RoR = the allowed rate of return (debt and
equity) on investment. ED = annual depreciation expense EO&M = annual operation & maintenance
(O&M) expense T = annual taxes paid by the utility Under this general framework
the utility has the responsibility of proving to the regulatory body's satisfaction that
each proposed element of the revenue required is prudent. for instance, investments made
in capital plant must be shown to be useful in the provision of electric service in order
to be included in the RB term of the formula. Similarly, individual operating expense
items must be shown to be necessary in order to be included in the EO&M term. The revenue requirements of
the regulated company are fixed and based upon the values of the terms in the formula
during a Test Year (see discussion on cost basis in Issue 5), usually adjusted for known
and measurable changes so as to reflect conditions expected to prevail during the time the
proposed tariff will be in effect. Each term of revenue requirement formula is usually
subjected to intense regulatory scrutiny and many are extensively contested by parties to
the regulatory proceeding. There are several advantages
of RoR regulation. First, the system limits prices based upon a test year and they are
unchangeable until the next tariff proceeding. After prices arc set. the regulated
entity's rate-of-return varies depending upon many seemingly uncontrollable aspects of
cost andumers should not
be penalised for the inefficiency of the licensee. For instance, the licensee should not
be allowed to collect energy charges without providing required level of service. The
licensee should institute time-of-day metering. Any subsidy programme should mandatorily
be financed by the Government in th-23_
ft">This system also has several
disadvantages. First, its cost-plus nature reduces the incentive for the utility to
minimize cost in the long run. Second, if the allowed rate-of-return is greater than the
actual cost of capital, there will be an incentive for the utility to build plant which
may not be essential. An alternative methodology is
Performance Based Regulation (PBR) which is a development over rate-of-return/rate base
regulation. Performance Based Regulation seeks to eleminate some of the regulator command
and control aspects of RoR regulation and substitutes it by a system of incentives(or
penalties) for performance by the regulated entity outside a 'normal" range. A PBR
system can be quite simple and focuses on a single area of utility operation such as
generating plant reliability or system losses. It can be more complex and wide-ranging in
its applicability by taking into account such things as customer satisfaction, cutages at
the consumer level, customer load growth, general inflation, prices to consumers, among
others. Whether simple or complex, the purpose of the system is to relinquish some of the
regulator's review power over one or more elements in the revenue requirement equation set
out above. Instead, monetary incentives for good results or penalties for bad ones are
substituted which the regulated entity can earn or pay respectively thereby affecting its
profitability. There are certain
characteristics that are present in a good PBR System of regulation. First, the focus of
the system should be on controllable aspects of the utility's operations. There is no
point in creating a goal the utility can never achieve. Second, the system should be put
into effect relatively for a longer period of time to recognize the short-and-long term
trade offs made by the utility. For example, it is possible for a utility to pay a hit
more in terms of capital cost for a transformer with lower associated losses. Over time
the capital cost would be more than offset by reduced losses. Third, the many
interrelationships between areas of utility operations should be well recognized. Fourth,
the possible rewards and penalties under the program should arguably be symmetric. For
instance, the maximum potential reward for improvement in system reliability should be the
same as the maximum potential penalty for failure to improve reliability. Fifth, those
rewards and penalties should he limited in size so as not to unnecessarily enrich the
utility or threaten its financial viability. Sixth, the targets set for the utility should
be a range of reasonable performance levels based on external and normative standards so
that the utility's own performance is not included in deriving the standard. Last, the
focus of a good PBR programme is results, not the methods used to achieve those results. A good PBR system of
regulation has both advantages and disadvantages. The advantages are much the same as
those listed for the RoR method with two important additions First. a definite incentive
for cost minimization can be built into the system. Second, a working PBR system may
reduce the need for repeated tariff filings by the licensee(s). The first disadvantage of
a PBR system is that unless the system is carefully designed, there may be an incentive
for the regulated entity to lower service quality while pursuing monetary incentives in
other areas. Second, there is less regulatory scrutiny in a well-designed PBR system
because incentives or penalties take the place of such oversight. Third, there is less
public input to the tariff process under this system because hearings are not held as
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frequently as under a RoR system. For proper design of a good
PBR system, comprehensive and reliable data arc an essential requirement. These data
should be amenable to independent verification. be an incentive for the utility to build plant which
may not be essential. An alternative methodology is
Performance Based Regulation (PBR) which is a development over rate-of-return/rate base
regulation. Performance Based Regulation seeks to eleminate some of the regulator command
and control aspects of RoR regulation and substitutes it by a system of incentives(or
penalties) for performance by the regulated entity outside a 'normal" range. A PBR
system can be quite simple and focuses on a single area of utility operation such as
generating plant reliability or system losses. It can be more complex and wide-ranging in
its applicability by taking into account such things as customer satisfaction, cutages at
the consumer level, customer load growth, general inflation, prices to consumers, among
others. Whether simple or complex, the purpose of the system is to relinquish some of the
regulator's review power over one or more elements in the revenue requirement equation set
out above. Instead, monetary incentives for good results or penalties for bad ones are
substituted which the regulated entity can earn or pay respectively thereby affecting its
profitability. There are certain
characteristics that are present in a good PBR System of regulation. First, the focus of
the system should be on controllable aspects of the utility's operations. There is no
point in creating a goal the utility can never achieve. Second, the system should be put
into effect relatively for a longer period of time to recognize the short-and-long term
trade offs made by the utility. For example, it is possible for a utility to pay a hit
more in terms of capital cost for a transformer with lower associated losses. Over time
the capital cost would be more than offset by reduced losses. Third, the many
interrelationships between areas of utility operations should be well recognized. Fourth,
the possible rewards and penalties under the program should arguably be symmetric. For
instance, the maximum potential reward for improvement in system reliability should be the
same as the maximum potential penalty for failure to improve reliability. Fifth, those
rewards and penalties should he limited in size so as not to unnecessarily enrich the
utility or threaten its financial viability. Sixth, the targets set for the utility should
be a range of reasonable performance levels based on external and normative standards so
that the utility's own performance is not included in deriving the standard. Last, the
focus of a good PBR programme is results, not the methods used to achieve those results. A good PBR system of
regulation has both advantages and disadvantages. The advantages are much the same as
those listed for the RoR method with two important additions First. a definite incentive
for cost minimization can be built into the system. Second, a working PBR system may
reduce the need for repeated tariff filings by the licensee(s). The first disadvantage of
a PBR system is that unless the system is carefully designed, there may be an incentive
for the regulated entity to lower service quality while pursuing monetary incentives in
other areas. Second, there is less regulatory scrutiny in a well-designed PBR system
because incentives or penalties take the place of such oversight. Third, there is less
public input to the tariff process under this system because hearings are not held as
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The Commission has considered
the advantages and disadvantages of the two basic forms of regulation and is inclined to
continue to utilize the methodology in the Sixth Schedule of the Electricity (Supply)
Act,1948 which is a form of RoR regulation until such time as data become available to
institute a comprehensive form of PBR in conjunction with the Sixth Schedule. The
Commission believes that a PBR scheme can be accommodated within the Sixth Schedule. For
example, if a licensee exceeded a performance goal for reliability in any given year, it
could be allowed to collect an additional amount of return (as set in the PBR parameters)
in the following year subject to the limits imposed by the Sixth Schedule. Likewise. under
performance would lead to a reduction in the amount of allowed return in the following
year. Gridco, which is the sole licensee in Orissa,
agrees that a PBR system of regulation is more transparent. Since price regulation may at
best yield a second-best solution, there is scope for inefficiency particularly when there
is no penalty for poor performance. While the Commission will make all efforts to ensure
prudence on the expenditure side, standards of performance should be carefully designed so
as not to allow unnecessarily excess return to the licensee or to avoid penalty truly not
required. |
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Issue 5: The Sixth Schedule has been incorporated in Section 57 and 57-A of the Supply Act. The said Sixth Schedule has been made the basis of tariff calculation in the OER Act, 1995 also. It has been prescribed in the Sixth Schedule that when the licensee intends to enhance the charges for supply of electricity, it has to send the proposal accompanied with such financial and technical data as may be prescribed by general or special order. Therefore, keeping in view the requirements of the Sixth Schedule? the Commission has drawn up elaborate proforma and information requirement which have been conveyed to the licensee for filing along with the tariff proposal. The requirement includes information on assessment of' consumption, billing determinants, transmission and distribution loss, financial information, investment details, power purchase details, marginal cost of transmission, least cost combination of power purchase, calculation of clear profit, calculation of capital base, subsidy, inter state comparison of tariff and salient performance data. Stipulation is that Gridco has to fulfill the
data requirements while submitting the tariff proposal. In case Gridco is not in a
position to fulfill the above data requirements, it would need to advise the Commission
about the non-availability of data. The Commission after examining the information and the
explanation given along with it may scale down the data requirements. In any case the
statements of essential data on the prescribed issues is a mandatory for processing the
tariff proposal. |
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Issue 5: The Sixth Schedule has been incorporated in Section 57 and 57-A of the Supply Act. The said Sixth Schedule has been made the basis of tariff calculation in the OER Act, 1995 also. It has been prescribed in the Sixth Schedule that when the licensee intends to enhance the charges for supply of electricity, it has to send the proposal accompanied with such financial and technical data as may be prescribed by general or special order. Therefore, keeping in view the requirements of the Sixth Schedule? the Commission has drawn up elaborate proforma and information requirement which have been conveyed to the licensee for filing along with the tariff proposal. The requirement includes information on assessment of' consumption, billing determinants, transmission and distribution loss, financial information, investment details, power purchase details, marginal cost of transmission, least cost combination of power purchase, calculation of clear profit, calculation of capital base, subsidy, inter state comparison of tariff and salient performance data. Issue 6: There are four possible measures of plant value for the calculation of the rate base: original cost less depreciation; reproduction or replacement cost less depreciation; the value assigned by the Government when it was transferred to Gridco; and the certified values being produced by Gridco for privatization under the Companies Act. The Commission first encountered this issue in the last Gridco tariff proceeding where it was faced with a decision on whether to. value Gridco's investment in plant as the original cost at the time the property was put in service or the value assigned to the investment by the Government when it was transferred to Gridco. As new values are being developed for the four distribution entities, this issue will surely come up again as potential purchasers of the Gridco system consider the level of their offers. While arguments can be made for the use of other measures of plant value for rate base, the Commission has no choice but to accept the plant values certified by Government for Gridco, plus any prudent capital additions made by the licensees at original cost, less depreciation. The value set by Government under the scheme to transfer assets from the OSEB to Gridco formed the basis of the calculations in the last consideration and the Commission will continue to use the transfer value until it is demonstrated to the Commission that regulatory principles or the, public interest requires a change to be made. Such changes will not be made lightly as the Commission places substantial weight on the principle of predictable and stable tariffs and tariff methods. However, the Commission will need to be assured that the sum of the valuations of the four new distribution and the remaining transmission entities will be no greater than the current valuation of the Gridco entity that exists today. The Commission will make inquiries as to the nature of the certified values being developed for the four distribution entities and put interested parties on notice of this requirement. While Gridco agrees with the Commission that the total value of the zonal assets should not exceed the total value of the distribution assets as set out in the Transfer Scheme as adjusted for subsequent additions and depreciation, it may be worthwhile to use the revalued fair price of the assets to avail of short- and long-term loan from financial institutions. The latter will enhance creditworthiness of the licensee while tariff will be based on depreciated hook value as set out in the Transfer scheme adjusted for subsequent addition & depreciation.
Issue 7: Bundled tariffs are those in which more than one function is combined in the same charge for service and usually occurs because the same entity provides more than one function and simply combines all of its costs into one charge. To the degree that pricing for the individual functions can be separated ' within a monopoly structure, consumers receive clearer signals regarding the costs of the different components of their service with an unbundled tariff . structure, but the information may be empirically uninteresting. The eventual introduction of competition, or privatization places new significance on unbundled tariffs. Tariffs separated into their- functional components inform both consumers and potential investors of the cost and revenue stream attributable to each functional entity. Presently, while the marginal cost model separates Gridco's costs into functional categories, the individual components are combined into a single retail tariff. As disaggregation of distribution and privatization approaches, however, it will become increasingly valuable to investors to be able to-calculate the revenue stream for the functional entity that interests them and, thereby, the value of the underlying asset. Though unbundling of tariff will promote transparency and may seem to be essential at the time of the privatization of four distribution companies, there appears to be no pressing need to go for it immediately. The Commission proposes to switch over to tariff unbundling providing a bulk supply tariff combining in it for bulk supply & transmission applicable for the distribution licensees. Further the transmission tariff is also to be shown separately to be made applicable to wheeling services. The concept of unbundling may then be viewed geographically and functionally. While geographical unbundling may reveal facts about the variations in the inter-zonal tariff structure, functional unbundling even at different voltage levels will help locate the areas of profit and loss of the licensees. As far as the retail user of electricity are concerned they may continue to be billed at a composite tariff as at present.
Issue 8: After the total revenue requirements of the regulated entity are determined it is necessary to distribute the total load to the various classes of service, and to tariff schedules within those classes. This distribution can be done with or without a basis in cost. If distribution has to be cost-based, two different cost methodologies can be used to determine a cost-based assignment. An assignment to classes and schedules without reference to costs can be referred to as social rate making. In this methodology, social policy determines the level of revenues from each class and there is no relationship between the costs a customer imposes on the system to provide electricity and the price the customer pays. The inefficiencies inherent in this method are very substantial, and ultimately in conflict with the Act and the Commission's assigned goals.<-23_ /font> One cost based methodology is to assign revenue responsibility using the results of a cost study based on the historic, embedded costs of the utility. In such an exercise, a historic year's revenue requirements are allocated to classes of service or tariff schedules based on an assortment of allocation factors. These factors can be based on the contributions of the classes to the total demand on the peak day of the utility, the kilowatt-hours purchased by each class as a percent of total sales, the number of customers in the class as well as many other factors and combinations thereof. The most economically efficient
assignment of the utility's revenue requirement is the use of marginal costs as the basis
for class revenue development. This is done by determining what the revenue realization
would be if marginal costs were charged as prices to each class and then comparing the
total to the revenue requirement of the utility. Almost certainly the two totals will
differ but it is possible to adjust prices away from marginal cost in such a way as to
minimize damage to efficiency. The Commission will require the licensees to workout and
submit marginal cost analysis, that could be used for development of tariff. Until such
time, however, the Commission will expect the tariff design to be based on the accounting
costs of the licensees, modified by the need to phase out existing subsidies and
cross-subsidies. Issue 9: In Orissa the cost of purchased power from various sources is largely defined by the Power Purchase Agreements in existence. However, both the estimated amount of power and the mix of sources that may be used to meet consumers' needs and to derive the licensee's tariffs can differ appreciably from the actual amount and the corresponding source mix in an operating year. Given the practical importance of both the estimates in the tariff process, there can he substantial risk to the licensee that it will not be repaid its full cost of purchased power. The company may, therefore, be inclined to overestimate both the cost of power and the amount of power required. The institution of a FPPAC could eliminate such possibility without being unfair either to consumers or to the licensee. The disadvantage of instituting such a clause is that Gridco may have little incentive to keep its cost of power low. The Commission will have to institute a process of thorough review of all aspects of licensee's purchase costs before allowing its collection through this clause. This review would deal only with actual numbers instead of estimates. The fuel price a-23_ djustment should be effective immediately after the change in price of fuel and/or oil in the interest of both the consumer & the licensee. The Commission believes that the institution
of FPPAC would be beneficial and could be instituted for licensees within the framework of
the Act. Nothing in the Act prohibits such a clause and Section 26(6) specifically allows
changes of this nature. The Orissa Electricity Regulatory Commission (Conduct of Business)
Regulations, 1996 makes specific provisions in this regard in Regulation 115. However, the
licensee bears the responsibility for initiating a proposal for the institution of such a
clause. The Commission shall examine the licensee's proposals, as and when received,
through appropriate process. Issue 10: Efficiency may suffer if prices don't reflect cost differences. For instance, consumers in the high cost (and low price) areas(s) may consume more power than they would it' charged its full cost and those in the low cost (and high price) areas(s) may consume less than they would if priced at their cost. At times the disparity between price and cost may be so high that one group of consumers may be paying more than its marginal cost while another may he paying less. This is what is known as cross-subsidy in economic literature. Differential tariffs that vary in relation to
cost differences generally make better use of society's resources than uniform tariffs.
While geographically cost-based tariffs are more efficient, the shift away from uniform
retail rates across the region violates a maxim of good tariff design that existing
consumers should not be surprised by sudden and significant discontinuities in their
tariffs. The principle of tariff continuity, however, should not be allowed to preserve
inefficient tariffs indefinitely particularly when differing tariffs may be an inevitable
result of the eventual formation of separate distribution companies, each filing its own
tariff structure based on its own cost. Tariffs of different electricity supply companies
have been different from those of the SEBs in states where such supply companies exist.
Different distribution companies may have different tariffs depending upon their
respective costs standard of service etc. In fact differential tariff based on cost
differences for different zones is a natural outcome. Issue 11: Prices for electricity that reflect
differences in cost as much as possible arc usually more efficient and that rule applies
equally to cost differences related to time as well as to geography. The Commission
believes that effective cost-based electricity pricing would involve TOU tariffs and that
they should be instituted immediately for large customers where adequate metering exists
for this purpose. Other large customers should be put on TOU Tariffs as soon as adequate
meters are made available. The Commission will therefore expect Gridco to report whether
it will be able to develop TOU tariffs for its large consumers at the earliest. While the
existing level of metering efficiency and capacity at the EHT and HT levels may be
improved upon in the short term in order to facilitate TOU tariffs, the latter may not be
cost-effective in LT category of consumers. The licensee may be required to reduce
purchase of costly power during peak hours by shifting loads to off-peak hours and thereby
flattening the load curve. |