TARIFF PHILOSOPHY PAPER OF M.P.E.R.C.

TARIFF FIXATION – PRINCIPLES AND PROCEDURE

1. In power sector, the tariff setting is a vital process of resource management for the utility’s survival and growth and efficient service to consumers. An important factor which has material bearing in pricing of electricity is that it cannot be stored to meet fluctuations in demand. Another distinguishing characteristic of this service is its intangible nature. Tariff adjustment is, therefore, a complicated and sensitive exercise. A utility is expected to pursue, besides the profit, other objectives like consumer service, technological excellence, growth rate and human resources development. The multiplicity of objectives is to be harmonised without affecting the commercial viability. The choices thrown up while designing the tariff are difficult and costly to reverse and the decisions have far-reaching and long term implications for a utility, consumers and the Government.
2. Having regard to the principle that ‘the Honesty is the best Policy’, the Commission will ensure to protect interest of honest consumers. For Tariff determination, the Commission will take into account the provisions of section 29(2) of the Act. The Commission has the discretion to depart for good and sufficient reasons from the previously acknowledged trends of price estimation, basing its order on appraisal of the current scenario of power sector. The regulatory framework, expected to deal with the situation of the power sector having been conceived as a national monopoly with important social objectives, is now required to accord priority for operational efficiency in costing of energy.
3. The Commission shall be guided by the factors specified in sections 22 and 29 of the Act and the principles set out under the Electricity (Supply) Act, 1948.
4. The object of the Electricity (Supply) Act, is to provide for rationalization of the production and supply of electricity and generally for taking measures conducive to coordinated electricity development. The State Electricity Boards were established under this Act. The Act also lays down principles for tariff fixation. According to section 59, the Board shall, after taking credit for any subvention from the State Government, carry on its operations and adjust its tariffs to ensure that the total revenues in any year of account shall, after meeting all expenses properly chargeable to revenues including operating, maintenance and management expenses, taxes on income and profits, depreciation and interests payable on all debentures, bonds, loans, leave such surplus, as is not less than three percent or such higher percentage, as the State Government may specify, of the value of the fixed assets of the Board in service at the beginning of such year. The value of fixed assets, according to the section, means the original cost of such assets as reduced by the aggregate of the cumulative depreciation in respect of such assets and consumer contributions for service lines.
5. The Commission has laid down tariff regulations (reproduced in Appendix) in Chapter V of Madhya Pradesh Electricity Regulatory Commission (Conduct of Business) Regulations, 1999.
6. The supply of electricity to ultimate consumers involves three main activities:
   • Generation: The act of producing electricity by thermal, hydro and other means, including the purchase from other sources.
   • Transmission: "Moving" the electricity through extra high voltage and high voltage system up to distribution level.
   • Distribution: The act of distribution and delivery to the consumers at suitable voltage.

   Electricity is priced at various stages of these activities, broadly classified as:

   • Generation tariff – Ex-bus delivery of electricity at the generating station.
   • Transmission charges – costs involved in transmission of electricity in bulk.
   • Distribution charges – costs involved in distribution of electricity.
   • Bulk supply tariff – cost of electricity delivered in bulk mostly at EHV either for redistribution or self consumption.
   • Retail tariff – cost of electricity delivered to consumers at high, medium and low voltages.
7. According to section 43A(2) of the Electricity (Supply) Act, 1948, the tariff for the sale of electricity by a generating company to the utility shall be determined in accordance with the norms laid down by Central Electricity Authority. However, the provisions of the above Section have been omitted in respect of State of Madhya Pradesh vide Government of India, Ministry of Power’s Notification No. S.O. 826(E) dated 11-9-2000.
8. APPLICATION OF TWO – PART TARIFF

   8.1 The two – part tariff consists of fixed charges related to investment and variable charges related to fuel cost.

   • The fixed charges cover:
     • Interest on loan capital
     • Depreciation
     • Return on equity capital if applicable or prescribed surplus
     • Interest on working capital
     • Operation and Maintenance expenses
     • Taxes, if any on income
   • The variable charges cover
     • Fuel cost – primary and secondary
     • Variable O&M cost, if any.
9. The Commission recognizes the need of promoting merit order dispatch and economic generation. Sooner or later the need may arise to examine the concept of availability tariff, to promote merit order dispatch, grid discipline and to consider competitive generation of power.
10. Supply of power at rates much less than the actual cost, to various categories of consumers largely contributes to SEB losses. The State has to ensure that electricity, as a basic necessity, is available at affordable (i.e. subsidized by the Government) rates to weaker section. The Commission may also consider allowing sustainable cross subsidization.
11. TRANSMISSION AND DISTRIBUTION LOSSES.

    The transmission and distribution losses of MPSEB are abnormally high, mainly due to large scale theft and pilferage of electricity. This menace can only be curtailed and controlled, when Board makes sincere and concerted efforts and the State Government lends its full support to such efforts. This also calls for bringing total accountability in the working system of the Board. T&D losses are required to be drastically reduced in a phased manner. Similarly operating efficiency norms need to be prescribed each year for each plant and for the utility as a whole to bring them gradually within the prescribed standard / acceptable norms of efficiency. The anticipated savings made through reduction of T&D losses and improvements made by utility in its performance would be accounted for in the determination of its expected revenue requirement.

12. The average cost of supply as underlined under the Act, could serve as the bench mark for fixation of tariff for any class or category of consumers in order to enable the utility to meet its statutory obligations. The subsidised supply could be limited to those classes of agriculture and domestic consumers who on account of their weak economic status are unable to pay the actual cost of supply.
13. It would also be necessary to determine the actual cross subsidy having been extended to specified consumer categories and to further quantify the extent of cross subsidisation amongst consumer categories.
14. CONSIDERATION OF MOU BETWEEN GOVERNMENT OF INDIA AND GOVERNMENT OF MADHYA PRADESH BY THE COMMISSION

The MOU between the Government of India and the Government of Madhya Pradesh includes reorganisation of utility, hundred percent electrification of villages and hamlets, metering of all consumers in a time bound manner and determination of tariff for all classes of consumers, so as to meet atleast seventy five percent of the cost of supply of electricity within the next 5 years, subject to decision of the Commission.

15. The Commission from time to time, will be laying down appropriate procedure and formats for furnishing of annual revenue requirement and tariff proposals. The information and the proposals filed by the utility will be examined by the Commission and proceeded with in accordance with the procedure contained in Chapter V of its conduct of business regulations.