The ERC Act of 1998 enjoins the CERC to
promote competition, efficiency and economy in the electricity industry. It also requires
that the CERC will aid and advise the central government in the formulation of tariff
policy, which shall be fair to the consumers and facilitate mobilisation of adequate
resources for the power sector.
The immediate objective of tariff regulation should be the establishment of a predictable and fair system, which rewards efficiency and discourages the cost plus approach to rate making. Consequently, the Commission proposes to establish tariff regulations, which simulate competitive conditions. Performance targets benchmarked at the level of industry best practice and incentives linked to their achievement is one such option which will induce utilties to continuously increase efficiencies. Disaggregation or unbundling of facilities for tariff determination is another option to induce competition in some segments of a market, which is otherwise dominated by a few producers. Through such methods, the Commission can try to ensure that the dominant position of central generating stations or of the public sector monopoly, which is currently designated as the Central Transmission Utility, is not exploited.
The Commission expects to achieve a long-term trend of electricity prices, declining in real terms, through the introduction of efficiency enhancing incentives and competition in supply, where feasible. The introduction of competition, in the supply of electricity and in the supply of fuels, has resulted in such real price declines in other countries. Fuel is the single major cost for thermal stations. Thermal power is dominant in India. For significant reduction in bulk/wholesale electricity tariffs, input costs must come down. The benefits, of such rationalisations in bulk power are expected to assist state level regulators to further rationalise retail tariffs.
Tariff regulations must be comprehensive and must support the establishment of commercial conditions acceptable both to the supplier and the buyer. The enforceability of contracts and agreements, particularly regarding the payment of dues, binding producers and buyers alike, is one such area requiring attention. The definition of shared responsibilities for grid management must be accompanied by the enforcement of strict penalties for grid indiscipline. Transparent decision making procedures for ensuring "least cost" investments, particularly in transmission, where economies of scale restrict competition, is another area which directly impacts tariff setting and will therefore be reviewed by the Commission.
This consultation paper does not seek to categorically state the mind of the Commission on tariff setting. However, it expresses views with the intention of eliciting a response from stakeholders. The Commission would like to see changes in some crucial areas of tariff setting. These include the determination of tariffs on the basis of outdated norms, the lack of certainity in the tariff payable at the time the transaction is entered into, the poor payment record of customers, the rampant indiscipline in the regional grids which results in extreme frequency and voltage excursions, fluctuations and the absence of incentives for continuous improvements in efficiency. It proposes to address these issues in its orders.
This paper describes the history of bulk power tariffs in India, the policy framework within which the Commission has to function, an exploration of what competition and markets would mean in the electricity industry and the principles and alternative methods for the determination of generation and transmission tariffs. For convenience, it highlights the primary issues separately, in an executive summary. These are issues concerning tariff setting which require resolution and on which the Commission seeks the views of stakeholders.
The Commission hopes that this paper will generate widespread discussion and comments, and welcomes written comments from members of the public, constituents of the electricity industry and other experts. The Commission proposes to arrange conferences at the headquarters of the Regional Electricity Boards, at Bangalore, Mumbai, Calcutta, Shillong and Delhi in October 1999 to enable greater interchange of views. The intention of the Commission is to announce the principles on which it will approach tariff determination, during the year.
(S. L RAO)
Dated: September 15,1999.
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