t tariff filing procedures a presentation by ugvcl

Summary of Presentation

MYT framework –A Brief Understanding

Drafting a petition and procedures to be followed by SERC & DISCOMs.

MYT – A Brief UnderstandingMYT Principles & BackgroundMYT conceptNeed for MYTMYT Benefits to StakeholdersMYT Framework

MYT Principles & BackgroundTraditionally, tariff regulation in India was managed by the owners of the system, i.e. State Governments State Governments played the all-encompassing role of policy-maker, owner, operator and regulatorGoI enacted the Electricity Regulatory Commissions Act, 1998 (ERC Act) – Aim was to provide an independent regulatory regime– Central Electricity Regulatory Commission (CERC)

and a number of State Electricity Regulatory Commissions were established

As per the EA 2003, the SERCs have to formulate new tariff guidelines for tariff determination and they have been mandated to develop the same keeping the Multi-Year Tariff (MYT) Principles in mind

MYT conceptThe pre-existing annual filing of expected revenues and expenditure was done and the Commission has to either approve the tariff proposed by the licensee or provide an alternative tariff. The earlier system of annual determination was too flexible, giving considerable freedom, and leading to arbitrary decision-making. MYT system was introduced as the answer to make the tariff-setting exercise more predictable.MYT is a system where the tariff determination is done for a number of years, in one exercise.

The concept of MYT can mean several things, such as prescribing the actual numbers or adhering to certain specific benchmarks.

It could also involve broader principles that will prevail for a number of years, covering, at one end, the principles that will govern the input costs of a utility and at the other end, the output prices of the utility.

These two can be linked, as the quantum of revenue to be allowed is linked to the quantum of costs to be allowed.

Need for MYTThe electricity business has certain characteristics that make it imperative to remove regulatory uncertainty:– capital-intensive infrastructure requiring large investments made

in anticipation of demand. – Licensees need to raise large funds to build / renovate networks

and contract generation, which becomes difficult if future income is risky and unpredictable.

– Electricity generation and consumption happen together. There is no storage – so licensees have to build or contract capacity to meet peak demand (used only for a short period) of consumers, maintain a reserve for system reliability, and import from other states if availability at any instance is insufficient to meet requirements

– Licensees are subject to universal service obligation, which mandates them to supply to all consumers irrespective of market conditions.

– Also, licensees cannot directly control how much or when electricity will be consumed.

Need for MYTThe cost of this uncertainty and risk falls on the licensees and ultimately on the consumers. However, it is becoming increasingly important to mitigate this uncertainty. Distribution companies (DISCOMs) need a large amount of capital to expand their networks, reduce the Aggregate Transmission and Commercial (AT&C) losses and also improve the quality of supply. Their ability to do so could however be adversely affected if there is any regulatory uncertainty that has a bearing on their future income. Thus, some income predictability needs to be provided over a certain timeframe (three to five years) for a DISCOM to plan effectively.

MYT Benefits to StakeholdersInvestor: – Some degree of predictability – Also, may reduce the need for frequent tariff filings by the

licensee(s), which would lead to reduced administrative costs.

Consumer: – Multi-year tariffs based on improvement in performance have a

tendency to instil in the utility a sense of efficiency. – In a well-designed MYT based tariff system, the constant

endeavour by the utility to improve operational efficiency can be expected to reduce tariffs. Utilities would have to provide better customer service or face penalties to be paid to customers.

Regulator: – The multi-year tariff introduces a stretched out regulatory lag,

which reduces the necessity for rigid regulatory command and control very frequently.

MYT FrameworkMYT framework lists out the general principles that will

provide regulatory certainty in determining retail tariffs.

Expected to provide predictability in the tariff regime and of

regulating outcomes as compared to the present ARR process

MYT Principles will be applied for determination of Annual

Revenue Requirement of the Discoms for a specified duration

viz. the Control Period

Under MYT, performance targets would be set for items that

are considered ‘controllable’ or ‘manageable’ by the Discoms

MYT FrameworkThe “controllable” items as identified by various ERCs

include: Consumer Sales System Losses Network Costs Investment Plan Financing cost (for the above mentioned Investment Plan) Quality of Supply and Customer Service Standards

Profitability neither guaranteed nor capped, but dependent on performance. Profit in excess of normative returns achieved by means of higher efficiency, growth etc shall be shared with consumers through rebates

Standards of quality for supply and customer service is to be monitored and penalties for falling short is also introduced.

MYT FrameworkDiscoms will not have to bear the burden of items that are considered “uncontrollable”. The consequent financial gain or loss will be adjusted in the revenue requirement :– vagaries of nature– changes in the laws of the land– judicial pronouncements– Government policies– fuel costs, costs on account of inflation, taxes and

cess etc

Discoms will need to ensure adequate investments in the business for asset creation and working capital, and will be fully compensated for it in the revenue requirement

MYT FrameworkMYT aims at incentivising DISCOMs to improve

performance

Presently, all surplus generated by the DISCOM

is utilised by the state for the sector as a whole

With MYT

30% surplus may be retained by the company

30% may go to a common pool

Remaining may go to a reserve fund, to be

utilised by the DISCOMs when required

How to draft a Petition?Regulatory ProvisionsCost element of ARRDemand & Financial assumptionsInitiation of Tariff Filing ProcessTruing Up Procedure for Previous YearTariff Determination of Ensuing YearFiling of Petition to the Hon’ble GERCIssuance of Public NoticeInviting Public ObjectionsPublic Hearing held by GERC on Tariff PetitionIssuance of Tariff Order by GERC

Regulatory Provisions ARR is the Revenue Required by an Utility to meet all the expenses to

carry on the business in a year and to earn a reasonable return on equity; SERCs to decide tariff for generation, supply, transmission and wheeling

of electricity; SERCs to Regulate electricity purchase and procurement process of

distribution licensees; SERCs to Regulate Intra-state transmission and wheeling of electricity; SERCs to Promote cogeneration and renewable energy; SERCs to Specify and enforce Standards of Performance; SERCs to Fix trading margin; Gujarat Electricity Regulatory Commission (Multi Year Tariff)

Regulations, 2011 (hereinafter referred to as the “MYT Regulations”) were notified by the Commission on 22nd March 2011; which supersede the “Gujarat Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2005” and “Gujarat Electricity Regulatory Commission (Multi Year Tariff Framework) Regulations, 2007”

The provision under the Distribution Tariff Regulations requires the licensees to submit their ARR / Tariff petitions latest by 30th November each year to be made applicable for the subsequent financial year

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Cost elements of ARR ARR is the Revenue Required by an Utility to meet all the

expenses to carry on the business in a year and to earn a reasonable return on equity; Power Purchase Cost Operation and Maintenance Cost Interest & Finance charges Interest on Working capital Depreciation Return on equity Other Expenditures

Provision for bad and doubtful debts Provision for contingency reserves Prior period adjustments/ power purchase arrears

Income Tax Provision The tariff may undergo a change depending upon the approval of

ARR by the Commission

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Distribution Companies – Demand Projections

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• Sales for FY 2011-12 estimated based on:

– Five Year CAGR Growth considered;– Necessary smoothening of growth considered

in abnormal cases– Higher Growth assumed in Residential &

Commercial Categories– Growth in Agriculture consumers on account

of release of new connections– Norm for computation of consumption of new

metered agriculture connection - 1200 Units/HP/Annum

Tariff Category DGVCL MGVCL PGVCL UGVCLLow Tension ConsumersResidential 11.00% 10.07% 9.40% 10.09%Commercial 11.00% 13.14% 13.37% 15.25%Industrial LT 6.00% 7.23% 6.95% 5.08%Public Water Works 9.00% 9.19% 9.62% 6.73%AgricultureStreet Light 6.00% 6.42% 7.56% 5.22%LT Total 8.30% 8.60% 6.60% 6.33%High Tension ConsumersIndustrial HT 5.00% 9.06% 3.33% 16.99%Railway Traction 4.00% 7.71% 0.00% 2.20%HT Total 4.93% 8.83% 17.81% 16.90%TOTAL 6.95% 8.69% 9.36% 8.36%

Sales


No. of Consumers


Connected Load

Financial Assumptions (FY 2011-12 to 2015-16) as per GERC MYT Regulations, 2011

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Treatment to meet revenue gapThe difference between ARR and revenue would be

met by:

Tariff increase Subsidy from state government Increasing the efficiency of the utility – by reduction of distribution

loss, targets based on utility plans including CAPEX Efficiency norms

Billing & collectionLevel of arrearsQuality of serviceEnhancement in operational efficienciesEffective demand supply management (DSM)Savings in power procurement

Regulatory asset Revolving bank guarantee from financial institutions

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Rationalization of Tariff Structure Tariff Philosophy shall be guided by Sec 61 (g) of the Electricity Act as well as

Clause 8.5.1 of the National Tariff Policy which necessitates movement of Tariff

Structure towards Cost of Supply; tariff should be within +_ 20 % of the Average

Cost of Supply

Major Constraints for achieving this end are:

Legacy Tariff, Consumer Mix and Paying Capacity of subsidised consumer categories;

Approach of a gradual reduction in Cross Subsidy, which is an important feature

in the Electricity Act, 03 and the Tariff Policy has to be undertaken;

Suitable merger of categories and sub categories may be done to evolve a simple,

comprehensible and logical tariff structure;

Provision of peak and off peak, load factor rebate, power factor rebate are an

important tool;

Seasonal and time differentiated tariff would help in aligning revenue and cost

structure.19

Initiation of Tariff Filing ProcessThe Hon’ble GERC vide tariff order dated 6th

September 2011, determined ARR for entire second control period (FY 2011-12 to FY 2015-16).

As per MYT Regulations 2011, Tariff Filing should be done each year for the entire second control period.

The Tariff Petition should include true-up of previous year ( say FY 2010-11) and tariff determination for ensuing year (FY 2012-13).

In accordance with the same Licensee has to initiate the procedure for tariff filing each year.

Licensee is required to collect required relevant data from all its sources in order to correctly execute the tariff filing process.

Truing Up Procedure for Previous YearTruing Up means comparison of expenses incurred as per

Audited Accounts with that of Approved ARR in order to find Revenue Gap if any which needs to be adjusted in tariff of subsequent year.

Based on the nature of the expense, MYT Regulations have defined a particular expense as either Controllable or Un-Controllable.

Controllable Expenses are such which are within the scope of the Licensee, whereas Un-Controllable Expenses are beyond the control of the Licensee

As per MYT Regulations, 1/3rd of the Controllable Expenses are to be shared with the Consumer while 2/3rd is to be retained by the Licensee.

Uncontrollable Expenses are entirely pass through to the consumers without any sharing mechanism.

With the above said calculation, Licensee has the determine the Revenue Gap for that particular year.

Tariff Determination for Ensuing YearThe Hon’ble GERC has determined ARR for the

entire second control period and therefore the Licensee has to adhere to this ARR till FY 2015-16.

However the Licensee can file for tariff revision every year during the second control period based on the truing up process.

The Licensee can revise the tariff for the ensuing year based on the revenue gap determined by the truing up process.

Similar Procedure can be followed by the Licensee each year during the second control period.

Filing of Petition to Hon’ble GERCThe petition with full details of the

calculation showing truing up of previous year and tariff of following year, is the be filed before the Hon’ble GERC by 30th November of each financial year.

The Licensee is also require to file other relevant information along with the petition and supporting documents like the Audited Accounts for the previous year.

The Licensee has to also make payment to the Hon’ble GERC as petition fees as specified in the MYT Regulations.

Issuance of Public NoticeThe Licensee has to issue public notice within

seven days of the acceptance letter issued by the Hon’ble GERC.

The public notice is an advertisement or brief note on the petition filed by the Licensee.

The format of the public notice to be issued needs to be approved by the Hon’ble GERC

The public notice is to be published in at least 2 daily newspapers, one in English and one in local language.

Inviting Public ObjectionsThrough the Public Notice, the Licensee is

required to invite public objections on the petition filed.

The Licensee has to also make a summary of the entire petition and make it available to the public on demand.

The Licensee has to allow a time period of 30 days to the public for suggestions/objections to approach them.

Public Hearing held by GERC on Tariff PetitionThe Hon’ble GERC issues a notice to the Licensee on schedule

of public hearing.Public Hearing can be held by GERC once the period of 30

days given by Licensee for inviting public objections is over.The Licensee is legally responsible for giving replies to the

public objections raised, before the schedule of the public hearing.

The general public has the right to be present at the public hearing and can directly question the management of the licensee present at the hearing.

They can also raised questions/doubts based on the replies made by the licensee during the allotted time slot.

The Management of the Licensee is responsible to satisfactorily respond to these queries.

The Hon’ble Commission has a right to hold the public hearing once again if it feels that appropriate objections were not raised.

Issuance of Tariff OrderAs per MYT Regulations, the Hon’ble Commission

has to come up with the tariff order for the coming year within 120 days of the filing of the petition by the Licensee.

During the period, the Licensee is free to file additional information or addendum to the petition, if the Licensee feels the need to do so.

The Licensee is also liable to produce any document/information before the Hon’ble GERC on demand.

After in depth understanding, analysis, authentication and scrutiny of the data submitted and adhering to the scope of the Regulation the Hon’ble GERC comes up with the tariff order for the Licensee.

Mechanism to monitor Implementation of Tariff Order

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Process / Systems Development of a Regulatory Information

Management System (RIMS) database to keep a check on the various performance parameters and to assist the compliance of the regulations;

By benchmarking the processesAS-IS process mapping;Business Process Re-engineering;

Designing a Monitoring and Evaluation Plan for various;

Asking the utility to use advance IT/ MIS enabled tools for better & efficient monitoring;

Meetings/ Workshops Organizing and conducting an Annual / Half

yearly meetings & Knowledge sharing workshops;

Quarterly meetings (official/unofficial) could be arranged;

Co-ordination Committee A monitoring committee could be formed

comprising of a nodal officer from the Commission and from each licensee’s side;

Various Directives/ issues such as Short term power purchase/ Fuel Adjustment charge can be discussed;

Other Critical Elements of ARR process

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UGVCL- Awarded Gold Shield for FY 2010-11

Awarded with Gold Shield for FY 2010-11.

t tariff filing procedures a presentation by ugvcl

Documents

tariff determination

myt system

tariff regulation

alternative tariff

regulatory uncertainty

electricity generation

new tariff guidelines

broader principles