The policy, which is currently being finalised by the Union ministry of power, entails that regulatory commissions could choose between return on equity (ROE) or return on investment (ROI), while deciding on tariffs of new generating plants.
The policy also calls for linking the rate of return with the RBI bank rates/interest rates. However, while doing so, “the actual returns in other sectors, apart from risk perceptions, would also be material factors in determining the rate,” says the policy.
According to the policy,”The ROE could take into account the differences in the gestation period of investments in hydro, thermal, transmission and distribution projects and also factor in the absence of any ROI during the period of project execution”.
Significantly, the policy stresses on the need to move towards a pre-tax return as against the prevailing post-tax return structure for efficient tax management. Introducing a differential tariff for peak and off-peak hours in order to incentivise and flaten the load curve is another feature of this policy. As per ministry officials, views of the central power PSUs have also been sought in this respect.
On distribution front, the tariff policy calls for a higher rate of return in the initial transition period for private distribution companies and enunciates that distribution tariff should move towards a multi-year performance target.
It elaborates that “where private management is being introduced in distribution, the multi-year tariff regime should commence from the date of take over by private management so that gains are suitably incentivised”.
The policy also advocates for a higher rate of return in the initial transition period for private distribution companies to incentivise a breakthrough in control of theft and distribution loss reduction.
For making the private sector power projects bankable, the policy stresses on the need for tariff based bidding mechanism for all future power projects. As per the policy, tariffs should actually emerge through a genuinely competitive process, which is fair, open and transparent.
For cases, where tariffs are not determined through a competitive bidding process, these will have to be determined by the Regulatory Commissions, as provided in the ERC Act, 1988. “The regulatory commissions would then need to provide a reasonable return and strike the right balance between consumer interests and the need to attract and sustain investments.
Moreover, as per the policy, the instrument of surcharge, as enunciated by the Central Electricity Regulatory Commission (CERC), should be used with flexibility to provide requisite resources for capacity addition, keeping in mind the long-term interests of the consumer in the mind.
As per the policy, the tariff structure should also facilitate the emergence of reserve capacities in generation and transmission to improve system reliability so that “ultimately performance standards of reliability becomes enforceable and a consumer is compensated for failure to comply with performance standards”.