International Journal of Scientific Research and Engineering Studies (IJSRES)

Volume 1 Issue 3, September 2014

ISSN: 2349-8862

www.ijsres.com Page 11

Optimization And Mapping Of The Process Of Tariff
Determination By The Electricity Regulators In Context Of
Indian Power Sector


Ashok Upadhyay
Deputy Director (Generation)
M. P. Electricity Regulatory Commission, Bhopal (M.P.) India



Abstract: Tariff determination ought to be treated
as a time bound exercise. I f there is any lack of
diligence on the part of the either Utilities or Regulator
which has led to the delay. The electricity regulators
should play a pro-active role in ensuring the compliance
of the provisions of the Act, Regulations and the
Statutory Policies. I t is seen that most of the State
distribution utilities have failed to file annual tariff
revision petitions in time and as a result in a number of
States, tariff revision has not taken place for a number
of years and that State Commissions constituted all over
I ndia have also failed to make periodical tariff revisions
resulting in the poor financial health of the State
distribution utilities. This paper focuses on the process
how to dispose of the tariff petitions within the
stipulated time limit. The papers provides a standard
process of tariff determination considering all the
activities and expected time required for completion of
each activities by applying I ndustrial Engineering and
management principles. This paper also focuses on the
detoriating financial condition of power utilities due to
delay in tariff filing by the utility or delay in issuing
tariff orders by the Regulator. The paper further
provides the mapping of tariff determination process
and optimizes the time taken in light of the section 64 of
the Electricity Act. For this purpose the principles of
I ndustrial Engineering have been applied to divide the
whole process in small segments/activities and then
standardized the process.

I ndex Terms: Tariff revision, financial health,
I ndustrial engineering.


I. INTRODUCTION

After the economic reforms in 1991 the Government
of India has formulated many strategies for bridging the
peak hour demand & supply gap by promoting the
private sector participation, regulatory intervention, tax
benefits, counter guarantee etc., for the growth of power
sector. The power or electricity is the basic need of
todays world and is the key infrastructure sector of any
country in the world. The role of power sector for Indian
economy is analogous to that of backbone for a body and
hence the power sector is given importance while creating
laws, regulations and planning for the nation. With its
huge population of around 1.25 billion, India has always
suffered acute power shortage and demand supply
mismatch. So what created such type of power sector
being burdened and almost at the edge of bankruptcy? It
all started in 1980s, when almost all the state electricity
boards started showing the signs of financial, technical
and governance failures. The 1990s started with the state
supported entry of private generation companies. The
power sector reforms were started in the mid-1990s era
and many SEBs were restructured during this time. In the
reforms process the structure of the SEBs was completely
changed with the financial and governance support from
international financial institutions like World Bank (WB).
Though, successful implementation of the power sector
reform process is not obtained till date and after almost
20 years we still dont have any great successes to boast
of. Also in the reforms process many failures occurred
like Orissas attempt to reform and the disasters like
Enron. Today the Indian govt. as well as the state govt.
is busy with many new developments in the sector
brought about by revolutionary Electricity Act 2003.
The policy changes along with the EA 2003 are supposed
to change the sector and overcome various bottlenecks.
Reform of power distribution is today widely viewed
as fundamental to improving commercial performance
and financial viability of the power sector in India. In
recent years, a number of states have worked to improve
the commercial performance of their state utilities,
unbundling state entities, creating more independent
regulatory systems, and putting in place measures to
control losses and theft. But progress has been difficult,
and slow than envisaged. Recognizing the urgent need to
address the issue of reducing financial losses and
improving the performance, the Ministry of Power has
focused on implementing distribution reforms and has
introduced several measures to accelerate the process.
The recent initiatives include the enactment of the EA
2003 which provides for a framework for more
competitive, transparent and commercially driven power
sector. The toughest roadblock Regulatory framework is
changing & leading way ahead to encourage private
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Volume 1 Issue 3, September 2014
ISSN: 2349-8862

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participation in the power sector. This is imperative to
boost more investments, also to induce competition in the
sector. Also the power sector is highly regulated sector,
so policies & regulations play a very important role to
bring the sector on the right track. Due to the degrading
conditions of the power sector, govt. had realized that
private participation has to play a major role in improving
the financial viability of the sector.

The poor state of utility finances has far-reaching
consequences. Utilities are unable to cover their costs or
make the investments required to serve customers or
both. They may also be unable to pay for power even
when electricity is available in the market, and so do not
purchase enough power to meet demand. This results in
poor quality of supply and inadequate capacity utilization
in generating stations, further weakening sector finances.
Customers must resort to the use of expensive standby
options, resulting in productivity losses and reduced
competitiveness. Finally, the financial sector, which has
in effect bankrolled the deficits, now faces huge risks
because of the loans made to the power sector for capital
investments and for working capital. The delay in
issuances of tariff orders also obstructing the
development of the power sector and the cause of poor
financial health of the utilities. The utilities are not able to
recover their actual cost of power. The Ministry of Power
have expressed his concern about the delay in tariff
determination process which further detoriate the
financial health of the power utilities.


II. STATUTORY PROVISIONS UNDER
ELECTRICITY ACT, 2003

Section 61 of the Electricity Act, 2003 requires the
Regulator to specify the terms and conditions for the
determination of tariff. Section 61(i) of the Act
provides that while specifying the terms and
conditions of tariff, the Regulator shall be guided by
the National Electricity Policy and Tariff Policy.
Section 64 of the Act provides the timeline for
determination of tariff and stated that the
Appropriate Commission shall, within one hundred
and twenty days from receipt of an application under
sub-section (1) and after considering all suggestions
and objections received from the public,-
Issue a tariff order accepting the application
with such modifications or such conditions as
may be specified in that order;
Reject the application for reasons to be recorded
in writing if such application is not in
accordance with the provisions of this Act and
the rules and regulations made there under or
the provisions of any other law for the time
being in force:
With regard to the timely disposal of tariff petitions,
the tariff policy has also provides that the appropriate
Commissions should initiate tariff determination and
regulatory scrutiny on a suo-moto basis in case the
licensee does not initiate filings in time. It is desirable
that requisite tariff changes come into effect from the date
of commencement of each financial year and any gap on
account of delay in filing should be on account of
licensee.


III. GOVERNMENT INITIATIVES TO IMPROVE
THE HEALTH OF THE DISTRIBUTION
COMPANIES

In October 2012 the government announced a
Scheme for Financial Restructuring of State Distribution
Companies, available to all loss-making discoms, that
may total Rs 1.9 trillion (Ministry of Power 2012). Under
the initiative, state governments would take over 50
percent of the short term liabilities of distribution utilities
outstanding as of March 31, 2012, and convert it into
bonds to be issued by discoms to participating lenders,
with the backing of state governments. The banks would
restructure the other 50 percent, with a three-year
moratorium on repayment. The restructured debt, too,
would be guaranteed by state governments. State
governments are part of a tripartite agreement to
implement the restructuring, in which discoms promise to
regularly file petitions for tariff revisions with their
respective State Electricity Regulatory Commissions, in
line with costs, and reduce aggregate technical and
commercial losses. The central government is making
available conditional transitional financing to support the
effort. As per the scheme two committees, one each at the
state and the central levels, are monitoring the plans
progress. Discom performance is to be verified annually
through a third party appointed by the Central Electricity
Authority. But bailouts limit the incentives of utilities,
lenders, and others to work to achieve financial
sustainability because they insulate sector participants
from the consequences of their choices. Banks with high
exposure to poorly performing utilities are among the
biggest beneficiaries of the bailout, since a large share of
their loans would arguably have turned bad otherwise.
While utilities have to meet certain conditions to benefit
from the aforesaid plan, the conditions appear unlikely to
remove moral hazard.


IV. ISSUE RAISED BY THE MINISTRY OF POWER

In continuation to make efforts for improving the
financial health of the distribution companies, the
Ministry of Power through its communication dated 21
st

January, 2011 requested the Appellate Tribunal for
Electricity that to take appropriate action by issuing
necessary directions to all the State Commissions to
revise the tariff periodically, if required by suo moto
action, in the interest of improving the financial health
and long term viability of the electricity sector in general
and distribution utilities in particular. However, some of
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Volume 1 Issue 3, September 2014
ISSN: 2349-8862

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the State Commissions have not complied with the
statutory requirements as provided in the Act for timeline
for issuances of tariff orders. Ministry of Power
communicated that periodical tariff revisions by the State
Commissions have not been taken place in most of the
States contributing to poor financial health of the State
Distribution utilities. According to the government, in
most of the States, the Utilities have failed to file Annual
Tariff Revision Petitions in time and even then, the State
Commissions have not taken suo-moto action for the
revision of tariff by invoking the suo-moto powers. Under
those circumstances, the Power Ministry, requested the
Tribunal to invoke authority under section 121 of the Act,
2003 by taking suo-moto action and to issue necessary
directions to all the State Commissions to take
appropriate steps periodically, if required, suo-moto, for
the determination of Annual Revenue Requirements/tariff
in the interest of improving the financial health and long
term viability of electricity sector in general and
distribution utilities in particular. The main content of the
Power Ministry letter dated 21.1.2011 are reproduced
below:
most of the State distribution utilities are under
financial strain due to the gap between the Average
Revenue Realised (ARR) and Average Cost of Supply. On
an aggregate basis, the gap between the average cost of
supply and tariff is 107.32 paisa per KWh which results
in financial loss for every unit of power sold. Financial
losses of State distribution utilities are reported to be
Rs.52,623 Cr in FY 2008-09 without subsidy. This is
likely to rise to Rs.116,089 Cr by FY 2014-15 at 2008
tariff level, with no increases, according to a Mercadoes
study for the 13
th

Finance Commission. According to the
PFC report for the year 2008-09, out of 39 utilities
studied, 22 utilities have negative net worth (35 utilities
are incurring losses with subsidy) and loss of Rs.32,197
Crores was incurred by the utilities (on subsidy received
basis) in 2008-09. This leads to short term borrowing by
distribution utilities to bridge the gap between the
revenue and expenditure every year.
In view of the above MOPs concern it may be
concluded that the debt trap of distribution utilities has
serious implication on the financial health of the
electricity sector as a whole. The distribution utilities
should generate adequate internal resources to honour the
Power Purchase Agreements (PPA) made with the
generating companies and hence any default in payment
will have repercussions on the financial institutions
lending to generating companies and future investments
in capacity addition. One of the most important reasons
for poor financial health of Discoms is the inadequacy of
tariff to cover the cost incurred by the utilities to procure
and supply electricity to the public. In a study conducted
by Forum of Regulators of ten States for assessment of
tariff revision and financial viability of Discoms in 2010,
it is estimated that additional increase to the tune of 1% to
39% is required to fully recover the cost of supply. On the
request of the Ministry of Power, the Appellate Tribunal
for Electricity initiated a Sue-moto proceeding against the
state Commissions and flag out the following issues:-

Several State Commissions are leaving Regulatory
gaps in tariff fixation i.e. the tariff fixed for a
particular year is not sufficient to cover the ARR for
that year;
Such Regulatory Gaps are left as a matter of course
and the gap is left to be filled up in the Truing up or
in subsequent years;
Delays in the tariff determination exercise;
Truing up is not being carried out on regularly and
sometimes not for several years at a time;
Several Commissions have not framed regulations
regarding Fuel Surcharge Adjustment Mechanism.
Lack of sue-moto action to be taken for initiating
appropriate proceedings for determination of ARR
and tariff fixation in the absence of the applications
to be filed by the utilities.
The Tribunal has also observed that the timely
truing-up expenses must be done since no projection can
be so accurate as to equal the real situation and the
burden/benefits of the past years must not be passed on to
the consumers of the future. The Tribunal also observed
that the delays in timely determination of tariff and
truing-up entails imposing an underserved carrying cost
burden to the consumers and Cash flow problems for the
licensees. In order to address the current situation, the
Tribunal issued the following directions:
Every State Commission has to ensure that Annual
Performance Review, true-up of past expenses and
Annual Revenue Requirement and tariff
determination is conducted year to year basis as per
the time schedule specified in the Regulations.
It should be the endeavour of every State
Commission to ensure that the tariff for the financial
year is decided before 1
st
April of the tariff year. The
State Commission could consider making the tariff
applicable only till the end of the financial year so
that the licensees remain vigilant to follow the time
schedule for filing of the application for
determination of ARR/tariff.
In the event of delay in filing of the ARR, truing-up
and Annual Performance Review, one month beyond
the scheduled date of submission of the petition, the
State Commission must initiate sue-moto proceedings
for tariff determination in accordance with Section
64 of the Act read with clause 8.1 of the Tariff
Policy.
In determination of ARR/tariff, the revenue gaps
ought not to be left and Regulatory Asset should not
be created as a matter of course except where it is
justifiable, in accordance with the Tariff Policy and
the Regulations. The recovery of the Regulatory
Asset should be time bound and within a period not
exceeding three years at the most and preferably
within Control Period. Carrying cost of the
Regulatory Asset should be allowed to the utilities in
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the ARR of the year in which the Regulatory Assets
are created to avoid problem of cash flow to the
distribution licensee.
Truing up should be carried out regularly and
preferably every year. For example, truing up for the
financial year 2009-10 should be carried out along
with the ARR and tariff determination for the
financial year 2011-12.
Fuel and Power Purchase cost is a major expense of
the distribution Company which is uncontrollable.
Every State Commission must have in place a
mechanism for Fuel and Power Purchase cost in
terms of Section 62 (4) of the Act. The Fuel and
Power Purchase cost adjustment should preferably
be on monthly basis on the lines of the Central
Commissions Regulations for the generating
companies but in no case exceeding a quarter. Any
State Commission which does not already have such
formula/mechanism in place must within 6 months of
the date of this order must put in place such formula/
mechanism.


V. TIME LIMIT FOR DISPOSAL OF TARIFF
PETITIONS

An analysis of the some of the generation tariff
orders for central sector generating stations issued by the
Central Electricity Regulatory Commission during last
three years has been done. On outcome, it may be
observed that the most of the tariff orders of central sector
generating stations have been issued after two to three
years from its filing and registration. Since the state
distribution utilities also have allocation in central sector
generating stations. Therefore, the state Commissions
facing problem in fixation of power purchase cost of
distribution licensees on year to year basis in absence of
the tariff orders of Inter State generating stations and the
state commissions have no option to allow power
purchase cost based on the order of previous control
period for the power allocated from central sector
stations. In this situation the distribution utilities are not
able to recover its actual cost of power and the difference
cost is recoverable after two to three year in true-up
exercise. In order to avoid delay in tariff determination
process, the industrial engineering principals like work
study, method study, time measurement etc. may be
applied to optimized the process.


VI. INDUSTRIAL ENGINEERING PRINCIPLES FOR
OPTIMIZATION OF TARIFF DETERMINATION
PROCESS

Work Study: By applying the Industrial Engineering
principles and economics theorys, the activity/process of
tariff determination may be optimize. Work study is one
of the management techniques which is employed to
improve the process of completing the activity. The main
objective of work study is to assist the management in the
optimum use of resources. There are three aspects of
work study: First is more effective use of resources.
Second is more effective use of effort and third is
evaluation of work. It also analyzes the work into smaller
parts followed by re-arrangement of these parts to give
the same effectiveness at lesser efforts and cost. It
examines both method and duration of the work involved
in the process. The work study is primarily concern with
discovering the best ways of doing work. It is also a
technique used to minimize cost through improvement in
current methods and by reducing ineffective or wasted
time. There are two main components of work study, one
is Method Study and other is Work Measurement.
Method Study is the systematic recording and critical
examination of existing and proposed ways of doing work
by developing and applying easier and more effective
methods and reducing cost. Work Measurement is the
application of techniques designed to establish time for a
qualified person to carry out a specified job at defined
level of performance.
Method study and work measurement are, therefore,
closely linked. Method study is concerned with the
reduction of the work content of a job or operation. While
work measurement is mostly concerned with the
investigation and reduction of any ineffective time
associated with it and with the subsequent establishment
of time standards for the operation, when carried out in
the improved fashion, as determined by method study.
The relationship of method study to work measurement is
represented as follows:














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Both method study and work measurement are
themselves made up of a number of techniques.
Generally method study should precede the use of work
measurement, but when the time standards for output
are being set, is often necessary to use one of the
techniques of work measurement. In order to determine
why ineffective time is occurring and what is its extent,
so that the management action can be taken to reduce it
before method study is begun. Equality, time study may
be used to compare the effectiveness of alternative
methods.
The work measurement provides a means of
measuring the time taken in the performance of a
activity or series of activities in such a way that
ineffective time is detected and separated from the
effective time. The purpose of work measurement are to
reveal the nature and extent of inefficient time, from
whatever cause, so that action can be taken to eliminate
it; and then to set standards of performance of such a
kind that they will be attainable only if all avoidable
ineffective time is eliminated and the work is performed
by the best available method and by personnel suitable
in training and ability to their task. Work measurement
can thus be used to set the standard times for carrying
out the work and standard output level.

VII. MAPPING OF TARIFF DETERMINATION
PROCESS
By applying the aforesaid Industrial Engineering
principles and methodology, the mapping for
optimization of tariff determination process has been
developed. In this process the total time taken from
filing of petition to issuance of tariff order has been
mapped as per the Electrical Act, 2003. The mapping
process ensure timely disposal of tariff petitions which
improve the financial health of the utilities and the
present consumers shall not burdened due to past
liability of the tariff. In this process the zero date is
considered the date of filing the tariff petition. If there
is any delay in disposing the tariff petition, the detailed
reasons of delay should be recorded by the regulator to
justify weather the delay was from petitioner side or at
Commissions end. The utility should also be ensure to
provide all the information required to the Commission
within stipulated time. The stages of tariff
determination process mapping and time taken by each
segments are as given below:

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VIII. CAPACITY BUILDING REQUIREMENTS
FOR REGULATORY STAFF

In order to achieved the aforesaid timeline for
disposal of the tariff petitions regulators are required to
develop the capacity of the officers/staff. The Forum of
Indian Regulators carries out a Study on assessing
Capacity Building requirements for regulatory staff
by engaging the consultant. The objective of the
assignment was to evolve effective Human Resource
Development policies in a regulatory body which will
strengthen the organizations ability to fulfill its
mission and meet emerging challenges. The consultant
has also proposed a regulators structure that contains
the typical functions of a regulator. The structure
consists of three distinct areas Advisory / Policy
Making, Regulatory (including tariff) and Support
functions. With regard to training and skill building of
the officers, the regulators are required to adopt a
structured approach for Training and Development. In
the long run a structured approach is need to be
adopted to build up internal capability and create an
institutional memory in the form of effective
knowledge management. In addition to the setting up
of a structured training and development mechanism, it
is important that there is adequate availability of
manpower to ensure that the nominated personnel are
relieved for training. There is need of multi pronged
approach to meet the training capacity building
requirements of the regulators. Specific strategies to
build capacity in the long run for the regulators are as
follows:
Induction training (internal)
Promotion linked training
Tie ups with other regulators Knowledge
Exchange & Internships
Initiatives to encourage Capacity Building
Refresher training (internal or external)
Creation of Knowledge management function
Setting up a dedicated Capacity Building cell or
division
Setting up a Regulatory research institute
Setting up a educational institute for conducting
specialized regulatory courses.
There is also need to explore options for the
creation of a common cadre across regulators for some
positions. This will considered with a view to provide
individuals exposure to multiple sectors. The
possibilities also need to be assessed to have common
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cadres in non sector specific / non technical areas such
as legal, financial analysis and economics.


IX. RECOMMENDATIONS

The mapping of activity of the regulators to the
various functions of a regulatory Commissions has to
be done. This mapping of activities to departments
undertaken to determine the competencies that the
incumbents in the departments require to possess to
execute the job effectively. This mapping of activities
is required to address following objects.

Since the utilities need to pay their fuel cost and
power purchase cost in time. Therefore, the tariff
petitions and true-up petitions should also be
disposed of timely so that the utilities will timely
recover their actual cost of power and the
burden/benefits of the past years must not be
passed on to the consumers of the future.
In order to achieve the aforesaid timelines the
regulators have to implement the attractive
Compensation scheme as per Central Public
Sector Enterprises. Based on approval, regulator to
work out detailed pay, allowances and benefits
policies applicable to each regulator.
Implementation of Training. Identify / Finalize
training programmes relevant to the areas of work
of the regulator. Tie up with concerned
organization (Indian / Abroad) for training /
capacity building of the officers. Constitute task
force to take forward the setting up of the specific
institute. Approach funding agencies for support
to set up institute and to sponsor training programs
As the regulators in India are operating on a fee
basis, as long as they do not require financial
assistance or financial support from the
Government of India, they need to be empowered
to take all establishment related decisions like
Creation / abolition of posts, Creation of
compensation package and its adoption and
formulation of HR Policies. In addition, a separate
regulatory cadre may also be develop by the MOP
and employee exchange across regulators may be
carried out.
Ministry of Power is need to start a specialized
academic certificate course or any other degree
programme on regulatory. The nodal agency of
this programme may be the forum of Regulators
and duration of this specialized academic course
may fixed after consultation with the acamidic
institutions. The benefits of such type of
programmes are that the spciilized man power
shall be available in this field and persons will
work with full mind set.


X. CONCLUSION

There is a continued need to analyzing existing
methods of tariff determination even in the case in
which special efforts are to develop efficient methods
for determination of tariff. The reason for this the best
methods to do may not necessarily remain the best
method after some period. Therefore, an opportunity to
improve upon existing methods always exists because
of advancement and technological developments.
Meanwhile, the capacity building of regulatory staff is
also necessary to do the regulatory work and complete
the process of tariff determination within the stipulated
time. It also required further exploring the area and
accordingly trained and skilled need.


REFERENCE

[1] More Power to India the Challenge of Electricity
Distribution issued by World Bank.in 2014, 1818,
H. Street NW, Waghington DC.
[2] Study report on assessing Capacity Building
requirements for regulatory staff prepared by
Deloite under the assignment for Forum of Indian
Regulators, in May, 2012.
[3] Planning Commission. 2011. Annual Report 2011
12 on the Working of State Power Utilities and
Electricity Departments. New Delhi: Government
of India.
[4] Central Electricity Regulatory Commission
(Conduct of Business) Regulations, 1999, and its
subsequent amendments.
[5] Judgment of Hon,ble Appellate Tribunal for
Electricity on Appeal No. OP.1 of 2011, on suo-
moto proceeding on request of the Ministry of
Power Government of India.
[6] Electricity Act, 2003 notified by Government of
India dated 2
nd
June, 2003 (No. 36 of 2003).
[7] Tariff Policy notified on 2
nd
January, 2006 by
Government of India in compliance with section 3
of the Electricity Act 2003 in continuation of the
National Electricity Policy (NEP).
[8] Power sector reform in India: current issues and
prospects by Anoop Singh, Department of
Industrial and Management Engineering, Indian
Institute of Technology, Kanpur 208 016, India
published in Elsevier, Energy Policy 34 of 2006.
[9] Dubash, N.K., Rajan, S.C., 2002. India: electricity
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N.K. (Ed.), Power Politics: Equity and
Environment in Electricity Reform. World
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[10] Wamukonya, N., 2003. Power sector reform in
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