Tariffs

Approach to tariff determination (based on the case of the Himachal Pradesh Electricity Regulatory Commission, India)

The Commission while determining the tariff, in the past has kept numerous factors and principles in view, which has already been outlined in the Tariff Regulations. Some of the important measures it has undertaken in the past tariff orders are mentioned below:

• introduction of kWh and time of use tariffs for various categories of consumers
• slab rationalisation across categories of consumers
• cost-to-serve approach in determination of tariff for various consumer categories
• rationalise the Peak Load Exemption Charge (PLEC) and the Peak Load Violation Charge (PLVC)
• introduction of a night time concessional tariff for industrial consumers

The Commission believes that there is further scope for tariff rationalisation across various consumer categories, which will make the industry more competitive, drive growth in the state and attract investments into the sector. The NEP states that consumers below poverty line, who consume below a specified level, say 30 units per month, may receive special support in terms of tariff, which is cross-subsidized. In Himachal Pradesh, such support is currently available to consumers below poverty line consuming 45 units per month. Commission may rationalise the existing slabs for domestic consumers further. The Commission may align the qualification criteria for support in terms of tariff in line with what has been suggested by the National Electricity Policy. The Policy also states that tariffs for such designated group of consumers will be at least 50 % of the average (overall) cost to serve. The Commission will also consider this guideline when determining the tariff for such consumers. It also believes that the future tariff determination exercise will be based on Cost to Serve and under a Multi Year Tariff framework.

Cost to Serve (CoS)

The Classical CoS approach is based on estimating the voltage-wise cost, losses and coincident demand factor, i.e. the extent to which each consumer category contributes to the peak demand. Broadly, there are two approaches to determining the cost of supply: The Embedded Cost Approach and the Marginal Cost Pricing Approach.

• The Embedded Cost Approach seeks to identify and assign the historical, or accounting costs that make up a utility’s revenue requirement.
• Marginal cost approach seeks to determine the incremental (marginal) change in total costs imposed on the system by a change in output (whether measured by kWh, customer, customer group or other relevant cost driver).

While being a forward-looking approach, marginal cost studies are data intensive and are, therefore, contingent upon the accuracy of data. Embedded Cost Model can be easily implemented and understood and data is readily available and verifiable.