CHAPTER 3 TRANSMISSION PRICING METHODOLOGIES13

The formulations of various methodologies adopted and developed in the software supplied are given below. In all these methods the charges have been calculated on monthly basis.

3.1 Postage Stamp Method

As basic concepts described in chapter1 Postage stamp method has been divided into five sub methods. In each method, total charge has been divided into two components. 1. Actual power Transmission charges 2. Charges for transmission losses The components of the ARR14 of Transco has been taken as follows 1 Return on capital base (RCB) 2 Administrative & General cost (AGC) 3 Repair & Maintenance cost (RMC) 4 Interest & Finance cost (IFC) 5 Depreciation cost (DC) 6 Provision for bad & doubtful debts (PBD) 7 Other expenses (OE) 8 Expenses capitalized (EC) The computation of the ARR has been done as follows (as calculated by UPERC)-ARR = RCB + AGC + RMC + IFC + DC + PBD + OE EC 3.1.1 ARR Method The wheeling charges are calculated as follows
and bibliography of this report and demand side management and dispatch report (3i Network). 14 As taken by UPERC Lucknow in different tariff order (UPPCL & KESCO)
_______________________ 13 Taken from references

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X = (Yearly energy Purchased)/12 Units Rate of average energy purchased by Transco = R Rs per unit Total energy loss in the transmission system: Y = (% of energy loss) * X Units Energy left for selling Z= (X-Y) Units Charges for transmission C = (ARR/12) / Z Rs. per unit per month Charges for energy loss LC =R * (% of energy lost) Rs per unit per month Total charge T = (C+LC) Rs per unit per month Energy sold to a Disco (Monthly) = E Units Total amount charged per month from Disco = (E * T) Rs 3.1.2 Energy Division Method Total monthly energy purchase (+Wheeled) by Transco X= (Yearly energy Purchased)/12 Units Total Energy sold per month to a Disco = E Units Total ARR of transmission company = ARR % Energy loss = L Amount Charged for transmission of energy C = (ARR * E)/ (12 * X) Rate of average energy purchased by Transco = R Rs per unit Amount Charged for energy lost from Disco LC=R * (L/(1-L)) * E Rs Total amount charged per month from Disco T = (C+LC) 3.1.3 Peak Load Method Total ARR of transmission company (UPPCL) = ARR Rs. Load of Disco at the time of Transco peak= LDS MW Peak load of Transco = TPL MW % Energy loss = L The expression for transmission charge is as follows Charge C = [ARR * LDS/12]/ TPL Rs Rate of average energy purchased by Transco = R Rs per unit Monthly Energy sold to a Disco = E Units Amount Charged for energy loss from Disco 25 Rs Rs

LC =R * (L /(1-L)) * E Rs Total monthly charge T = (C+LC) Rs Depending upon the time of occurrence of peak load on the system (Transco) the above methodology can be divided into: 1 Monthly Day Peak of Transco (Occurrence of maximum peak load in a particular month in between 6.00AM to 6.00 PM) 2 Monthly Night Peak of Transco (Occurrence of maximum peak load in a particular month between 6.00 PM to 6.00 AM) 3 Monthly Peak of Transco (Occurrence of maximum peak load in a particular month within 24 hours) 4 Monthly average Peak load (Average of daily peak during all days of the month) 4.1.2 Approximation Method15 In this method it is considered that company is playing the role of both Disco and Transco and ARR is not split (Transmission and Distribution). Total cost of annual Energy purchased by the company = P Rs Total annual expenses of company = F Rs Return on Capital Base = B Rs Annual Revenue Required ARR= (Z+B) Where Z = k * (F - P), k=running cost taken as 20% of total cost. Monthly Transmission Charge in Rs. C = (ARR * LDS/12)/ TPL Rate of average energy purchased by Transco = R Rs per unit Energy sold per month to a Disco = E Units15 % Energy loss = L Amount to be collected from Disco for energy loss LC =R * (L/(1-L)) * E Rs Total amount to be collected per month from Disco T = (C+LC) Rs

15 Transmission ARR and distribution ARR are not separated normally in India. A comparison of the tariff filling formats used by various SERCs, A report prepared for the 3-I network: By Daljeet singh

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3.1.5 Calculations as per CERC Recommendations In this method all the guidelines of CERC as per their notification dated March 26, 2001 have been followed. The salient points of the notification are reproduced as below. Calculation of the Transmission Charges The single part tariff for transmission of electricity by a transmission system shall comprise the recovery of annual transmission charges consisting of interest on loan capital, depreciation, advance against depreciation, operation and maintenance expenses, return on equity and interest on working capital at-a normative availability level. The taxes on income reckoned as expenses at actual on-core business and FERV (Foreign Exchange Rate Variation) shall be regulated as prescribed. The annual Transmission Charges shall be computed on the following basis, namely: (a) Interest on loan Capital Interest on loan capital shall be computed on the outstanding loans, duly taking into account the schedule of repayment, as per the financial package approved by the Authority or any independent agency. (b) Depreciation (i) The value base for the purpose of depreciation shall be the historical cost of the asset. (ii) Depreciation shall be calculated annually as per straight-line method at the rate of depreciation as prescribed in the Schedule attached to this notification in Appendix II of CERC notification march 26, 2001. Provided that the total depreciation during the life of the project shall not, exceed 90% of the approved Original Cost. The approved original cost shall include additional capitalization on account of foreign exchange rate variation also. (iii) Advance against depreciation (AAD), in addition to allowable depreciation, shall be permitted wherever originally scheduled loan

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repayment exceeds the depreciation allowable as per schedule and shall be computed as follows: AAD = (Originally scheduled loan repayment amount subject to a ceiling of 1/12 th of loan amount - Depreciation as per the schedule) (iv) On repayment of entire loan, the remaining depreciable value shall be spread over the balance useful life of the asset. (v) Depreciation shall be chargeable from the first year of operation. In case of operation of the asset for part of the year, depreciation shall be charged on pro-rata basis. (vi) Depreciation against assets relating to environmental protection shall be allowed on case-to-case basis at the time of fixation of tariff subject to the condition- that the environmental standards as prescribed have been complied with during the previous tariff period. (c) Return on Equity Return on equity shall be computed on the paid up and subscribed capital relatable to the transmission system and shall be 16 percent of such capital. Explanation:-1 Premium raised by the Transmission Utility while issuing share capital & internal resources created out of free reserve of the existing utility, if any, for the funding of the project, shall also be reckoned as paid up capital for the purpose of computing the return on equity, provided such premium amount and internal resources are actually utilized for meeting the capital expenditure of the Transmission project and forms part of the approved financial package as set out in the techno-economic clearance accorded by the Authority. (d) Operation and Maintenance expenses Operation and maintenance expenses including expenses on insurance, if any, (hereinafter referred to as O&M expenses) shall be calculated as guideline given by CERC.

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(e) Interest on Working Capital Interest on working capital shall cover(i) Operation and maintenance expenses (cash) for one month; (ii) Maintenance spares at a normative rate of 1% of the Capital cost less 1/5 of the initial capitalized spares. Cost of maintenance -spares for each subsequent year shall be revised at the rate applicable for revision of expenditure on O&M of transmission system and (iii) Receivables equivalent to two months average billing calculated on normative availability level. The above Three points will be added for calculation of the working capital and interest rate will be taken as 11.5 % on total working capital, as guided by CERC. (This is the maximum limit and Power grid also takes this interest rate as 11.5%) (f) Tax on income Tax on the income streams of the Transmission Utility from core activity, if any, must be computed as an expense and shall be received from the beneficiaries. Any under-recoveries or over recoveries of tax shall be adjusted every year on the basis of certificate of statutory Auditors. Provided: (i) Tax on any other income streams, other than the core activity, shall not constitute a pass through component in the tariff. Tax on such other income shall be payable by the Transmission Utility. (ii) The region-wise profit before tax as estimated for a year in advance shall constitute the basis for distribution of the corporate tax liability to all the regions. (iii) The benefits of Tax Holiday applicable as per the provisions of the Income Tax Act, 1961 shall be passed on to the beneficiaries. (iv) The credit for carry forward losses could also be given in the same proportion as mentioned above (in the Sub clause (ii)) in the absence of any other equitable basis. 29

(v) The tax allocated to regions shall be charged to the beneficiaries on the same lines as annual fixed charges/existing charges. Payment of Transmission Charges Full annual transmission charges shall be recoverable at 98 percent Availability of Operation. Payment of transmission charge below 98 percent shall be on pro-rata basis. There shall not be any payment of annual transmission, charges for availability level above 98%. The transmission charge shall be calculated on monthly basis. In case of more than one beneficiaries of the transmission system, the monthly transmission charge leviable to each beneficiary shall be computed as per the following formula. Transmission Charges = (TC* EB)/(12 * ES) Where, TC = Annual Transmission Charges payable by the beneficiaries. EB = Monthly energy sale from Central Sector Stations as may come in the system to each beneficiary individually as per Regional Energy Account. ES = Total monthly energy sale from Central Sector Stations. Note When availability based generation tariff and unscheduled interchange tariff is introduced for payment of generation/ unscheduled interchange charges by the beneficiaries, the monthly transmission charges leviable to each beneficiary shall be computed as per their respective capacity allocation from ISGS or per the transmission agreement, if any. Incentive The Transmission Utility shall be entitled to incentive beyond the Availability of 98% as per table below:

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Table 3.1 Availability % 98 % and below 98.01% -98.50% 98.51% - 99.00% 99.01% - 99.50% 99.51% - 99.75% Development Surcharge The Transmission Utility shall be entitled to a Development Surcharge of 10 % on every bill raised by it on account of transmission charges at regional level. The levy of Development Surcharge shall be subject to the following conditions: (a) Surcharge collected by the transmission utility shall be kept in a separate bank account and may be invested in securities of recognized infrastructure funds like IDFC or IDBI Tax free bonds and income there from shall also be credited to that bank account; (b) The transmission utility shall maintain separate accounts in its books and reflect the balance in the Development Surcharge Reserve Account and the investment represented against the same in its balance sheet: (c) On the purchase of the undertaking or on any other such contingency the reserve and the corresponding investments shall be transferred to the successor undertaking to successor the same objective of fresh capacity addition: (d) The fund can be made use of to the extent of 1/3rd of the equity requirement for any capacity addition in the respective region and the balance 2/3rd being provided by the transmission utility: Incentive As a percent of equity 0.00 1.00 1.00 1.00 1.00 Cumulative 0.00 1.00 2.00 3.00 4.00 Incentive As a percent of equity

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(e) To the extent to which the fund is used as equity in any new capacity addition, pro rata reduction for the return on equity in the determination of tariff of the new project shall be allowed. (f) A certificate in the prescribed form regarding the use of these funds shall be filed with the Commission every year, duly verified by the statutory auditors of the Transmission Utility. (g) The use of these funds in any other manner shall be only with the prior approval of the Commission either on petition or suo motto for which the due process as per the CERC (Conduct of Business) Regulations shall be followed. Rebate For payment of bills through letter of credit on presentation, a rebate of 2.5 percent shall be allowed. Where payments are made subsequently through opening of letter of credit or otherwise, but within a period of one month of presentation of bills by the Transmission Utility, a rebate of one percent shall be allowed. Late payment surcharge In case the payment of bills by the beneficiary (s) is delayed beyond a period of 1 month from the date of billing a late payment surcharge at the rate of 1.5 percent per month shall be levied by the Transmission Utility Discussions The Postage Stamp method is popular because it is easy to compute the transmission charges and understand. Conventional Postage stamp method allocates total system costs to consumers on the basis of energy consumed/load shared by him. It is a flat rate per kW charge for network access. The utility transmitting the power, charges at the same rate regardless of the distance of power transmitted. The following table represents the results of KESCO.

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FOR 2001-02 (KESCO) (with 3.6% losses) (Detailed calculations shown in chapter 5) Table 3.2 S.No Name of the Method Monthly Rs. Charged (Crores) 1 2 3 4 5 Transmission ARR Method CERC Method Consideration of Peaks 4.578 4.4868 5.3336 22.890 22.434 26.668 method (Monthly peak) Approximation Method Energy division Method Recommendation 5.4876 3.2300 Transmissio n Charges Paisa/Unit 27.438 16.1500

The transmission ARR method predicts a higher charge per unit because the cost of energy is calculated by subtracting the losses from the total energy. The cost for the losses is calculated separately and the total cost of transmission is the sum of the two. This method can be used efficiently for UPPCL system; however the method requires correct values of transmission losses. In CERC method the cost of transmission losses is excluded, which is approximately Rs. 0.08 per unit (for 5% loss in the system), and ARR is calculated differently. This method can also be used on UPPCL system, but the method requires an extensive and efficient database, which is currently not available. Recent trend in the electrical power sector abroad is to charge on the basis of the instant of the peak load on the system. But in Indian system this method is not at all feasible at present due to lack of instant data availability of the Transcos and Discos. Also the desired power may not

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be available to all the Discos at the instant of Transco peak to due to load shedding. If it is not possible to segregate the ARR of transmission and distribution, then method based on Approximations is used by assuming 20 % of the total ARR (calculated after comparing different methods proposed and results are in a maximum error of +6% to -6%) for transmission only. However if transmission and distribution ARR is available separately we can calculate the cost efficiently. Problem may again arise if there is further division of the existing companies (to calculate the percentage of ARR for new transmission). Energy division method is an alternate way to calculate the transmission pricing. In this method the cost of energy is calculated by taking total energy purchased and then the total cost of transmission is the sum of the cost of energy purchased and cost of transmission losses. At the outset the postage stamp method results in higher costs because it incorporates historical fixed costs. It does not provide any information about transmission congestion. Also it does not reflect marginal costs except in a special circumstance where all generators are at equal distances from load and where the load on each line is equal.

3.2 MW Mile Method

In this method the cost of transmission depends on the quantum and the distance of power transmitted. It requires an accurate load flow16 results to compute the power flow in the lines. Once the power flow in each line is known, we calculate the system usage index for each Transaction to calculate the share of system use by individual companies. The Transmission charge is then proportional to the transmission usage by individual transaction. The system usage index for each Transaction is calculated as below
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For load flow and optimal power flow refer Chapter-2

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 Pj ; Ti L j F j RTi = P +P j j ;base j ;Ti i

RTi

is the price charge for transaction Ti in Rs. (System Usage Index)

Pj ;Ti

is the incremental loading of line j due to transaction Ti , in MW (Real power)

Lj Fj

is the length of line j, in Km is the cost of the line per unit length, (Rupees per km)

Following example illustrates the methodology -Consider an 8-bus system comprising of three generators located at busses 1, 2 and 3 and there are three load busses namely 4, 7 & 8. There are two transaction taking place in addition to the native loads, which a Transco has to satisfy: (A) A genco at bus 5 has entered into a contract with a customer at bus 6 for power sell of P1 MW (Say T1) (B) A genco at bus 8 has a contract with a customer at bus 4 for power sell of P2 MW (Say T2) The power will be transported through the network system and the Transco will receive payments for power transactions from the buying or selling nodes/parties. The problem will be solved as follows by the MW-Mile method

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Fig 3.1 Base case network 3.2.1 Calculation of System Usage Index First we define a constant F, which could be more than one in No. for better precision, = Asset of the Transmission system17/ (Length of the transmission lines in system * system capacity) The unit of F is Rs/Km-Mw. Now we go through the following steps Step A: Find the cost of the line by multiplying the unit cost of the line by the line lengths Note: If more then one Fj constants are used then skip this step A. Step B: Run the base-case load flow. Step C: Find the new load flow solution with the transaction T1, and hence the power flows on each line. Step D: Find the new load flow solution with the transaction T2, and hence the power flows on each line. Step E: Calculate the incremental power flows on each line caused by the transaction T1 Step F: Calculate the incremental power flows on each line caused by the transaction T2.

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Determination of voltage class wise assets for calculation of Fj constants

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Step G: Calculate each line usage due to transaction T1 and hence find the total transaction system usage by T1. Step H: Calculate each line usage due to transaction T2 and hence find the total transaction system usage by T2. Step I: Calculate the total transaction system usage by T1 and T2 for proportional allocation of the cost. Note: Till this step the system usage Index of each Transaction will be known. Step J: Calculate the proportional allocation of cost (ARR) to transaction T1. Step K: Calculate the proportional allocation of cost (ARR) to transaction T2. 3.2.3 Methodology for Proportional allocation of ARR For the allocation of the ARR and losses following methodologies have been adopted: Suppose there are two Distribution Companies (B, C) other then the Transmission Company (A). Lets call this transmission company (A) as Base case company. The base case company has its usage Index = A1 Company B has usage Index = B1 Company C has usage Index = C1 Combine usage Index of the companies (B & C) taking all the transactions together = D1 Now the ARR allocation can be done by one of the following methods3.2.3.1 Method 1 (Division_base_Trans) Amount paid by the company B = (ARR * B1) / (A1+B1+C1) Amount paid by the company C = (ARR * C1) / (A1+B1+C1) 3.2.3.2 Method 2 (Division_base) Amount paid by the company B = (ARR * B1) / (A1) Amount paid by the company C = (ARR * C1) / (A1)

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3.2.3.3 Method 3 (Division_base_Trans_both) Amount paid by all the Distribution Company (B & C) P1 = (ARR * D1) / (A1+D1) Amount paid by the company B = (P1* B1) / (B1+C1) Amount paid by the company C = (P1* C1) / (B1+C1) 3.2.3.4 Method 4 (Division_base_both) Amount paid by all the Distribution Company (B & C) P2 = (ARR * D1) / (A1) Amount paid by the company B = (P2* B1) / (B1+ C1) Amount paid by the company C = (P2* C1) / (B1+ C1) Similar calculation can be done if more distribution companies are there. 3.2.4 Determination of Asset on the basis of transmission line voltage class (for calculation of Fj constants) In the existing system of UPPCL we have considered seven (7) Fj constants, which has been calculated as follows F1: For 800 KV line F2: For 400 KV, double Ckt.(DC) line F3: For 400 KV, single Ckt. (SC) line F4: For 220 KV, double Ckt. line F5: For 220 KV, single Ckt. Line F6: For 132 KV, double Ckt. line F7: For 132 KV, single Ckt. line The assets of the line on different class is calculated as follows Step 1: Calculate the total costs of lines as on today (voltage class wise i.e. 800 SC/400DC/400SC/220DC/220SC/132 DC/132SC). Step 2: Find the fraction of cost of individual line (each voltage class) in total cost calculated in step 1. Step 3: Calculate the current cost of the substation (voltage class wise i.e 400/220/132)

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Step 4: Find the fraction cost of each substation (voltage class wise) in total cost in step 3. Step 5: Divide the total assets of UPPCL in to sub station and lines in 30:70 ratio (CERC recommendations). Step 6: Divide the asset of lines depending on the fraction (various classes) of current calculated cost (step 2) of transmission lines. (800 SC/400DC/400SC/220DC/220SC/132 DC/132SC). Step 7: Divide the asset (cost) of sub station depending on the fraction of (various classes) current calculated cost of the substation. (From step 4) (400/220/132) Step 8: Divide the cost of the sub station (400/220/132) into different (voltage class wise) in the ratio of the length of the line. (800 SC/400DC/400SC/220DC/220SC/132 DC/132SC) Step 9: Calculate the total cost of the lines (voltage class wise) after adding the costs obtained in step 7 and step 8. On following step1 to step 9 we will be able to calculate the asset division on voltage class wise. (800 SC/400DC/400SC/220DC/220SC/132 DC/132SC).In Mw Mile method the transmission charge will depend on the above cost. For the year 2001-02 the asset is 3599.92 Crores. Based on above methodology the asset division for voltage class wise is as follows. Voltage Class 800 SC 400 DC 400 SC 220 DC 220 SC 132 DC 132 SC Rs. in Crore 496.1 555.979 919.59 601.3742 357.4805 480.5463 589.4398

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For calculation of the assets line voltage class wise for other years, tables are given in the Appendix B (Table 1, Table 2, Table 3, Table 4 & Table 5) The method described above is for real power flow only. The charges calculated for real power would be added with the cost of the real power losses. The methodology for calculating the cost of losses is same as described above. Discussions The Mw-Mile method is a very efficient method to calculate the transmission charge. The factors that may increase or decrease the transmission charges are flexibility in choosing a location, distance of generator from load, type of load and generation (active and reactive), line capacity factor, cost of the line and transaction voltage class. The MwMile seeks to allocate the costs based on actual system use as closely as possible. For any transmission company the selection of any methodology discussed above (method 1to method-4) will depend upon the his commitment/contract with distribution company. If the agreement between Transco and Disco (contract) is such that the amount of power to be purchased has been told earlier we can use either Division_base_Trans method (method-1) or Division_base_Trans_both (method-3) method. In the worst case method-3 will result in method-1. The allocation of charges will be in the fraction of the system use by the disco and Transco in these methods. In method-1 UPPCL will be able to gain more as this will not give benefit to the new distribution company, if they decrease the system usage index in the network. If any transmission company sells power to some other distribution company after shedding its own load then either Division_base (method 2) or Division_base_both (method-4) can be applied. In the worst case the method-4 will result in the method-2. These methods are recommended for UPPCL in the current context as there is always more 40

demand then generation. In method-2 UPPCL will be able to gain more as no benefit will be gained by the new distribution company, if it decreases the system usage index in the network. Method-4 is more transparent than method-2. At the outset method-3 and method-4 gives benefits to the distribution company if it decreases the power flow or system usage index of the network. Method-3 is the best method out of the four for any distribution company and also most transparent. UPPCL will have to bear more as its system usage index is very high Comparative to KESCO & NPCL Caution: In method-1 and method-2 the distribution company can claim that even if the amount of power to be purchased is told in advance Why the Transco is giving the power after disconnecting existing users? Why do not they purchase extra power from generating station? Also in the above methods the charges are fixed depending on the transaction but if another new company comes in to existence (network) and it decreases the flow on critical lines in the network, then benefits are not given to Distribution Companies who are already in transaction.

4.2 Forecasting the charges for next year in MW Mile method

The proposed methodology has also been extended for the prediction of the charges for the next twelve months. After analyzing the monthly load variation of the last three years (2000-02) a best fit equation has been formed. Based on this method the charges can be predicted with an error of +10% to -10%.

3.4 Best economic node method calculation

If a new transaction has come in to contract in future then there is an option in the software that the transmission company can give the power

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at various selling & buying points selected optimally. In this method we can tell the customer about the optimal selling and buying nodes on which they can get the cheapest power. The basic methodology behind this method is MW-Mile and the marginal costs for each group of transaction points (input and output points) are calculated. The pair with minimum system usage index is the desired solution.

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