Approach Paper Determination of Various Charges for Open Access Including Cross Subsidy Surcharge and Additional Surcharge

UTTAR PRADESH ELECTRICITY REGULATORY COMMISSION 2nd Floor, Kisan Mandi Bhawan, Vibhuti Khand, Gomti Nagar, Lucknow

BACKGROUND In order to promote competition in the power sector and to provide consumers an option of procuring power at competitive rates, the Electricity Act 2003 (hereinafter referred to as the Act) has enabling provisions in the form of Open Access (OA) to transmission and distribution networks. The Act and the National Electricity Policy formulated therein by the Central Government mandates the State Electricity Regulatory Commissions to frame regulations specifying the terms and conditions and timeframe for introduction of Open Access in distribution. The Commission has specified the terms and conditions for Open Access and its phasing under the UPERC (Terms and Conditions for Open Access) Regulations 2004, notified on 7th June, 2005, and the methodology for the determination of Transmission Charges, Wheeling Charges, Surcharge and Additional Surcharge, under the Terms and Conditions for Determination of Transmission and Distribution Tariff Regulations-2006. In accordance with the provisions of the Act, Open Access consumers are required to pay the Transmission Charges, Wheeling Charges (if connected to the distribution network), Surcharge and Additional Surcharge, as may be specified by the State Commission. The Surcharge (herein after referred as Cross Subsidy Surcharge) and the Additional surcharge have been provided under the Act to safeguard the interest of the incumbent distribution licensee. The Cross Subsidy Surcharge is meant to compensate the incumbent distribution licensee for loss of cross-subsidy on account a migration of a cross-subsidizing consumer from his area of operation and additional surcharge to meet the fixed cost of such a licensee as may arise out of his obligation to supply. Therefore, to operationalise Open Access within the State the Commission has to determine following charges for an Open Access consumer in accordance with the provisions of the Act, regulations made under it:

i. ii. iii. iv.

Transmission Charges Wheeling Charges. Cross-subsidy Surcharge Additional Surcharge

In addition to above charges the Commission has also specify the standby arrangement charges in the light of clause 8.5.6 of the Tariff Policy which states as below: In case of outages of generator supplying to a consumer on open access, standby arrangements should be provided by the licensee on the payment of tariff for temporary connection to that consumer category as specified by the Appropriate Commission. The Commission had determined the applicable transmission charges on per unit basis in its tariff order for the FY 2004-05 stating: UPPCL has mentioned in its filings and subsequent submissions that metering of interface points with Special Energy Meters of the required accuracy class is in progress. Once these meters and the associated information technology tools for reading the meters and aggregating such readings to generate the demand and energy readings are available, suitable tariff design based on the actual demand placed by the distribution licensees on the transmission system can be implemented. However at present, in the absence of historical data, there is no history available to determine the peak and average demand of each of the licensees. Neither is any contracted demand been determined (or allocated) by UPPCL for each of the distribution licensees. Accordingly a demand based transmission tariff is not feasible to implement at this juncture. In these circumstances the Commission has decided to implement energy based transmission charges. It was also indicated by the Commission in the above Tariff order that the charges so determined could be utilized for the purposes of Open Access to the transmission network.

Regarding Surcharge and Additional Surcharge, UPERC (Terms and Conditions for Open Access) Regulations 2004 provided that: Surcharge (a) In addition to transmission charges and wheeling charges, a consumer availing open access to the transmission system/distribution system not being a captive consumer shall pay a surcharge; (b) Surcharge shall be determined by the Commission separately in the concerned tariff order. In absence of such determination, the surcharge shall be specified by the Commission on a case to case basis for a specified period based on an application moved before it in this behalf. Provided that the applicant shall pay surcharge as determined as per these regulations post the expiry of the period specified above under regulation 15(2) (b). (c) The amount of surcharge shall be so calculated as to meet the current level of cross subsidy from that category of consumers and shall be paid to the distribution licensee of area of supply where the consumer is located. (d) The surcharge shall be reduced and eliminated in the manner as determined by the Commission in respect to reduction and elimination of cross subsidies in terms and conditions of tariff of transmission/distribution licensees. (e) The consumers availing exclusively interstate transmission system shall pay such amount of surcharge as determined by the Commission by regulations in this regard. Additional Surcharge (a) A consumer availing open access and receiving supply of electricity from a person other than the distribution licensee of his area of supply shall pay to the distribution licensee an additional surcharge, in addition to wheeling charges and surcharge, to meet the fixed cost of such distribution licensee arising out

of his obligation to supply as provided under sub-section (4) of section 42 of the Act; (b) The distribution licensee shall submit to the Commission an account of fixed cost, which the licensee is incurring towards his obligation to supply; (c) The Commission shall scrutinize the statement of account submitted by the licensee and objections, if any, and determine the amount of additional surcharge payable by the consumer to the licensee, (d) The additional surcharge shall be leviable for such period as the Commission may determine. Since, the data in the ARR/Tariff filing was not adequate for the determination of surcharge or the additional surcharge and further since no application, from any consumer, for grant of Open Access was filed, the Surcharge and Additional Surcharge were not determined by the Commission. Transmission charges and Wheeling Charges were again determined in the Tariff Order for the FY 2006-07. Surcharge and Additional Surcharge however again could not be determined in absence of data required for the purpose. However, considering the importance of Open Access in promoting competition and private investment in the sector the Commission now feels it necessary to determine the various applicable charges for Open Access including the Cross-subsidy surcharge and the Additional Surcharge, based on the data available with it and making certain assumptions. Accordingly, under this Approach Paper some interim calculations of various applicable charges for Open Access have been done. The idea behind this Approach Paper is to determine the various charges for Open Access in consultation with the utilities linked and other stakeholders. It is felt that giving consumers as well as utilities some idea of various applicable charges for Open Access will facilitate implementation of Open Access within the State.

It is to clarify that the debate and discussions on the approach paper will not be limited to the issues linked with the determination of applicable charges for Open Access only. Utilities and other stakeholders may feel free to raise any other issues which they feel are relevant for the immediate and effective implementation of Open Access within the State. It is further clarify that the views and opinions expressed in this paper are only to initiate a discussion on the topic and do not necessarily reflect the Commissions views or opinions in the matter. Further, to have a meaningful debate on all the issues related to effective and early implementation of Open Access in the State, the Commission desires the utilities and other stake holders to actively participate in the discussions to be held and submit their comments in writing within 30 days of issuance of notice to this effect. The Commission may also conduct public hearings for the purpose for which separate notices shall be issued. Based on the objections/suggestions/ comments received form various stakeholders and public at large, the Commission shall determine the various applicable charges for Open Access and issue appropriate orders in the matter. The charges as may finally be determined by Commission based on this approach paper shall remain in force till the Commission re-determines them along-with the next tariff order. Before detailing the method and procedure for determining the various applicable charges for Open Access including cross subsidy surcharge and the additional surcharge, the Commission would like to quote relevant provisions of Open Access under the Act, the National Electricity Policy, the Tariff Policy and the regulations framed by the Commission.

PROVISIONS RELATED TO OPEN ACCESS UNDER THE ACT, THE TARIFF POLICY, THE NATIONAL ELECTRICITY POLICY AND REGULATIONS FRAMED BY THE COMMISSION A. PROVISIONS RELATED TO OPEN ACCESS UNDER THE ACT i) Provisions related to Open Access relevant to STU Section 39 (2) The functions of the State Transmission Utility (STU) shall be(a) . (b) . (c) . (d) Provide non-discriminatory open access to its transmission system for use by(i) any licensee or generating company on payment of the transmission charges ; or (ii) any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the State Commission: Provided that such surcharge shall be utilized for the purpose of meeting the requirement of current level cross-subsidy: Provided further that such surcharge and cross subsidies shall be progressively reduced and eliminated in the manner as may be specified by the State Commission: Provided also that such surcharge may be levied till such time the cross subsidies are not eliminated*:

Provided also that the manner of payment and utilization of the surcharge shall be specified by the State Commission. Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use. ii) Provisions Related to Open Access for a Transmission Licensee Similar provisions also exist under Section 40 (c) of the Act for a Transmission licensee. iii) Provisions Related to Open Access for a Distribution Licensee Section 42 (2) The State Commission shall introduce open access in such phases and subject to such conditions, (including the cross subsidies, and other operational constraints) as may be specified within one year of the appointed date by it and in specifying the extent of open access in successive phases and in determining the charges for wheeling, it shall have due regard to all relevant factors including such cross subsidies, and other operational constraints: Provided that such open access may be allowed before the cross subsidies are eliminated* on payment of surcharge in addition to the charges for wheeling as may be determined by the State Commission: Provided further that such surcharge shall be utilized to meet the requirements of current level of cross subsidy within the area of supply of the distribution licensee: Provided also that such surcharge and cross subsidies shall be progressively reduced and eliminated* in the manner as may be specified by the State Commission:

Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use. * Note: It may however be noted that Government of India has vide notification dated 28th May 2007 issued the Electricity (Amendment) Act 2007 to amend certain provisions of the Electricity Act 2003. Under the amended provisions the word eliminated used in connection of elimination of crosssubsidies has been removed from Section 38 (2) (d), Section 39 (2) (d), Section 40 and Section 42 (2) and accordingly third proviso from Section 38 (2) (d), Section 39 (2) (d) and Section 40 has been removed. iv) Power of the Commission under the Act to frame regulations for Open Access and determine applicable charges including surcharge Section 181 read with Section 86 of the Act empowers the Commission to frame regulations and determine tariffs for supply of electricity by a generating company to a distribution licensee, transmission of electricity, wheeling of electricity and retail sale of electricity as well the surcharge. It is further provided under the Act that these tariffs are to be determined by the concerned Electricity Regulatory

Commissions in accordance with the provisions of the Act and the regulations for tariff determination framed by them. Section 86 (1) (a) of the Act provides that: The State Commission shall discharge the following functions, namely: (a) determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail, as the case may be, within the State: 8

Provided that where open access has been permitted to a category of consumers under section 42, the State Commission shall determine only the wheeling charges and surcharge thereon, if any, for the said category of consumers; B. PROVISIONS RELATED TO OPEN ACCESS UNDER THE TARIFF POLICY Government of India has prescribed a formula for the calculation of cross-subsidy surcharge under Clause 8.5 of the Tariff Policy. Clause 8.5.1 National Electricity Policy lays down that the amount of cross-subsidy surcharge and the additional surcharge to be levied from consumers who are permitted open access should not be so onerous that it eliminates competition which is intended to be fostered in generation and supply of power directly to the consumers through open access. A consumer who is permitted open access will have to make payment to the generator, the transmission licensee whose transmission systems are used, distribution utility for the wheeling charges and, in addition, the cross subsidy surcharge. The computation of cross subsidy surcharge, therefore, needs to be done in a manner that while it compensates the distribution licensee, it does not constrain introduction of competition through open access. A consumer would avail of open access only if the payment of all the charges leads to a benefit to him. While the interest of distribution licensee needs to be protected it would be essential that this provision of the Act, which requires the open access to be introduced in a timebound manner, is used to bring about competition in the larger interest of consumers. Accordingly, when open access is allowed the surcharge for the purpose of sections 38, 39, 40 and sub-section 2 of section 42 would be computed as the difference between (i) the tariff applicable to the relevant category of consumers and (ii) the cost of the distribution licensee to supply electricity to the consumers of the applicable class. In case of a consumer opting for open access, the distribution licensee could be in a position to discontinue purchase of power at the margin in the merit order. Accordingly,

the cost of supply to the consumer for this purpose may be computed as the aggregate of (a) the weighted average of power purchase costs (inclusive of fixed and variable charges) of top 5% power at the margin, excluding liquid fuel based generation, in the merit order approved by the SERC adjusted for average loss compensation of the relevant voltage level and (b) the distribution charges determined on the principles as laid down for intra-state transmission charges. Surcharge formula: S = T - [C *(1+ L / 100) + D] Where S T C is the surcharge is the Tariff payable by the relevant category of consumers; is the Weighted average cost of power purchase of top 5% at the margin excluding liquid fuel based generation and renewable power D L is the Wheeling charge is the system losses for the applicable voltage level, expressed as a percentage. The cross-subsidy surcharge should be brought down progressively and, as far as possible, at a linear rate to a maximum of 20% of its opening level by the year 2010-11. Clause 8.5.2 No surcharge would be required to be paid in terms of sub-section (2) of Section 42 of the Act on the electricity being sold by the generating companies with consent of the competent government under Section 43(A)(1)(c) of the Electricity Act, 1948 (now repealed) and on the electricity being supplied by the distribution licensee on the 10

authorization by the State Government under Section 27 of the Indian Electricity Act, 1910 (now repealed), till the current validity of such consent or authorizations. Clause 8.5.3 The surcharge may be collected either by the distribution licensee, the transmission licensee, the STU or the CTU, depending on whose facilities are used by the consumer for availing electricity supplies. In all cases the amounts collected from a particular consumer should be given to the distribution licensee in whose area the consumer is located. In case of two licensees supplying in the same area the licensee from whom the consumer was availing supply shall be paid the amounts collected. Clause 8.5.4 The additional surcharge for obligation to supply as per section 42(4) of the Act should become applicable only if it is conclusively demonstrated that the obligation of a licensee, in terms of existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. The fixed costs related to network assets would be recovered through wheeling charges. Clause 8.5.5 Wheeling charges should be determined on the basis of same principles as laid down for intra-state transmission charges and in addition would include average loss compensation of the relevant voltage level. Clause 8.5.6 In case of outages of generator supplying to a consumer on open access, standby arrangements should be provided by the licensee on the payment of tariff for temporary connection to that consumer category as specified by the Appropriate Commission.

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C.

PROVISIONS RELATED TO OPEN ACCESS UNDER THE NATIONAL ELECTRICITY POLICY National Electricity Policy under clause 5.8.3 while discussing the surcharges to imposed on Open Access Consumers provides that: Under sub-section (2) of Section 42 of the Act, a surcharge is to be levied by the respective State Commissions on consumers switching to alternate supplies under open access. This is to compensate the host distribution licensee serving such consumers who are permitted open access under section 42(2), for loss of the cross-subsidy element built into the tariff of such consumers. An additional surcharge may also be levied under subsection (4) of Section 42 for meeting the fixed cost of the distribution licensee arising out of his obligation to supply in cases where consumers are allowed open access. The amount of surcharge and additional surcharge levied on consumers who are permitted open access should not become so onerous that it eliminates competition that is intended to be fostered in generation and supply of power directly to consumers through the provision of Open Access under Section 42(2) of the Act. Further it is essential that the Surcharge be reduced progressively in steps with the reduction of cross-subsidies as foreseen in Section 42(2) of the Electricity Act 2003.

D.

REGULATIONS OF THE COMMISSION The Commission has specified the terms and conditions for open access and its phasing under the UPERC (Terms and Conditions for Open Access) Regulations -2005 and the methodology for the determination of transmission charges and/or wheeling charges, surcharge and additional surcharge under the UPERC (Terms and Conditions for determination of Transmission Tariffs) Regulations and the UPERC (Terms and Conditions for determination of Distribution Tariffs) Regulations. The relevant provisions of the above regulations are discussed below:-

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I)

Open Access Regulations of the Commission The Uttar Pradesh Electricity Regulatory Commission has notified its Open Access Regulations, 2005 on 21st June 2005 which among other things details the Charges, the Surcharge and the Additional Surcharge to be paid by Open Access customers and the phasing of Open Access for distribution. Under the scheme of things Open Access is to be allowed in phases as detailed below:
S. Phases No.

Category of consumers Consumers with demand of 20 MW and above and connected on voltage levels of 33 KV and above Consumers with demand of 10 MW and above and connected on voltage levels of 33 KV and above Consumers with demand of 5 MW and above and connected on voltage levels of 11 KV and above Consumers with demand of above 1 MW

Time from which open access allowed July 1, 2005

Phase I

Phase II

April 1, 2006

Phase III

April 1, 2007

Phase IV

April 1, 2008

Regarding Transmission Charges, Wheeling Charges, Cross-subsidy surcharge and additional surcharge, clause 15 of the above regulations provides that: Clause 15 - Charges for open access (1) Transmission charges and Wheeling charges The Transmission charges or Wheeling charges for use of the Transmission System of a Transmission Licensee or the distribution system of a distribution licensee shall be regulated as under: (a) Transmission charges and wheeling charges payable by an open access customer shall be determined by the Commission in terms of the

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regulations framed by the Commission for determination of tariff for transmission and distribution licensee respectively. (b) Where a dedicated transmission system or a distribution system used for open access has been constructed for exclusive use of an open access customer, the transmission charges or wheeling charges for such dedicated system shall be worked out in terms of the regulations for determination of tariff and shall be borne entirely by such open access customer till such time the surplus capacity is used for other persons or purposes. (c) In case intra state transmission system or distribution system is used by an open access customer in addition to inter-state transmission system, transmission charges and wheeling charges shall be payable for use of intra-state transmission and/or distribution system in addition to payment of transmission charges for inter-state transmission. (d) The short-term open access customer shall pay 25% of the annual transmission or wheeling charges as determined by the Commission for that year based on average capacities served by such systems. The average capacity, for transmission system shall be sum of generating capacities connected to the transmission system and contracted capacities of other transactions handled by the system of the Licensee while in case of distribution system, it shall be sum of import of power at each interface point of exchange of power at electrical boundary of distribution licensee and generation from captive power plants, co-generation plants and plants generating electricity from renewable sources of energy located in the area of such licensee. Provided that above charges shall be on one-day basis which transmission / distribution licensee shall declare in Rs. Per MW, which shall remain fixed for a period of one year. Provided further that when reservation of capacity has been done consequent to bidding, the rate shall be taken as decided by bidding.

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(e)

25% of the charges collected in this manner from the short- term customers shall be retained by transmission or distribution licensee and the balance 75% shall be adjusted towards reduction in transmission/wheeling charges of the transmission/ distribution licensee respectively chargeable to long terms customers and/or retail tariff of the consumers of the distribution licensee. Provided that the price determined under regulation 15(1) shall be the floor price for the purpose of regulation 9(2) (b).

(2) (a)

Surcharge In addition to transmission charges and wheeling charges, a consumer availing open access to the transmission system/distribution system not being a captive consumer shall pay a surcharge;

(b)

Surcharge shall be determined by the Commission separately in the concerned tariff order. In absence of such determination, the surcharge shall be specified by the Commission on a case to case basis for a specified period based on an application moved before it in this behalf. Provided that the applicant shall pay surcharge as determined as per these regulations post the expiry of the period specified above under regulation 15(2) (b).

(c)

The amount of surcharge shall be so calculated as to meet the current level of cross subsidy from that category of consumers and shall be paid to the distribution licensee of area of supply where the consumer is located.

(d)

The surcharge shall be reduced and eliminated in the manner as determined by the Commission in respect to reduction and elimination of cross subsidies in terms and conditions of tariff of transmission/distribution licensees. *

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* Note: It may however be noted that Government of India has vide notification dated 28th May 2007 issued the Electricity (Amendment) Act 2007 to amend certain provisions of the Electricity Act 2003. Under the amended provisions the word eliminated used in connection of elimination of cross-subsidies has been removed from Section 38 (2) (d), Section 39 (2) (d), Section 40 and Section 42 (2) and accordingly third proviso from Section 38 (2) (d), Section 39 (2) (d) and Section 40 has been removed. (e) The consumers availing exclusively interstate transmission system shall pay such amount of surcharge as determined by the Commission by regulations in this regard. (3) (a) Additional Surcharge A consumer availing open access and receiving supply of electricity from a person other than the distribution licensee of his area of supply shall pay to the distribution licensee an additional surcharge, in addition to wheeling charges and surcharge, to meet the fixed cost of such distribution licensee arising out of his obligation to supply as provided under sub-section (4) of section 42 of the Act; (b) The distribution licensee shall submit to the Commission an account of fixed cost, which the licensee is incurring towards his obligation to supply; (c) The Commission shall scrutinize the statement of account submitted by the licensee and objections, if any, and determine the amount of additional surcharge payable by the consumer to the licensee, (d) The additional surcharge shall be leviable for such period as the Commission may determine. II) Terms and condition for determination of transmission tariff and distribution tariff regulations

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The Commission has notified the Terms and Conditions for determination of Transmission as well as Distribution Tariffs Regulations on 6th October 2006. (i) Terms and Conditions for determination of Transmission Tariffs Regulations Clause 3.11, of the above Regulation gives the methodology for the determination of Transmission/wheeling charges as below: Clause-3.11 Transmission/Wheeling Charges 1. In case of more than one long term of customers of the Transmission System (distribution licensee/long term open access customers) utilizing the transmission system, the monthly transmission/wheeling charges leviable on such customers shall be computed as per the following formula: Transmission/Wheeling charges payable by the long term customers of the Transmission System for use of transmission system for a month = (Net ARR/12)*(CL/SCL) Where: Net ARR = Annual Revenue Requirement of the Transmission Licensee for the ensuing financial year computed in accordance with these regulations, less Non Tariff Income under Regulation 5.1.2, which includes such percentage of revenue as specified in the UPERC (Treatment of income of Other Businesses of Transmission Licensees and Distribution Licensee) Regulation 2004, as amended from time to time, recovered from Short-term open access customers;

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CL = Allotted Transmission Capacity in MW of particular long term of customers of the Transmission System as per Transmission Service Agreement. SCL = Sum of the Allotted Transmission Capacities (in MW) to all the long-term customers of intra-State Transmission System. 2. It is mandatory for all long-term transmission system customers and the short-term transmission system customers including the distribution licensees to enter into an agreement, in terms of the Open Access Regulations of the Commission, with the Transmission Licensee. 3. Wheeling charges for short-term open access customers shall be in accordance with Open Access Regulations of the Commission as amended from time to time. III) Terms and Conditions for determination of Distribution Tariffs Regulations Clause 2.1 Filing of Annual Revenue Requirement and Tariff Application 1. The Distribution Licensee shall file the Aggregate Revenue Requirement (ARR)/Tariff petitions complete in all respect along with requisite fee as prescribed in the Commissions Fee and Fine Regulations on or before 30th November of each year. The above ARR petition shall contain the details of the estimated expenditure and the expected revenue that it may recover in the ensuing financial year at the prevailing tariff. Information as per formats specified in Annexure A to these regulations shall form part of the ARR filings. 2. ARR/Tariff filing by the Distribution Licensee shall

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separately indicate Aggregate Revenue Requirement (ARR) for Wheeling function and Retail Supply function embedded in the distribution function. 3. Till such time complete segregation of accounts between Wheeling and Retail Supply Business takes place, ARR proposals for Wheeling and Retail Supply Business shall be prepared based on an allocation statement to the best judgment of the distribution licensee. Methodology for such segregation shall in any case form part of the proposal. 4. The licensee in the ARR filing for the ensuing financial year shall indicate the manner in which the gap, if any, between the expenses, which it is permitted to recover and the expected revenue at the existing tariff for the ensuing year, shall be bridged. The ARR filing shall include detailed tariff proposal for Wheeling and Retail Supply in case it is proposed to bridge the gap through tariff hike. The proposed wheeling charges shall be voltage wise. However the distribution licensee may, in absence of voltage wise data, compute wheeling charges based on normative distribution losses. Clause 5.2 1. Revenue Gap: Tariff for wheeling of electricity shall be computed on the basis of the costs allocated to the wheeling business as per the allocation statement and the projected electricity units to be wheeled through distribution licensee's network in the ensuing tariff period. The wheeling cost for electricity units wheeled for retail supply shall form part of the ARR for the retail supply business.

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2.

The difference between the Expected Expenditure for retail supply business as per allocation statement and the Revenue from projected sale of power at prevailing tariff, non-tariff income and other revenues as per allocation statement for the retail supply business shall be called the Revenue Gap.

3.

The revenue gap shall be bridged by measures such as improvements in efficiency, tariff hikes and utilization of contingency reserves etc., as may be approved by the Commission as well as Government subsidy.

Clause 6.6 1.

Surcharge Till such time the cross subsidies are eliminated, the open access consumer shall pay to the distribution licensee a cross subsidy surcharge in addition to wheeling charges. Surcharge to be levied on the open access consumer shall be determined by the Commission keeping in view the loss of cross-subsidy from the consumers or category of consumers who have opted for open access to take supply from a person other than the incumbent distribution licensee.

2.

When open access is allowed the surcharge for the purpose of sections 38,39,40 and sub-section 2 of section 42 would be computed as the difference between (i) the tariff applicable to the relevant category of consumers and (ii) the cost of the distribution licensee to supply electricity to the consumers of the applicable class. In case of a consumer opting for open access, the distribution licensee could be in a position to discontinue purchase of power at the margin in the merit

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order. Accordingly, the cost of supply to the consumer for this purpose may be computed as the aggregate of (a) the weighted average of power purchase costs (inclusive of fixed and variable charges) of top 5% power at the margin, excluding liquid fuel based generation, in the merit order approved by the UPERC adjusted for average loss compensation of the relevant voltage level and (b) the transmission and distribution wheeling

charges as determined in accordance with the UPERC Terms and Conditions for Determination of Distribution and Transmission Tariff

Regulations as amended from time to time. Cross Subsidy Surcharge formula: S = T [C (1+ L / 100) + D] Where S is the cross subsidy surcharge T is the Tariff payable by the relevant category of consumers; C is the Weighted average cost of power purchase of top 5% at the margin excluding liquid fuel based generation and renewable power D is the Wheeling charges for transmission and distribution of power. L is the system Losses for the applicable voltage level, expressed as a percentage The cross-subsidy surcharge shall be brought down

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progressively and, as far as possible, at a linear rate to a maximum of 20% of its opening level by the year 201011. 3. No such surcharge would be required to be paid in terms of sub-section (2) of Section 42 of the Act on the electricity being sold by the generating companies with consent of the competent government under Section 43(A)(1)(c) of the Electricity Act, 1948 (now repealed) and on the electricity being supplied by the distribution licensee on the authorization by the State Government under Section 27 of the Indian Electricity Act, 1910 (now repealed), till the current validity of such consent or authorizations. 4. The cross subsidy surcharge may be collected either by the distribution licensee, the transmission licensee or the STU, depending on whose facilities are used by the consumer for availing electricity supplies. In all cases the amounts collected from a particular consumer should be given to the distribution licensee in whose area the consumer is located. In case of two licensees supplying in the same area the licensee from whom the consumer was availing supply shall be paid the amounts. 5. However, in order to facilitate open access, the Commission may adopt a procedure different from the procedure stated above for the calculation of cross subsidy surcharge consistent with the provisions of the EA 2003 and the spirit of the tariff policy after considering the view points of licensee and the open access customer.

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Clause 6.7 1.

Wheeling Charge The licensee shall provide non-discriminatory open access to the consumers within the period as stipulated by the Commission in UPERC (Terms and Conditions for Open Access) Regulations, 2005 and amendments thereof if any. For the purpose of tariff for wheeling, the person utilizing wheeling services shall be charged tariff on both cash and kind basis.

2.

The wheeling charge in cash for a consumer category for the present shall be based on simple postage stamp method and shall be computed as per regulation 5.2(1).

3.

The normative transmission and distribution losses at the voltage at which the open access is availed shall be borne by the open access consumer in kind.

Clause 6.8 1.

Additional Surcharge Where a consumer avails open access, the Commission may determine the additional surcharge to meet the fixed costs of distribution licensee arising out of his obligation to supply and permit collection of such additional surcharge for the period the fixed cost remains stranded. For recovery of additional surcharge, the distribution licensee shall conclusively demonstrate that his obligation in terms of existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. Further, fixed costs related to electrical network assets should be recovered through wheeling charges.

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2.

The Commission shall determine the amount of additional surcharge to be paid by the consumer to the licensee based on the statement of account submitted by the licensee and objections thereof if any of the consumer.

3.

The additional surcharge shall be leviable for such period as the Commission may determine.

DETERMINATION OF APPLICABLE CHARGES FOR OPEN ACCESS First and foremost, before giving the details of the calculation of various charges for Open access, the Commission would like to discuss the order dated July 05, 2007 of the Appellate Tribunal of India in the matter of Appeal Nos. 169,170,171,172 of 2005 & 248 and 249 of 2006, vide which Honble Appellate Tribunal has interpreted the provisions related to Open Access in accordance with the spirit of the Act. Commission feels that the same will put the issues linked with the determination of Open Access in the proper perspective.

In its above order dated 5th July 2007, highlighting the importance of purposive interpretation of any enactment Honble Appellate Tribunal of India has very clearly brought about the intent of the Act: Para 14 The object and purpose of the Act lies in its preamble, which is for unshackling the electricity industry. This it seeks to achieve by adopting, inter alia, measures conducive to the development of the electricity industry and promoting competition. Competition is a significant factor for unleashing the electricity sector. Competition in the sector depends upon various factors. One of the most important factors is the availability of open

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access to the consumer, generator and distributor, as the case may be. Open access is the back bone of competition. It is the corner stone of the Act. Further, while interpreting the provisions related to Open Access under the Act the Appellate Tribunal lays down that Para 15 Under the Act, it is no longer necessary that the supplier of energy should be the owner of delivery system. In theoretical terms, it means that a consumer should be able to buy electricity from any one and not just the distribution licensee located within its area of supply. Para 18 Sub-section (47) of Section 1 of the Act defines open access. It means providing for non discriminatory open access to any licensee or consumer or a person engaged in generation or to the use of transmission line or distribution system in accordance with the Regulations of the appropriate Commission. In other words, it means providing equal opportunity to any consumer, licensee or generator, as the case may be, to use open access. It is the duty of the Regulatory Authority to keep the definition in view and work towards elimination of discrimination and to promote equality of opportunity in the matter of open access. Regarding determination of cross-subsidy surcharge and its quantum the order interprets Sub-Section (2) of Section 42 of the Act as below: Para 24 Sub-Section (2) of Section 42 of the Act authorizes the State Regulatory Commissions to introduce open access in the area of distribution of electricity. It requires the State Commission to introduce open access in such phases and subject to such conditions including the cross subsidies and other operational constraints that may be specified within one year of the appointed date by it. While determining the charges for wheeling, the Commission is required to have due regard to all relevant factors including surcharge and other operational constraints. According to the first proviso to

25

Section 42(2), open access can be allowed by the Commission on payment of surcharge in addition to wheeling charges. The State Commission under first proviso is also required to determine the surcharge. In terms of second proviso to Section 42(2), the surcharge determined by the Commission is required to be utilized to meet the requirements of current level of crosssubsidies within the area of supply of distribution licensee. It needs to be noted that neither the first proviso nor the second proviso provides that the cross subsidy must be so computed that it is equal to or more than the current level of cross subsidy. All that the second proviso requires is that after the surcharge is determined by the Commission under the first proviso, the surcharge collected for providing open access must be utilized towards meeting the current level of cross subsidy. The dictionary meaning of the word utilised is to put to use. The appearance of the word utilised in the second proviso to Sub-Section (2) of Section 42 before the words to meet the requirements of current level of cross subsidy is not without significance. It is a pointer as to how the surcharge will be used. In case the surcharge was always required to be equal to or more than the current level of cross subsidy, the second proviso would have stated as follows:Provided further that such surcharge shall be equal to or may be more than the requirements of current level of cross subsidy within the area of supply of the distribution licensee. Para 25 In fact the second proviso only deals with mode of utilization of surcharge. It does not lay down that surcharge should measure up to or be equal to the current level of cross subsidy. In this context it is also relevant to quote clause 5.8.3 of the National Electricity Policy which also holds that: The amount of surcharge and additional surcharge levied on consumers who are permitted open access should not become so onerous that it eliminates

26

competition that is intended to be fostered in generation and supply of power directly to consumers through the provision of Open Access under Section 42(2) of the Act. Further it is essential that the Surcharge be reduced progressively in steps with the reduction of cross-subsidies as foreseen in Section 42(2) of the Electricity Act 2003. The Honble Appellate Tribunal further builds up the argument citing acute shortage of electricity and absence of commensurate build up of generation capacities to meet the growing demand: Para 27 It should have adopted such level of cross subsidy surcharge as would have maintained the right equilibrium between promotion of competition and financial security of the utility (distributor). Unless the consumers can avail of the open access at a reasonable cost not exceeding the rate at which electricity is available within the area of supply of the distribution licensee, it will be difficult for the private entrepreneurs to set up generating stations. The Regulatory Authorities must face the reality. There is no denying the fact that there are crippling shortages of electricity in the country. The economic growth which is about 9% of the GDP, cannot be sustained and further accelerated unless substantial capacity addition takes place. The Regulatory Commissions need to encourage the entrepreneurs to set up generating stations by their visionary orders. In the last para of the order Honble Appellant Tribunal of India directs all the Electricity Regulatory Commission that: In future all the Regulatory Commissions while fixing wheeling charges, cross subsidy surcharge and additional surcharge, if any, shall have regard to the spirit of the Act as manifested by its Preamble. The charges shall be reasonable as would result in promoting competition. They shall be worked out in the light of the above observations made by us.

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From discussions above it becomes quite clear that in no case quantum of cross-subsidy surcharge and the additional surcharge be such that it eliminates competitions and renders the provision related to Open Access under the Act otiose.

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A.

Transmission Charges

Section 61of Electricity Act provides that the Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the principles and methodologies specified by the Central Commission for determination of

the tariff applicable to generating companies and transmission licensees; The Commission has accordingly adopted the same principles for the determination of Transmission Tariffs as has been specified by the Central Electricity Regulatory Commission. In accordance with the UPERC (Terms and Conditions for determination of Transmission Tariff) Regulations 2006 the annual per MW charges for use of Transmission network can be calculated by dividing the Net ARR of the Transmission licensee by the Sum of the Allotted Transmission Capacities (in MW) to all the long-term customers of intra-State Transmission System.: Annual per MW Transmission Charges Where: Net ARR = Annual Revenue Requirement of the Transmission Licensee for the ensuing financial year computed in accordance with these regulations, less Non Tariff Income under Regulation 5.1.2, which includes such percentage of revenue as specified in the UPERC (Treatment of income of Other Businesses of Transmission Licensees and Distribution Licensee) Regulation 2004, as amended from time to time, recovered from Short-term open access customers; SCL = Sum of the Allotted Transmission Capacities (in MW) to all the longterm customers of intra-State Transmission System. The Net ARR, as approved by the Commission, of UPPCL (Transco) for the FY 2006-07 is as given below: = Net ARR / SCL

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Approved Net ARR of UPPCL (Transco) for the FY 2006-07

ARR as approved by the Commission in Tariff Order FY 2006-07 Employees Expenses 181.64 A & G Expenses 22.80 R & M Expenses 59.31 Depreciation 208.36 Interest Charges 316.61 Other Interest and Finance 8.99 Less: Other Income /Non Tariff (16.30) Special Appropriations 0 Reasonable Return 20.64 ARR (Rs. Crs.) 802.05 ARR Items

Gross Capacity Available to UPPCL

Description/Name of Agency UPRVUNL (Thermal) UPJVNL (Hydro) UPs Share of Capacity from Central Sector Plants Thermal 3387 -3387 9965 Hydro 501 -501 UPs Share of Capacity from JV/IPP Plants

Installed Capacity (MW) Capacity of plants shut down (MW) Sum of total Available Capacity (MW) Total System Available Capacity (MW)

4480 183 4297

522 -522

1258 -1258

Station Name Anpara A Anpara B Harduaganj Obra A Ext-I Obra B Panki Paricha Paricha Ext. Total

Installed Capacity (MW) 630 1000 440 550 1000 220 220 420 4480

Derated (Shutdown) Capacity (MW) 0 0 65 108 0 10 0 0 183

Available Capacity (MW) 630 1000 375 442 1000 210 220 420 4297

Gross Available Hydro Generating Capacity from UPJVNL Plants

Station Name Khara Matatila Capacity (MW 72 30

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Obra (Hydel) Rihand U.G.C. Power Stations (Including Belka & Babail). Total

99 300 21.5 522.5

Gross Available Generating Capacity from CGS and JV Plants

Name of the Central Sector Generating Station Anta Auriya Dadri Thermal Dadri Gas Rihand-I Rihand-II Singrauli Tanda Unchahar I Unchahar II Unchahar-III Chamera Chamera-II Dhauliganga Salal I&II Tanakpur Uri Dulhasti NAPP RAPP Nathpa Jhakri Farakka Kahalgaon Talchar VishnuPrayag Tala Power Tehri Hydro Total Allocation from CGS MW allocations to UP 104.8 231.1 84.0 259.4 361.1 331.5 824.6 440.0 254.7 143.8 69.6 109.5 74.8 65.9 48.0 21.3 96.3 85.0 152.90 78.32 256 17.1 23.7 12.3 14.8 352 300 350 5146

Transmission Charges Rs./MW/Year

= ARR Transco/ Total MW Allocations = 802.05 x 10^7/ (4297+ 522.5+ 5146) =802.05 x 10000000/9965.5 = Rs. 804826.6519 /MW/Year

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Transmission Charges Rs./MW/Month = Rs. 67068.8877 /MW/Month The above transmission charges are taking into account the costs of entire transmission network. In absence of voltage wise segregated data it is assumed that cost of wheeling of power through transmission network related to 400 kV, (400+220) kV and (400+220+132) kV is 40%, 70% and 100% respectively of the total costs for the entire transmission network respectively. Accordingly, the voltage wise transmission charges shall be as below: Sl. No. 1 Voltage of Supply 400 kV Transmission charges Rs. 321930.6608/MW/Year or Rs. 26827.5551/MW/month 2 220 kV Rs. 563378.6563/MW/Year or Rs. 46948.2214/MW/month 3 132 kV Rs. 804826.6519 /MW/Year or Rs. 67068.8877 /MW/Month

Transmission charges for Short Term Open Access can be calculated from the above charges in accordance with the provision of UPERC (Terms and Conditions for Open Access) Regulations 2004. B. Determination of Wheeling Charges

Clause 2.1 (2) & (3) of the Terms and Conditions for determination of Distribution Tariff Regulations provide that ARR/Tariff filing by the Distribution Licensee shall separately indicate Aggregate Revenue

Requirement (ARR) for Wheeling function and Retail Supply function embedded in the distribution function and that till such time complete segregation of accounts between Wheeling and Retail Supply Business takes place, ARR proposals for Wheeling and Retail Supply Business shall be prepared based on an allocation statement to the best judgment of the distribution licensee.

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Since, the above regulation was not in force at the time of filing of ARR/Tariff petitions for the FY 2006-07 segregated data was not made available by the licensees. Wheeling charges for open access therefore could not be determined alongwith the Tariff Order in accordance with the provisions of the above reguation. However, to initiate a dialogue on the methodology specified in the regulation, the Commission has, based on the data and information available in the ARR for the FY 2006-07 and certain assumptions, done the calculation for wheeling charges for the purposes of Open Access to the distribution network. As per the provisions of the Distribution Tariff Regulation: Wheeling Charges = ARR W / Energy handled by the distribution system Where: ARR W Further, ARR
W

is ARR for Wheeling function

= {ARR

PPC TC

Annual}

* (% of total costs allocated to wheeling

Function) Where ARR W PPC TC Annual -

is the ARR for Wheeling function Power Purchase Cost Annual Transmission Charges

The consolidated Net ARR for all the Discoms as approved by the Commission for FY 2006-07 is as below:
S.No. 1 2 3 4 ARR Heads Power Purchase Costs (PPC) Annual Transmission Charges (TC)Annual Employees Costs A & G Costs Approved Costs 10779.61 802.05 818.51 91.66

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S.No. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

ARR Heads Repair & Maintenance Expenses Interest Charges Other Interest & Finance Charges Provision for Bad & Doubtful Debts Depreciation Special Provisions Reasonable Return Total Approved Expenses Less: Expenses Capitalized Employees Costs A & G Costs Interest & Finance Charges Net Approved Expenses Less: Other Income Less: Committed GoUP Subsidy Net ARR

Approved Costs 222.87 296.37 57.22 0.00 691.09 0.00 0.00 13759.39 (204.99) (122.78) (13.75) (68.46) 13554.40 (126.00) (1012.00) 12416.40

In absence of actual segregation of costs it has been assumed that 80% of the total costs shall be towards the wheeling function, accordingly: ARR W = = Rs. Rs. (13554 10779 802) * 0.8 Crores (1578.4) Crores

Further, in accordance with the Tariff Order for the FY 2006-07, taking energy handled by the distribution system of 48073 MU, the per unit cost of wheeling had been worked out as Rs. 0.33 /unit. The above wheeling charges have been determined taking into account the costs of entire distribution network. However, cost of wheeling for the purposes of Open Access (i.e. at 33 and 11 KV), will be much less. It is accordingly assumed that 50% of the charges so determined shall apply to Open Access consumers at 33 KV and 60% to Open Access consumers at 11 KV. Accordingly the charges for wheeling of power through distribution network at different voltages shall be as below:

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Sl.No. 1.

Voltage of Supply

Wheeling Charges

Open Access Consumers drawing power from Rs. 0.17/unit the distribution network at 33 KV.

2.

Open Access Consumers drawing power from Rs. 0.20/unit the distribution network at 11 KV.

However, Open Access Consumer directly connected to the transmission network need to pay only the transmission charges and no wheeling charges. C. Determination of Cross-Subsidy Surcharge

The Formula for the calculation of the Cross Subsidy Surcharge as prescribed in the Tariff Policy and adopted by the Commission in its regulations is as below: Surcharge formula: S = T - [C *(1+ L / 100) + D] Where S T is the cross-subsidy surcharge to be determined. is mentioned as the Tariff payable by the relevant category of consumers but in view of two part tariffs taken as the average revenue realized or the through rate of particular category of consumers as worked out during determination of tariffs. C is the Weighted average cost (both fixed and variable) of power purchase of top 5% at the margin excluding liquid fuel based generation and renewable power in the merit order approved by the Commission during determination of tariffs.

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has been mentioned as the Wheeling charge but shall include both the Transmission Charges as well as wheeling charges (if connected to distribution network).

the normative system losses for the applicable voltage level, expressed the as a percentage and or shall mean normative to which

Transmission as well as Distribution losses depending upon network (Transmission Distribution) connected. L is system losses at applicable voltage level. However, for Open Access consumers drawing power directly from the transmission network the same shall be the normative transmission losses as approved by the Commission. For the sample calculation of Cross Subsidy Surcharge for the HV-2 category of consumers T has been taken as the through rate for the HV-2 category i.e Rs 4.4/kWh , as approved by the Commission in the Tariff Order for FY 200607. C the weighted average cost of top 5% power, purchased at the margin excluding liquid fuel based generation and renewable power has been taken from the merit order as approved by the Commission in the Tariff Order for the FY 2006-07. The information submitted by the licensees in the ARR/Tariff Filings for the FY 2006-07 indicated that they have purchased 2120 MU of Power @ Rs. 5.5 /unit through other sources. The Commission was made to understand that this is the average rate of power procured through the trading route. Accordingly, the cost of top 5% power (around 2530.15 MU) at the margin can be fairly assumed as not more than Rs. 5.0/unit. Further, for wheeling of electricity through transmission network the commission has determined the average transmission charges irrespective of voltage level as Rs.0.167/unit in the Tariff Order for the FY 2006-07.

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Substituting these values in the surcharge formula yields negative results indicating no requirement for any cross-subsidy surcharge: S = = Rs. 4.44 (5.0*(1+5/100) + (0.167)) Rs. -0.977 /unit

In this context it is also relevant to quote from the order of the Honble Appellate Tribunal dated 5th July 2005 in which it has been held that: It is well-known that there is a shortage of electricity and in case a consumer finds another source of power for its needs, it reduces the burden of the distribution licensee due to the avoided additional purchase of power at marginal cost. In case the distribution licensee can meet the demand of electricity and provide quality service at a reasonable price, there can be no dearth of consumers and in that event there is hardly any question of loss to the distribution licensee when a consumer moves away from it. Meaning thereby that if the consumer mix of a particular licensee is not changing with the migration of a cross-subsidizing consumer there should not be any requirement for the cross-subsidy surcharge. The cross-subsidy surcharge accordingly is determined to be as zero for the present. D. Determination of Additional Surcharge

Clause 8.5.4 of the Tariff Policy provides that: The additional surcharge for obligation to supply as per section 42(4) of the Act should become applicable only if it is conclusively demonstrated that the obligation of a licensee, in terms of existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. The fixed costs related to network assets would be recovered through wheeling charges. Accordingly, Additional Surcharge shall be payable by the Open Access consumers only if licensee demonstrates to the satisfaction of the

37

Commission that his obligation in terms of existing power purchase commitments, has been and continues to be stranded, or there is an unavoidable obligation and incidence to bear fixed costs consequent to such a contract. This view has also been upheld by the Appellate Tribunal of India in its order dated 5th July 2007 in APPEAL Nos. 169,170,171,172 of 2005 & 248 and 249 of 2006. In view of ever growing demand for power and gap between its demand and supply, it is felt that there is hardly any reason for any of the obligations of the licensee, in terms of existing power purchase commitments, to remain stranded for which licensee has to bear the fixed costs. Accordingly, for the present, additional surcharge is determined to be zero. E. Standby Arrangement Charges

In this context, the Tariff Policy notified by the Central Government under clause 8.5.6 provides that: In case of outages of generator supplying to a consumer on open access, standby arrangements should be provided by the licensee on the payment of tariff for temporary connection to that consumer category as specified by the Appropriate Commission. The State Electricity Regulatory Commissions (SERCs) are further required to be guided by the tariff policy in discharge of their functions as well as framing of regulations under Section 61 of the Act. It is however to clarify that though, the tariff order issued by the Commission provides for charges to be paid by the consumers requiring temporary connection, but the supply under the category is to be provided at 230/440 Volts only. Therefore some temporary rates need to be prescribed for such

standby arrangement requiring supply at 11 kV and above voltages in the Tariff Order. 38

It is felt that temporary charges of Open Access consumers can be linked to UI charges. Accordingly, it is proposed that the temporary charges for Open Access consumers for drawl over and above his schedule may be UI + 25%. The detailed scheme is as below: (i) User of captive generating plant, if not a consumer of distribution licensee of his area, while receiving supply of electricity from such plant as well as Open Access Consumers, connected directly or indirectly with the grid/distribution system, shall ensure to draw power as per schedule during each 15 minute time block. The drawl more than the schedule by them shall be considered as temporary supply from the distribution licensee in whose area they are located. The temporary supply shall be charged at rate schedule specified by the Commission for them. No charge has so far been specified for temporary supply at 11 kV and above. The temporary charges for such user or consumer shall be frequency linked rate 255 higher than UI rate specified by CERC from time to time. Such frequency linked rates based on CERC notification dated 26.4.07 are as follows:

Average frequency of time block (Hz) Below Not Below ---50.50 50.50 50.48 50.48 50.46 ------------49.84 49.82 49.82 49.80 49.80 49.78 49.78 49.76 ------------49.54 49.52 49.52 49.50 49.50 49.48 49.48 49.46 ------------49.04 49.02

UI Rate (Paise per kWh) 0.0 8.0 15.0 ------255.0 263.00 274.00 285 ------420.00 431.00 451.00 471.00 ------911.00

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49.02

----

931.00

(Each 0.02 Hz step is equivalent to 7.5 Paise/kWh in 50.5 49.8 Hz frequency range, to 11.2 Paise/kWh in 49.8 49.5 Hz frequency range and to 20 Paise/KWh in 49.5 49.02 Hz) (ii) Above charges shall be without prejudice to penalty which may be imposed by the Commission, for non-compliance of the provision of the Act, Regulation or Code or order made there under, on recommendation of State Load Despatch Centre. (iii) the billing of the standby arrangement charges, under sub-para (i) above, shall be carried out with the billing of UI charges and paid accordingly similar to UI payments. The premium of 25% is required to ensure the grid discipline and protect the interest of incumbent distribution licensee as well as the consumers in its area of operation. Higher premium will further force the open access consumer to think in terms of alternatives sources which can provide power at economical rates and at shorter notice thereby also promoting competition.

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