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THE GAZETTE OF INDIA : EXTRAORDINARY [PART I—SEC. 1]

MINISTRY OF POWER

RESOLUTION

New Delhi, the 28th January, 2016

TARIFF POLICY
No. 23/2/2005-R&R (Vol-IX).—1.0 INTRODUCTION
1.1 In compliance with section 3 of the Electricity Act 2003, the Central Government notified the
Tariff Policy on 6 th January, 2006. Further amendments to the Tariff Policy were notified on 31st
March, 2008, 20th January, 2011 and 8th July, 2011. In exercise of powers conferred under section
3(3) of Electricity Act, 2003, the Central Government hereby notifies the revised Tariff Policy to be
effective from the date of publication of this resolution in the Gazette of India.

Notwithstanding anything done or any action taken or purported to have been done or taken under
the provisions of the Tariff Policy notified on 6th January, 2006 and amendments made thereunder,
shall, in so far as it is not inconsistent with this Policy, be deemed to have been done or taken under
provisions of this revised policy.

1.2 The National Electricity Policy has set the goal of adding new generation capacity and enhancing
per capita availability of electricity per year and to not only eliminate energy and peaking shortages
but to also have a spinning reserve as specified by the Central Electricity Authority. Development of
the power sector has also to meet the challenge of providing access for affordable electricity to all
households in next five years.

1.3 It is therefore essential to attract adequate investments in the power sector by providing
appropriate return on investment as budgetary resources of the Central and State Governments are
incapable of providing the requisite funds. It is equally necessary to ensure availability of electricity
to different categories of consumers at reasonable rates for achieving the objectives of rapid
economic development of the country and improvement in the living standards of the people.

1.4 Balancing the requirement of attracting adequate investments to the sector and that of ensuring
reasonability of user charges for the consumers is the critical challenge for the regulatory process.
Accelerated development of the power sector and its ability to attract necessary investments calls
for, inter alia, consistent regulatory approach across the country. Consistency in approach becomes
all the more necessary considering the large number of States and the diversities involved.

2.0 LEGAL POSITION

2.1 Section 3 (1) of the Electricity Act, 2003 empowers the Central Government to formulate the
tariff policy. Section 3(3) of the Act enables the Central Government to review or revise the tariff
policy from time to time.

2.2 Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions
(SERCs) shall be guided by the tariff policy in discharging their functions including framing the
regulations.

2.3 Regulatory Commissions shall be guided by the principles and methodologies specified by the
Central Commission for determination of tariff applicable to generating companies and transmission
licensees.

2.4 The Forum of Regulators has been constituted by the Central Government under the provisions of
the Act which would, inter alia, facilitate consistency in approach specially in the area of distribution.

3.0 EVOLUTION OF THE POLICY

The tariff policy has been evolved in consultation with the State Governments, the Central Electricity
Authority (CEA), the Central Electricity Regulatory Commission and various stakeholders.

4.0 OBJECTIVES OF THE POLICY

The objectives of this tariff policy are to:

(a) Ensure availability of electricity to consumers at reasonable and competitive rates;

(b) Ensure financial viability of the sector and attract investments;

(c) Promote transparency, consistency and predictability in regulatory approaches across jurisdictions
and minimise perceptions of regulatory risks;

(d) Promote competition, efficiency in operations and improvement in quality of supply;

(e) Promote generation of electricity from Renewable sources;

(f) Promote Hydroelectric Power generation including Pumped Storage Projects (PSP) to provide
adequate peaking reserves, reliable grid operation and integration of variable renewable energy
sources;

(g) Evolve a dynamic and robust electricity infrastructure for better consumer services;

(h) Facilitate supply of adequate and uninterrupted power to all categories of consumers;
(i) Ensure creation of adequate capacity including reserves in generation, transmission and
distribution in advance, for reliability of supply of electricity to consumers.

5.0 GENERAL APPROACH TO TARIFF

5.1 Introducing competition in different segments of the electricity industry is one of the key
features of the Electricity Act, 2003. Competition will lead to significant benefits to consumers
through reduction in capital costs and also efficiency of operations. It will also facilitate the price to
be determined competitively. The Central Government has already issued detailed guidelines for
tariff based bidding process for procurement of electricity by distribution licensees.

5.2 All future requirement of power should continue to be procured competitively by distribution
licensees except in cases of expansion of existing projects or where there is a company owned or
controlled by the State Government as an identified developer and where regulators will need to
resort to tariff determination based on norms provided that expansion of generating capacity by
private developers for this purpose would be restricted to one time addition of not more than 100%
of the existing capacity.

Provided further that the Appropriate Commission, as defined in the Electricity Act, 2003, shall
ensure that in case of expansion of such projects, the benefit of sharing of infrastructure of existing
project and efficiency of new technology is passed on to consumers through tariff.

Provided also that the State Government can notify a policy to encourage investment in the State by
allowing setting up of generating plants, including from renewable energy sources out of which a
maximum of 35% of the installed capacity can be procured by the Distribution Licensees of that State
for which the tariff may be determined under Section 62 of the Electricity Act, 2003.

Provided that notwithstanding the provision contained in para 5.11(j) of the policy, the tariff for such
35% of the installed capacity shall be determined by SERC.

However, the 15% of power outside long term PPAs allowed under para 5.7.1 of National Electricity
Policy shall not be included in 35% allowed to be procured by Distribution Licensees of the State.

5.3 The tariff of all new generation and transmission projects of company owned or controlled by the
Central Government shall continue to be determined on the basis of competitive bidding as per the
Tariff Policy notified on 6 th January, 2006 unless otherwise specified by the Central Government on
case to case basis.

Further, intra-state transmission projects shall be developed by State Government through

competitive bidding process for projects costing above a threshold limit which shall be decided by the
SERCs.
5.4 The Central Electricity Regulatory Commission in consultation with Central Electricity Authority
and other stakeholders shall frame within six months, regulations for determination of tariff for
generation of electricity from projects using coal washery rejects. These regulations shall also be
followed by State Electricity Regulatory Commissions.

Provided that procurement of power from coal washery rejects based projects developed by
Central/State PSUs, Joint Venture between Government Company and Company other than
Government Company in which shareholding of company other than Government Company either
directly or through any of its subsidiary company or associate company shall not be more than 26% of
the paid up share capital, can be done under Section 62 of the Act.

5.5 The developer of a hydroelectric project, including Pumped Storage Plant (PSP), would have the
option of getting the tariff determined by the Appropriate Commission for the power to be sold
through long term Power Purchase Agreements (PPAs) on the basis of performance based cost of
service regulations if the following conditions are fulfilled:

(a) The Appropriate Commission is satisfied that the project site has been allotted to the developer
by the concerned State Government after following a transparent two stage process. The first stage
should be for prequalification on the basis of criteria of financial strength, past experience of
developing infrastructure projects of similar size, past track record of developing projects on time
and within estimated costs, turnover and ability to meet performance guarantee etc. In the second
stage, bids are to be called on the basis of only one single quantifiable parameter, such as, additional
free power in excess of percentage of free power, as notified by the Central Government, equity
participation offered to the State Government, or any other parameter to be notified by the Central
Government from time to time.

(b) Concurrence of CEA (if required under Section 8 of the Act), financial closure, award of work and
long term Power Purchase Agreement (PPA) (of the duration of 35 years or more) of the capacity
specified in (c) below with distribution licensees are completed by 15.08.2022.

(c) Long term PPA is firmed up for 60% or more of the total saleable design energy, balance being
allowed for merchant sale.

Provided that distribution licensees can extend the duration of long term PPA beyond 35 years for a
further period of 15 years at the existing terms and conditions subject to the approval of Appropriate
Commission.

Provided further that nothing contained in this clause shall apply to Pumped Storage Plants (PSP).

(d) The time period for commissioning of all the units of the project shall be fixed at four years from
the date of approval of the commissioning schedule by the Appropriate Commission. However, the
Appropriate Commission may, after recording reasons in writing, fix longer time period for hydro
electric projects (reservoir as well as run-of- river projects) of more than 100 MW capacity. Agreed
timelines to achieve the fixed commissioning schedule alongwith penalty for delay shall be decided
by the Appropriate Commission in consultation with the Central Electricity Authority. The
Appropriate Commission shall allow pass through the Interest During Construction (IDC) and
Financing Cost (FC) only upto the period of delay not attributable to the developer, as approved by
the CEA.

(e) Award of contracts for supply of equipment and construction of the project, either through a
turnkey or through well defined packages, are done on the basis of international competitive bidding.

5.6 Notwithstanding anything contained in Para 5.5 above, the developers of hydro electric projects
of more than 100 MW design capacity for which sites have been awarded earlier by following a
transparent process and on the basis of pre-determined set of criteria would have the option of
getting the tariff determined by the Appropriate Commission for the power to be sold through long
term PPA on the basis of cost plus under Section 62 of the Act.

5.7 In case of projects covered under Para 5.5 and 5.6, the Appropriate Commission shall determine
tariff ensuring the following:

(i) Any expenditure incurred or committed to be incurred by the project developer for getting project
site allotted (except free power as notified) would neither be included in the project cost, nor any
such expenditure shall be passed through in tariff.

(ii) The project cost shall include the cost of the approved R&R plan of the Project which shall be in
conformity with the following:

(a) the National Rehabilitation & Resettlement Policy currently in force;

(b) the R&R package as enclosed at appendix.

(iii) Annual fixed charges shall be taken pro-rata to the saleable design energy tied up on the basis of
long term PPAs with respect to total saleable design energy. The total saleable design energy shall be
arrived at by deducting the following from the design energy at the bus bar:

a) Free power as notified by the Central Government from time to time for the host State and the
riparian State and percentage for contribution towards Local Area Development Fund as constituted
by the State Government. This free power may be suitably staggered as decided by the State
Government.

b) Energy corresponding to 100 units of electricity to be provided free of cost every month to every
Project Affected Family notified by the State Government to be offered through the concerned
distribution licensee in the designated resettlement area/projects area for a period of ten years from
the date of commissioning.

5.8 The Appropriate Commission shall provide for suitable regulatory framework for incentivizing the
developers of Hydro Electric Projects (HEPs) for using long-term financial instruments in order to
reduce the tariff burden in the initial years.

5.9 The real benefits of competition would be available only with the emergence of appropriate
market conditions. Shortages of power supply will need to be overcome. Multiple players will
enhance the quality of service through competition. All efforts will need to be made to bring power
industry to this situation as early as possible in the overall interests of consumers. Transmission and
distribution, i.e. the wires business is internationally recognized as having the characteristics of a
natural monopoly where there are inherent difficulties in going beyond regulated returns on the
basis of scrutiny of costs.

5.10 Consumer interest is best served in ensuring viability and sustainability of the entire value chain
viz., generation, transmission and distribution of electricity, while at the same time facilitating power
supply at reasonable rate to consumers. The financial turnaround/restructuring plans are approved
by the Appropriate Government from time to time to achieve this objective. The Appropriate
Government as well as the Appropriate Commission while implementing such plans shall ensure
viability of the generation, transmission and distribution in terms of recovery of all prudent costs.

5.11Tariff policy lays down the following framework for performance based cost of service regulation
in respect of aspects common to generation, transmission as well as distribution. These shall not
apply to competitively bid projects as referred to in para 6.1 and para 7.1 (6). Sector specific aspects
are dealt with in subsequent sections.

a) Return on Investment
Balance needs to be maintained between the interests of consumers and the need for investments
while laying down rate of return. Return should attract investments at par with, if not in preference
to, other sectors so that the electricity sector is able to create adequate capacity. The rate of return
should be such that it allows generation of reasonable surplus for growth of the sector.

The Central Commission would notify, from time to time, the rate of return on equity for generation
and transmission projects keeping in view the assessment of overall risk and the prevalent cost of
capital which shall be followed by the SERCs also. The rate of return notified by CERC for
transmission may be adopted by the SERCs for distribution with appropriate modification taking into
view the risks involved. For uniform approach in this matter, it would be desirable to arrive at a
consensus through the Forum of Regulators.
While allowing the total capital cost of the project, the Appropriate Commission would ensure that
these are reasonable and to achieve this objective, requisite benchmarks on capital costs should be
evolved by the Regulatory Commissions. The Central Commission may adopt either Return on Equity
or Return on Capital approach whichever is considered better in the interest of the consumers. The
State Commission may consider ‘distribution and supply margin’ as basis for allowing returns in
distribution business at an appropriate time.

The State Commission may also consider price cap regulation based on comprehensive study. The
Forum of Regulators should evolve a comprehensive approach in this regard. The considerations
while preparing such an approach would, inter-alia, include issues such as reduction in Aggregate
Technical and Commercial losses, improving the standards of performance and reduction in cost of
supply.

b) Equity Norms
For financing of future capital cost of projects, a Debt: Equity ratio of 70:30 should be adopted.
Promoters would be free to have higher quantum of equity investments. The equity in excess of this
norm should be treated as loans advanced at the weighted average rate of interest and for a
weighted average tenor of the long term debt component of the project after ascertaining the
reasonableness of the interest rates and taking into account the effect of debt restructuring done, if
any. In case of equity below the normative level, the actual equity would be used for determination of
Return on Equity in tariff computations.

c) Depreciation
The Central Commission may notify the rates of depreciation in respect of generation and
transmission assets. The depreciation rates so notified would also be applicable for distribution
assets with appropriate modification as may be evolved by the Forum of Regulators.

Provided that the Appropriate Commission shall specify, for the purpose of tariff determination, a
upper ceiling of the rate of depreciation to be applicable during the useful life of the project and the
developer shall have the option of indicating, while seeking approval for tariff, lower rate of
depreciation subject to the aforesaid ceiling.

The rates of depreciation so notified would be applicable for the purpose of tariffs as well as
accounting.

There should be no need for any advance against depreciation.

Benefit of reduced tariff after the assets have been fully depreciated should remain available to the
consumers.
Notwithstanding the above, power from those plants of a generating company, where either whose
PPAs have expired or plants have completed their useful life, may be bundled with power from
renewable generating plants to be set up through the process of bidding or for which the equipment
for setting up such plant is procured through competitive bidding. In such cases, power from such
plants can be reallocated to beneficiaries purchasing power from renewable energy generating
plants on the principles to be decided by Appropriate Government. The Obligated Entities which
finally buy such power shall account towards their renewable purchase obligation to the extent of
power bought from renewable energy generating plants.

The scheduling and despatch of such conventional and renewable generating plants shall be done
separately.

d) Cost of Debt
Structuring of debt, including its tenure, with a view to reducing the tariff should be encouraged.
Savings in costs on account of subsequent restructuring of debt should be suitably incentivised by
the Regulatory Commissions keeping in view the interests of the consumers.

e) Cost of Management of Foreign Exchange Risk

Foreign exchange variation risk shall not be a pass through. However, appropriate costs of hedging
and swapping to take care of foreign exchange variations should be allowed for debt obtained in
foreign currencies. This provision would be relevant only for the projects where tariff has not been
determined on the basis of competitive bids.

f) Operating Norms
Suitable performance norms of operations together with incentives and disincentives would need to
be evolved along with appropriate arrangement for sharing the gains of efficient operations with the
consumers. Except for the cases referred to in para 5.11(h)(2), the operating parameters in tariffs
should be at “normative levels” only and not at “lower of normative and actuals”. This is essential to
encourage better operating performance. The norms should be efficient, relatable to past
performance, capable of achievement and progressively reflecting increased efficiencies and may
also take into consideration the latest technological advancements, fuel, vintage of equipments,
nature of operations, level of service to be provided to consumers etc. Continued and proven
inefficiency must be controlled and penalized.

The Central Commission would, in consultation with the Central Electricity Authority, notify
operating norms from time to time for generation and transmission. The SERC would adopt these
norms. In cases where operations have been much below the norms for many previous years, the
SERCs may fix relaxed norms suitably and draw a transition path over the time for achieving the
norms notified by the Central Commission, or phase them out in accordance with the norms specified
by the Authority in this regard.
Operating norms for distribution networks would be notified by the concerned SERCs. For uniformity,
the Forum of Regulators should evolve model guidelines taking into consideration the state specific
distinctive features.

g) Renovation and Modernization

Renovation and modernization of generation plants (including repowering of wind generating plants)
need to be encouraged for higher efficiency levels even though they may have not completed their
useful life. This shall not include periodic overhauls. A Multi-Year Tariff (MYT) framework may be
prescribed which should also cover capital investments necessary for renovation and modernization
and an incentive framework to share the benefits of efficiency improvement between the utilities
and the beneficiaries with reference to revised and specific performance norms to be fixed by the
Appropriate Commission. Appropriate capital costs required for predetermined efficiency gains
and/or for sustenance of high level performance would need to be assessed by the Appropriate
Commission.

h) Multi Year Tariff

1) Section 61 of the Act states that the Appropriate Commission for determining the terms and
conditions for the determination of tariff shall be guided, inter-alia, by Multi-Year Tariff (MYT)
principles. The framework should feature a five-year control period. The initial control period may,
however, be of 3 year duration for transmission and distribution if deemed necessary by the
Regulatory Commission on account of data uncertainties and other practical considerations. In cases
of lack of reliable data, the Appropriate Commission may state assumptions in MYT for first control
period and a fresh control period may be started as and when more reliable data becomes available.

2) In cases where operations have been much below the norms for many previous years, the initial
starting point in determining the revenue requirement and the improvement trajectories should be
recognized at “relaxed” levels and not the “desired” levels. Suitable benchmarking studies may be
conducted to establish the “desired” performance standards. Separate studies may be required for
each utility to assess the capital expenditure necessary to meet the minimum service standards.

3) Once the revenue requirements are established at the beginning of the control period, the
Regulatory Commission should focus on regulation of outputs and not the input cost elements. At
the end of the control period, a comprehensive review of performance may be undertaken.

4) Uncontrollable costs should be recovered speedily to ensure that future consumers are not
burdened with past costs. Uncontrollable costs would include (but not limited to) fuel costs, costs on
account of inflation, taxes and cess, variations in power purchase unit costs including on account of
adverse natural events.

5) Clear guidelines and regulations on information disclosure may be developed by the Regulatory
Commissions. Section 62 (2) of the Act empowers the Appropriate Commission to require licensees to
furnish separate details, as may be specified in respect of generation, transmission and distribution
for determination of tariff.

(i) Benefits under Clean Development Mechanism (CDM)

Tariff fixation for all electricity projects (generation, transmission and distribution) that result in
lower Green House Gas (GHG) emissions than the relevant base line should take into account the
benefits obtained from the Clean Development Mechanism (CDM) into consideration, in a manner so
as to provide adequate incentive to the project developers.

(j) Composite Scheme

Sub-section (b) of Section 79(1) of the Act provides that Central Commission shall regulate the tariff
of generating company, if such generating company enters into or otherwise have a composite
scheme for generation and sale of electricity in more than one State.

Explanation: The composite scheme as specified under section 79(1) of the Act shall mean a scheme
by a generating company for generation and sale of electricity in more than one State, having signed
long-term or medium-term PPA prior to the date of commercial operation of the project (the COD of
the last unit of the project will be deemed to be the date of commercial operation of the project) for
sale of atleast 10% of the capacity of the project to a distribution licensee outside the State in which
such project is located.

5.12 While it is recognized that the State Governments have the right to impose duties, taxes, cess on
sale or consumption of electricity, these could potentially distort competition and optimal use of
resources especially if such levies are used selectively and on a non-uniform basis.

In some cases, the duties etc. on consumption of electricity is linked to sources of generation (like
captive generation) and the level of duties levied is much higher as compared to that being levied on
the same category of consumers who draw power from grid. Such a distinction is invidious and
inappropriate. The sole purpose of freely allowing captive generation is to enable industries to access
reliable, quality and cost effective power. Particularly, the provisions relating to captive power plants
which can be set up by group of consumers has been brought in recognition of the fact that efficient
expansion of small and medium industries across the country will lead to faster economic growth and
creation of larger employment opportunities.

For realizing the goal of making available electricity to consumers at reasonable and competitive
prices, it is necessary that such duties are kept at reasonable level.

5.13 The Act provides for introduction of open access for consumers of one megawatt and above in a
time bound manner. The Regulatory Commissions shall introduce open access for different
categories of consumers as per the provisions of the Act.
6.0 GENERATION
Accelerated growth of the generation capacity sector is essential to meet the estimated growth in
demand. Adequacy of generation is also essential for efficient functioning of power markets. At the
same time, it is to be ensured that new capacity addition should deliver electricity at most efficient
rates to protect the interests of consumers. This policy stipulates the following for meeting these
objectives.

6.1 Procurement of power

As stipulated in para 5.1, power procurement for future requirements should be through a
transparent competitive bidding mechanism using the guidelines issued by the Central Government
from time to time. These guidelines provide for procurement of electricity separately for base load
requirements and for peak load requirements. This would facilitate setting up of generation
capacities specifically for meeting such requirements.

However, some of the competitively bid projects as per the guidelines dated 19th January, 2005 have
experienced difficulties in getting the required quantity of coal from Coal India Limited (CIL). In case
of reduced quantity of domestic coal supplied by CIL, vis-à-vis the assured quantity or quantity
indicated in Letter of Assurance/FSA the cost of imported/market based e-auction coal procured for
making up the shortfall, shall be considered for being made a pass through by Appropriate
Commission on a case to case basis, as per advisory issued by Ministry of Power vide OM No. FU-
12/2011-IPC (Vol-III) dated 31.7.2013.

6.2 Tariff structuring and associated issues

(1) A two-part tariff structure should be adopted for all long-term and medium-term contracts to
facilitate Merit Order dispatch. According to National Electricity Policy, the Availability Based Tariff
(ABT) is also to be introduced at State level. This framework would be extended to generating
stations (including grid connected captive plants of capacities as determined by the SERC). The
Appropriate Commission shall introduce differential rates of fixed charges for peak and off peak
hours for better management of load within a period of two years.

Power stations are required to be available and ready to dispatch at all times. Notwithstanding any
provision contained in the Power Purchase Agreement (PPA), in order to ensure better utilization of
un-requisitioned generating capacity of generating stations, based on regulated tariff under Section
62 of the Electricity Act 2003, the procurer shall communicate, at least twenty four hours before
00.00 hours of the day when the power and quantum thereof is not requisitioned by it enabling the
generating stations to sell the same in the market in consonance with laid down policy of Central
Government in this regard. The developer and the procurers signing the PPA would share the gains
realized from sale, if any, of such un-requisitioned power in market in the ratio of 50:50, if not already
provided in the PPA. Such gain will be calculated as the difference between selling price of such
power and fuel charge. It should, however, be ensured that such merchant sale does not result in
adverse impact on the original beneficiary(ies) including in the form of higher average energy charge
vis-à-vis the energy charge payable without the merchant sale. For the projects under section 63 of
the Act, the methodology for such sale may be decided by the Appropriate Commission on mutually
agreed terms between procurer and generator or unless already specified in the PPA

(2) Power Purchase Agreement should ensure adequate and bankable payment security
arrangements to the Generating companies. In case of persisting default on payment of agreed tariff
as per PPA in spite of the available payment security mechanisms like letter of credit, escrow of cash
flows etc. the generating companies may sell such power to other buyers.

(3) In case of coal based generating stations, the cost of project will also include reasonable cost of
setting up coal washeries, coal beneficiation system and dry ash handling & disposal system. (4) After
the award of bids, if there is any change in domestic duties, levies, cess and taxes imposed by Central
Government, State Governments/Union Territories or by any Government instrumentality leading to
corresponding changes in the cost, the same may be treated as “Change in Law” and may unless
provided otherwise in the PPA, be allowed as pass through subject to approval of Appropriate
Commission.

(5) The thermal power plant(s) including the existing plants located within 50 km radius of sewage
treatment plant of Municipality/local bodies/similar organization shall in the order of their closeness
to the sewage treatment plant, mandatorily use treated sewage water produced by these bodies and
the associated cost on this account be allowed as a pass through in the tariff. Such thermal plants
may also ensure back-up source of water to meet their requirement in the event of shortage of
supply by the sewage treatment plant. The associated cost on this account shall be factored into the
fixed cost so as not to disturb the merit order of such thermal plant. The shutdown of the sewage
treatment plant will be taken in consultation with the developer of the power plant.

6.3 Harnessing captive generation

Captive generation is an important means to making competitive power available. Appropriate
Commission should create an enabling environment that encourages captive power plants to be
connected to the grid.

Such captive plants could supply surplus power through grid subject to the same regulation as
applicable to generating companies. Firm supplies may be bought from captive plants by distribution
licensees using the guidelines issued by the Central Government under section 63 of the Act taking
into account second proviso of para 5.2 of this Policy.

The prices should be differentiated for peak and off-peak supply and the tariff should include
variable cost of generation at actual levels and reasonable compensation for capacity charges.

Wheeling charges and other terms and conditions for implementation should be determined in
advance by the respective State Commission, duly ensuring that the charges are reasonable and fair.
Grid connected captive plants could also supply power to non-captive users connected to the grid
through available transmission facilities based on negotiated tariffs. Such sale of electricity would be
subject to relevant regulations for open access including compliance of relevant provisions of rule 3
of the Electricity Rules, 2005.

6.4 Renewable sources of energy generation including Co-generation from renewable energy
sources:
(1) Pursuant to provisions of section 86(1)(e) of the Act, the Appropriate Commission shall fix a
minimum percentage of the total consumption of electricity in the area of a distribution licensee for
purchase of energy from renewable energy sources, taking into account availability of such resources
and its impact on retail tariffs. Cost of purchase of renewable energy shall be taken into account
while determining tariff by SERCs. Long term growth trajectory of Renewable Purchase Obligations
(RPOs) will be prescribed by the Ministry of Power in consultation with MNRE.

Provided that cogeneration from sources other than renewable sources shall not be excluded from
the applicability of RPOs.

(i) Within the percentage so made applicable, to start with, the SERCs shall also reserve a minimum
percentage for purchase of solar energy from the date of notification of this policy which shall be
such that it reaches 8% of total consumption of energy, excluding Hydro Power, by March 2022 or as
notified by the Central Government from time to time.

(ii) Distribution Licensee(s) shall compulsorily procure 100% power produced from all the Waste-to-
Energy plants in the State, in the ratio of their procurement of power from all sources including their
own, at the tariff determined by the Appropriate Commission under Section 62 of the Act.

(iii) It is desirable that purchase of energy from renewable sources of energy takes place more or less
in the same proportion in different States. To achieve this objective in the current scenario of large
availability of such resources only in certain parts of the country, an appropriate mechanism such as
Renewable Energy Certificate (REC) would need to be promoted. Through such a mechanism, the
renewable energy based generation companies can sell the electricity to local distribution licensee at
the rates for conventional power and can recover the balance cost by selling certificates to other
distribution companies and obligated entities enabling the latter to meet their renewable power
purchase obligations. The REC mechanism should also have a solar specific REC.

(iv) Appropriate Commission may also provide for a suitable regulatory framework for encouraging
such other emerging renewable energy technologies by prescribing separate technology based REC
multiplier (i.e. granting higher or lower number of RECs to such emerging technologies for the same
level of generation). Similarly, considering the change in prices of renewable energy technologies
with passage of time, the Appropriate Commission may prescribe vintage based REC multiplier (i.e.
granting higher or lower number of RECs for the same level of generation based on year of
commissioning of plant).

(2) States shall endeavor to procure power from renewable energy sources through competitive
bidding to keep the tariff low, except from the waste to energy plants. Procurement of power by
Distribution Licensee from renewable energy sources from projects above the notified capacity, shall
be done through competitive bidding process, from the date to be notified by the Central
Government.

However, till such notification, any such procurement of power from renewable energy sources
projects, may be done under Section 62 of the Electricity Act, 2003. While determining the tariff from
such sources, the Appropriate Commission shall take into account the solar radiation and wind
intensity which may differ from area to area to ensure that the benefits are passed on to the
consumers.

(3) The Central Commission should lay down guidelines for pricing intermittent power, especially
from renewable energy sources, where such procurement is not through competitive bidding. The
tariff stipulated by CERC shall act as a ceiling for that category. (4) In order to incentivize the
Distribution Companies to procure power from renewable sources of energy, the Central
Government may notify, from time to time, an appropriate bid-based tariff framework for renewable
energy, allowing the tariff to be increased progressively in a back-loaded or any other manner in the
public interest during the period of PPA, over the life cycle of such a generating plant.
Correspondingly, the procurer of such bid-based renewable energy shall comply with the obligations
for payment of tariff so determined.

(5) In order to promote renewable energy sources, any generating company proposing to establish a
coal/lignite based thermal generating station after a specified date shall be required to establish
such renewable energy generating capacity or procure and supply renewable energy equivalent to
such capacity, as may be prescribed by the Central Government from time to time after due
consultation with stakeholders. The renewable energy produced by each generator may be bundled
with its thermal generation for the purpose of sale. In case an obligated entity procures this
renewable power, then the SERCs will consider the obligated entity to have met the Renewable
Purchase Obligation (RPO) to the extent of power bought from such renewable energy generating
stations.

Provided further that in case any existing coal and lignite based thermal power generating station,
with the concurrence of power procurers under the existing Power Purchase Agreements, chooses to
set up additional renewable energy generating capacity, the power from such plant shall be allowed
to be bundled and tariff of such renewable energy shall be allowed to be pass through by the
Appropriate Commission. The Obligated Entities who finally buy such power shall account towards
their renewable purchase obligations.
Provided also that scheduling and despatch of such conventional and renewable generating plants
shall be done separately.

(6) In order to further encourage renewable sources of energy, no inter-State transmission charges
and losses may be levied till such period as may be notified by the Central Government on
transmission of the electricity generated from solar and wind sources of energy through the inter-
state transmission system for sale.

(7) Appropriate Commission may provide regulatory framework to facilitate generation and sale of
electricity from renewable energy sources particularly from roof-top solar system by any entity
including local authority, Panchayat Institution, user institution, cooperative society, Non-
Governmental Organization, franchisee or by Renewable Energy Service Company. The Appropriate
Government may also provide complementary policy support for this purpose.

Explanation: “Renewable Energy Service Company” means an energy service company which provides
renewable energy to the consumers in the form of electricity.

7.0 TRANSMISSION
The transmission system in the country consists of the regional networks, the inter-regional
connections that carry electricity across the five regions and the State networks. Development of the
State networks has not been uniform and capacity in such networks needs to be augmented. These
networks will play an important role in intra-State power flows and also in the regional and national
flows. The tariff policy, in so far as transmission is concerned, seeks to achieve the following
objectives:

1. Ensuring optimal development of the transmission network ahead of generation with adequate
margin for reliability and to promote efficient utilization of generation and transmission assets in the
country;

2. Attracting the required investments in the transmission sector and providing adequate returns.

7.1 Transmission pricing

(1) A suitable transmission tariff framework for all inter-State transmission, including transmission of
electricity across the territory of an intervening State as well as conveyance within the State which is
incidental to such interstate transmission, has been implemented with the objective of promoting
effective utilization of all assets across the country and accelerated development of new
transmission capacities that are required.

(2) The National Electricity Policy mandates that the national tariff framework implemented should
be sensitive to distance, direction and related to quantum of power flow. This has been developed by
CERC taking into consideration the advice of the CEA. Sharing of transmission charges shall be done
in accordance with such tariff mechanism as amended from time to time. (3) Transmission charges,
under this framework, can be determined on MW per circuit kilometer basis, zonal postage stamp
basis, or some other pragmatic variant, the ultimate objective being to get the transmission system
users to share the total transmission cost in proportion to their respective utilization of the
transmission system. The ‘utilization’ factor should duly capture the advantage of reliability reaped
by all. The spread between minimum and maximum transmission rates should be such as not to
inhibit planned development/augmentation of the transmission system but should discourage non-
optimal transmission investment.

(4) In view of the approach laid down by the NEP, prior agreement with the beneficiaries would not
be a precondition for network expansion. CTU/STU should undertake network expansion after
identifying the requirements in consonance with the National Electricity Plan and in consultation with
stakeholders and taking up the execution after due regulatory approvals. For smooth operation of
the grid, efforts should be made to develop transmission system ahead of generation.

(5) The Central Commission has specified norms for capital and operating costs and laid down
Standards of Performance for inter-State transmission licensees. Tariff determination and adherence
to Standards of Performance shall be carried out in accordance with these norms, as amended from
time to time.

(6) Investment by transmission developer including CTU/STUs would be invited through competitive
bids in accordance with the guidelines issued by the Central Government from time to time.

(7) While all future inter-state transmission projects shall, ordinarily, be developed through
competitive bidding process, the Central Government may give exemption from competitive bidding
for (a) specific category of projects of strategic importance, technical upgradation etc. or (b) works
required to be done to cater to an urgent situation on a case to case basis.

(8) CERC has specified Regulation on framework for the inter-State transmission. A similar approach
should be implemented by SERCs for the intra-State transmission, duly considering factors like
voltage, distance, direction and quantum of flow.

(9) Metering compatible with the requirements of the proposed transmission tariff framework should
be established on priority basis. The metering should be compatible with ABT requirements, which
would also facilitate implementation of Time of Day (ToD) tariffs.

7.2 Transmission loss allocation

(1) Transactions are being charged on the basis of average losses arrived at after appropriately
considering the distance and directional sensitivity, as applicable to relevant voltage level, on the
transmission system. Based on the methodology laid down by the CERC in this regard for inter-state
transmission, the SERCs may evolve a similar framework for intra-state transmission.
The loss framework should ensure that the loss compensation is reasonable and linked to applicable
technical loss benchmarks. The benchmarks may be determined by the Appropriate Commission after
considering advice of CEA.

(2) It would be desirable to move to a system of loss compensation based on incremental losses as
present deficiencies in transmission capacities are overcome through network expansion. The
Appropriate Commission may require necessary studies to be conducted to establish the allowable
level of system loss for the network configuration and the capital expenditure required to augment
the transmission system and reduce system losses. Since additional flows above a level of line loading
lead to significantly higher losses, CTU/STU should ensure upgrading of transmission systems to
avoid the situations of overloading. The Appropriate Commission should permit adequate capital
investments in new assets for upgrading the transmission system.

7.3 Other issues in transmission

(1) Financial incentives and disincentives should be implemented for the CTU and the STU around the
Key Performance Indicators (KPI) for these organisations. Such KPIs would include efficient network
construction, system availability and loss reduction.

(2) All available information should be shared with intending users by the CTU/STU and the load
dispatch centers, particularly information on available transmission capacity and load flow studies.

(3) In extraordinary circumstances including threat to security to the State, public order or natural
calamity, if the Central Government allocates power out of the unallocated share of the Central
Generating Stations or otherwise, such allocation of power will have priority over short-term,
medium-term and long-term access in this order.

7.4 Ancillary Services

(1) The Central Commission may introduce the norms and framework for ancillary services, including
the method of sharing the charges, necessary to support the power system or grid operation for
maintaining power quality, reliability and security of the grid.

(2) The Central Commission shall also consult the Central Electricity Authority, SERCs/JERCs,
CTUs/STUs and NLDC/RLDC/SLDCs while specifying the norms for ancillary services.

(3) The State Commission shall also adopt the norms and framework for ancillary services as specified
by the Central Commission.

8.0 DISTRIBUTION
Supply of reliable and quality power of specified standards in an efficient manner and at reasonable
rates is one of the main objectives of the National Electricity Policy. The State Commission should
determine and notify the standards of performance of licensees with respect to quality, continuity
and reliability of service for all consumers. It is desirable that the Forum of Regulators determines
the basic framework on service standards. A suitable transition framework could be provided for the
licensees to reach the desired levels of service as quickly as possible. Penalties may be imposed on
licensees in accordance with section 57 of the Act for failure to meet the standards.

Making the distribution segment of the industry efficient and solvent is the key to success of power
sector reforms and provision of services of specified standards. Therefore, the Regulatory
Commissions need to strike the right balance between the requirements of the commercial viability
of distribution licensees and consumer interests. Loss making utilities need to be transformed into
profitable ventures which can raise necessary resources from the capital markets to provide services
of international standards to enable India to achieve its full growth potential. Efficiency in operations
should be encouraged. Gains of efficient operations with reference to normative parameters should
be appropriately shared between consumers and licensees.

Appropriate Commission should mandate Distribution Licensee to undertake load forecasting every
year and to publish and submit to the Commission their short, medium and long-term power
procurement plans to meet the load.

The State Regulatory Commission will devise a specific trajectory so that 24 hours supply of adequate
and uninterrupted power can be ensured to all categories of consumers by 2021-22 or earlier
depending upon the prevailing situation in the State.

Micro-grids supplying renewable energy are being set up in such areas where the grid has not
reached or where adequate power is not available in the grid. Investment involved in setting up of
such microgrids is substantial. One of the risks of investment is grid reaching the area before the
completion of the project life and thereby making power from micro grids costly and unviable. In
order to mitigate such risk and incentivize investment in microgrids, there is a need to put in place an
appropriate regulatory framework to mandate compulsory purchase of power into the grid from such
micro grids at a tariff to be determined under section 62 of the Act considering depreciated cost of
investments and keeping in view industry benchmark and with a cap if necessary, as approved by the
Appropriate Commission. The Appropriate Commission shall notify necessary regulations in this
regard within six months

8.1 Implementation of Multi-Year Tariff (MYT) framework

1) MYT framework would minimise risks for utilities and consumers, promote efficiency and
appropriate reduction of system losses and attract investments. It would also bring greater
predictability to consumer tariffs on the whole by restricting tariff adjustments to known indicators
of power purchase prices and inflation indices. The framework should be applied for both public and
private utilities.
2) The State Commissions should introduce mechanisms for sharing of excess profits and losses with
the consumers as part of the overall MYT framework. In the first control period the incentives for the
utilities may be asymmetric with the percentage of the excess profits being retained by the utility set
at higher levels than the percentage of losses to be borne by the utility. This is necessary to
accelerate performance improvement and reduction in losses and will be in the long term interest of
consumers by way of lower tariffs.

3) As indicated in para 5.11(h), the MYT framework implemented in the initial control period should
have adequate flexibility to accommodate changes in the baselines consequent to metering being
completed.

4) Licensees may have the flexibility of charging lower tariffs than approved by the State Commission
if competitive conditions require so without having a claim on additional revenue requirement on this
account in accordance with Section 62 of the Act.

5) At the beginning of the control period when the “actual” costs form the basis for future
projections, there may be a large uncovered gap between required tariffs and the tariffs that are
presently applicable. This gap should be fully met through tariff charges and through alternative
means that could inter-alia include financial restructuring and transition financing.

6) Incumbent licensees should have the option of filing for separate revenue requirements and tariffs
for an area where the State Commission has issued multiple distribution licenses, pursuant to the
provisions of Section 14 of the Act read with para 5.4.7 of the National Electricity Policy.

7) Appropriate Commissions should initiate tariff determination and regulatory scrutiny on a suo
moto basis in case the licensee does not initiate filings in time. It is desirable that requisite tariff
changes come into effect from the date of commencement of each financial year and any gap on
account of delay in filing should be on account of licensee.

8.2 Framework for revenue requirements and costs

8.2.1 The following aspects would need to be considered in determining tariffs:

(1) All power purchase costs need to be considered legitimate unless it is established that the merit
order principle has been violated or power has been purchased at unreasonable rates. The reduction
of Aggregate Technical & Commercial (AT&C) losses needs to be brought about but not by denying
revenues required for power purchase for 24 hours supply and necessary and reasonable O&M and
investment for system upgradation. Consumers, particularly those who are ready to pay a tariff which
reflects efficient costs have the right to get uninterrupted 24 hours supply of quality power. Actual
level of retail sales should be grossed up by normative level of T&D losses as indicated in MYT
trajectory for allowing power purchase cost subject to justifiable power purchase mix variation (for
example, more energy may be purchased from thermal generation in the event of poor rainfall) and
fuel surcharge adjustment as per regulations of the SERC.

(2) AT&C loss reduction should be incentivised by linking returns in a MYT framework to an achievable
trajectory. Greater transparency and nurturing of consumer groups would be efficacious. For
government owned utilities improving governance to achieve AT&C loss reduction is a more difficult
and complex challenge for the SERCs. Prescription of a MYT dispensation with different levels of
consumer tariffs in succeeding years linked to different AT&C loss levels aimed at covering full costs
could generate the requisite political will for effective action to reduce theft as the alternative would
be stiffer tariff increases. Third party verification of energy audit results for different areas/localities
could be used to impose area/locality specific surcharge for greater AT&C loss levels and this in turn
could generate local consensus for effective action for better governance. The SERCs may also
encourage suitable local area based incentive and disincentive scheme for the staff of the utilities
linked to reduction in losses.

The SERC shall undertake independent assessment of baseline data for various parameters for every
distribution circle of the licensee.

The SERC shall also institute a system of independent scrutiny of financial and technical data
submitted by the licensees.

As the metering is completed up to appropriate level in the distribution network, it should be

possible to segregate technical losses. Accordingly technical loss reduction under MYT framework
should then be treated as distinct from commercial loss reduction which requires a different
approach.

(3) Section 65 of the Act provides that no direction of the State Government regarding grant of
subsidy to consumers in the tariff determined by the State Commission shall be operative if the
payment on account of subsidy as decided by the State Commission is not made to the utilities and
the tariff fixed by the State Commission shall be applicable from the date of issue of orders by the
Commission in this regard. The State Commissions should ensure compliance of this provision of law
to ensure financial viability of the utilities. To ensure implementation of the provision of the law, the
State Commission should determine the tariff initially, without considering the subsidy commitment
by the State Government and subsidised tariff shall be arrived at thereafter considering the subsidy
by the State Government for the respective categories of consumers.

(4) Working capital should be allowed duly recognising the transition issues faced by the utilities such
as progressive improvement in recovery of bills. Bad debts should be recognised as per policies
developed and subject to the approval of the State Commission.
(5) Pass through of past losses or profits should be allowed to the extent caused by uncontrollable
factors. During the transition period controllable factors should be to the account of utilities and
consumers in proportions determined under the MYT framework.

(6) The contingency reserves should be drawn upon with prior approval of the State Commission only
in the event of contingency conditions specified through regulations by the State Commission. The
existing practice of providing for development reserves and tariff and dividend control reserves
should be discontinued.

(7) Section 61 of the Act mandates that the Appropriate Commission, while determining tariff, shall
not only ensure safeguarding of consumer’s interests but also the recovery of the cost of electricity
in a reasonable manner. Section 62 of the Act further provides for periodic tariff adjustment during a
year to take care of the variation in fuel price, as may be specified.

Therefore, the Appropriate Commission shall specify an appropriate price adjustment formula for
recovery of the costs, arising on account of the variation in the price of fuel, power purchase etc. on
monthly/quarterly basis for recovery of all prudent costs of the generating company and the licensee.

8.2.2 The facility of a regulatory asset has been adopted by some Regulatory Commissions in the past
to limit tariff impact in a particular year. This should be done only as a very rare exception in case of
natural calamity or force majeure conditions and subject to the following:

a. Under business as usual conditions, no creation of Regulatory Assets shall be allowed;

b. Recovery of outstanding Regulatory Assets along with carrying cost of Regulatory Assets should
be time bound and within a period not exceeding seven years. The State Commission may specify the
trajectory for the same.

8.3 Tariff design: Linkage of tariffs to cost of service

It has been widely recognised that rational and economic pricing of electricity can be one of the
major tools for energy conservation and sustainable use of ground water resources.

In terms of the Section 61(g) of the Act, the Appropriate Commission shall be guided by the objective
that the tariff progressively reflects the efficient and prudent cost of supply of electricity.

The State Governments can give subsidy to the extent they consider appropriate as per the
provisions of section 65 of the Act. Direct subsidy is a better way to support the poorer categories of
consumers than the mechanism of crosssubsidizing the tariff across the board. Subsidies should be
targeted effectively and in transparent manner. As a substitute of cross subsidies, the State
Government has the option of raising resources through mechanism of electricity duty and giving
direct subsidies to only needy consumers. This is a better way of targeting subsidies effectively.
Accordingly, the following principles would be adopted:

1. Consumers below poverty line who consume below a specified level, as prescribed in the National
Electricity Policy may receive a special support through cross subsidy. Tariffs for such designated
group of consumers will be at least 50% of the average cost of supply.

2. For achieving the objective that the tariff progressively reflects the cost of supply of electricity,
the Appropriate Commission would notify a roadmap such that tariffs are brought within ±20% of the
average cost of supply. The road map would also have intermediate milestones, based on the
approach of a gradual reduction in cross subsidy.

3. While fixing tariff for agricultural use, the imperatives of the need of using ground water resources
in a sustainable manner would also need to be kept in mind in addition to the average cost of supply.
Tariff for agricultural use may be set at different levels for different parts of a state depending on
the condition of the ground water table to prevent excessive depletion of ground water. Section 62
(3) of the Act provides that geographical position of any area could be one of the criteria for tariff
differentiation. A higher level of subsidy could be considered to support poorer farmers of the region
where adverse ground water table condition requires larger quantity of electricity for irrigation
purposes subject to suitable restrictions to ensure maintenance of ground water levels and
sustainable ground water usage.

4. Extent of subsidy for different categories of consumers can be decided by the State Government
keeping in view various relevant aspects. But provision of free electricity is not desirable as it
encourages wasteful consumption of electricity. Besides in most cases, lowering of water table in
turn creating avoidable problem of water shortage for irrigation and drinking water for later
generations. It is also likely to lead to rapid rise in demand of electricity putting severe strain on the
distribution network thus adversely affecting the quality of supply of power. Therefore, it is
necessary that reasonable level of user charges is levied. The subsidized rates of electricity should be
permitted only up to a pre-identified level of consumption beyond which tariffs reflecting efficient
cost of service should be charged from consumers. If the State Government wants to reimburse even
part of this cost of electricity to poor category of consumers the amount can be paid in cash or any
other suitable way. Use of prepaid meters can also facilitate this transfer of subsidy to such
consumers.

5. Metering of supply to agricultural/rural consumers can be achieved in a consumer friendly way and
in effective manner by management of local distribution in rural areas through commercial
arrangement with franchisees with involvement of panchayat institutions, user associations,
cooperative societies etc. Use of smart meters may be encouraged as a cost effective option for
metering in cases of “limited use consumers” who are eligible for subsidized electricity.

8.4 Definition of tariff components and their applicability

1. Two-part tariffs featuring separate fixed and variable charges and time differentiated tariff shall
be introduced on priority for large consumers (say, consumers with demand exceeding 1 MW) within
one year and subsequently for all consumers within a period of five years or such period as may be
specified. This would also help in flattening the peak and implementing various energy conservation
measures.

2. The National Electricity Policy states that existing PPAs with the generating companies would need
to be suitably assigned to the successor distribution companies. The State Governments may make
such assignments taking care of different load profiles of the distribution companies so that retail
tariffs are uniform in the State for different categories of consumers. Thereafter, the retail tariffs
would reflect the relative efficiency of distribution companies in procuring power at competitive
costs, controlling theft and reducing other distribution losses.

3. The Appropriate Commission may provide incentives to encourage metering and billing based on
metered tariffs, particularly for consumer categories that are presently unmetered to a large extent.
The metered tariffs and the incentives should be given wide publicity. Smart meters have the
advantages of remote metering and billing, implementation of peak and off-peak tariff and demand
side management through demand response. These would become essential in future for load-
generation balancing due to increasing penetration of intermittent type of generation like wind and
solar power.

Appropriate Commission shall, therefore, mandate smart meters for:

(a) Consumers with monthly consumption of 500 units and more at the earliest but not later than
31.12.2017;

(b) Consumers with monthly consumption above 200 units by 31.12.2019.

Further, two way smart meters shall be provided to all prosumers, who also sell back electricity to the
grid as and when they require.

In order to enable energy audit in the distribution system, all distribution companies shall ensure
smart meters in their electricity system throughout the chain from transformers at 132kV level right
down to distribution transformer level at 11kV and further down to each consumer. Further, in order
to reduce theft of power, the distribution companies should have enabling feature like distribution
SCADA with distribution management system and energy audit functions. SERCs shall mandate these
to be in place within two years.

4. The SERCs may also suitably regulate connection charges to be recovered by the distribution
licensee to ensure that second distribution licensee does not resort to cherry picking by demanding
unreasonable connection charges. The connection charges of the second licensee should not be more
than those payable to the incumbent licensee.

8.5 Cross-subsidy surcharge and additional surcharge for open access

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 time-bound manner, is used to bring about
competition in the larger interest of consumers.

SERCs may calculate the cost of supply of electricity by the distribution licensee to consumers of the
applicable class as aggregate of (a) per unit weighted average cost of power purchase including
meeting the Renewable Purchase Obligation; (b) transmission and distribution losses applicable to
the relevant voltage level and commercial losses allowed by the SERC; (c) transmission, distribution
and wheeling charges up to the relevant voltage level; and (d) per unit cost of carrying regulatory
assets, if applicable.

Surcharge formula:
S= T – [C/ (1-L/100) + D+ R]

Where S is the surcharge

T is the tariff payable by the relevant category of consumers, including reflecting the Renewable
Purchase Obligation

C is the per unit weighted average cost of power purchase by the Licensee, including meeting the
Renewable Purchase Obligation

D is the aggregate of transmission, distribution and wheeling charge applicable to the relevant
voltage level.
L is the aggregate of transmission, distribution and commercial losses, expressed as a percentage
applicable to the relevant voltage level.

R is the per unit cost of carrying regulatory assets.

Above formula may not work for all distribution licensees, particularly for those having power deficit,
the State Regulatory Commissions, while keeping the overall objectives of the Electricity Act in view,
may review and vary the same taking into consideration the different circumstances prevailing in the
area of distribution licensee.

Provided that the surcharge shall not exceed 20% of the tariff applicable to the category of the
consumers seeking open access.

Provided further that the Appropriate Commission, in consultation with the Appropriate
Government, shall exempt levy of cross subsidy charge on the Railways, as defined in Indian Railways
Act, 1989 being a deemed licensee, on electricity purchased for its own consumption.

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 authorisation by the State Government
under Section 27 of the Indian Electricity Act, 1910 (now repealed), till the current validity of such
consent or authorisation.

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.

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.

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.
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. Provided that such charges shall not
be more than 125 percent of the normal tariff of that category.

9.0 Trading Margin

The Act provides that the Appropriate Commission may fix the trading margin, if considered
necessary. Though there is a need to promote trading in electricity for making the markets
competitive, the Appropriate Commission should monitor the trading transactions continuously and
ensure that the electricity traders do not indulge in profiteering in situation of power shortages.
Fixing of trading margin should be resorted to for achieving this objective.

JYOTI ARORA, Jt. Secy

APPENDIX
SALIENT FEATURES OF THE APPROVED R&R PROVISIONS FOR HYDRO POWER PROJECTS
1. SCOPE OF COVERAGE
The following provisions shall be applicable even if one family is affected by the development of a
Hydro Power Project.

2. DEFINITION OF PROJECT AFFECTED FAMILIES (PAFs)

A Project Affected Family (PAF) shall mean a family whose place of residence or other property or
source of livelihood has been affected by the development of a hydro project and who have been
residing in the affected zone for two years preceding the date of declaration of notification under
Section-11 of the LARR Act. The affected family would also include squatters.

3. DEFINITION OF AGRICULTURAL LABOURER

A person normally residing in the affected zone for two years preceding the date of declaration of
the affected zone and earns his/her livelihood principally by manual labour on agricultural land.

4. DEFINITION OF NON-AGRICULTURAL LABOURER

A person normally residing in the affected zone for two years preceding the date of declaration of
the affected zone and who does not hold any land in the affected zone but earns his/her livelihood
principally by manual labour or as rural artisan or a service provider to the community.

5. DEFINITION OF SQUATTERS
A family occupying Government land in the affected zone without a legal title, at least for 5 years
prior to the date of declaration of notification under Section-11 of LARR Act.

6. REHABILITATION/RESETTLEMENT COLONIES
This policy aims to provide built up houses to Project Affected Families (PAFs) who get displaced due
to the development of hydro projects to the extent possible. However, wherever opted for, liberal
House Construction Allowance would be given in lieu.

7. TRAINING AND CAPACITY BUILDING

This policy also emphasizes the need to provide training to the Project Affected Families as well as to
the local population for a sustained livelihood. Special training programmes from ITIs aimed at
providing the required skills to the local population would be undertaken by the Project developers
at least six months prior to commencement of construction. This is expected to boost the
employability of the PAFs and other people residing in the vicinity of the project.

8. ADDITIONAL PROVISIONS
This policy envisages additional provisions for Project Affected Families such as:

o scholarships for meritorious students,

o extension of medical facilities,

o marriage grants,

o subsistence grants,

o support for income generation schemes for cooperative and self-help groups,

o seed, pesticides and fertilizer subsidies, and irrigation support.

Besides the additional provisions mentioned above, the normally applicable provisions of the
National Policy on Rehabilitation and resettlement, currently in force, would be applicable.