EXECUTIVE SUMMARY

Availability of power is one of the important ingredients for industrial growth. It is an

important infrastructure facility without which no industrial activity can be thought of in

Modern times. Increasing automation of Indian industries has created huge demand of power

in India. This huge demand has resulted into demand supply gap in India in recent times.

India is one of the main manufacturers and users of energy. Globally, India is presently

positioned as the 11th largest manufacturers of energy. It is also the worlds’ 6th largest

energy users. In spite of its extensive yearly energy output, Indian power sector is a regular

importer of energy because of huge disparity. Global and Indian economy have decelerated,

but power is one of the few commodities in short supply in India. So, despite the sluggishness

in production and demand for manufactured products, India remains power hungry, both in

terms of normal and peak power demand. Power is derived from various sources in India.

These include thermal power, hydropower or hydroelectricity, solar power, biogas energy,

wind power etc. The distribution of the power generated is undertaken by Rural

Electrification Corporation for electricity power supply. Energy is a basic requirement for

economic development. Every sector of the national economy – agriculture, industry,

transport, commercial and domestic – needs inputs of energy. The renewable energy based

power generation capacity presently constitutes 5% of the total installed capacity in the

country for power generation from all sources. The country is aiming to achieve up to 10% of

additional installed capacity to be set up till 2012 to come from renewable energy sources.

Hydro power is a renewable economic non polluting and environmentally benign source of

energy. Hydro Power stations have inherent ability for instantaneous starting, stopping, load

variations etc. & help in improving reliability of power system. Hydro stations are the best

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choice for meeting the peak demand. The generation cost is not only inflation free but

reduces with time Hydroelectric projects have long useful life extending over 50 years and

help in conserving scarce fossil fuels. They also help in opening of avenues for development

of remote and backward areas.

As the world is facing the crisis of “Global Warming” and the shortage of fuel is causing a

problem for energy generation, so to avoid these problems the trend is to develop the cleaner

and non-conventional sources of energy.

The project comprised of study of Hydro Power regulations of CERC. The project has been

undertaken with the objective of understanding and critically analyzing the power

generation tariff structure followed by National hydro power Corporation of India Ltd.

This tariff structure is governed by the administered pricing based on norms notified by

Central Electricity Regulation commission in line with the tariff policy notified by GOI.

Along with the inclination of fully achieving this objective the report also covers the

following areas:

 Comparison of the current tariff structure with the one being followed earlier.

 To determine the areas of tariff where GENERATION could have benefited if the

new tariff norms had been followed from the very beginning.

 To see if there is still a scope of improvement in the new tariff norms.

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In the end some suggestions and recommendations are given as per the findings of the

project. Tariff for a sample hydro power plant was also determined.This project is an attempt

to review out the various issues with the tariff structure and their determination.

It is a rigorous effort by a novice to go through the voluminous files/ documents, comprehend

and discuss with the concerned dealing officers, and correlate the procedures with different

books and journals and to come out with some heartfelt suggestions which I hope will be of

good use to its users and any suggestion to improve it would be a welcome.

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 OBJECTIVES OF THE STUDY
To study the methodology adopted by NHPC for pricing of GENERATION services and

critically analyse the power GENERATION tariff structure followed by the National hydro

power Corporation of India Ltd. Along with the inclination of fully achieving this objective

the report will cover the following areas:

 To study and calculate various parameters required for calculation of tariff for

hydro power plants.

 To analyse Tariff structure followed by NHPC and Calculation of Tariff for a

hydro power plant.

 To see if there is still scope for improvement in new tariff norms and how tariff

norms help in building better Company Position.

 To give some valuable suggestions for improving return.

 To Study the Various problems faced by the NHPC.Ltd , while determining the

tariff and considering the other aspects.

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.

RESEARCH METHODOLOGY
This chapter presents the basic methodology and requirements in research. It includes the

nature and scope of the study, method of study, source of data, literature survey and methods

of data collection, which were used in the study.

NATURE AND SCOPE OF THE STUDY

The study is descriptive and analytical in nature, as it lends to elaborate on the process of

determination of tariff structure. The study takes into account the theoretical as well as the

practical aspects of the various factors available to an industrial concern

METHOD OF THE STUDY:

This study is about the analysis of tariff development of hydropower plant in India. The study

is descriptive in nature. The researcher has utilized the descriptive method in acquiring

information for the analysis of tariff structure.

METHODS OF DATA COLLECTION:

Since the report required studying the theoretical as well as the practical aspects of financing

of projects, I have distributed it in two parts i.e.

1. Primary data.

2. Secondary data.

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1. Primary data - mainly I have a discussion with commercial department on the related

topics, understanding the various aspects in tariff determination, the effect of new regulation

of tariff on the profitability of the company.

2. Secondary data – going through with the company manual, books, journals, internet to

collect the related and latest information which is useful for the project.

LITERATURE SURVEY:

Extensive reading have been done from annual reports of NHPC Ltd., various guidelines

issued by GOI with respect to the tariff , Electricity Act, 2003; Tariff guidelines issued by

CERC for the period 2004-09 and 2009-2012, various articles/reports.

The report thus contains the mix of all the above-mentioned sources. The summary and

conclusion is given based on the above.

LIMITATIONS OF THE STUDY

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This project has various boundaries which are require to be overcome:

 The language of the regulations is very complicated and it leads to different

interpretations by different parties. It sometimes leads to confusion.

 Each hydro power plant is unique in itself and may be exposed to different geological

constraints. So same set of parameters can’t be applied to all hydro power plants.

 As study of complex regulatory framework requires considerable time, so time was a

major constraint.

 The project lacked the practical touch as interaction with the officials of the

Companies which made the detailed project reports (DPRs) was minimal.

 It takes into consideration mainly the projects set up in India..

 Confidential information:- In depth knowledge about each factor is not possible due to

confidential in nature.

INTRODUCTION OF POWER INDUSTRY

Power is an essential requirement for all facets of our life and has been recognized as a basic

human need. It is the critical infrastructure on which the socio-economic development of the

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country depends. The growth of the economy and its global competitiveness hinges on the

availability of reliable and quality power at competitive rates. The demand of power in India

is enormous and is growing steadily. The vast Indian power market, today offers one of the

highest growth opportunities for private developers.

India is endowed with a wealth of rich natural resources and sources of energy. Resources for

power generation are unevenly dispersed across the country. This can be appropriately and

optimally utilized to make available reliable supply of electricity to each and every

household. Electricity is considered key driver for targeted 8 to 10% economic growth of

India. Electricity supply at globally competitive rates would also make economic activity in

the country competitive in the globalized environment.

As per the Indian Constitution, the power sector is a concurrent subject and is the joint

responsibility of the State and Central Governments. The power sector in India is dominated

by the government. The State and Central Government sectors account for 58% and 32% of

the generation capacity respectively while the private sector accounts for about 10%. The

bulk of the transmission and distribution functions are with State utilities. The private sector

has a small but growing presence in distribution and is making an entry into transmission.

Power Sector which had been funded mainly through budgetary support and external

borrowings was opened to private sector in 1991.

 Some facts

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  More than 64% of India’s total installed capacity is contributed by thermal power.

Significant jump in unit size and steam parameters will result in higher efficiencies

and better economics for the Indian power sector.

 Western region accounts for largest share (30.09%) of the installed power in India

followed by Southern region with 27.76%.

 Unbalanced growth remains the cause of concern for the Indian power sector. Only

about 56% of households have access to electricity, with the rural access being 44%

and urban access about 82%.

 Southern region remains the dominant region in renewable energy source accounting

for more than 57% of the total renewable energy installed capacity.

1. INDIAN POWER INDUSTRY

Growth of Power Sector infrastructure in India since its Independence has been noteworthy

making India the third largest producer of electricity in Asia. Generating capacity has grown

manifold from 1,362 MW in 1947 to 141GW (as on 30.09.2004). The overall generation in

India has increased from 301 Billion Units (BUs) during 1992- 93 to 558.1 BUs in 2003.

India’s Total installed capacity of power sector has been 141 GW. This India’s 141GW of

total power is generated by its three different sectors, i.e., state sector, central sector and

private sector. Stare sector contribution has been 53% to total installed capacity. Likewise,

contribution of central sector and private sector has been 34% and 13.5% respectively.

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 India's total installed capacity
14%
state sector(53.5%)
central sector(34%)
private sector(13.5%)
53%
34%

fuel wise break up of installed capacity

70.00%
60.00%
50.00%
40.00% %contribution

30.00%
20.00%
10.00%
0.00%
total thermal Hydro Nuclear Res

India has fifth largest generation capacity in the world and low per capita consumption at

631 units which is less than half of china. India’s transmission and distribution network is of

6.6 million circuit km. This is considered to be third largest in the world. As per above chart,

thermal fuels like Coal, gas, oil constitute 64.6% of India’s total installed capacity, followed

by 24.7% from hydro power, 2.9% nuclear energy and 7.7% from other energy sources.

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INDUSTRY STRUCTURE
Power sector structure in India has been very simple yet well defined. Majority of

Generation, Transmission and Distribution capacities are with either public sector companies

or with State Electricity Boards (SEBs). National thermal power corporation, Nuclear Power

Corporation, National Hydro Electric Power Corporation are the public sector companies in

India which are into power generation. TATA power, Reliance Energy is domestic private

players and CLP, Marubeni Corporation is international private players in power sector.

public sector is only power generation. Private sector participation is increasing especially in

Generation, transmission and Distribution. Distribution licences for several cities are already

with the private sector. Three large ultra-mega power projects of 4000MW each have been

recently awarded to the private sector on the basis of global tenders.

STATISTICS OF THE SCENARIO IN INDIA

Year ENERGY(MU) PEAK(MW)

Requirement Availability % Shortage Demand Met %Shortage

2002-03 5,45,674 4,97,589 8.8 81,492 71,547 12.2

2003-04 5,59,264 5,19,398 7.1 84,574 75,066 11.2

2004-05 5,91,373 5,48,115 7.3 87,906 77,652 11.7

2005-06 6,31,554 5,78,819 8.4 93,255 81,792 12.3

2006-07 6,90,587 6,24,495 9.6 1,00,715 86,818 13.8

2007-08 7,39,345 6,66,007 9.9 1,08,866 90,793 16.6

Source: Ministry of Power

POLICY

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Indian Power Policy framework is designed and developed under Electricity Act 2003 and

National Electricity Policy 2005. Under current policy the Government is keen to draw

private investment into the sector.100% FDI permitted in Generation, Transmission &

Distribution of power and no discrimination is made in terms of foreign private and domestic

private players. All the companies (domestic and private) in this particular sector are treated

at par. Incentives like, Income tax holiday for a block of 10 years in the first 15 years of

operation; waiver of capital goods' import duties on mega power projects (above 1,000 MW

generation capacity) is being provided. Independent Regulators that exist in Indian power

sector are a) Central Electricity Regulatory Commission for central PSUs B)centreal

electricity regulatory commission for inter-state issue.

MAJOR PLAYERS CAPACITY GEN. TRANS. DIST.

PUBLIC SECTOR
NTPC 29144(MW) 

NHEPC 2755(MW) 

NPC 1412(MW) 

DOMESTIC PRIVATE

SECTOR
TATA power 2323(MW)   

RPG group 975(MW)  

Reliance energy 941(MW)   

INRERNATIONAL

PRIVATE SECTOR
CLP 655(MW) 

MC 347(MW) 

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Above table depicts that NTPC has got highest installed capacity (29144MW) in the public

sector. Secondly, all three players in the public sector have restricted their business only to

power generation. In domestic private sector, TATA Power is the biggest player with

installed capacity of 2323 MW. All the major domestic private players are in to generation

transmission and distribution of power except RPG group which is not in to power

transmission.

,NPC-Nuclear NTPC-National Thermal Power Corporation, NHEPC-National Hydro Electric Power Corporation Power Corporation,
CLP- China Light and Power, MC-Marubeni Corporation

2. GOVERNMENT RULES AND

REGULATIONS FOR POWER INDUSTRY

 Electricity Act 2003

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The Electricity Act enacted in year 2003 has created a new paradigm for the development of

power sector in India. It has abolished monopoly of the State Electricity Board created under

the Electricity (Supply) Act 1948 and has created a new competitive framework for the

development of the power sector in India with focus on the consumers and safeguarding their

interests by independent Regulatory Commissions. The Act has eliminated/reduced entry

barriers in the entire chain of the electricity supply business. It marks the culmination of the

process beginning in the mid nineties of States enacting their own Reform Acts and the

enactment of the Electricity Regulatory Commission Act of 1998 which brought into place

the Central Electricity Regulatory Commission and authorized the state to create Regulatory

Commissions at State level, if they wished to do so.

The Act has made structural change in the market with single-buyer model to multi-

buyer model moving the market to the competitive phase

Open Access in Transmission is allowed right from the date of promulgation of the act.

Central Electricity Regulatory Commission (CERC) has already notified regulations on non-

discriminatory open access in transmission. Open access in distribution for the consumer

consuming more than 1 MW of power allowed after January 2009.

The Electricity Act 2003 addresses concerns of all the players in the power sector and sets up

a framework for development of a competitive, efficient, economically viable and consumer

friendly power sector in India.

IMPACT ON THE INDUSTRY

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 No restriction on captive generation

Multi buyer model

Reduce lead time

Reduce financial and regulatory risk

Balance inter region disparities in power abilities

Private captive investment allowed

Open access

No monopoly over consumers

Parallel distribution network allowed

Encourage competition

 National Electricity Policy

The National Electricity Policy has been notified by the Central Government on January 2005

under the Electricity Act 2003 to set direction of development of the Power Sector. Apart

from the salient features mentioned above, the policy sets momentum in following areas:

• Full development of hydro potential in India

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• Choice of fuel for thermal generation to be based on economics of generation and

supply of electricity

• Development of national grid

• Availability Based Tariff (ABT) to be extended to state level

• All India transmission tariff sensitive to distance and direction to be introduced by the

Central Commission

 Tariff Policy

Tariff Policy has been notified by the Central Government under the Electricity Act 2003

to set clear methodology and principles for determining tariff by the Regulatory

Commissions and to remove the Regulatory Risks for the various players in the Sector.

The policy has addressed critical issues of uncertainty like computation of cross subsidy

surcharge, agricultural tariff and Multi-Year-Tariff.

FEATURES OF THE POLICY

Tariff of all generation and transmission projects in private sector by competitive

bidding-public sector to compete in five years

Reduction of cross subsidy to +-20% in next five years

Emphasis on distribution level open access; clear computation of cross subsidy

surcharge

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 Transmission tariff sensitive to direction and distance

Strict implementation of performance standards

Agricultural tariff to encourage sustainable use of ground water

Time bound introduction of Multi-Year-Tariff structure

Recent developments in CERC norms

The Central Electricity Regulatory Committee (CERC) has issued a new notification that

deals with the tariff computation for the years 2009-10 to 2013-14

NORMS RATIONALISED

Return on equity (RoE) raised from 14 to 15.5 per cent

Provision of additional RoE of 0.5 per cent for projects commissioned on

schedule.

RoE to be computed post-tax.

Advance against depreciation removed, depreciation rates increased to 5.28

per cent from 3.6 per cent.

Incentive payment linked to availability rather than plant load factor

 ROLE OF INSTITUTIONAL PLAYERS

 Central Government

• Formulate National Electricity Policy and National Tariff Policy

• Formulate national policy on stand alone systems

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 • Formulate national policy on Rural Electrification

• Make Rules & Procedure for implementing provisions of Electricity Act 2003

• Appoint Chairpersons& other members of CEA.

 State Government

• Assist Central Govt. in formulating National Electricity Policy, Tariff Policy,

etc

• Make Rules & Procedure for implementing provisions of Electricity Act 2003

• Form SLDCs for optimal scheduling & dispatch for the power systems

• Make Rules & Procedure for implementing provisions of Electricity Act 2003

 Central Electricity Authority

• Advice Central Government on matters relating to National Electricity Policy

• Advice appropriate government on technical matters related to electrical

systems

• Formulate paln for optimal utilization of resources in accordance wih Natioanl

Electricity policy

 Central Electricity Regulatory Commission

• Fix tariff for generating stations either owned by central government or

having sales in more than one state

• Regulate inter-state transmission tariff & fix trading margin

• Grant of licenses for interstate transmission & trading

 State Electricity Regulatory Commission

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 • Fix tariff for generation supply, transmission and wheeling within the state.

• Fix cross subsidy surcharge when open access is allowed.

• Fix trading margin for intra-state operations

• Grant of licenses for intrastate transmission & trading

• Advice the State Govt. on policy matters

3. ANALYSIS OF THE POWER SECTOR IN

INDIA
Growth potential

According to a report by KPMG and CII, India's energy sector will require an investment of

around US$ 120 billion-US$ 150 billion over the next five years. The government has revised

its target of power capacity addition to 90,000 MW in the 11th Five-Year-Plan (2007-12), up

by 11,423 MW from the earlier estimate of 78,000 MW to sustain the growth momentum of

the economy. Further, according to the Planning Commission estimates, renewable energy

(RE) projects worth US$ 16.50 billion, for the generation of 15,000 MW power, would come

up in the 11th Plan. Moreover, the government has earmarked a total capital subsidy of US$

6.88 billion for providing electricity connections and for the distribution of infrastructure to

rural households.

Nuclear power generation

Subsequent to the Indo-US nuclear deal and India getting clearance from the Nuclear

Suppliers Group (NSG), nuclear power generation is likely to provide an opportunity of US$

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10 billion in the next five years, according to a JP Morgan estimate. India will now also be

partnering several countries for nuclear fuel technology projects.

 As a part of the Eleventh Five-Year-Plan, Nuclear Power Corporation of India Ltd

(NPCIL) will be commencing work on 12 reactors. NPCIL will be developing a series

of nuclear reactors with capacities between 1,000 MW to 1,650 MW at 5-6 sites along

the country's coastline.

 India will also be exploring export opportunities and is planning to set up nuclear

power reactors abroad. Three Indian public sector companies—the NPCIL, BHEL and

NTPC—will be setting up a company for the export of nuclear power reactors.

 GE Hitachi Nuclear Energy has tied up with NPCIL and BHEL for building multiple

GEH-designed nuclear reactors.

 Sweden sees a market of around US$2 billion in India for back-end operations like

nuclear waste management.

 NTPC Ltd and NPCIL would jointly invest around US$ 3.09 billion in the next eight

years to set up nuclear power plants in the country.

Investments

According to an ASSOCHAM study during January-June 2008, investment announcements

totalling to US$ 40.84 billion were made in the power sector. Reliance Power Transmission

will invest nearly US$ 348.66 million in setting up a 1,500-km transmission line.

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Hyderabad-based Greenko Group plans to invest about US$ 300 million in three years for

setting up about 15 clean energy projects in the country.

Government initiatives

The government has taken several proactive steps to open the sector for the private players

and realise the full potential of the country in the power sector.

 Introduction of the Electricity Act 2003 and the notification of the National Electricity

and Tariff policies.

 Constitution of Independent State Electricity Regulatory Commissions in the states.

 Allowing the private sector to set up coal, gas or liquid-based thermal projects, hydel

projects and wind or solar projects of any size.

 Allowing foreign equity participation up to 100 per cent in the power sector under the

automatic route.

 Providing income tax holiday for a block of 10 years in the first 15 years of operation

and waiver of capital goods' import duties on mega power projects (above 1,000 MW

generation capacities).

 The government has also taken up some ambitious programmes like the Ultra Mega

Power Projects (UMPP), Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY),

Accelerated Rural Electrification Programme and the goal of Power for All by 2012

among others to rapidly increase the installed capacity.

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4. POWER SECTOR SWOT ANALYSIS

Strengths
 India has the fifth largest electricity generation capacity in the world

 Transmission & Distribution network of 6.6 million circuit km - the third largest in

the world

 Potential for growth in this sector (demand exceeding supply)

 Increasing focus on renewable sources of energy

 Government presence in the sector (encouraging entry of foreign players)

 No barriers to entry

Weaknesses
 Public sector players are only into generation of power

 Large demand-supply gap: All India average energy shortfall of 9% and peak demand

shortfall of 14%

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 Lack of exposure of entrepreneurs to handle international contracts

 Inexperience of SEBs to handle changing market environment in addition to their

weak financial condition

 Unavailability of fuel and unwillingness of fuel suppliers to enter into bankable

contracts

 Lack of necessary infrastructure to transport and store fuel, high cost risk involved in

transporting fuel

Opportunities
 huge population base

 Opportunities in Generation

 Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each.

 Coal based plants at pithead or coastal locations which are untapped.

 Hydel power potential of 150,000 MW is untapped as assessed by the Government of

India.

 Renovation, modernisation, up-rating and life extension of old thermal and hydro

power plants.

Threats
 Competition to domestic players from foreign Pvt. players as 100% FDI permitted by

government in Generation, Transmission & Distribution

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 Not a lucrative option for investors(ROE )

 Rise in price of raw materials

 Tariffs are distorted and do not cover cost

HYDROPOWER SCENARIO
India is blessed with immense amount of hydro-electric potential and ranks 5th in

terms of exploitable hydro-potential on global scenario. As per assessment made by

CEA, India is endowed with economically exploitable hydro-power potential to the

tune of 1 48 700 MW of installed capacity. The basin wise assessed potential is as

under :-

Probable Installed Capacity

Basin/Rivers (MW)

Indus Basin 33,832

Ganga Basin 20,711

Central Indian River system 4,152

Western Flowing Rivers of

9,430
southern India

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Eastern Flowing Rivers of
14,511
southern India

Brahmaputra Basin 66,065

Total 1,48,701

In addition, 56 number of pumped storage projects have also been identified with

probable installed capacity of 94 000 MW. In addition to this, hydro-potential from

small, mini & micro schemes has been estimated as 6 782 MW from 1 512 sites. Thus,

in totality India is endowed with hydro-potential of about 2 50 000 MW. However,

exploitation of hydro-potential has not been up to the desired level due to various

constraint

In 1998, Government of India announced "Policy on Hydro Power Development"

under which impetus is given to development of hydropower in the country. This was a

welcome step towards effective utilization of our water resources in the direction of

hydropower development. During October 2001, Central Electricity Authority (CEA)

came out with a ranking study which prioritized and ranked the future executable

projects. As per the study, 399 hydro schemes with an aggregate installed capacity of 1

06 910 MW were ranked in A,B & C categories depending upon their inter-se

attractiveness. During May 2003, Govt. of India launched 50 000 MW hydro initiative

in which preparation of Pre Feasibility Reports of 162 Projects totalling to 50 000 MW

was taken up by CEA through various agencies. The PFRs for all these projects have

already been prepared and projects with low tariff (first year tariff less than

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Rs.2.50/kWh) have been identified for preparation of DPR.

 HYDRO POWER POTENTIAL

INDIA is endowed with economically exploitable and viable hydro potential assessed to

be about 84,000 MW at 60% load factor (1,48,701 MW installed capacity). In addition,

6780 MW in terms of installed capacity from Small, Mini, and Micro Hydel schemes

have been assessed. Also, 56 sites for pumped storage schemes with an aggregate

installed capacity of 94,000 MW have been identified. However, only 19.9% of the

potential has been harnessed so far.

Advantages of Hydro Power

 A renewable source of energy - saves scarce fuel reserves.

 Non-polluting and hence environment friendly.

 Long life - The first hydro project completed in 1897 is still in operation at

Darjeeling is still in operation.

 Cost of generation, operation and maintenance is lower than the other sources of

energy.

 Ability to start and stop quickly and instantaneous load acceptance/rejection

makes it suitable to meet peak demand and for enhancing system reliability and

stability.

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  Has higher efficiency (over 90%) compared to thermal (35%) and gas (around

50%).

 Cost of generation is free from inflationary effects after the initial installation.

 Storage based hydro schemes often provide attendant benefits of irrigation, flood

control, drinking water supply, navigation, recreation, tourism, pisciculture etc.

 Being located in remote regions leads to development of interior backward areas

(education, medical, road communication, telecommunication etc.)

 HYDRO ELECTRIC POWER GENERATION IN INDIA

REGULATORY BODY FOR POWER GENERATION

ELECTRICITY REGULATION IN INDIA

(According to Electricity Act 2003)

An Act to consolidate the laws relating to generation, transmission, distribution, trading

and use of electricity and generally for taking measures conducive to development of
electricity industry, promoting competition therein, protecting interest of consumers and
supply of electricity to all areas, rationalization of electricity tariff, ensuring transparent
policies regarding subsidies, promotion of efficient and environmentally benign policies
constitution of Central Electricity Authority, Regulatory Commissions and establishment
of Appellate Tribunal and for matters connected therewith or incidental thereto.

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 RATIONALE OF REGULATION
A “public utility’ is a company supplying merit goods, such as electricity or water, to a large

section of the population at the quality and quantity that is affordable to all consumer classes.

The industry supplying power or water that emerged in the earlier twentieth century, due to the

technologies, tended to be monopolies. What were originally unconnected small generating

stations supplying the power needs of the immediate locality gave place to centralized power

generation and supplying to distant places as a consequence of the economies of scale in

generating and efficiency improvements in transmission.

Public utilities in most countries in the past were government owned, as the massive

investments required precluded the private sector. Moreover, there were fears of monopoly

abuse. Technology also favored an industrial structure that was vertically integrated and a

monopoly regulation became necessary.

With rapid strides in power generation plants as well as informational technology, the

structure of the power sector changed to that of smaller generation plants as well as functional

unbundling. With the changing structure, competition could be introduced into some

segments of the electricity supply industry while the other segments such as transmission

continue to be regulated. New players entered the market taking over the roles that were

earlier bundled into the vertically integrated monopoly that the electricity utility was.

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In case of power sector, the need for the regulation of price to the ultimate consumer was

recognized very well due to the intrinsic structural features of the power industry. The main

reasons for the market imperfections in the power industry are:

a) Sellers of power are usually very large corporate and better informed about all factors

compared to buyers who are relatively smaller, scattered and unorganized. This

asymmetry in terms of competitive capability and information makes the market

imperfect.

b) Power can be supplied only through a distribution network of wires and whoever

establishes them first has the incumbent advantage over later entrants thus establishing

the features of a natural monopoly.

c) Electricity is a unique commodity in that it must be produced largely upon demand it

cannot be stored in large quantities with economic efficiency.

The above features are common to many network industries, but the power industry, unlike

other industries such as telecom and natural gas, the flows of electricity across the network of

interconnected lines cannot be directed. Therefore, the price of electricity has been regulated

ever since the industry emerged, not only in India but all over the world. However, the design

of regulation has evolved in response to the structure of the power industry, which in turn has

been significantly dependent on the technology and the state market relations prevalent in each

country.

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 GENERATION OF ELECTRICITY

Any generating company may establish, operate and maintain a generating Station without

obtaining a license under this Electricity Act if it complies with the technical Standards

relating to connectivity with the grid referred to in clause (b) of Section 73.

1. Notwithstanding anything contained in section 7, any generating company intending

to set-up a hydro-generating station shall prepare and submit to the

Authority for its concurrence, a scheme estimated to involve a capital expenditure exceeding

such sum, as may be fixed by the Central Government, from time to time, by notification.

2. The Authority shall, before concurring in any scheme submitted to it under sub-section (1)

have particular regard to, whether or not in its opinion,-

(a) the proposed river-works will prejudice the prospects for the best ultimate development of

the river or its tributaries for power generation, consistent with the requirements of drinking

water, irrigation, navigation, flood-control, or other public purposes, and for this purpose the

Authority shall satisfy itself, after consultation with the State Government, the Central

Government, or such other agencies as it may deem appropriate, that an adequate study has

been made of the optimum location of dams and other river-works;

(b) the proposed scheme meets, the norms regarding dam design and safety.

30 | P a g e
 3. Where a multi-purpose scheme for the development of any river in any region is in

operation, the State Government and the generating company shall co-ordinate their activities

with the activities of the person responsible for such scheme in so far as they are inter-related.

 DUTIES OF GENERATING COMPANIES

. (1) Subject to the provisions of this Act, the duties of a generating company shall be to

establish, operate and maintain generating stations, tie-lines, sub-stations and dedicated

transmission lines connected therewith in accordance with the provisions of this Act or the

rules or regulations made there under.

(2) A generating company may supply electricity to any licensee in accordance with this Act

and the rules and regulations made there under and may, subject to the regulations made

under sub-section (2) of section 42, supply electricity to any consumer

.(3) Every generating company shall –

(a) Submit technical details regarding its generating stations to the Appropriate Commission

and the Authority;(b) Co-ordinate with the Central Transmission Utility or the State

Transmission Utility, as the case may be, for transmission of the electricity generated by it.

31 | P a g e
 THREE STAGES PROCESS FOR DEVELOPMENT OF
HYDRO ELECTRIC PROJECTS
The upcoming projects of nhpc are categorized broadly into three groups depending upon

the clearance obtained from the government. This broad classification of new projects

indicates the stage/ present status of the projects. This was done with the objective of

reducing the time and cost overrun of various projects. Government of India has introduced

a three stage process for development of hydro electric projects. The three stages are:

STAGE I: SURVEY AND INVESTIGATION AND PREPARATION OF PRE

FEASIBILITY REPORT

KEY ACTIVITES INCLUED IN STAGE1:

Data collection / preparation of application for site clearance by MOEF

Establishment of gauge and discharge sites and Meteorological observatories.

Hydrological measurements and meteorological observations will continue till

construction of the project.

Obtaining of site clearance from MOEF.

Essential geological exploration for establishing type of dam and its foundation and

other civil structures.

Topographic survey of the project area and detailed survey or the purpose of

preliminary layouts of DAM , powerhouse etc.

32 | P a g e
 Essentially temporary infrastructure/access required for carrying out the above works.

Commencement of EIA and EMP studies.

Formulation of a pre feasibility report for assessment of commercial viability of the

projects.

. Preparation of estimates for stage 2 activities and their submission to CEA.

STAGE II: DETAILED INVESTIGATION, PREPARATION OF DPR AND PRE-

CONSTRUCTION ACTIVITY INCLUDING LAND ACQUISITION

KEY ACTIVITIES INCLUDED IN STAGE II:

Essential survey and investigation work comprising the following:

Detailed topographical survey of reservoir area and project area.

Procurement of satellite imageries including aerial maps where required.

Geo-physical surveys comprising seismic and resistivity test etc.

Hydro-meteorological observations.

Collection of site data and its analysis.

Geological exploration comprising surface mapping, drilling, drifting and then

logging etc.

Construction material survey both qualitative and quantitative.

33 | P a g e
 a) Preparation of detailed project report.

b) Submission of DPR to CEA and obtaining Techno-Economic clearance from CEA

c) Submission of EIA and EMP to MOEF and obtaining forest and Environment

Clearance of the project.

d) Temporary and Permanent buildings (residential and non residential)

e) Roads and permanent bridges as may be required for approaching work sites and

transportation of heavy equipment.

f) Acquisition of land required for the execution of the project including land.

Initiating the process for acquisition of land of the reservoir sub mergence area.

g) Arrangement of construction power.

h) Preparation of tender specification and bid documents.

i) Submission of PIB memo/CCEA note.

STAGE-III EXECUTION OF THE PROJECT AFTER INVESTMENT

DECISION THROUGH PIB/CCEA .
Project proposal after getting various statutory clearances are put up to pre-public investment

board for recommendation which is there after sanctioned by Cabinet Committee on

economic Affairs for execution. The approval of the PIB/CCEA would be sought after

Environment and Forest clearance have been obtained from MOEF and Techno-Economic

Clearance from CEA

34 | P a g e
INTRODUCTION OF
NATIONAL HYDRO
POWER
35 | P a g e
CORPORATION
(NHPC)

NHPC Limited (Formerly known as National Hydroelectric Power Corporation Ltd.),

A Govt. of India Enterprise, was incorporated in the year 1975 with an authorized capital of

Rs. 2000 million and with an objective to plan, promote and organize an integrated and

efficient development of hydroelectric power in all aspects. Later on NHPC expanded its

objects to include other sources of energy like Geothermal, Tidal and Wind etc. 

36 | P a g e
At present, NHPC is a schedule 'A' Enterprise of the Govt. of India with an authorized

share capital of Rs. 1,50,000 Million . With an investment base of over Rs. 3, 17,000 Million

Approx. NHPC is among the TOP TEN companies in the country in terms of

investment.

Initially, on incorporation, NHPC Limited took over the execution of Salal Stage-I, Bairasiul

and Loktak Hydro-electric Projects from Central Hydroelectric Project Construction and

Control Board. Since then, it has executed 13 projects with an installed capacity of 5175 MW

on ownership basis including projects taken up in joint venture. NHPC Limited has also

executed 5 projects with an installed capacity of 89.35 MW on turnkey basis. Two of these

projects have been commissioned in neighboring countries i.e. Nepal and Bhutan.

 During the financial year 2007-2008, NHPC Limited Power Stations achieved the

highest ever generation of 14811.35 MU.

 During the period 2007-2008, NHPC Limited had a sales turnover of 23110 Million

with a Net Profit of 10040.9 Million

National Hydroelectric Power Corporation is one of the largest organization for hydro power

development in India having constructed 13 hydro-power projects in India and abroad. With

an  asset value of Rs. 2,54,000 million NHPC has planned to add 2480 MW of power during

Xth plan and 6297 MW of power during XIth plan. NHPC's capabilities include the complete

spectrum of hydropower development from concept to commissioning.

37 | P a g e
 Hydroelectric Projects are recognized as the most economic and preferred source of

electricity, share of hydropower in the total installed capacity in India has been declining

steadily since 1963. The hydro share has declined from 44 percent in 1970 to 24 % in

1999. The ideal hydrothermal mix should be in the ratio of 40:60 and present imbalance is

largely responsible for system instability. In order to reverse the trend and given the

renewed thrust on hydropower by the Government, NHPC Limited has drawn up a

massive capacity addition plan in hydro sector up to 2017.

COMPANY VISION
A world class, diversified & transnational organization for sustainable Development of

hydropower and water resources with strong environment conscience.

38 | P a g e
COMPANY MISSION

 To achieve international standards of excellence in all aspects of hydro power and

diversified business.

 To execute and operate projects in a cost effective, environment friendly and

socio-economically responsive manner.

 To foster competent trained and multi-disciplinary human capital.

 To continually develop state-of-the-art technologies thru innovative R&D and

adopt best practices.

 To adopt the best practices of corporate governance and institutionalize value

based management for a strong corporate identity.

To maximize creation of wealth through generation of internal funds and effective

CORPORATE OBJECTIVES

 Management of resources.

 Development of vast hydro potential at faster pace and optimum cost eliminating

time and cost over-run.

39 | P a g e
  Completion of all on-going projects within stipulated time frame.

 Ensure maximum utilization of installed capacity and help in better system

stability.

 Generation of sufficient internal resources for expansion and setting up new

projects.

 Corporate development along with simultaneous Human Resource Development.

COMPANY’S CORPORATE PROFILE:

Authorized Capital Rs. 1,50,000 Million

Value of Assets Rs. 2,54,000 Million Approx.

Paid Up Capital Rs. 111,982 Million 31.03.2007

Projects Completed 13 Nos. (5175 MW)

Projects Under Construction 11 Nos. (4622 MW)

Projects Awaiting Clearances 8 Nos. (5751 MW)

Projects Under Survey and Investigation

11 Nos. (7585 MW)
Stage

Joint Venture Projects 3 Nos. (1586 MW)

40 | P a g e
Projects on Turnkey Basis 5 Nos. (89.35 MW)

In 2007-2008

Energy Generated (Including Deemed Generation) 14811.35 MU

Capacity Index 96.13%

Sales Turnover 23110 Million

Net Profit 10040.9 Million

Performance Rating "Very Good"

In 2006-2007

Energy Generated (Including Deemed Generation) 13048.76 MU

Capacity Index 94.11%

Sales Turnover 19630 Million

Net Profit 9248 Million

41 | P a g e
Performance Rating "Excellent"

In 2005-2006

Energy Generated (Including Deemed Generation) 12567.15 MU

Capacity Index 98.16%

Sales Turnover 17140 Million

Net Profit 7427 Million

Performance Rating "Excellent"

In 2004-2005

Energy Generated (Including Deemed Generation) 11286.43 MU

Capacity Index 95.28 %

Net Profit 6845.8 Million

Performance Rating "Excellent"

SALES V/S PROFIT

42 | P a g e
FINANCIAL PERFORMANCE DURING 2008-09
Registered a net profit (after tax) of Rs. 1,050 crore (provisional) against the net

profit (after tax) of Rs. 1,004 crore registered during the previous financial year.

Achieved an all time high sales turnover of Rs. 2,562 crore (provisional) as against

Rs. 2,301 crore achieved during the year 2007-08

Poised to declare an all time high dividend for the year 2008-09. An interim dividend

of Rs. 125 crore for the year 2008-09 has already been paid to Government of

India.

Received ‘NIL’ comments on annual accounts of the company for the year 2007-08

from Comptroller & Auditor General of India. This is the second consecutive year

43 | P a g e
 the company has received ‘NIL’ comments.

Better business management coupled with prudent financial policies like efficient

sales realization, better grid management, efficient treasury management systems etc.

have resulted in sound financial position which made the Company self reliant for

the resources generation for ambitious capacity addition program in XI and XII Five

year plans.

No budgetary support from Government from 2007-08 onwards.

Enjoys highest credit rating i.e. AAA for domestic borrowings from M/s Fitch and

BBB- for external borrowings both from M/s Fitch and M/s S&P which is equivalent

to Sovereign rating.

Updated Draft Red Herring Prospectus filed with SEBI during August 2008. The

IPO has been deferred due to adverse market conditions.

Power Generation

During the period under review, the operating Power Stations of NHPC generated 16690

Million Units exceeding the annual MoU target of 16200 million units for ‘very good’

rating, as compared to 14813 Million Units generated during the previous year, showing an

increase of 12.69 %. The machine availability of the operating power stations measured as

44 | P a g e
Capacity Index has been 93.61% (provisional) exceeding the annual MoU targets of 92.50%

for ‘Good’ rating. Uri Power Station achieved 100% Capacity Index.

Sale of Energy & Realization

The sale rate of NHPC power during 2008-09 varied from 66 paise per unit (Salal Power

Station) to 300 paise per unit (Dul Hasti Power Station). The average sale rate has been 154

paise per unit. Revenue realization from the beneficiaries of NHPC operating power stations

during 2008-09 has been Rs. 2,420.36 crore (99.69%) against the target of 97%. The actual

billing for the period was Rs. 2,427.98 crore.

Capacity Addition Programme

NHPC has planned to add 5322 MW during XI plan (2007-12) through 12 projects. Out of these,

two projects with aggregate installed capacity of 1030 MW (520 MW Omkareshwar Project in JV

and 510 MW Teesta-V Project) have already been commissioned.

NHPC abroad

 The expertise available with NHPC is being utilized by countries like Bhutan, Myanmar and

Tajikistan etc.       Prepared Detailed Project Report (DPR) of 720 MW Mangdechhu

Hydroelectric Project in the Mangdechhu Basin, Bhutan for Department of Energy

Royal Government of Bhutan and Ministry of External Affairs, India.

45 | P a g e
   Preparation of DPRs for 670 MW Chamkharchhu-I and 1800 MW Kuri Gongri

Projects under Indo-Bhutan Cooperation in hydro power sector.

 NHPC has signed MoU with the Union of Myanmar on 16 th September, 2008 to

study the master plan for hydro power development of Chindwin River Basin and for

reviewing the DPRs of the 1200 MW Tamanthi Hydroelectric Project and the 642

MW Shwezaye Hydroelectric Project.

 A tripartite agreement has been signed amongst MEA, NHPC and BHEL on 12.8.

2008 for renovation, modernization and uprating of Varzob Hydro Power Plant-I

(2x3.67 MW) in Tajikistan. NHPC shall execute the civil and hydro-mechanical

works at a cost of Rs. 23.95 crore.

PROJECTS UNDER CONSTRUCTION

1.       Sewa–II H.E. Project (120 MW), Jammu & Kashmir

Dam concreting completed.

Excavation, erection of liner & concreting for Vertical Pressure shaft, Upper &

Lower Horizontal Pressure Shaft has been completed.

Power House concreting is nearly complete.

Boxing up of all the three units completed and Auxiliaries is in progress.

Erection of switchyard is in progress. Erection of all Radial Gates and Tail Race

46 | P a g e
 Channel (TRC) Gates completed. Erection of Intake Gate, Surge Shaft Gate, SFT &

DC gates are in progress.

Head Race Tunnel (HRT) excavation completed and 6667m (66%) out of 10084 m

Overt lining has been completed.

The completion has been delayed due to poor geology in HRT, contractual problem

and labour union agitations.

The project is expected to be commissioned by October 2009

2. Teesta Low Dam H.E. Project Stage-III (132MW), West Bengal

In Barrage Bays 1 to 7, Intake and Power House, excavation is over and concreting is

in progress.

About 91.10% excavation of Tail Race Channel (TRC) has also been completed.

Supply and erection of Electrical & Mechanical (E&M) and Hydro Mechanical

(HM) components is in progress.

During flash floods in July’07, entire work area got flooded causing a severe setback

to the progress of works and delaying the completion of Project.

Construction activities are suffering due to off and on agitation by "Gorkha JanMukti

47 | P a g e
 Morcha (GJMM) since Feb. 2008.

The Project is expected to be completed by February 2010.

2. Parbati H.E. Project Stage–II (800 MW), Himachal Pradesh

In Head Race Tunnel (HRT), excavation of 81.90% has been completed out of

31.50 Km length.

22% concreting in HRT completed.

During Nov.’06 in HRT face-4, the Tunnel Boring Machine (TBM) was partly

buried due to heavy ingress of silt and water, causing total stoppage of work.

Refurbishment of TBM has been completed. Agency for treatment of strata

ahead of TBM has been finalized and work is to start shortly.

54.72 % concreting of Dam and Intake structure has been completed.

13.85% concreting in Power House completed, but the back hill slope failure

occurred in Feb.’07. Slope stabilization work is in progress and major work of

Power House is likely to be started from Nov.’09.

The Project is to be completed by March 2013.

4. Subansiri (Lower) H.E. Project (2000 MW), Arunachal Pradesh

Excavation and concreting of Dam is in progress.

48 | P a g e
 36.42% Head Race Tunnel excavation completed.

Intake structure and Power House concreting is in progress.

340T (EOT) crane has been commissioned in service bay.

The Project is to be completed by December 2012.

5. Uri –II H.E. Project (240MW), Jammu & Kashmir

Concreting upto River Bed Level (RBL) in Dam is completed and above RBL is in

progress.

    Head Race Tunnel heading and benching excavation completed except 53m which

will be taken up after completion of Surge Shaft widening and concrete lining are in

progress.

Heading of Tail Race Tunnel (TRT) completed except 49m TRT outlet portion and

benching is in progress.

Power House excavation completed & concreting is in progress.

Erection of 2 nos. draft tubes completed and in other 2 units in progress. Earth mat

in all units completed. Erection of EOT crane in service bay completed.

   Design & Engineering and fabrication of Electrical & Mechanical and Hydro

Mechanical works are in progress.

The project is expected to be commissioned by February 2011.

6.       Parbati-III H.E. Project (520 MW) , Himachal Pradesh

Excavation for Rockfill Dam completed and rockfilling above EL 1300m is in

progress.

49 | P a g e
      In Head Race Tunnel, 71.60% excavation completed..

    Slashing of Pressure Shaft and Surge Shaft is in progress.

      In Tail Race Tunnel (TRT), 89.20% excavation has been completed.

    Power House excavation is in progress.

The project is expected to be completed by November 2010

7. Chamera –III H.E. Project (231 MW), Himachal Pradesh

94% Dam excavation and 26% Dam Concreting has been completed.

Head Race Tunnel excavation completed and 2181 m(14%) out of 15995m overt

lining has been completed

Excavation of Vertical Pressure shaft, Surge Shaft is in progress.

Excavation of Power House completed and its concreting is in progress.

92% of Tail Race Tunnel excavation completed.

  EOT Crane at Service bay commissioned and erection of Electrical & Mechanical

component for Unit-1, Unit-2 & Unit-3 is in progress.

The project is expected to be completed by August 2010.

8. Teesta Low Dam H.E. Project Stage-IV (160MW), West Bengal

Excavation for Dam Spillway has been completed and concreting is in progress.

Excavation and concreting of Cellular Wall completed.

Excavation of Power House has been completed and concreting in progress.

50 | P a g e
 During flash floods in July’07, entire work area got flooded causing a severe setback

to the progress of works and delaying the completion of Project.

Construction activities are suffering due to off and on agitation by "Gorkha JanMukti

Morcha (GJMM) since February 2008.

The Project is expected to be completed by December 2010.

9. Nimoo Bazgo H.E. Project (45MW), Jammu & Kashmir

The project is being constructed by NHPC in highly inclement weather conditions of

Leh & Ladakh in Jammu & Kashmir.

Dam excavation completed and concreting is in progress.

Power House excavation and concreting upto crane beam level completed

Hydro Mechanical works awarded to PES Engineers Private Limited on 28.07.08.

The project is expected to be completed by August 2010.

10. Chutak H.E. Project (44MW), Jammu & Kashmir

The project is being constructed by NHPC in highly inclement weather

conditions of Leh & Ladakh in JAMMU & KASHMIR.

Barrage & Power House excavation completed and concreting is in progress.      

About 86.54% Head Race Tunnel (HRT) excavation completed and lining is in

51 | P a g e
 progress.

Hydro Mechanical (HM) works awarded to PES Engineers Private Limited on

28.07.08.

The project is expected to be completed by Feb. 2011.

11. Kishanganga H.E. Project ( 330 MW), Jammu & Kashmir

Project was cleared by CCEA in July 2007. CCEA clearance for revised Cost

Estimate of Rs 3,642.04 crores with scheduled completion in 84 months

(i.e. by January 2016) has been received vide letter dated 14.1.2009.

Project is proposed to be completed by January 2016.

Letter of acceptance for award of the project has been issued on 22.1.2009 in

favour of M/s Kishanganga Consortium (HCC-Halcrow) for turnkey execution.

 Mobilization and survey work has been started at site by contractor.208m of

Diversion tunnel stands excavated departmentally.

ANALYSIS OF THE TARIFF STRUCTURE

I. INTRODUCTION TO TARIFF

52 | P a g e
“Tariff means maximum of any price, rate or charge payable or demanded

with respect to generation, transmission, distribution, supply or sale of

electricity to consumer or customer.”

 Tariff Regulation according to Indian Electricity Act

2003
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

following, namely:-

a. the principles and methodologies specified by the Central Commission for

determination of the tariff applicable to generating companies and transmission

licensees;

b. the generation, transmission, distribution and supply of electricity are conducted on

commercial principles;

c. the factors which would encourage competition, efficiency, economical use of the

resources, good performance and optimum investments;

d. safeguarding of consumers' interest and at the same time, recovery of the cost of

electricity in a reasonable manner;

e. the principles rewarding efficiency in performance;

53 | P a g e
 f. multiyear tariff principles;

g. that the tariff progressively reflects the cost of supply of electricity and also, reduces

and eliminates cross-subsidies within the period to be specified by the Appropriate

Commission;

h. the promotion of co-generation and generation of electricity from renewable sources

of energy;

i. the National Electricity Policy and tariff policy:

Provided that the terms and conditions for determination of tariff under the Electricity

(Supply) Act, 1948, the Electricity Regulatory Commission Act, 1998 and the enactments

specified in the Schedule as they stood immediately before the appointed date, shall continue

to apply for a period of one year or until the terms and conditions for tariff are specified

under this section, whichever is earlier.

Determination of tariff
1. The Appropriate Commission shall determine the tariff in accordance with provisions

of this Act for –

a. supply of electricity by a generating company to a distribution licensee:

Provided that the Appropriate Commission may, in case of shortage of supply

of electricity, fix the minimum and maximum ceiling of tariff for sale or

purchase of electricity in pursuance of an agreement, entered into between a

54 | P a g e
 generating company and a licensee or between licensees, for a period not

exceeding one year to ensure reasonable prices of electricity;

b. transmission of electricity ;

c. wheeling of electricity;

d. Retail sale of electricity. Provided that in case of distribution of electricity in

the same area by two or more distribution licensees, the Appropriate

Commission may, for promoting competition among distribution licensees, fix

only maximum ceiling of tariff for retail sale of electricity.

2. The Appropriate Commission may require a licensee or a generating company to

furnish separate details, as may be specified in respect of generation, transmission and

distribution for determination of tariff.

3. The Appropriate Commission shall not, while determining the tariff under this Act,

show undue preference to any consumer of electricity but may differentiate according

to the consumer's load factor, power factor, voltage, total consumption of electricity

during any specified period or the time at which the supply is required or the

geographical position of any area, the nature of supply and the purpose for which the

supply is required.

4. No tariff or part of any tariff may ordinarily be amended more frequently than once in

any financial year, except in respect of any changes expressly permitted under the

terms of any fuel surcharge formula as may be specified.

55 | P a g e
 5. The Commission may require a licensee or a generating company to comply with

such procedures as may be specified for calculating the expected revenues from the

tariff and charges which he or it is permitted to recover.

6. If any licensee or a generating company recovers a price or charge exceeding the tariff

determined under this section, the excess amount shall be recoverable by the person

who has paid such price or charge along with interest equivalent to the bank rate

without prejudice to any other liability incurred by the licensee.

 PROCEDURE FOR TARIFF ORDER

1. An application for determination of tariff under section 62 shall be made by a

generating company or licensee in such manner and accompanied by such fee, as may

be determined by regulations.

2. Every applicant shall publish the application, in such abridged form and manner, as

may be specified by the Appropriate Commission.

3. The Appropriate Commission shall, within one hundred and twenty days from receipt

of an application under sub-section (1) and after considering all suggestions and

objections received from the public,-

a. issue a tariff order accepting the application with such modifications or such

conditions as may be specified in that order;

b. reject the application for reasons to be recorded in writing if such application

is not in accordance with the provisions of this Act and the rules and

56 | P a g e
 regulations made there under or the provisions of any other law for the time

being in force: Provided that an applicant shall be given a reasonable

opportunity of being heard before rejecting his application.

4. The Appropriate Commission shall, within seven days of making the order, send a

copy of the order to the Appropriate Government, the Authority, and the concerned

licensees and to the person concerned.

5. Notwithstanding anything contained in Part X, the tariff for any inter-State supply,

transmission or wheeling of electricity, as the case may be, involving the territories of

two States may, upon application made to it by the parties intending to undertake such

supply, transmission or wheeling, be determined under this section by the State

Commission having jurisdiction in respect of the licensee who intends to distribute

electricity and make payment therefore:

6. A tariff order shall, unless amended or revoked, shall continue to be in force for such

period as may be specified in the tariff order.

II. Tariff at NHPC

57 | P a g e
 Tariff determination process was done by the commercial division in NHPC.

 INTRODUCTION OF COMMERCIAL DIVISION

The commercial aspects of NHPC power stations are being handled by Commercial Division,

which is an important unit of corporate centre and has been assigned responsibility of

fixation of tariff of all the operational power stations of the corporation from time to time as

per directives of Central Electricity Regulatory Commission (CERC). Most important

functions of commercial division include Billing for the energy supplied and realization of

revenue, reconciliation of accounts, negotiating and signing of Bulk power supply

agreements in respect of operating power stations as well as Power Purchase Agreement for

the upcoming power stations of NHPC with various Bulk Power Consumers and

coordination with Ministry of Power, various Regional Electricity Boards (REB's), Regional

Load Dispatch Centres (RELD’s), SEB's/Union Territories, CERC, CEA and other power

sector utilities.

RESPONSIBILITIES

1. Revenue realization against electricity supplied.

2. Getting tariff fixed CEA/MOP or relevant authority.

3. Getting the L/C opened by beneficiary states.

4. Getting agreements for bulk power signed by beneficiaries.

58 | P a g e
 FUNCTIONS

1. Submission of requisite data to CEA/MOP for tariff fixation, follow up action till

fixation of tariff.

2. Preparation of bills for energy supplied to beneficiaries; billing and follow up action.

3. Revenue collection and revenue realization.

4. Participation in meetings and tariff policies entitlement allocation and actual supply

of electricity.

5. Co-ordination and liaison with Regional Electricity Boards, beneficiaries, CEA, MOP

etc.

6. Preparation of statement of outstanding dues, reconciliation with beneficiaries and

intimation to MOP etc.

7. Data bank regarding tariff of NHPC Projects and other Projects in India and Abroad.

8. Professional upgradation including recommending Training Programmes for

employees in the Division.

COMMERCIAL TARIFF
Each operating power station of the corporation has a station wise tariff. At present the tariff

of NHPC Power stations is approved by the Central Electricity Regulatory Commission

59 | P a g e
(CERC). The CERC has approved the tariff of Baira siul, Loktak, Salal, Tanakpur, Chamera-

I, Chamera-II, Rangit & Uri Power stations for the period 1.4.2001 to 31.3.2004 on the basis

of CERC (Terms and conditions of Tariff) Regulation 2001. The Commission has approved

the Annual Fixed Charges (AFC) for each of these power stations except for the Chamera II

for which provisional tariff has been approved.

AFC is to be recovered in the form of capacity and energy charges on monthly basis as per

the directions laid in the tariff orders. The components of tariff (AFC) are Interest on loan,

Interest on working capital, Depreciation, Advance against depreciation, O&M expenses and

Return on equity.

Availability Based Tariff as ordered by CERC has been implemented w.e.f. 01.07.2002 in

Western Region, 01.12.2002 in Northern Region, 01.01.2003 in Southern Region and

01.04.2003 in Eastern Region & 01.11.2003 in North Eastern Region.

In ABT regime the generator has to generate as per schedule given by Regional Load

Dispatch Centre (RLDC), presently being operated by Central Transmission utility (CTU)

and the beneficiary (SEB) has to draw power from grid as per the schedule. Unscheduled

Interchange (UI) charges are imposed on the constituents of the grid who deviate from

schedule.

The CERC has issued the revised CERC (Terms & Conditions of Tariff) Regulations, 2009

on 19.01.2009 which are applicable for the period 01.04.2009 to 31.03.2013. Fresh tariff

petitions of all the operating projects for the period 01.04.2009 to 31.03.2013 have since been

filed by NHPC in CERC based on these regulations. The determination of tariff by the

60 | P a g e
 Commission based on the revised terms and conditions will take some time, till that

Commission directed that billing of charges, shall be billed as per AFC as applicable on

31.03.2009 on provisional basis and shall be further subject to adjustment after final

determination of tariff by the Commission in accordance with the revised terms and

conditions.

 NHPC TARIFF STRUCTURE

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   1. Fixed charges

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 2.  Variable charges

The variable charges in case of Hydro Generating Station are Nil. So tariff in respect of

Hydro Generating Station consists of fixed charges only. These fixed charges were further

divided into:-

1. Capacity charges

2. Energy charges

ELEMENTS OF FIXED CHARGES

 Interest on loan

 Depreciation and advance against Depreciation

 Return on equity

 O&M expenses

 Interest on working capital.

PROCEDURE FOR TARIFF DETERMINATION

 TARIFF DETERMINATION

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 Tariff of generating station may be determined for the whole of the generating station or a

stage or a unit of the generating station. For the purpose of determination of tariff, the capital

cost of the project may be broken up into stages.

 APPLICATION FOR DETERMINATION OF TARIFF

The generating company may make an application for determination of tariff based on capital

expenditure incurred duly certified by the auditors or projected to be incurred during the tariff

period of the generating station in accordance with CERC Regulations, in respect of the units

of generating station, completed or projected to complete within 6 months from the date of

the application.

In case of the existing projects, the generating company shall continue to provisionally bill

the beneficiaries or the long-term customers with the tariff approved by the Commission and

applicable as on 31.3.2009.

Provided that where the tariff provisionally billed exceeds or falls short of the final tariff

approved by the Commission under these regulations, the company shall refund to or recover

from the beneficiaries or the within six months along with simple interest at the

rate equal to short-term Prime Lending Rate of State Bank of India on the 1st April of the

concerned/respective year.

 TRUING UP OF CAPITAL EXPENDITURE AND TARIFF.

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The Commission shall carry out truing up exercise along with the tariff petition filed for the

next tariff period, with respect to the details capital expenditure including additional capital

expenditure incurred for the period from 1.4.2009 to 31.3.2014, duly audited and certified by

the auditors; as admitted by the Commission after prudence check at the time of truing up.

III. COMPUTAION OF CAPITAL COST

CAPITAL COST.

Capital cost for a project shall include:

(a) The expenditure incurred or projected to be incurred, including interest during

Construction and financing charges, any gain or loss on account of foreign exchange risk

Variation during construction on the loan –

(i) being equal to 70% of the funds deployed, in the event of the actual equity in excess of

30% of the funds deployed, by treating the excess equity as normative loan, or

(ii) being equal to the actual amount of loan in the event of the actual equity less than 30% of

the funds deployed, - up to the date of commercial operation of the project, as admitted by the

Commission, after prudence check;

(b) Capitalized initial spares subject to the ceiling rates and

(c) Additional capital expenditure

Provided that the assets forming part of the project, but not in use shall be taken out of the

capital cost.

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Provided also that in case the site of a hydro generating station is awarded to a developer (not

being a State controlled or owned company), by a State Government by following a two stage

transparent process of bidding, any expenditure incurred or committed to be incurred by the

project developer for getting the project site allotted shall not be included in the capital cost.

Provided also that the capital cost in case of such hydro generating station shall include:

(a) cost of approved rehabilitation and resettlement (R&R) plan of the project in conformity

with National R&R Policy and R&R package as approved; and

(b) Cost of the developer’s 10% contribution towards Rajiv Gandhi Grameen Vidyutikaran

Yojana (RGGVY) project in the affected area.

INITIAL SPARES

Initial spares shall be capitalised as a percentage of the original project cost, subject to

following ceiling norms:

(i) Coal-based/lignite-fired thermal generating stations - 2.5%

(ii) Gas Turbine/Combined Cycle thermal generating stations - 4.0%

(iii) Hydro generating stations - 1.5%

(iv) Transmission system

(a) Transmission line - 0.75%

(b) Transmission Sub-station - 2.5%

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(c) Series Compensation devices and HVDC Station - 3.5%

RENOVATION AND MODERNISATION.

The generating company or the transmission for meeting the expenditure on renovation and

modernization(R&M) for the purpose of extension of life beyond the useful life of the

generating station shall make an application before the Commission for approval of the

proposal with a Detailed Project Report giving complete scope justification, cost-benefit

analysis, estimated life extension from a reference date, financial package, phasing of

expenditure, schedule of completion, reference price level, estimated completion cost

including foreign exchange component, if any, record of consultation with beneficiaries and

any other information considered to be relevant by the company.

Any expenditure incurred or projected to be incurred and admitted by the Commission after

prudence check based on the estimates of renovation and modernization expenditure and life

extension, and after deducting the accumulated depreciation already recovered from the

original project cost, shall form the basis for determination of tariff.

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IV. COMPUTATION OF TARIFF
The following are components of tariff:-

1. Annual Fixed Charges(AFC) consisting of Capacity and Energy Charges

2. Incentive

3. Foreign Exchange Rate Variation

4. Unscheduled Interchange(UI)

1) ANNUAL FIXED CHARGE

It comprises the following:-

a) Return On Equity

b) Interest on Loan

c) Depreciation

d) Interest on Working Capital

e) O&M Expenses

a) Return on Equity
Return on equity is a measure of a company's ability to use its assets to generate additional

value for shareholders.

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Return on equity is applicable only to generating stations that come under regulatory

authority. It shall be computed in rupee terms. ROE shall be computed on pre tax basis at

15.5% to be grossed up with mat/normal tax rate.

Rate of return on equity shall be computed as per following formula:- Rate of pre-tax return

on equity= Base rate/(1-t)

Illustration:-

I) In case of generating company paying Minimum Alternate Tax @ 11.33% including cess&

surcharge:

Rate of return on equity=15.50/ (1-0.1133)

=17.481%

With 11.33% MAT rate ROE works out to 17.481%.

II) In case of generating company paying Normal Corporate Tax @ 33.99% including cess &

surcharge:

Rate of return on equity=15.50/ (1-0.3399)

=23.481%

With normal tax rate ROE will be 21.48%. For timely completion of project, an additional

half percent ROE shall be allowed.

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b) Interest on Loan Capital
Interest on loan will be allowed on normative basis. The normative loan outstanding at the

beginning of the tariff period shall be worked out by deducting cumulative repayment from

gross normative loan. The repayment of loan shall be considered from the 1 st year of

commercial operation of the project and shall be equal to the annual depreciation allowed.

The rate of interest shall be the weighted average rate of interest calculated on the basis of

actual loan portfolio at the beginning of each year applicable to the project.

c) Depreciation and Advance Against Depreciation ( AAD )

Depreciation is the loss of value of an asset and is calculated asset-wise. It depends on the

size, type of equipment and its estimated life. Advance against depreciation is applicable only

to generating stations, which comes under regulatory authority. In other cases, this is set to

zero. Depreciation shall be allowed at the rates prescribed by the commission and based on

Straight line method. Considering 10% salvage value depreciation has been allowed upto

90% of the capital cost. Land other than the land held under lease and land for reservoir shall

not be a depreciable asset. Depreciation shall be chargeable from 1 st year of commercial

operation. In case of commercial operation of the asset for part of the year depreciation shall

be charged on pro-rata basis.

d) Interest on Working Capital

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Working capital usually used for the purchase of raw materials, components and spares,

payment of wages and salaries, the day-to-day expenses and overhead costs such as power

and office expenses etc. The interest on working capital is determined on normative basis.

e) Operation and Maintenance Expense (O&M Expense)

Operation and maintenance cost depends on the capacity of the plant as well as the operation

and maintenance of the generating station, expenditure on spares and repairs, administration

and general expenses and other miscellaneous expenses. Operation and maintenance expense

can be calculated using average method, or comparison method.

ILLUSTRATION:-

Now we will calculate AFC and Commercial tariff for NHPC’s SEWA-II Project which has

following detail:-

Capital cost …………………………………………………………….785.56Cr.

Design Energy………………………………………………………..533.52MU

Total Equity-GOI Grant (30%)……………….235.67Cr.

Total Loan-GOI Soft Loan (70%)…………….549.89Cr.

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Repayment in 15yrs with 3year moratorium

ROE……………………….……………………………………………………………17.48%

O&M Expenses …………………2% of Capital cost escalated @5.72%

Interest on Loan………………………………………………………………11%

Depreciation rate………………………………………………………………5.20% First

12yrs

1.20% next 23yrs

Interest on Working Capital

i. 1 month O&M expenses

ii. 15% O&M expenses

iii. 2 months average billing

Rate- SBI PLR………………………………………………….12.5%

a) Depreciation - For 1st to 12 yrs

= 785.56*5.20%

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 = 40.85

For next 23 yrs

=785.56*1.2%

=9.43

b) Interest on Loan – 549.89*11%

= 58.24

c) ROE = 235.67*17.48%

=41.19

d) O&M Exp - 785.56*2%

- 15.71

i) 1 month O&M = 15.71/12

= 1.31

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ii) 15% of O&M = 15%*15.71

= 2.36

iii) 2 month average billing- Total cost/6

=159.78/6

-=26.63

e) Interest on Working Capital- { i) +ii) +iii)}*12.5%

= (1.31+2.36+26.36)*12.5%

= 30.3*12.5%

= 3.79

AFC = a+b+c+d+e

= 40.85+58.24+41.19+15.71+3.79

= 159.78

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 2) INCENTIVES

The generating company can achieve incentives for maintaining reliable and quality power.

Incentive is based on the declared capacity in MW corresponding to the generation and the

incentive rate is in paisa/kWh.

operational cost can also include with variable charges. A penalty clause also can be added

for not maintaining quality and reliable power.

Total electricity price/month = Demand charges/moth + Variable charge/month+ other

service charges, like reactive power control, voltage and frequency control + cess/service tax

implemented by the government.

3) FOREIGN EXCHANGE RATE VARIATION:-

The generating company may hedge foreign exchange in respect of all foreign loans. The

generating company shall recover the cost of hedging & foreign exchange rate variation on

year-to-year basis as income or expense in the period in which it arises.

4) UNSCHEDULED INTERCHANGE CHARGES

All variations between actual net injection and scheduled net injection for the generating

station shall be treated as unscheduled interchanges, charges for which will be governed by

the relevant regulations specified by CERC.

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 V. COMPUTATION AND PAYMENT OF CAPACITY
CHARGE AND ENERGY CHARGE FOR HYDRO
GENERATING STATIONS.
The fixed cost of a hydro generating station shall be computed on annual basis and will be

recovered on monthly basis under Capacity charge(inclusive of incentive) and Energy charge

which will be payable by Beneficiaries in proportion to their respective allocation in the

saleable capacity of the generating station excluding free power to home state.

CAPACITY CHARGE (inclusive of incentive) is calculated as:-

CC= AFC ×0.5 NDM / NDY (PAFM/NAPAF) (in Rupees)

ENERGY CHARGE RATE is calculated as:-

ECR= AFC 0.5 10/ {DE (100-AUX)× (100-FEHS)}

ILLUSTRATION:-

Now we will calculate total billing charges for the month of April’2009 for Baira suil
Plant.

And will also calculate how it is charged from its Beneficiary say for Punjab.

CHARGES VALUE

PSCH 85.153027
PFP 10.22009
PAFM 100.070
AFC 52.8735
ADE 779.28
AUX 0.7%
NAPAF 85

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1) ECR= AFC 0.5/ {DE (100-AUX) (100-FEHS)}

= 0.5×159.78×107

779.28 (1-0.7%)(1-12%)

= 0.39 Rs/unit (kh)

2) Sale Energy upto the Month = PSCH-PFP

= 85.153027- 10.22009

=74.932937 MU

3) Sale DE upto the Month = DE upto the Month (1-AUX)× (1-FP)

= 97.85(1-0.7%)(1-12%)

= 97.85 0.993 0.88

= 85.505244 MU

{In case the energy charge rate (ECR) for a hydro generating station, as computed in step 1

above, exceeds eighty paisa per kWh, and the actual saleable energy in a year exceeds

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saleable DE as computed in step 3 above then, the Energy charge for the energy in excess of

the above shall be billed at eighty paisa per kWh only}

4) Sale energy upto DE = 74.932937 MU

5) Energy charge upto the Month = 74.932937 0.39×106

= 29223845

6) Capacity Charge = 0.5 AFC PAFM NDM

NAPAF NDY

= 0.5 52.8735 100.07 30

85 365

= 25581230

7) Project total Charge upto the Month= Project Energy charge + Project Capacity Charge

= 29223845+ 25581230

= 54805107

VI. SCHEDULING, ACCOUNTING AND BILLING

SCHEDULING.

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The methodology for scheduling and dispatch for the generating station shall be as specified
in the Indian Electricity Grid Code, as amended from time to time.

METERING AND ACCOUNTING.

The provisions of the Indian Electricity Grid Code, as amended from time to time shall be
applicable.

NHPC maintains three accounting books:-

1. Corporate office

2. Regional Office

3. Project Office

At the time of billing:-

 In the books of corporate office:-

Beneficiaries A/c-------------Dr.

To Regional offices

 In the books of Regional Office:-

Corporate office A/c------------Dr.

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 To power station

 In the books of project office

Regional Office A/c-----------------Dr.

TO sales

BILLING AND PAYMENT OF CHARGES.

NHPC has adopted a monthly billing cycle. Based on the Regional Energy Accounts issued

by the respective Regional Electricity Boards and  Regional Load Dispatch Centre’s , billing

is done centrally at the Corporate Office on monthly basis in accordance with the rates, terms

and conditions of the tariff notification issued by Government of India/CERC for that

particular power station. Payments are received through confirmed, revolving, irrevocable

Letters of Credit opened by the beneficiaries in favour of NHPC and also directly through

Demand Draft/Cheques. Due to opening of letters of credit by the beneficiaries and also as a

result of special incentives offered by NHPC to the beneficiaries for making prompt

payments, realization of payments has improved and in 2004-2005 it stood at 101.29% 

A surcharge @ 1.25% per month is levied if the payments are not made by the beneficiaries

beyond a period of 60 days from the date of billing. 

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Bills shall be raised for capacity charge and energy charge on monthly basis by the company

in accordance with CERC regulations, and payments shall be made by the beneficiaries

directly to the company.

Now we will calculate how we Bill it for a particular Beneficiary lets say for Punjab

from this Bara Siul Plant.

1) Schedule Sale Energy = Scheduled energy- Free power

= 39.590934-0

= 39.590934

2) Energy Charge = Schedule Sale Energy ×ECR

6
= 39.590934 0.39 10

= 15440464

3) Capacity Share = 46.5

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4) Capacity Charge = Project Capacity Charge Capacity share

88

= 25581230× 46.5

88

= 13517354

5) Total Charge = Energy charge + Capacity charge

= 15440464 + 13517354

= 28957818

Note 1

Shares / allocations of each beneficiary in the total capacity of Central sector generating

stations shall be as determined by the Central Government, inclusive of any allocation made

out of the unallocated capacity. The shares shall be applied in percentages of installed

capacity and shall normally remain constant during a month. Based on the decision of the

Central Government the changes in allocation shall be communicated by the

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Member-Secretary, Regional Power Committee in advance, at least three days prior to

beginning of a calendar month, except in case of an emergency.

The total capacity share of a beneficiary would be sum of its capacity share plus allocation

out of the unallocated portion. In the absence of any specific allocation of unallocated power

by the Central Government, the unallocated power shall be added to the allocated shares in

the same proportion as the allocated shares.

Note 2

The beneficiaries may propose surrendering part of their allocated firm share to other

States within/outside the region. In such cases, depending upon the technical feasibility

of power transfer and specific agreements reached by the company with other

States, the shares of the beneficiaries may be prospectively re-allocated by the Central

Government for a specific period from the beginning of a calendar month. When such re-

allocations are made, the beneficiaries who surrender the share shall not be liable to pay

capacity charges for the surrendered share. The capacity charges for the capacity surrendered

and reallocated shall be paid by the State(s) to whom the surrendered capacity is allocated.

Note 3

FEHS = Free energy for home State, in percent and shall be taken as 12%

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Three types of bills are prepared by the NHPC

1. Provisional bills: This is the starting bill generated by the NHPC against beneficiaries.

2. Supplementary Bills: This bill generated when some mistake occurred:

Income tax

FARB (foreign exchange regulatory board)

Additional capitalisation

3. Final bills

REBATE

ACCORDING TO CERC
For payment through LC on presentation of bill, 2% rebate is allowed on the bill amount. In

case payment is made within one month other than LC, 1% rebate is allowed.

ACCORDING TO NHPC (GRADE SYSTEM)

For payment through LC on presentation of bill, 2% Rebate is allowed on the bill amount.For

Payment without LC, 0.33% rebate is allowed to the beneficiaries.

LATE PAYMENT SURCHARGE

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In case the payment of any bill is delayed by a beneficiary beyond a period of 60 days from

the date of billing a late payment surcharge of 1.25% per month shall be levied by generating

company.

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SUMMARY OF NEW CERC PROVISION

a. The Capacity Index has been replaced with Normative Annual Plant Availability

Factor (NAPAF).

b. Earlier system of self-adjusting formula for recovery of Annual Fixed Charges has

been changed. Now, AFC shall be recovered as Energy and Capacity Charges on 50-

50 basis.

c. Hydrological risk has to be borne by the generator under new Regulations.

d. ROE has been increased from 14 to 15.5% on post-tax basis. 0.5% additional return

has been allowed for timely completion of the project.

e. O&M expenses have been enhanced upwardly from 1.5% to 2% p.a. for new Power

Stations which are commissioned within a period of 5 years. Annual escalation rate

has also been enhanced to 5.72% from 4%.

f. The concept of advance against depreciation has been dispensed with.

g. The rate of depreciation has been revised upwards from weighted average 2.5-3% to

4.5-5%.

h. Maintenance spares has been allowed at the rate of 15% of O&M expenses instead of

1% of the historical cost for calculation of Interest on Working Capital.

85 | P a g e
i. In case of under and over recovery of tariff the rate of interest has been changed to

SBI PLR Rate instead of 6% p.a. allowed earlier.

j. Earlier system of incentive on achieving higher capacity index over normative level

has been dispensed with. Instead incentive has been made in-built in Capacity

charges at lower rate.

k. Hedging has been allowed in case of interest and repayment of foreign loan. To the

extent, hedging has not been done FERV has been allowed.

l. Rebate to be provided to beneficiaries has been allowed on entire bill amount instead

of only capacity and energy charges.

m. The rate of secondary energy is varying and has been capped to 80 paise per unit.

86 | P a g e
 COMPARISON BETWEEN NEW NORMS AND OLD NORMS

 Return on Equity (ROE)

The commission in its draft regulations had proposed a ROE of 14% which it argued was

sufficient in view of the huge response of the investors to the IPOs of companies like

NTPC,PGCIL and Reliance Power. However most of the generators contested this fact and

argued for a higher rate of return on the basis of

a) CAPM method as suggested initially by CERC and

b) Comparative Return allowed by CERC in earlier tariff period vis-à-

vis prevailing interest rates at that time.

c) Return on Equity

OLD PROVISION NEW PROVISION

ROE @ 14% was allowed on post tax basis. ROE @ 15.5% has been allowed on post tax

basis. On pre tax basis 17.48% & 23.481%

Beneficiary has to bear the tax on income
shall be allowed with tax rates of 11.33 %
from core business.
(MAT) and 33.99%(normal corporate tax)

respectively.

 0.5 % additional return has been allowed for the projects which are completed

within the prescribed time limit as per Appendix II of the CERC regulation 2009.

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  ROE shall be computed by grossing up the base rate with normal tax rate as

applicable for the year 2008-09 which shall be trued up for each tariff year as per

applicable rate of relevant Finance Act and shall be filed along with the tariff

petition for the next tariff period.

 The above incremental ROE of 1.5% translates into incremental 101.52 Cr. on the

basis of equity deployed amounting to 6767.66 Cr. of O&M stations in FY 08-09.

 INTERSET ON LOAN
OLD PROVISION NEW PROVISION
The loan outstanding as on 1.4.2004 shall be The normative loan outstanding as on

worked out as the gross loan minus 1.4.2009 shall be worked out by deducting the

cumulative repayment as admitted by the cumulative repayment as admitted by the

Commission up to 31.3.2004. Commission up to 31.3.2009 from the gross

normative loan.

The repayment for the period 2004-09 shall The repayment for the respective year of the

be worked out on a normative basis by tariff period 2009-14 shall be deemed to be

applying actual repayment ratio to opening equal to the depreciation allowed for that

normative loan year irrespective of actual repayment during

the year.

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  DEPRECIATION
OLD PROVISION NEW PROVISION
Depreciation @ 2.57% to 2.8% was allowed Depreciation at the prescribed rates is

till the year of loan repayment with balance allowed for 12 years with balance

depreciable value spread over the balance depreciable value spread over the balance

years after the year of repayments till the years till the 35th year.

35th year.

Advance against depreciation was also The provision of advance against

allowed to the extent of difference between depreciation has been done away with.

actual loan repayment and depreciation

amount.

 INTEREST ON WORKING CAPITAL

OLD PROVISION NEW PROVISION
The components of working capital are : The components of working capital are :

A) One month O&M expenses. a) One month O&M expenses.

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 B) Maintenance spares @1% of Capital b) Maintenance spares @15% of O&M

Cost to be escalated @ 6% p.a. Expense

C) Receivable equivalent to 2 months c) Receivable equivalent to 2 months of

fixed charges for sale of electricity fixed cost

calculated on normative CI.

RECOVERY OF FIXED CHARGE

OLD PROVISION NEW PROVISION

Earlier Fixed Charges were Now fixed charges have been

recoverable by way of Primary Energy bifurcated into two components as

Charges and Capacity Charges energy & capacity charges in the ratio

whereas Capacity Charge was of 50:50. Recovery of energy charges

calculated as AFC – PE Charges. As as well as capacity charges is now

such generation was not an issue for dependent on the actual generation.

recovery of full AFC since both the

charges were self adjusting and
Capacity Charge recovery was based.

INCENTIVE AND SECONDARY ENERGY

OLD PROVISION NEW PROVISION

Incentive was allowed on the basis of machine Incentive would be available based on

availability irrespective of operation. actual operation of machine.

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The basis of Incentive calculation was excess The basis of incentive would be higher APAF

of actual CI over and above normative CI. over NAPAF.

Quantum of incentive was based on 65% of Quantum of incentive is based on 50% of

AFC. AFC.

Rate of Secondary Energy was primary energy Maximum Rate of Secondary Energy has been

rate/.88 which was 100.09 P/Kwh for NR capped @ 80 P/Kwh.

Projects in FY08-09

 TAX ON INCOME
OLD PROVISION NEW PROVISION
Tax on the income streams of the The Post tax ROE of 15.5% shall be

generating company or the transmission adjusted for the applicable tax rate by the

licensee, as the case may be, from its core formula ROE/(1-t) to arrive at the pre tax

business, shall be computed as an expense ROE and no further tax pass through shall

and shall be recovered from the be allowed whereas tax rate applicable for

91 | P a g e
beneficiaries. the FY 2008-09 would be applied for the

tariff period 2009-14 with truing up at the

end of tariff period for actual tax rates

during the tariff period.

FOREIGN EXCHANGE RATE VARIATION (FERV)

OLD PROVISION NEW PROVISION
Extra Rupee liability towards interest Hedging on Foreign exchange exposure in

payment and loan repayment on foreign respect of interest on foreign currency loan

currency loan was pass through in Tariff. and repayment of foreign loan has been

allowed.

Hedging cost has been made pass through.

To the extent Foreign currency loan has not

been hedged, extra Rupee liability is pass

through in Tariff.

REBATE
OLD PROVISION NEW PROVISION
For payment of bills of Capacity and Energy For payment of bills by the generating

Charges through LC on presentation, a company through LC on presentation, 2%

92 | P a g e
rebate of 2% shall be allowed. rebate shall be allowed.

For payment of bills other than LC mode Where payment of bills made other than LC

but within a period of one month of raising mode within one month of presentation of

of bills, a rebate of 1% shall be allowed. bill, a rebate of 1% shall be allowed.

SURCHARGE
OLD PROVISION NEW PROVISION
Surcharge @ 1.25% per month was levied for Surcharge @ 1.25% per month was levied for

delayed payments beyond 60 days from the delayed payments beyond 60 days from the

date of raising of the bill. date of raising of the bill.

93 | P a g e
PROBLEM FACED DURING THE DETERMINATION
OF TARIFF

1. Due to transparency of system, company has to face lot of queries by

beneficiaries/distribution Company or state utility. Company has to counter reply and

try to satisfied them for its capital cost.

2. Company has to face problem in maintain the debt – equity ratio.ie,.70:30 as per the

CERC regulation.

3. Final approval is done by CERC, so sometimes AFC determine by the company does

not completely approved by the CERC. Therefore, it’s very difficult to cover full

capital cost.

94 | P a g e
 RECOMMENDATIONS

I have broadly categorized my recommendations into three parts :-

Part A : Issues which were earlier taken up with CERC while furnishing our replies to

draft CERC Regulations and during public hearing and also through separate petition

but the same did not find favour of CERC. Looking into the gravity of its implication on

company performance, NHPC may take up the matter with Ministry of Power and CEA.

1. Entire Hydrological risks should be borne by the beneficiaries as it is beyond the

control of Generator as allowed till 31.03.2009.

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2. a) NAPAF in respect of ROR stations should not be more than design

PLF.

b) 5% relaxation allowed for power stations significantly affected by silt

should be extended for Chamera-II and Dulhasti.

c) Similarly, 5% relaxation allowed during first year of operation as

provided in last tariff period (2004-09) should be continued.

3. 0.5% additional return provided in the Tariff Notification, 2009 should also be

extended to the new projects being commissioned, where reasons for delay beyond

the original schedule is not attributable to generating company and also approved by

the Govt/.CCEA as under force major condition .

4. Additional ROE should be allowed for hydro projects taking into consideration

increased risk involved on account of long gestation period, remote accessibility,

militancy, difficult terrain, fragile geology, etc.

5. ROE during construction period should be allowed. Matter was earlier taken up with

CERC while furnishing our replies to draft CERC Regulations but the same did not

find favour. Considering the effective impact on ROE, NHPC may take up the matter

with Ministry of Power and CEA for taking suitable policy decision.

6. Provision regarding additional 1% for local area Development under Rehabilitation &

Resettlement as per amended tariff policy applicable for private developers should

also be extended to NHPC Matter needs to be pursued with MOP further.

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Part B: - New Issues

1. Differential rates of tariff for peak and off peak hours should be allowed for getting

higher returns.

2. The Corporation should tie-up long term loan not less than 17 years to

a) Derive maximum benefit under tariff i.e. match the cash out flow towards

repayment of loan with the permissible level of depreciation.

b) Govt. of India may be approached for issuing necessary guidelines to banks and

financial institutions directing them to extend long term loan, separate exposure

limit for hydro sector and restoration of section 10(23)(G) of Income Tax Act,

1961 which was earlier discontinued.

3. 15% of the generation capacity of new projects be sold outside long-term PPA, to

promote trading through Power Exchange as already provided in the National

Electricity Policy, 2005 (Clause No.5.7.1). The matter is to be further pursued with

MOP .

Part C :- Internal action points

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1. The power stations should incur add Cap expenditure as per the Norms allowed in

CERC Notification.

2. Renovation & modernization works to be taken up with prior approval of CERC

giving detailed justifications, cost benefit analysis, estimated life extension, financial

packages, reference price level, record of consultation with beneficiaries etc.

3. We should invest more and more in new project, in order to improve profitability.

4. Efforts should be made to achieve higher NAPAF over and above normative value.

Best maintenance practices are to be adopted for further improving the operating

performance of the power stations. Performance of all the power stations needs to be

monitored continuously. Special emphasis should be given to those power stations

having higher AFC and should be monitored on daily basis.

5. We can enhance our profitability by reducing actual expenses than normative

expense. 9 out of 11 power stations are incurring O&M expenditure in excess of

normative expenditure allowed by CERC through tariff. Excess O&M expenditure

during the years 2007-08 & 2008-09 was about Rs.122 Crores & Rs.191 Crores

respectively primarily due to excessive man power.

6. A number of R&D initiatives including various coatings have already been taken up

in our power stations as preventive measures to reduce damage caused by silt. The

result/feedback of such steps needs to be compiled and further pursued for finding

lasting and effective solution to this serious problem.

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7. Utilization of accommodation available at various power stations needs to be

reviewed and alternative use/disposal of vacant quarters to be considered.

Construction of quarters for the new projects needs to be seen in this reference and

considering the fact that requirement of bachelor accommodation is increasing at

present.

8. Approval of revised completion cost should be processed immediately after

commissioning of the project. Approved completion cost of Chamera-II, Dhauliganga

and Teesta-V Power Stations are yet to be received. Timeline should be specified for

arranging approval of completion cost soon after commissioning of the project.

9. It is proposed to retain a small team of experienced officers earmarked for dealing

with operation & maintenance, tariff petitions, matter relating to Appellate Tribunal

and energy billing.

CONCLUSION

The overall conclusion of my study of the tariff structure in NHPC which is

among the best in country, tariff determination process is a very transparent

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process since it is a public limited company . All the working of company is

regulated through govt. of India.

After considering the already mentioned aspects of tariff determination

process and critical analysis of CERC norm, I can give some suggestions to

NHPC for increasing its profitability.

In order to attract investment in Hydro so that available hydro potential in

country is exploited, it is suggested that existing Regulations in respect of

Hydro be continued except that ROE should be increased keeping in view

the increase in Interest rates in the market and escalation factor also needs to

be realistic.

Although the new tariff structure, shows a much more realistic and factual

picture of the actual expenses incurred in setting up a project, maintaining it

and making it easily available for the generators, there is still a scope of

further improvement in the tariff structure from the point of view of both –

the seller (NHPC) and the customers (SEBs/beneficiaries/distributors)

I hope that my recommendations will be useful for the company and the

project will benefit from it.

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 BIBLIOGRAPHY

SOURCES OF INFORMATION

1. Manuals of commercial department

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 2. Interaction with the various employees.

3. Guidelines of electricity Act 2003,

4. CERC regulations 2009-2014.

LIST OF BOOKS

1. Best Practices in Hydro Power – CEA

2. Various petitions and orders of CERC.

3. Manual on Renovation, Modernisation, Uprating and Life Extension of

Hydro Power Plants – G.N. Mathur, A.K. Jain, V.B. Prasad

4. POWERLINE Magazine,.

Websites

1. www.nhpcindia.com

2. www.nsdl.co.in

3. www.cerc.com

4. www.google.com

5. www.powermin.nic.in

6. www.cercind.gov.in

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 GLOSSARY

1. ABT Availability based tariff

2. ADE Annual design energy

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3. AFC Annual Fixed charge

4. CEA Central electricity authority

5. CERC Central Electricity Regulatory Commission

6. DPR Detailed project Report

7. ECR Energy charge rate

8. EIA Environment impact assessment

9. EMP Environmental management plan

10. FDI Foreign Direct Investment

11. GOI Govt. Of India

12. L/C Letter of credit

13. MAT Mnimum alternate tax

14. MOEF Ministry of environment and forest

15. MOP Ministry of power

16. MOU Memorandum of Understanding

17. NAPAF Normative Annual Plant availability factor

18. PAFM Plant availability factor during month

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19. PFP Plant free power

20. PFR Pre feasibility Report

21. PIB Pre-Public Investment Boards

22. RLDC Regional load dispatch centre

23. SEBs State Electricity Boards

24. SERC State Electricity Regulatory Commission

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