In compliance with the Electricity Act 2003 (EA 2003), the Government of India (GoI) notified the Tariff Policy in continuation to the National Electricity Policy (NEP), in 2005.

Why Tariff Policy?

Pan India, all the consumers are to be electrified and everybody is to have not only access to electricity but also uninterrupted electricity. This infrastructure set up would involve huge investment in generation, transmission and distribution network. Along with Public Sector Undertakings (such as NTPC, NHPC, PGCIL, etc.), private players (domestic as well as international) would play very critical role in establishing this infrastructure. Now to sustain the infrastructure, GoI required pouring confidence in the private players on the business opportunities and assurance on returns on their investments. It’s very much imperative to balance the requirement of appealing adequate investment to the sector and ensuring the reliability of user charges for the consumers. And this has to be materialized by the regulatory framework enacted by the Electricity Act 2003.

So, the Electricity Act empowers the Central Government to formulate, review and revise the Tariff Policy; and in turn, CERC and SERC would be guided by this tariff policy in discharging their duties including framing regulations under the EA 2003. The forum of regulators, established by the Central Government would ensure consistency in the approach.

The Tariff Policy evolves in consultation with the state government and CEA.

Objectives of the Tariff Policy:

  1. Ensure availability of electricity to consumers at reasonable and competitive rates;
  2. Ensure financial viability of the sector and attract investments;
  3. Promote transparency, consistency, and predictability in regulatory approaches across jurisdictions and minimise perceptions of regulatory risks; and
  4. Promote competition, efficiency in operations and improvement in the quality of supply.

Perspective to the Tariff Policy:

It’s true that competition enhances productivity; competition brings best out of the available resources, and competition ignites innovation. These all, in turn, benefit the consumers, as tariff determination would become competitive. So, while introducing competition was at the heart of the EA 2003, all the policies were framed keeping this perspective in the core. Prior notifying the Tariff Policy, Central Government already notified the guidelines for the tariff-based bidding process for procurement of electricity by the distribution licensee for a medium or long-term period, by early 2005.

Below are the elements of the Tariff Policy framework:

  1. Return on Investment
  2. Equity Norms
  3. Depreciation
  4. Cost of Debt
  5. Cost of Management of Foreign Exchange Risk
  6. Operating Norms
  7. Renovation and Modernization
  8. Multi-Year Tariff
  9. Benefits under CDM

If I put it in a simple perspective, it was simply aimed to justify and encourage the private sector investment in the power sector by inducing competition and bring in price transparency to offer fair and justified electricity charges to the consumers.

In the subsequent post, we shall talk about how Tariff Policy applies to the Generation, Transmission and Distribution companies.