Annex II

K.P. RAO COMMITTEE REPORT--- A BRIEF ANALYSIS

Tariff for Central Thermal Generating Stations

1. Introduction of the concept of two-part tariff, i.e. a fixed and a variable charge;

2. Payment of fixed charges on normative basis recovered at normative PLF: return on notional equity of 50% of gross capital cost at government notified rates, Interest at actual weighted average interest rate on notional outstanding debt (50% of gross capital cost reduced by actual cumulative repayment), 2.5% of Current Capital Cost as O&M; Interest at an average cash credit rate on a normative level of working capital.

The fixed expenses calculated in the above manner for each year covered by the tariff period of 5 years are aggregated and average annual tariffs arrived at. These are payable collectively by the SEBs on a monthly basis at 1/12th of the annual fixed expenses.

Elements of fixed charges are further elaborated in Table 1.
Details of incentives and disincentives are indicated in Table 2.

3. The calculation of variable charges was based on normative parameters for Station Heat Rate, Auxiliary Consumption and Specific Secondary Fuel Oil which were different for different technologies; The variable charge consists of only fuel costs

a) Cost of primary fuel like coal, oil or gas;
b) Cost of secondary fuel oil.

Auxiliary Electricity Consumption indirectly affects the fuel cost recovery and hence was also prescribed.
Norms & Elements of variable charges are further elaborated in Table 3.

4. The norms prescribed by the KPRC for variable charges were differentiated on the basis of technology and hence provide correct signals to the generators (of each fuel type and technology) for reducing their variable costs. However such cost savings were not passed on to the consumers. On the other hand generating companies seeing the opportunities of self-dispatch continued to maximize the generation, sales and the profits at the cost of grid indiscipline.

5. These norms were subsequently adopted by GoI but were not reviewed from time to time as recommended by the KPRC report.

Tariff for Central Hydro Generating Stations

1. The fixed costs were proposed to be calculated as per those of the thermal stations.

2. The report states that since the incremental cost of generating hydro power is zero, all attempts should be made to absorb hydro power on a 100% basis, by backing down other forms of generation of power.

3. The report further proposes to treat hydro power stations as multi-product firms, where power from such plants is priced differently during peak and off-peak periods and during periods when water supply is surplus and when it has to be released for irrigation purposes.

4. Though these recommendations send signals for optimal and sustainable integration of hydro resources with the rest of the systems, these were not notified by GoI for Central Hydro Stations.

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