Transcript Implementation of Multi-Year Tariff framework Contents of the presentation  Issues to address in design of multiyear tariff (MYT) frameworks  Alternative frameworks.

Implementation of Multi-Year
Tariff framework
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Contents of the presentation
 Issues to address in design of multiyear tariff (MYT) frameworks
 Alternative frameworks of MYT for
Uttar Pradesh
 Selecting the appropriate framework
 Implementation aspects
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What an MYT framework intends to
achieve
•
Determine framework for regulating the utilities for a period of time,
– Principles of regulation of returns/profits of utilities
– Principles of regulating individual cost and revenue elements
– Degree of regulation on an ongoing basis
•
•
•
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Incentivise utilities to become more efficient in operations
Mitigate risks that are external to the utilities
Make the sector financially liquid
Introduce efficient tariff design
MYT is recognised to be a key for private sector participation since it reduces
regulatory risks very significantly. However even for public utilities it brings
about clarity on regulatory principles and incentivises efficient behaviour
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Background
Conceptual Inter-play Between Sector
Development and Strategy
Scenario B Incentive payments
Scenario B Losses
Scenario B Price
Scenario A Price
Scenario A Incentive payments
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Cost
Background
Financial Viability and Economic Efficiency of
the Sector is at Risk
• Licensees face a number of financial risks holding back private
investment
 Tariffs are not reflective of costs
 Efficiency incentives may not have been grafted adequately and explicitly into the
existing single-year regulatory framework
• Existing single-year approach to regulation is not mitigating risk
 Gap between costs and revenues too large to bridge in single year
 Certainty on revenue and tariff determination principles not assured
• Efficiency improvement targets are failing to achieve meaningful
results
• These problems can only be remedied gradually - therefore the
design of the starting point and the transition phase is crucial.
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Background
Issues for Evaluation of MYT framework
• Selection of appropriate framework from the options available
– Performance based regulation (Price caps/Revenue Caps)
– Reference Utility framework
– Target based regulation
• Risk mitigation framework
– Identification of “controllable” and “uncontrollable” elements
– Mechanisms for addressing risks
• Determining key elements for regulation
– Tariffs
– Quality of service
– Key cost elements (system losses, collections, investments, procurement, etc)
• Credibility of the regulatory process/extent of regulatory intervention
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Selecting appropriate framework
The framework selected has to address
the critical issues in Uttar Pradesh
• Utility operations are currently inefficient
• Significant improvements are possible by addressing certain specific
elements like system losses, collections, efficiency of investments
• Institutional capabilities in the Licensees are low. Framework needs to
help utilities understand where and how to focus
• Data availability is poor and needs to be improved for improved utility
performance and effective regulation
• Understanding of regulatory principles is low among Licensees – need
to clearly lay out the principles and accord them the necessary
certainty
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Selecting appropriate framework
The implementation of the framework
has to address the provisions of UPERA
due to which…
• It may not be possible to ‘set’ tariffs for more than one
year period; and
• The licensees have to continue to adhere to an annual
filing process
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Selecting appropriate framework
Options on MYT
Option
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Description
Performance based
regulation (PBR)
• Characterised by RPI-X+Y formula
• Base cost set at beginning of control period (3-7 yrs
ordinarily) based on historical cost data
• Efficiency gains/losses to account of utility
• Pass through of external costs (Y) allowed
Reference Utility
regulation
• Based on forward looking (incremental) cost framework
• Hypothetical “ideal” utility modelled based on load and
generation configuration for control period (upto 10 years)
• Tariffs for “ideal” utility set in advance and subject to only a
few pass through elements (primarily fuel)
Target based
regulation
• Specific targets set for important operating elements (e.g.
losses, collections, quality of service) for control period
• All other cost elements subject to normal cost-plus regulation
• Improvements on targets to account of utility or shared with
consumers and vice-versa
Selecting appropriate framework
Evaluation of MYT framework for Uttar
Pradesh
Criteria
PBR
Reference
Utility
Targeted
Incentives
Power of incentives
High
High
Medium
Degree of regulatory
intervention
Low
Low
High
Data requirement for
framework design
High
Medium
Medium
Measurement requirements for
implementation
Low
Low
Med/High
Ease of understanding/
institutional capability reqd.
Medium
Low
High
Identified focus on critical
issues
Medium
Low
High
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Appropriate MYT design in the context of
the current proceedings
• From an MYT perspective the current proceedings need to address the
following issues
– The Order should incentivise efficient utility operations across a multi-year
period. The philosophy of incentivisation/disincentivisation needs to be clearly
articulated
– The Order should clearly identify the elements for which the utilities can be
held responsible. Conversely the utilities should be protected from any risks
that are external to their business
– The process of regulatory review of utility performance in the coming years
needs to be clearly laid out in the Order
• Key process issues that need to be addressed include,
– Mechanism and periodicity of review
– Mechanisms/information systems for measurement of performance
– Administration of the incentives/disincentives
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Developing a selection criteria to choose
the right elements is critical for MYT
Measurability
Measurability of the
element around
which incentivisation
will be planned is
important for design
and correct
implementation.
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Materiality
Risk mitigation
mechanisms
become necessary
around those
elements that have
the potential to
significantly affect
the performance of
the utility
Controllability
The element will
need to be
controllable to the
utility to enable them
to beat regulatory
targets
Predictability
The element will
need to be
predictable because
the ability to
determine a prudent
level of regulatory
target is crucial for
the incentivisation
process
Typical cost Profile of Distribution
Utilities
• Bulk Supply Cost
– Power purchase cost of units
sold by the licensee
– Power purchase costs of units
bought by the licensee to cover
system loss
• Operating Costs
– Network costs
• Employee expenses
• R&M expenses
• A&G & Other expenses
– Financing costs
• Interest cost
• Reasonable return
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Network Cost
14%
Financing Cost
4%
Power Purchase
Cost
63%
Loss
19%
Identification of the element for
incentivisation plan
Measurability
Materiality
Controllability
Predictability
Element
Unit Cost of
Power
System Loss
High
High
Low
Medium
Medium
High
High
High
Network costs
High
Medium
High
Medium
Interest cost on
LT loans
Level of
Receivables
Quality of
Service
Customer Mix
High
Low
Low
Medium
High
High
High
High
Low
High
High
Medium
Medium
High
Low
Medium
Quantity of
Sale of Power
Medium
High
Low
Medium
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Identification of the elements have to be
followed by a suitable incentivisation
process
Structuring of the incentivisation is a decision which
will have to take into account
– the adequacy of the reasonable return to absorb adverse
variations of cost elements
– need for a minimum size of the incentives to induce utilities
towards exceeding regulatory targets set at the start of the year
– the mechanism in which financial risk / benefits are shared
between the utility and the consumer
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Open Ended Incentivisation Scheme
Regulatory
target levels
set at the
beginning of the
year
Higher risk
and
Higher gain
Adverse
Performance
Loss
Benefits
Superior
Performance
In an open-ended design, the entire financial benefit (or loss) arising out of
superior (or adverse) performance is retained (or absorbed) by the utility
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Closed Ended Incentivisation Scheme
Regulatory
target levels
set at the
beginning of the
year
Lower risk
and
Lower gain
Adverse
Performance
Total
Loss
Extent of
benefit
distribute
d back to
the
consumer
Total
Benefit
Superior
Performance
Extent of
benefit
retained
by the
utility
In a closed-ended design, the total financial benefit (or loss) arising out of
superior (or adverse) performance is shared (or absorbed) by means of a
pre-determined formula between the utility and the consumer
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UPERC has already made some moves
towards a long term framework
• Multi-year trajectories have been established for system losses and
collection efficiency for UPPCL
• A comprehensive power purchase true-up process has been put in
place
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UPERC has already made some moves
towards a long term framework
• However the accompanying mechanisms and implementation
processes need to be put in place
–
–
–
–
–
Measurement mechanisms not identified clearly
Review process (during and after the year) not specified
Incentives/disincentives not defined
Treatment of other cost and revenue elements need to be firmed up
Certain aspects of cost definition need review
• Cost-to-serve study, a fundamental instrument for regulation is not yet
in place
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UPERC also needs to establish the
future framework of MYT regulation
• As the utilities gain experience in commercial operation and functioning
under regulatory oversight, the framework needs to be advanced to a
more powerful and less intrusive framework of regulation
• The new Act prescribes MYT and the National Electricity Policy and
Tariff policy is likely to provide implementation options
• Multi-year tariff philosophy and a blue-print for future implementation
needs to be put in place. Consultation needs to commence soon – if
possible the initiation can happen through the forthcoming orders
• Mechanisms for improved data discovery need to be emphasised
upon, and incentivised if feasible
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