Tamil Nadu passed its latest tariff order on 9th September, 2022. It is important that consumers understand this order, both to check their bills and to make required changes in their usage of devices/ selection of devices. The latter is especially important because the new changes have created special challenges for consumers in terms of tackling energy bills and conserving electricity. In this series we simplify the new tariff order and break it down for consumers’ ease of understanding.
To adequately understand why this increase occurred we need to begin with the tariff determination process. There is a legal/regulatory process undertaken by Tamil Nadu Generation and Distribution Corporation (TANGEDCO) to propose new tariffs. These are enforceable when they are passed by the Tamil Nadu Electricity Regulatory Commission (TNERC) as “tariff orders”. TNERC is a statutory body constituted by the Government of Tamil Nadu and discharges its functions as mentioned in the Electricity Act, 2003. Amongst other roles, TNERC plays a vital role in determining the tariff rate for all the consumer categories (refer to Section 86 of the Electricity Act, 2003) .
What is an electricity tariff?
Tariff means the price paid for a particular service. Electricity tariff is the price paid by the consumer for their consumption of electricity. This is a variable charge collected based on the number of units consumed in a particular billing period. This charge also varies with each category of consumers. (Domestic consumers typically pay different tariff rates compared to commercial and industrial consumers.)
TANGEDCO provides the power supply to its electricity consumers, and calculates the supply of electricity in Kwh (Kilowatt per hour) basis for various consumer categories.
Why is an electricity tariff needed ?
Tariff is collected from consumers to recover costs incurred by the utilities for generation, transmission, distribution and other expenses related to electricity, to ensure uninterrupted supply of electricity. Annually, TANGEDCO submits the aggregate revenue requirement, which contains the expenses and revenues for the financial year. This is submitted along with the tariff application to compute the costs involved. There are comprehensive legal frameworks in place to determine tariff rates for consumers.
Legal provisions that govern tariff
Under Section 61 of the Act, TNERC (Terms and Conditions for Determination of Tariff) Regulations, 2005 and Tariff Policy, 2016 the principles that should govern regulations providing the determination of tariff are enshrined. The tariff should be fixed by taking into account the commercial principles of ensuring optimal returns for the utility and consumer friendly pricing. Furthermore, all the factors that will support competition, investment and efficiency in the electricity sector are quintessential to fix a tariff. Therefore, there must be a balance between the interest of the consumer and recovery by the utility.
Another important guideline is the Multi Year Tariff (MYT) principles. These are a framework for regulating the licensees over a period of time wherein the principles of regulating the returns/profits of licensees and the trajectory of cost and revenue of the utility are determined in advance. Through this, all stakeholders are made aware of the outcome of various actions/events for a specified period and can plan accordingly. TNERC Regulations provide a limit for the tariff to any category of consumers which must be within 50% to 150% of the cost of supply. Apart from these guiding principles, cost components are utilised to arrive at the final tariff.
Factors that influence tariff
The tariff determination process by TNERC takes into consideration all cost components:
- Power procurement from the generation companies - the cost at which the supplier bought power from the generating company.
- Transmission charges - the cost required to transfer electricity from the generating plants to substations, to supply electricity.
- Distribution charges - the cost required to distribute the electricity from the substations, to the consumers.
- Operating and maintenance cost - which is the expenditure incurred for operation and maintenance of the generating plant, or part thereof of the transmission system or distribution system. This also includes the expenditure on employee cost, repair and maintenance, administration and general expenses.
- Depreciation, interest, and return on equity.
These parameters are used to determine energy charges and fixed/ demand charges for various consumer categories.
Determination of tariff
As described under Sec. 62 of the Act, the Commission is given the power to decide the tariff. Let us briefly discuss this. The Section specifies that the Commission determines the tariff for the following categories:
- Generation: ‘Generation’ means to produce electricity from a generating station for supplying to other parties
- Transmission: This is the transporting of electricity from generating station to substation, by means of power lines. These are high voltage power lines maintained by Tamil Nadu Transmission Corporation Limited (TANTRANSCO)
- Supply of electricity: This is the charges collected by a generating company to supply electricity to distribution licensee, like TANGEDCO
- Wheeling of electricity: Wheeling means the operation whereby electricity is transported using the pre-existing system for distribution, typically run by a utility. These charges are applicable for the consumer who uses power generated by a third party, at a voltage below 66 kV.
- Retail sale of electricity: It is the sale of electricity to the consumer (end user)
The Commission directs the licensee to submit specific and separate details of generation, transmission and distribution of electricity. These are necessary for the Commission to determine tariffs. The Commission has to remain unbiased towards all consumers while determining their tariff. Nevertheless it can consider total consumption, voltage, etc to differentiate tariff. The Commission must also strive to refrain from amending tariffs more than once in a financial year. The Commission provides a permitted procedure for utilities to calculate revenue from the tariff and also set charges that can be recovered. Anything collected by the utility, in excess of the costs and charges determined by the Commission, is recoverable by the consumer with interest.
Procedure adopted to revise tariff:
Sec.64 of the Electricity Act and TNERC (Terms and Conditions for Determination of Tariff) Regulations, 2005 provide the mechanism to pass a new tariff order i.e, to revise tariff charges. Let us discuss this process:
- TANGEDCO submits the Aggregate Revenue Requirement (ARR) along with the tariff application to the TNERC. ARR is the revenue required to meet the costs pertaining to the licensed business for a financial year, which would be permitted by the Commission to be recovered through tariffs and charges.
- The applicant shall publish, for the information of the public, contents of the application in an abridged form in English and Tamil newspapers having wide circulation and as per the direction of the Commission in this regard.
- The copies of petition and documents filed with the Commission shall also be made available at a nominal price, besides being made available on the TANGEDCO website.
- The power to conduct hearings is given under the TNERC Conduct of Business Regulations. Typically, TNERC conducts public hearings for the consumers to convey their opinion on the petition and convey any grievances. For this tariff order, three public hearings were held in Madurai, Coimbatore and Chennai. Any consumer can attend such a hearing and is given a chance to express their concerns.
- Apart from this, the Commission provides sufficient time to stakeholders for submission of written comments and suggestions on the petition filed by TANGEDCO. Please see CAG’s comments on the latest Tariff order (Order No. 7 in T.P. No.1) and Non-Tariff related Miscellaneous Charges order, sent to TNERC during this stage of the petition. These submissions along with TNERC’s ruling on each of them are attached to the final order.
- Finally, within 120 days from the date of receiving the application, after consideration of all the submissions, TNERC shall decide the matter. It can either:
- Reject the application by recording the reasons for rejection. An applicant must be given a reasonable opportunity to be heard before rejection of the application; or,
- It can pass the order. Within 7 days of passing the order, copies of the same must be sent to appropriate authorities and concerned persons.
- A tariff order’s tenure is five years, according to the latest multi-year tariff policy passed in 2022. Thus, once in five years a new tariff petition is submitted.
In the next part of this blog, we will be discussing the various tariff categories and rates payable for domestic consumers. We will also discuss the new common connection tariff category, which is applicable for domestic consumers.