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Indian Power
Only regulators have the power to cap prices and only for
a limited period
We see no merit in recent reports claiming there are plans to
cap power tariffs for projects with captive mines
As per the Electricity Act, only regulators have the power to
put a price ceiling in certain circumstances and for short
durations to ensure reasonable electricity prices
Historically, only once has CERC capped prices and only under
short-term trades for 45 days, independent of fuel source
We see no merit in recent news reports (see Business Standard dated 22 January 2012)
regarding the Power Ministry capping the price of power generated using captive coal for the
following reasons:
1. Deciding tariffs and fixing a ceiling is the responsibility of the regulator or the
appropriate commission. Under the Electricity Act 2003, only the regulator or the
appropriate commission has the power to determine tariffs, including approving
tariffs determined through price-based bidding (Section 63, see page 2).
2. Neither the ministry nor state government has any authority to determine tariffs
(either bulk or retail) or fix a ceiling. There have been numerous instances of the
government intervening in fixing retail tariffs, which were rejected by the courts in
India, highlighting the power of the regulators.
3. Under the Act, the appropriate commission can only fix the minimum and maximum
ceiling of a tariff in cases of an electricity supply shortage and for a period not
exceeding one year to ensure reasonable electricity prices. This is irrespective of the
source of generation.
4. There is no provision for selective capping of power prices based on source of
generation, if that were the case, a ceiling can potentially be fixed on hydro power,
which is relatively the cheapest source of power in India.
Historically, only once in the past, in 2009, has CERC put a cap on the short-term tariff
rate at INR8 per unit for a period of 45 days applicable to all inter-state, day-ahead
transactions by exercising its powers under Section 62 of the Electricity Act, 2003 (see
text of the Act on page 2). The reason it initiated this regulatory intervention was because
of the steep increase in short-term power prices owing to an electricity supply shortage
(abnormally high prices at INR14-18 per unit at that time) to ensure consumers’ interests.
CERC’s order of fixing cap also mentioned that the commission is equally conscious of its
statutory obligation to ensure a reasonable return for investors in the sector and assure that
their long-term interests, future investment plans and a reasonable rate of return are
among the considerations kept in mind when arriving at the caps.
Excerpts of Section 62 of Electricity Act, 2003 – 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 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.
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.
Excerpts of Section 63 of Electricity Act, 2003 – Determination of tariff by bidding process
Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such
tariff has been determined through transparent process of bidding in accordance with the guidelines issued by
the Central Government.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Power
Only regulators have the power to cap prices and only for
a limited period
We see no merit in recent reports claiming there are plans to
cap power tariffs for projects with captive mines
As per the Electricity Act, only regulators have the power to
put a price ceiling in certain circumstances and for short
durations to ensure reasonable electricity prices
Historically, only once has CERC capped prices and only under
short-term trades for 45 days, independent of fuel source
We see no merit in recent news reports (see Business Standard dated 22 January 2012)
regarding the Power Ministry capping the price of power generated using captive coal for the
following reasons:
1. Deciding tariffs and fixing a ceiling is the responsibility of the regulator or the
appropriate commission. Under the Electricity Act 2003, only the regulator or the
appropriate commission has the power to determine tariffs, including approving
tariffs determined through price-based bidding (Section 63, see page 2).
2. Neither the ministry nor state government has any authority to determine tariffs
(either bulk or retail) or fix a ceiling. There have been numerous instances of the
government intervening in fixing retail tariffs, which were rejected by the courts in
India, highlighting the power of the regulators.
3. Under the Act, the appropriate commission can only fix the minimum and maximum
ceiling of a tariff in cases of an electricity supply shortage and for a period not
exceeding one year to ensure reasonable electricity prices. This is irrespective of the
source of generation.
4. There is no provision for selective capping of power prices based on source of
generation, if that were the case, a ceiling can potentially be fixed on hydro power,
which is relatively the cheapest source of power in India.
Historically, only once in the past, in 2009, has CERC put a cap on the short-term tariff
rate at INR8 per unit for a period of 45 days applicable to all inter-state, day-ahead
transactions by exercising its powers under Section 62 of the Electricity Act, 2003 (see
text of the Act on page 2). The reason it initiated this regulatory intervention was because
of the steep increase in short-term power prices owing to an electricity supply shortage
(abnormally high prices at INR14-18 per unit at that time) to ensure consumers’ interests.
CERC’s order of fixing cap also mentioned that the commission is equally conscious of its
statutory obligation to ensure a reasonable return for investors in the sector and assure that
their long-term interests, future investment plans and a reasonable rate of return are
among the considerations kept in mind when arriving at the caps.
Excerpts of Section 62 of Electricity Act, 2003 – 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 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.
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.
Excerpts of Section 63 of Electricity Act, 2003 – Determination of tariff by bidding process
Notwithstanding anything contained in section 62, the Appropriate Commission shall adopt the tariff if such
tariff has been determined through transparent process of bidding in accordance with the guidelines issued by
the Central Government.
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