Draft CERC Tariff Regulations 2024 Quiz

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Questions and Answers

How does the proposed definition of new projects affect the calculation of Interest on Loan (IoL)?

The proposed definition complicates IoL calculations by requiring different methods based on the loan portfolios for various assets within the same project.

What is the impact of maintaining different tariff norms for projects approved before and after April 1, 2024?

Maintaining different tariff norms increases regulatory complexity, as it necessitates ongoing differentiation between projects for tariff determination.

What is the significance of the date April 1, 2024, in the context of Return on Equity (RoE) and tariff determination?

April 1, 2024, marks the cutoff for applying new tariff norms to projects, affecting those whose investment approvals were granted before this date.

How is Return on Equity (RoE) computed according to the Draft CERC Tariff Regulations, 2024?

RoE is computed in rupee terms on the equity base determined in accordance with Regulation 18 of the regulations. Signup and view all the answers

Why is it recommended that different tariff norms should apply based on the Investment Approval date?

This recommendation aims to simplify the regulatory process and provide clarity in tariff determination for both new and existing projects. Signup and view all the answers

What is the base rate of Return on Equity (RoE) for existing thermal generating stations?

15.50% Signup and view all the answers

What RoE is proposed for new storage type hydro generating stations achieving COD on or after 01.04.2024?

17.00% Signup and view all the answers

Why has the rate of RoE for existing projects been maintained at 15.5%?

To maintain regulatory certainty and investor confidence in the power sector. Signup and view all the answers

What is the proposed RoE for new transmission systems including communication systems?

15.00% Signup and view all the answers

What concern is raised regarding the proposed RoE for new projects?

It is insufficient to meet the growing investment needs and risks in Transmission. Signup and view all the answers

What rate of RoE applies to run-of-river hydro generating stations under existing projects?

15.50% Signup and view all the answers

How does the proposed RoE for new projects compare with that of existing projects?

It is lower, with existing projects at 15.5% and new projects proposed at 15.0%. Signup and view all the answers

What is the significance of maintaining the RoE rate during the transition phase of the power sector?

It helps avoid regulatory uncertainty and fosters growth and investment in renewable energy. Signup and view all the answers

What is the primary purpose of allowing utilities to earn a reasonable return on their investments?

To compensate for the investment-related risks undertaken by the utilities. Signup and view all the answers

How is the rate of Return on Equity (ROE) determined according to the content?

It is determined based on the assessment of overall risk and the prevalent cost of capital. Signup and view all the answers

What impact does a delay in the construction of power projects have on effective Return on Equity?

A delay reduces the effective Return on Equity, as no return is allowed during the construction period. Signup and view all the answers

What does Para 5.8.4 of NEP, 2005 argue regarding Return on Investment?

It states that ROE should attract adequate investments comparable to other sectors. Signup and view all the answers

What happens to the effective rate of return if a project experiences a delay of one year?

The effective rate of return decreases from 12.88% to 11.99%. Signup and view all the answers

Why is there no Return on Equity allowed during the construction period for projects?

Because the regulatory framework does not permit ROE compensation during this phase. Signup and view all the answers

How does the principle of opportunity cost apply to Return on Equity in the transmission sector?

Investors expect returns that are comparable to those from alternate investments with similar risks. Signup and view all the answers

What challenges may contribute to delays in the construction period affecting Return on Equity?

Challenges such as Right of Way (RoW) issues and complex topography can lead to delays. Signup and view all the answers

Study Notes

Central Electricity Regulatory Commission (CERC) (Terms and Conditions of Tariff) Regulations, 2024

Power Grid Corporation of India Limited submitted comments on the draft regulations
Key topics covered in the submissions included: Force Majeure, Implementation Agreement, Operations & Maintenance Expenses, Original project cost, Rated Voltage, Reference Rate of Interest, Useful life of UNMS, Carrying Cost, Procedure for Tariff Determination, Capital Structure, Computation of Additional Capital Expenditure, Computation of Annual Fixed Cost, Norms for New Transmission Projects, Return on Equity, and more.
The document contains numerous specific suggestions for amending the draft regulations, aiming for clarity, accuracy, and practical application.

Force Majeure

CERC defines Force Majeure events as circumstances beyond normal statistical and historical observations, including exceptional weather conditions or Acts of God.
The submissions suggest amending the regulation to a more realistic reference such as events exceeding 20-30% of average conditions over the last 10 years instead of just the last 100 years
Suggestions include incorporating local/regional disturbances as Force Majeure, to provide for circumstances and/or delays beyond the control of the licensee.
Consideration of Pandemics like COVID-19 and Cyber-attacks as Force Majeure.

Implementation Agreement

The term "Implementation Agreement" is not used in the proposed regulations, and the submission recommends removing the term.

Operation & Maintenance Expenses

The definition of O&M expenses proposed to include additional capital expenditure of an individual asset costing up to Rs.20 lakhs. The submission recommends that such expenditure should be considered under "Additional Capitalization" rather than O&M expenses.

Original Project Cost

The submission recommends deleting the qualifying phrase "up to the cut-off date" from the definition of "Original Project Cost" to accommodate expenditure that may be incurred for issues such as Court cases, arbitration outcomes, or contract closing issues arising even after the cutoff date.

Rated Voltage

The document advises amending the Regulation to use "Customer Transmission Utiliy Line" (CTUIL) instead of "long-term customers" in the definition of "Rated Voltage"

Useful Life

Useful life of assets like OPGW, HVAC & HVDC lines and other equipment is defined.
The submission proposes maintaining the current useful life definitions, which are in the existing regulation.

Reference Rate of Interest

The draft regulation defines the reference rate of interest.
The comments suggest continuing the current reference rate of SBI MCLR + 350 basis points instead of using 325 basis points.

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Description

Test your understanding of the Draft CERC Tariff Regulations 2024 and its implications on interest calculations and Return on Equity (RoE). This quiz covers key aspects such as tariff norms, investment approval dates, and rates of RoE for various types of generating stations. Engage with questions about how these regulations impact project financing and energy tariffs.