New charging method for electricity transmission

By Sakya Singha Chaudhuri and Aditya Kapoor, Trilegal
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The Central Electricity Regulatory Commission (CERC) recently notified the CERC (Sharing of Inter State Transmission Charges and Losses) Regulations, 2010, which comes into effect from January 2011. Under the regulations, a new method for determination of transmission charges for the national grid, namely, point of connection (PoC) method has been introduced, to gradually replace the prevailing regional postage stamp (RPS) method. The PoC method will require existing transmission service agreements to be realigned in line with the regulations, thereby affecting certain vital areas like cash flow management and payment security mechanism.

Sakya Singha Chaudhuri Counsel Trilegal
Sakya Singha Chaudhuri
Counsel
Trilegal

PoC v RPS

Under the RPS method, transmission charges and losses are shared on a regional pooled basis by all states in a particular region, based on the proportion of power drawn through the inter-state transmission system (ISTS). A state or utility situated in one region, buying power from another region, has to bear the proportionate transmission charges and losses of such region, regardless of the distance and direction of power flow.

The PoC method aims to distribute the cost of the entire transmission system among its users (designated ISTS customers or DICs), in proportion to their respective utilization of the transmission system. DICs include generating companies, state transmission utilities (STU) and any other customer connected to the high tension national grid. The PoC method takes into account the distance and direction of power flow, while calculating charges for DICs.

How does the PoC work?

For calculating transmission charges, each generation and load centre has been identified as a node under the PoC method. Since the grid is an integrated mesh of transmission lines, the physical paths through which the electricity generated by a generating station or load consumed by a load centre is transmitted are identified using the average participation method.

Further, the marginal participation method is then applied to identify how the flow in the grid is modified by a minor change in the load flow. Based on the results of the load flow study, the transmission charges are proportionately divided among DICs. The charges for the generating companies are payable by its long-term beneficiaries.

On the transmission side, companies are required to indicate the cost of the transmission lines set up or maintained by them. The yearly transmission charges are then worked out on a weighted average basis and recoved from DICs and distributed to the companies.

Change of guard

The regulations usher in important changes in the operation of transmission systems. While transmission companies under the RPS method entered into transmission service agreements with specific identified beneficiaries, the new method obliterates such one-to-one relationships, and ties in all DICs and transmission companies under a uniform transmission service agreement.

Aditya Kapoor Associate Trilegal
Aditya Kapoor
Associate
Trilegal

As a consequence, the transmission companies will not be dealing with identified counter-parties as beneficiaries. They will be required to set up, operate and maintain transmission systems for which they will be paid by the Central Transmission Utility (CTU). It will be the CTU which will be completely responsible for the invoicing and collection of transmission charges from DICs and disbursing the same to transmission companies. The transmission companies will have no control over billing and recovery of transmission charges. Consequently, all payment security mechanisms will be held by the CTU, and not by transmission companies.

Issues

The new regulations leave a few loose ends in the implementation of the PoC method and recovery of transmission charges. The regulations do not indicate the procedure for transmission companies to raise disputes regarding the metering and invoicing of their services. Since the PoC method works on a pooled basis, any default in payment by any DIC (irrespective of region) will proportionately reduce the disbursement to all transmission companies.

Further, it is unclear how payment security mechanisms will be effected against utilities that are not DICs but are connected to the national grid through STUs. The regulation also does not provide for any payment security to the transmission licensees for recovery of some of the additional charges from DICs, and which are not covered by payment security mechanisms.

The Indian transmission sector is looking at private sector participation in a big way to expand and strengthen the inter-state transmission system. However, private participation will depend on the willingness of financial institutions to invest in transmission projects. It remains to be seen how the financial institutions react to the new regulations for financing existing and future transmission projects.

Sakya Singha Chaudhuri is a counsel in the Delhi office of Trilegal where Aditya Kapoor is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.

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