With a view to ensuring that promoters source funds at optimum cost, the Central Electricity Regulatory Commission has asked the Industrial Development Bank of India to work out the broad guidelines for using the return-on-capital-employed approach to determine power tariffs.

Tariffs are now set by factoring in both the return on equity and the interest on loans.

The move to ask the IDBI to submit a proposal on the merits of having a single rate of return for the calculation of tariffs and suggestions on the rate itself followed a meeting of the CERC's Central Advisory Committee on July 18.

The meeting was attended by P P Vora, chairman of the IDBI, C P Jain, chairman and managing director of the National Thermal Power Corporation, Anil Ambani, vice-chairman and managing director of Reliance, Phiroz Vandrevala of Tata Power and representatives from industry chambers and consumer groups.

In the build-up to setting new tariff norms for central power utilities and inter-state private projects, the CERC had asked the various stakeholders to comment on improvements to be brought about in the existing tariff norms.

Some of the suggestions received have already been incorporated in the discussion paper floated by the CERC and will be formulated under the "terms and conditions of tariff order" for central utilities from April 1, 2004.

The advantage of determining tariffs based on a single rate for return-on-capital-employed over having two separate rates for interest on loan and return on equity is one of the suggestions received from stakeholders.

The benefit of having just one rate of total investment, say a 12 per cent on return-on-capital-employed, rather than having a 16 per cent return on equity and a separate rate of interest on loans to be passed on to the tariffs, is expected to force promoters of projects to rethink the financing structure, including the debt-equity ratio and the rate at which they source the debt portion.

At present, the 16 per cent return on equity and the interest on loans are passed on to the tariffs, giving promoters the luxury to source loans at relatively high rates of interest.

"The committee stressed the need for simplicity of regulation, uniformity in orders of the central and state regulatory commissions and speedy disposal of orders," CERC Chairman A K Basu said.

On other parameters of tariff fixation, the committee advised the CERC on retaining the present three-year tariff period and allowing operational and maintenance expenses to utilities to recover only 'prudent costs,' he said.

In the responses submitted to the CERC by stakeholders earlier, the option of changing over from the present system of a three-year tariff regime to a four-, five- or 10-year one was suggested.

There was also a suggestion on the need to have a one-time tariff and indexing of financial parameters like return on investments to the annual inflationary trend.

The rate factor

• Tariffs are now set by factoring in both the return on equity and the interest on loans.
• CERC had asked stakeholders to comment on improvements to be brought about in the existing tariff norms.
• The benefit of having one rate of total investment rather than a return on equity and a separate rate of interest on loans can force promoters to rethink the financing structure.