Sterlite Industries (India) Limited - Sterlite Industries India Ltd.

Power Trading
Power trading takes place between suppliers with surplus capacity and areas with deficits. Recent regulatory developments include the
announcement of rules and provisions for open access and licensing related to interstate trading in electricity to promote competition. Several
entities, including PTC India Limited (formerly Power Trading Corporation of India Limited), NTPC’s subsidiary, NTPC Vidyut Vyapar
Nigam Limited, and Tata Power Trading Company Private Limited have started trading operations or have applied for trading licenses.
Tariff Setting
Until the end of 2005, the tariff regime in India for all electricity generators was regulated and determined by either the Central Electricity
Regulatory Commission, or CERC, or the State Electricity Regulatory Commissions that set the tariff on a cost-plus basis consisting of a
capacity charge, a variable energy charge and an unscheduled interchange charge. The tariff regime guaranteed a fixed return on equity to the
generators and treated all costs as pass through in the tariff.
In order to improve efficiency and provide cheaper electricity cost to consumers and at the same time attract adequate investments and
accelerate development in the power sector, the Government of India notified the NTP in January 2006 with the key objectives of:
• ensuring availability of electricity to consumers at reasonable and competitive rates;
• promoting transparency, consistency and predictability in regulatory approvals across jurisdictions and minimising the perception of
regulatory risks; and
• promoting competition, efficiency in operations and improvement in quality of supply.
To achieve these objectives, the NTP mandated that power procurement for future requirements by all distribution licensees should be
through a transparent competitive bidding mechanism using the Guidelines for Determination of Tariff by Bidding Process for Procurement of
Power by Distribution Licensees, dated January 19, 2005, issued by the Ministry of Power of the Government of India. Further, to facilitate a
transparent competitive bidding mechanism, an availability-based tariff mechanism has also been introduced whereby the electricity tariffs are
split into two parts comprising a fixed capacity charge and a variable energy charge. The fixed cost elements like interest on loans, return on
equity, depreciation, operations and maintenance expenses, insurance, taxes and interest on working capital are covered by the capacity charge.
The variable cost (that is, fuel cost) of the power plant for generating energy is covered by the energy charge.
The NTP also provides that power purchase agreements should ensure adequate and bankable payment security arrangements like letters of
credit and escrow of cash flows for the benefit of the generating companies. In case of persisting default, generating companies may sell power
to other buyers.
Government Initiatives
Historically, management of the power sector by SEBs was driven by local populist politics that caused the financial health of central and
state utilities to deteriorate, which led to under-investment, continued loss and theft and cash leakage. In response, the Government of India
launched a combination of regulatory and development initiatives which, among other measures, made anti-theft laws more stringent,
prohibited unfunded subsidies and required 100% metering in all states.
Initiatives have also been introduced to address poor transmissions and distributions infrastructure and dilapidated metering systems. These
initiatives include concessional loans from the Government of India to fund up to half the costs of state transmissions and distributions projects
and incentive payments to the states linked to the reduction in annual cash losses of the SEBs.
The Accelerated Power Development and Reform Program, or APDRP, was implemented to accelerate reforms in the distribution sector by
giving incentives and loans to state utilities to reduce Aggregate Technical and Commercial losses and outage interruptions. The APDRP has
not been as successful as was initially planned. The Ministry of Finance has finalized a new APDRP, the Re-Structured Accelerated Power
Development and Reform Program, or R-APDRP. The focus of the R-APDRP is on actual, demonstrable performance in terms of sustained
loss reduction. Establishment of reliable and automated systems for sustained collection of accurate base line data, and the adoption of
information technology in the areas of energy accounting, will be essential before taking up distribution strengthening projects. The R-APDRP
is intended to cover urban areas, towns and cities with populations of over 30,000 people (10,000 in the case of special category states). In
addition, in certain dense rural areas with significant loads, works of separation of agricultural feeders from domestic and industrial feeders and
of high voltage distribution systems (11 kilovolt) will also be taken up.
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