Events in 1991
In 1991, under new policies announced by the
Govt. of India, additional private sector participation was allowed in the power
sector.
1.
Policy
and legal Background:
In order to effectuate the policy of attracting private investment to the power
sector, the Electricity (Supply) Act, 1948 (hereinafter referred to as ‘the
Act’) was extensively amended with effect from October 1991 specifically
keeping in view the policy changes.
The act mandated the Central electricity Authority (CEA) to evaluate
proposed power projects from a technical and economic angle and to examine the
tariff structure. This concurrence is referred to as a `techno-economic'
clearance.
The Act further, specifically extended the scope of private sector
participation by allowing private sector generating companies to enter into
agreements for the sale of electricity by the generating company to the State
Electricity Boards (Boards) with
the addition of S. 43A to the amended Act. The Act however mandated that the
tariff for such sale would be in accordance with norms set down thereunder. A
notification set out these mandatory norms for computing tariff for the sale of
Electricity by a generation company to the Board.
Whilst the Act envisaged that the CEA would examine and evaluate various
economic aspects of the matter, including reasonableness of tariff, capital
costs, the financial package (the amount of debt, the rates of interest and
repayment schedule), the notifications, inter alia envisaged that capital costs
and the financial package required
specific approval and were to be
set out in the concurrence/clearance. These were essential elements of the `cost
plus fixed return plus incentive' basis
of tariff fixation adopted by the Act. Fuel costs were to be a pass through to
the boards at actuals. These fixed costs and fuel costs plus returns
The primary variable factors determining fixed costs and therefore costs
to the board and the consumer are the capital cost of the project and also the
financial package.
A critical examination and approval by the CEA of capital costs and the financial package is mandated by the Act and the honest and fair examination by the CEA was, therefore the only protection granted to the public under the Act.