The Central Electricity Regulatory Commission on Monday fixed 14 per cent return on equity on all power projects and said that all future projects in generation, transmission and distribution would be structured through a tariff-based competitive bidding process.

Announcing the new tariff norms for a period of five years from April 1, 2004 to March 31, 2009, CERC, in a press release, said: "The return on equity shall be 14 per cent post tax across the board, and this shall be uniformly applicable to the central power PSUs and the private producers."

According to the release, depreciation shall be allowed over the "fair life of the assets" at the rate notified by the commission. In addition, advance against depreciation shall also be allowed to meet debt service obligations by considering the repayment period of loan as 10 years.

"While determining the advance against depreciation, cumulative depreciation recovered shall also be compared with the cumulative repayment made," the release said.

Working capital shall be allowed on normative basis and the rate of interest applicable shall be the short term prime lending rate of State Bank of India, it added.

According to the release, new terms and conditions of tariff finalised by CERC are likely to result in some reduction in bulk electricity tariffs.

"Since the norms for servicing capital investment have been fine tuned with the current financial scenario and the benchmarks of efficiency have been raised, it would enable the state regulators, who determine the retail electricity tariffs, to pass on the benefit to the ultimate consumers," it said.

All future projects and investments in generation, distribution and transmission both by public sector as well as by private producers would now be structured through a tariff based competitive bidding process in order to pass on the benefits of increased economic efficiency to the customers.

The normative debt-equity ratio has been pegged at 70:30, CERC said, adding income tax on the core activity of the utility shall be reimbursable by the beneficiaries and shall be adjusted subsequently based on the income tax assessment by the I-T authority under the Income Tax Act, 1961.

The commission has also discontinued the development surcharge.

As far as the performance benchmark for the purpose of incentives are concerned, CERC has raised the level virtually in all types of projects, the release said.

Performance benchmark for thermal generating station has been raised from a plant load factor of 77 per cent to 80 per cent and rate of incentive has been increased to 25 paise per unit from the existing 21.5 paise per unit, it said.

Performance benchmark of availability in terms of capacity index has been raised to 90 per cent from 85 per cent for purely run of the river hydro power stations, it added.

The state electricity regulators shall be guided by the principles and methodology prescribed by CERC as has been stated in the new Electricity Act, the regulator said adding "this would lead to greater harmonisation, uniformity and certainty in electricity regulation across the states."

CERC said that it has created an investor friendly environment by moving to light-handed regulation based on normative parameters as far as possible, and carefully crafted the norms in a manner which allows an efficient enterprise to earn additional returns through savings and incentives.

The availability based tariff (ABT) mechanism was adopted by the CERC during the last tariff period and has been successfully implemented across the whole country at the regional and inter-state level, the release said.

"CERC has decided that ABT would continue during the new tariff period. The commission expects that the ABT mechanism would be taken to its logical conclusion and the state regulators would extend it to an intra-state level in the near future," the regulator said.

New projects in the power sector based on tariff-based competitive bidding process would also obviate the need for detailed regulation based on the existing "cost plus approach" which leads to inefficiencies and lack of initiative for better performance.

Guidelines for competitive bidding should be announced by the government as early as possible, CERC said, adding that during the period of transition to a competitive bidding regime, tariff regulation as far as practicable, should move away from "cost plus actuals" approach, to a new regime of light-handed regulation based on normative parameters.

"This would incentivise efficiency and streamline tariffs," CERC said.

The terms and conditions finalised by the CERC would apply to all inter-state generating and transmission utilities including NTPC, NHPC, Powergrid, NEEPCO, Neyveli Lignite Corporation, and the relevant independent power producers, CERC said.