What exactly is a tariff?. Tariff means a schedule of rates or charges. Tariff in case of electric supply means schedule or rates framed for the supply of electric energy to the different classes of consumers.
Objectives of tariff :
Recovery of the cost of capital investment in Generation, Transmission and Distribution equipment. Recovery of the cost of operation, supplies, and maintenance of equipment Recovery of the cost of equipment for metering, billing, collection, and related miscellaneous services. Satisfactory returns on capital investments. The aim is to distribute equally the cost of supplying energy among the various classes of consumers.
Factors affecting the formation of tariff :
1) A proper return is secured from each consumer. While fixing the tariff for different classes of consumers, it has to be taken into account whether the tariff will result in revenue, meeting all the expenditure of the supply authority. In addition, collect money to enable future expansion for the anticipated future load.
2) The tariff should be simple and capable of easy explanation to the public. A complicated tariff may cause opposition from the public.
3) Consumers are encouraged to use more electricity.
4) The tariff should be such as to satisfy the consumers of all categories. A big consumer should be charged at a lower rate than a small consumer.
5) The consumers are encouraged to use power during off-peak hours. They are penalized for high loads demanded at the system’s peak load.
6) The consumers are penalized for poor power factor.
Tariff Setting Principle
While setting the tariff, the regulator must perform analysis and assessment of cost and profit. So tariff must correspond to economically justified costs. The regulator approves the basic principles and specifications; according to regulated enterprise applies the cost allocation model. This model must be compressive. While determining capital cost, the regulatory asset base and rate of return on capital are used, average return rate, long term interest rates on borrowed capital must be thought of.
According to the existing procedure, the company submits reasonably justified tariff proposals. Within a period of 20 days, the commission studies the proposal and accepts or rejects such a proposal and may give chance for corrections/modifications. But once the proposal is rejected it can only be challenged in court for justice.
Desirable Characteristics of Tariff Following are the expected main characteristics of a tariff.
- Attraction of consumers
- Simplicity in understanding
- Reasonable/fair enough
- Proper returns to the company
- Reasonable profit to the company
Explanation in brief of tariff
1) The attraction of consumers :
Companies aim is always attract as many consumers as possible which is beneficial to the company. To attract consumers, and frame the tariff such that consumers can at the ford to pay easily. Less rate for the first 20 to 30 units of consumption so that poor consumers are encouraged.
2) Simplicity in understanding the tariff :
The tariff should be so simple that one can understand very easily. No hitches in it, easy for calculations. If the tariff is complicated, and not understandable, a lot of complaints may be received and will spoil the friendly atmosphere and mutual relations of the company and consumers.
3) Reasonable and fair enough :
The trip must be framed such that all the consumers are satisfied with the rate of change of energy per unit. lt is the general practice that big consumers are charged at a lower rate than small
Consumers. This is advantageous to the company also such that increased energy consumption spreads the fixed charges over a large number of units which results in a reduction of the overall cost of production of energy.
4) Proper returns to company :
The tariff must be equal to the cost of producing and supplying electrical energy plus a reasonable profit. This assures continuous and reliable supply which is very important. Properly designed tariff ensures the proper returns from each consumer.
5) Reasonable profit to company :
There should be a logical profit component in the tariff. Generally, electric companies are public utility companies and no other companies for competition. So such a company enjoys the benefits of monopoly therefore the investment is relatively very safe. This suggests that profit is less than or equal to 8% only.