The CERC has recommended that the Ministry of Power (MoP) not defer the date for the introduction of mandatory tariff-based competitive bidding for all procurement of power and transmission services. The deadline for this important transition is, at present, set to January 2011.- The CERC has based its assertion on the results of a comprehensive study that concludes that, even when view conservatively, tariffs computed under the cost-plus methodology work out to be significantly higher than the levelized tariffs discovered under competitive bidding for 12 out of the 14 projects analyzed.
- The Commission has cited moral hazard as a potential cause of this phenomenon, since the capital costs of projects in a cost-plus tariff regime is open-ended, due to room for numerous subsequent 'additional capitalizations' that keep on expanding the equity base for return on equity.
- Further, unforeseen cost increases are passed on to the consumers fully under the now-prevalent regime, whereas a sizeable portion of such increases is borne by suppliers under a tariff-based competitive bidding, because the seller is more likely to quote capacity and energy charges as non-escalable components in the latter case.
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