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SUMMER INTERNSHIP-REPORT

On

ANALYSIS OF FINANCIAL VIABILITY OF DISTRIBUTION TARIFF ORDER

Under the guidance of,

Mr. Chandra Prakash

Deputy Chief (Engineering)

Central Electricity Regulatory Commission

Submitted by

Bhanu Pratap Singh Garia

Roll no- 26

MBA-POWER MANAGEMENT

2012-14

August 2013

CENTRE FOR ADVANCED MANAGEMENT & POWER STUDIES NATIONAL POWER TRAINING INSTITUTE, FARIDABAD

(Under the Ministry of Power, Government of India)

Affiliated to

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DECLARATION

I Bhanu Pratap Singh Garia ( Roll No. 26), MBA (Power Management), Batch 2012-14 of the National

Power Training Institute, Faridabad, hereby declare that the summer training report entitled Analysis Of

Financial Viability Of Distribution Tariff order is an original work and the same has not been

submitted to any other institute for the award of any other degree.

A Seminar presentation of the Training Report was made on 30th

Aug, 2013 and the suggestions as approved

by the faculty were duly incorporated.

Presentation Incharge Signature of the Candidate

Countersigned

Director/Principal of the Institute

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ACKNOWLEDGEMENT

I am first thank to my Project Convener Mr. Chandra Prakash Deputy Chief (Engineering), CERC

without his help and interest it would have been difficult to finish this work. I would also like to

acknowledge Mr. Tanmay Vyas ,Senior Research Officer, CERC for his valuable support and guidance

throughout this project.

Special thanks go to all the staff members of CENTRAL ELECTRICITY REGULATORY

COMMISSION specially Mr. Amit Paul Ekka ,Research Associate, CERC Without their insights and

helpful thoughts, I would not have gained as much information as we have. Their help has sparked our

interest even more!

Thanks!

I also thank Mr. S.K Chaudhary (Principle Director, NPTI), Ms. Manju Mam (Director, CAMPS), Ms. Indu

Maheswari, (Dy. Director, NPTI), & Dr. Rohit Verma, (Dy. Director, NPTI), and Ms. Farida Khan for

arranging my summer internship program with Central Electricity Regulatory Commission and providing

assistance and support whenever required.

I would like to extend my gratitude to Mr. N. V. Kumar, (Mentor) for his continuous help and motivation

during summer internship.

Last but not the least; I would like to thank my family members without the efforts & moral support of

whom i would never have been able to accomplish all the achievements in our life.

Bhanu Pratap Singh Garia

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LIST OF ABBREVIATIONS

AERC Assam Electricity Regulatory Commission

A&G Administrative and General Expenses

ASEB Assam State Electricity Board

ARR Aggregate Revenue Requirement

BERC Bihar Electricity Regulatory Commission

BPL Below Poverty Line

BSEB Bihar State Electricity Board

BST Bulk Supply Tariff

CA Commission Approval

CERC Central Electricity Regulatory Commission

CAGR Compound Annual Growth Rate

CAPEX Capital Expenditure

CEA Central Electricity Authority

CGS Central Generating Station

COD Commercial Date of Operation

CoS Cost of Supply

CoS Cost of Service

CPI Consumer Price Index

CWIP Capital Work in Progress

DERC Delhi Electricity Regulatory Commission

DISCOMS Distribution Companies

DS Domestic Supply

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EA Electricity Act

ED Electricity Duty

FSA Fuel Surcharge Adjustment

FY Financial Year

GFA Gross Fixed Asset

GoP Government of Punjab

HERC Haryana Electricity Regulatory Commission

HT High Tension

IPP Independent power Plant

MoP Ministry of Power

MPERC Madhya Pradesh Electricity Regulatory Commission

MU Million Units

MW Megawatt

MYT Multi year Tariff

NEP National Electricity Policy

NTI Non Tariff Income

NTP National Tariff Policy

O&M Operating and Maintenance

PGCIL Power Grid Corporation of India Limited

PLEC Plant load Exemption Charges

PLF Plant Load Factor

PPA Power purchase Agreement

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PPC Power Purchase Cost

PS Petition Submission

PSEB Punjab State Electricity Board

PSERC Punjab State Electricity Regulatory Commission

PSL Public Street Lighting

R&M Repair and Maintenance charges

ROCE Return on Capital Employed

ROE Return on Equity

ROR Rate of Return

RST Retail Supply Tariff

SBI State Bank of India

SEB State Electricity Board

SERC State Electricity Regulatory Commission

SLDC State load dispatch Center

TANGEDCO Tamil Nadu Generation and Distribution Corporation

TNEB Tamil Nadu Electricity Board

TNERC Tamil Nadu Electricity Regulatory Commission

TOD Time of Day

WPI Whole Price Index

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TABLE OF CONTENTS Page no

Declaration.. 2

Acknowledgement.. 3

List of Abbreviations.. 4

Executive Summary. 11

About the Organisation.. 13

Objective of the project 16

Significance of the project. 17

Research Methodology. 18

Guiding Policies for Determining Tariff. 19

Introduction to ARR methodology and Tariff Order 22

MADHYA PRADESH. 31

Approaches adopted by Commission to determine ARR Components. 32

Petitioner Submission vs Commission Approval. 37

Reason for Difference.. 38

Highlights of the order. 38

HARYANA. 39

Approaches adopted by Commission to determine ARR Components.. 43

Petitioner Submission vs Commission Approval 47

Reason for Difference.. 48

Highlights of the order 48

PUNJAB. 50

Approaches adopted by Commission to determine ARR Components... 51

Petitioner Submission vs Commission Approval.. 55

Reason for Difference 56

Highlights of the order. 56

BIHAR 57

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Approaches adopted by Commission to determine ARR Components. 60

Petitioner Submission vs Commission Approval. 63

Reason for Difference 64

Highlights of the

order.. 65 ASSAM..

66 Approaches adopted by Commission to determine ARR Components

67 Petitioner Submission vs Commission Approval.

70 Reason for Difference..

71 Highlights of the order.

71 DELHI.

72 Approaches adopted by Commission to determine ARR Components

75 Petitioner Submission vs Commission Approval..

79 Reason for Difference

80 Highlights of the order..

80 CONCLUSION.

81 RECOMMENDATIONS.

84 REFRENCES.

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LIST OF TABLES

Table no 1 Consumer Category wise sales approved by MPERC 31

Table no 2 Methodology for computation of ROE (FY14).. 36

Table no 3 Diff in amount of ARR Components by Petitioner & approved by

Commission. 37

Table no 4 Consumer Category wise sales approved by HERC 42

Table no 5 Diff in amount of ARR Components by Petitioner & approved by

Commission. 47

Table no 6 Consumer Category wise sales approved by PSERC 50

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Table no 7 Diff in amount of ARR Components by Petitioner & approved by Commission. 55

Table no 8 Consumer Category wise sales approved by BERC........................ 58

Table no 9 Diff in amount of ARR Components by Petitioner & approved by

Commission. 63

Table no 10 Consumer Category wise sales approved by AERC..... 67

Table no 11 Diff in amount of ARR Components by Petitioner & approved by Commision 70

Table no 12 Consumer Category wise sales approved by DERC 73

Table no 13 Consumer Category wise sales(NDMC) approved by DERC 74

Table no 14 Consumer Category wise sales(NDMC FY13) approved by DERC.. 74

Table no 15 Diff in amount of ARR Components by Petitioner & approved by

Commision... 79

List of Figures

Fig 1 Trend of PPC over three years 33

Fig 2 Trend of O&M Cost over three years 34

Fig 3 Trend of Depreciation over three years............................ 35

Fig 4 Trend of PPC over three years 44

Fig 5 Trend of O&M Cost over three years 45

Fig 6 Trend of Depreciation over three years. 46

Fig 7 Trend of PPC over three years 51

Fig 8 Trend of O&M Cost over three years 52

Fig 9 Trend of Depreciation over three years 53

Fig 10 Trend of PPC over three years. 60

Fig 11 Trend of O&M Cost over three years. 61

Fig 12 Trend of Depreciation over three years 62

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Fig 13 Trend of PPC over three years 76

Fig 14 Trend of O&M Cost over three years....... 77

Fig 15 Trend of Depreciation over three years 78

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EXECUTIVE SUMMARY

The electricity sector in India has been operating under a monolithic structure. With the growing

requirements for improvement in the sector, various models to bring in improvements and investments into

the sector have been contemplated. Unbundling of the state electricity boards into functional companies is

already a reality. but even after these reforms , huge debt and financial losses are burden on DISCOMs and

the whole power sector. In order to bring in accelerated improvements, further restructuring of the

distribution segment is being contemplated.

As a student of National Power Training Institute (NPTI), Faridabad and doing my MBA in Power

Management, we got this opportunity of working as a summer trainee with Central Electricity Regulatory

Commission (CERC) for a period of two months from June 10, 2013 to August 10, 2013.

As a part of summer training we got an opportunity to work on the issues related to ARR filing by the

distribution utilities and the approval of it by the SERCs after some normative modifications if required.

One major concern regarding the poor financial condition of DISCOMs is that cost of ARR components

approved by regulatory commissions is so often less than petitioners demand and in few states tariff has

not been revised for years .as a result petitioner is not able to recover its cost of supply resulting in huge debt

and creation of regulatory assets which has become a regular practice today. Thus this project is carried out

to understand the different approaches adopted by the State Electricity Regulatory Commissions (SERCs) of

10 States while analyzing & approving the ARR Components like Power Purchase Cost, Operating and

Maintaining Cost (O&M Cost) ,Depreciation, Interest on Working Capital, Interest and Finance charges,

Return on equity, Non Tariff Income and annual tariff determination approach for fixing the Retail tariff for

DISCOMs under their jurisdiction.

For the treatment of revenue gap/surplus in each of the tariff order, ERCs approach has varied as per the

requirement. In case when revenue gap is large, the Commission had used a mix of options to bridge the

revenue gap through increase in tariff of certain categories and creation of regulatory assets. In case when

gap is meager, Commission had hiked the tariff of all categories to meet the revenue gap and the surplus

come are utilized for the purpose of amortization of regulatory asset. The Average cost of Supply (in

Rs/unit) of ten States in each FY has also calculated in the Excel sheet.

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The enactment of Electricity Act 2003 has provided the legal framework to bring the reforms in electricity

sector. The Act has also empowered & given the responsibilities to the SERCs to deal with the operational

matters related to Distribution of electricity. The Section 61 (Tariff Regulations) & Section 62

(Determination of Tariff) of Electricity Act 2003, notifies the function ial viability ofof SERCs to determine

the tariff for Generation, Transmission, supply & wheeling charges for electricity, wholesale, bulk or retail

tariff as in the case may be, within their area of jurisdiction. SERCs have issued Tariff Orders for the

DISCOMs after analyzing & approving the Aggregate Revenue Requirement (ARR) of the DISCOMs. This

Project is an attempt to study the approaches adopted by SERCs & their effect on DISCOMs performance.

This Project has analyzed the Distribution ARR & Tariff Orders issued by the Six SERCs of

States namely Madhya Pradesh, Haryana, Bihar, Punjab, Delhi, Assam, during the three years i.e. from FY

2011-12 to FY 2013-14.The objectives of the project are as follows:

Thorough study of the tariff orders to understand their design & structure

Understanding of the approaches adopted by the SERCs on Annual Revenue

Requirement Components

Comparing the Petitioner Submission and Commission Approval

Find out the Reasons for Differences

Highlights of the Tariff order

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ABOUT THE ORGANISATION

Central Electricity Regulatory Commission (CERC), a key regulator of power sector in India, is a statutory

body functioning with quasi-judicial status under sec - 76 of the Electricity Act 2003. CERC was initially

constituted on 24 July 1998 under the Ministry of Powers Electricity Regulatory Commissions Act, 1998

for rationalization of electricity tariffs, transparent policies regarding subsidies, promotion of efficient and

environmentally benign policies, and for matters connected Electricity Tariff regulation. CERC was

instituted primarily to regulate the tariff of Power Generating companies owned or controlled by the

government of India, and any other generating company which has a composite scheme for power

generation and interstate transmission of energy, including tariffs of generating companies.

FORMULATION

The conceptualization of independent Regulatory Commission for the electricity sector dates back to early

1990s, when the National Development Council (NDC) Committee on Power headed by Shri Sharad Pawar,

the then Chief Minister of Maharashtra recommended in 1994, constitution of independent professional

Tariff Boards at the regional level for regulating the tariff policies of the public and private utilities. The

Committee reiterated that the Tariff Boards will be able to bring along with them a high degree of

professionalism in the matter of evolving electricity tariffs appropriate to each region and each State. The

need for constitution of the Regulatory Commission was further reiterated in the Chief Ministers

Conference held in 1996. The Common Minimum National Action Plan for Power evolved in the

Conference inter-alia agreed that reforms and restructuring of the State Electricity Boards are urgent and

must be carried out in definite time frame; and identified creation of Regulatory Commissions as a step in

this direction Thus was enacted the Electricity Regulatory Commissions Act, 1998 paving way for creation

of the Regulatory Commissions at the Centre and in the States. The 1998 Act was enacted with the objective

of distancing Government from the tariff regulation. The Act provided for Electricity Regulatory

Commissions at the Center and in the States for rationalization of electricity tariff, transparent policies

regarding subsidies etc. Under the provisions of this Act, the Central Government constituted the Central

Electricity Regulatory Commission (CERC) in July, 1998. The ERC Act, 1998 has since been replaced by

the Electricity Act, 2003. The CERC created under the provisions of the ERC Act, 1998 has been recognized

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as the Central Electricity Regulatory Commission under the Electricity Act, 2003. The Electricity Act, 2003

has significantly enlarged the spectrum of responsibility of CERC. Under the ERC Act, 1998 only the tariff

fixation powers were vested in CERC. The new law of 2003 has entrusted on the CERC several other

responsibilities in addition to the tariff fixation powers, for instance, the powers to grant license for inter-

State transmission, inter-State trading and consequently to amend, suspend and revoke the license, the

powers to regulate the licensees by setting performance standards and ensuring their compliance, etc.

MISSION STATEMENT

The Commission intends to promote competition, efficiency and economy in bulk power markets, improve

the quality of supply, promote investments and advise government on the removal of institutional barriers to

bridge the demand supply gap and thus foster the interests of consumers. In pursuit of these objectives the

Commission aims to

Improve the operations and management of the regional transmission systems through Indian Electricity

Grid Code (IEGC), Availability Based Tariff (ABT), etc.

Formulate an efficient tariff setting mechanism, which ensures speedy and time bound disposal of

tariff petitions, promotes competition, economy and efficiency in the pricing of bulk power and

transmission services and ensures least cost investments.

Facilitate open access in inter-state transmission

Facilitate inter-state trading

Promote development of power market

Improve access to information for all stakeholders.

Facilitate technological and institutional changes required for the development of competitive

markets in bulk power and transmission services.

Advise on the removal of barriers to entry and exit for capital and management, within the limits of

environmental, safety and security concerns and the existing legislative requirements, as the first step

to the creation of competitive markets.

ORGANISATION STRUCTURE

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The Central Commission consists of a Chairman and three full time Members and the Chairman of Central

Electricity Authority (CEA) as the Member, Exofficio. The Commission is having a right mix of persons

having adequate knowledge and experience in engineering, law, economics, commerce, finance and

management. The Qualifications of Chairman and Members are also prescribed in Section 77 of the

Electricity Act 2003. The Chairman and Members are appointed by the President of India on the

recommendations of a selection committee constituted by the Central Government as prescribed under the

Act. The Section 91 of the Act also provides for the appointment of a Secretary of the Commission whose

powers and duties are defined by the Commission Section 79 of the Electricity Act, 2003.

FUNCTIONS

Mandatory Functions:-

To regulate the tariff of generating companies owned or controlled by the Central Government;

To regulate the tariff of generating companies other than those owned or controlled by the Central

Government specified in clause (a), if such generating companies enter into or otherwise have a

composite scheme for generation and sale of electricity in more than one State;

To regulate the inter-State transmission of electricity ;

To determine tariff for inter-State transmission of electricity;

To issue licenses to persons to function as transmission licensee and electricity trader with respect to

their inter-State operations;

Improve access to information for all stakeholders.

To adjudicate upon disputes involving generating companies or transmission licensee in regard to

matters connected with clauses (a) to (d) above and to refer any dispute for arbitration;

To levy fees for the purposes of the Act;

To specify Grid Code having regard to Grid Standards;

To specify and enforce the standards with respect to quality, continuity and reliability of service by

licensees;

To fix the trading margin in the inter-State trading of electricity, if considered, necessary;

To discharge such other functions as may be assigned under the Act.

Advisory Functions:-

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formulation of National Electricity Policy and Tariff Policy;

promotion of competition, efficiency and economy in the activities of the electricity industry;

promotion of investment in electricity industry;

Any other matter referred to the Central Commission by the Central Government.

OBJECTIVE OF PROJECT

This Project has analyzed the Distribution ARR & Tariff Orders issued by State Electricity Regulatory

Commission (SERCs) of the Six States during the three years i.e. from FY 2011-12 to FY 2013-14.In the

early 2000s, the Govt. of India introduced a number of reform measures for the power sector. These

included the passing of the Electricity Act 2003, National Electricity Policy & the National Tariff Policy.

These initiatives aimed to create a competitive marketplace & ensure availability of power at affordable

price. They also aimed to ensure commercial viability of the state utilities & promote transparency,

predictability & consistency as well as competition among the supplier. This project has also carried out

with the aim whether these policies have resulted in achievement of above said objectives as well as tariff

rationalization & a reduction in cross subsidy levels.

Under this study, a comprehensive survey of tariff orders issued by SERCs was undertaken and the findings

were compiled in a uniform format for all the states. In particular, the study had attempted to bring out the

following:

Comparison of approaches followed by SERCs towards different elements of annual revenue

requirement (ARR).

Compliance attained by the regulated utility with the costs approved and the directives issued by

SERCs.

Highlights of the order.

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SIGNIFICANCE OF PROJECT

This project is important in a way to study the role of Regulatory Commission in the post reform period &

aftermaths of the enactment of Electricity Act 2003. The enactment of Electricity Act 2003 has brought

radical changes in electricity sector by empowering the Electricity Regulatory Commissions (CERC &

SERC) to deal with most of the operational functions related to generation, Transmission & distribution of

electricity previously carried out by Govt. The State Electricity Regulatory Commission (SERC) determines

the tariff for Distribution Licensees.

The guidelines framed by the SERCs for Revenue and Tariff filings of licenses which seeks its calculations

related to ARR of each licenses for the ensuing financial year regarding (i) its expected aggregate revenue

from proposed sale under its existing approved tariff; (ii) its expected cost of service and (iii) its expected

revenue gap (if any) and a general explanation on how it proposes to deal with the revenue gap. The

Commission then analyses the data filed in ARR with previous years trend under the reference of Tariff

regulations issued by SERC with reference to NEP and NTP guidelines as notified under section 3 of

Electricity Act 2003. The energy business is a concurrent business. Being a quasi-judicial autonomous body

the approaches held by SERCs regarding approval of ARR differs. This Project aims to analyze different

approaches held by respective SERCs to approve the required ARR Components like O&M Expenses,

Depreciation, Interest on Working Capital etc.

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RESEARCH METHODOLOGY

The report has been compiled on the basis of secondary data sources. Data on units sold, power purchase,

power procurement cost, distribution losses, transmission losses, connected load, sales mix, O&M cost,

depreciation, capital expenditure, GFA, interests on loans, non tariff incomes, etc. have been collected from

the information available on the internet validated from various recognized websites like Ministry of Power

(India), CERC, CEA & other Electricity Regulatory Commissions. Besides this, data has been collected

from the faculty of the institute and other officials of the mentioned distribution utilities & state electricity

boards and state electricity regulatory commissions.

Steps followed for the project work are as under:

1) Selection of the project title

2) Selecting the states & utilities for the purpose of study and analysis

3) Downloading of all available ARR petitions and Tariff Orders of all the utilities in the states

undertaken for analysis

4) Understanding the design, structure and contents included in ARR petitions and Tariff Orders

5) Thorough study of all ARR petitions and Tariff Orders to understand the viewpoints of licensee

and commission and issues of contradiction between the two

6) Scrutinizing the data & Collecting the relevant data from the available documents and literatures

7) Arranging the data year and utility wise on excel sheet in a lucid manner

8) Comparison of data

9) Calculating the values of various important empirical & derived parameters for all utilities

10) Developing models on excel sheets

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11) Plotting the trends for different parameter

12) Drawing of inferences and conclusions

13) Giving suggestions & recommendations

14) Drafting of report

15) Submission of report to the mentor for review, suggestions and modifications

16) Final draft of report incorporating suggested modifications

17) Final submission to the external and internal guides for evaluation

The above mentioned steps were followed for the successful accomplishment of the project work.

GUIDING POLICIES FOR DETERMINING TARIFF

The Commissions are guided by the Electricity Act 2003 (the Act) and its own Regulations i.e. SERC

(Terms and Conditions for Determination of Tariff) Regulations. The Commission is also guided by the

National Electricity Policy and the National Tariff Policy in the determination of tariffs. The Commission

also proposes to take into account the issues raised in the Draft Report of the Expert Committee on

Integrated Energy Policy published by the Planning Commission, Government of India.

Electricity Act 2003

Main features of Electricity Act 2003 related to distribution and tariff determination are

listed below:-

Distribution to be licensed by SERCs

Distribution licensee free to take up generation & Generating co. free to take up distribution license.

This would facilitate private sector participation without Government guarantee/ Escrow. (Sections

7, 12).

Retail tariff to be determined by the Regulatory Commission (Section 62)

Metering made mandatory. (Section 55)

Provision for suspension/revocation of licence by Regulatory Commission as it is an essential

service which can not be allowed to collapse. (Sections 19, 24)

Open access in distribution to be allowed by SERC in phases. (Section 42)

In addition to the wheeling charges provision for surcharge if open access is allowed before

elimination of cross subsidies, to take care of current level of cross subsidy

Licensees obligation to supply. (Section 42) 15

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This would give choice to customer.

Regulatory Commission to determine tariff for supply of electricity by generating co. on

long/medium term contracts. (Section 62)

No tariff fixation by regulatory commission if tariff is determined through competitive bidding or

where consumers, on being allowed open access enter into agreement with generators/traders.

Consumer tariff should progressively reduce cross subsidies and move towards actual cost of supply.

(Section 61 (g), (h))

State Government may provide subsidy in advance through the budget for specified target groups if

it requires the tariff to be lower than that determined by the Regulatory Commission. (Section 65)

Regulatory Commissions may undertake regulation including determination of multi-year tariff

principles, which rewards efficiency and is based on commercial principles. (Section 61 (e), (f))

National Electricity Policy

The Government of India has issued the National Electricity Policy in accordance with Section 3 of the

Electricity Act 2003 which aims at laying guidelines for accelerated development of the power sector,

providing supply of electricity to all areas, and protecting interests of consumers and other stakeholders.

National Electricity policy lays down that the amount of cross subsidy & the additional surcharge to be

levied from consumers who are permitted open access should not be so onerous that it eliminates

competition which is intended to be fostered in generation & supply of power directly to the consumers

through open access.

Open access consumers need to pay generators charges, transmission usage charges, and wheeling charges

plus cross subsidy surcharge to compensate the distribution licensee. Sections 42(distribution licensee &

open access) of the Electricity Act, 2003, which permit open access, enjoin upon Commissions to fix the

surcharge which shall be utilized to meet the current level of cross-subsidy. The Commissions under study

have issued open access regulations & the charges based on voltage wise cost to serve & T&D losses.

Cross subsidy surcharge formula used by SERCs is as follows:

S=T-[C (1+L/100) +D]

Where

S is the surcharge

T is the tariff payable by the relevant category of consumers;

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C is the weighted average cost power purchase of top 5% at the margin excluding liquid fuel based

generation & renewable power.

D is the wheeling charges.

L is the system losses for the applicable voltage level, expressed as a percentage.

The open access is allowed for HT consumers having contract demand more than1MVA

Open access is aimed to bring competition in retail business.

National Tariff Policy

The Government of India has issued the National Tariff Policy in accordance with Section 3 of the

Electricity Act 2003 which aims at Ensure availability of electricity to consumers at reasonable and

competitive rates, Ensure financial viability of the sector and attract investments, Promote transparency,

consistency and predictability in regulatory approaches across jurisdictions and minimise perceptions of

regulatory risks and Promote competition, efficiency in operations and improvement in quality of supply.

Based on the guiding principles of the National Tariff Policy, Commission proposes to adopt certain

measures for tariff determination as stated below:

Commission will institute a system and undertake independent scrutiny of financial, commercial and

technical data submitted by the licensees. The above exercise is envisaged to be completed by

March, 2008 for every distribution circle of the licensee

Commission would develop a policy for treatment of bad debts based on the proposed methodology

of the utility during the course of the deliberations with the licensee during the process of tariff

determination for the ensuing year.

While allowing the total capital cost of generation projects, the Commission would ensure that these

are reasonable and to achieve this objective. The Commission would evolve requisite benchmarks on

capital costs.

Commission would like to promote projects under Clean Development Mechanism (CDM). Tariff

fixation for all electricity projects (generation, transmission and distribution) that result in lower Green

House Gas (GHG) emissions than the relevant base line would take into account the benefits obtained from

the CDM so as to provide adequate incentive to project developers.

INTEGRATED ENERGY POLICY

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The broad vision behind the Integrated Energy Policy is to reliably meet the demand for energy services of

all sectors including the lifeline energy needs of vulnerable households, in all parts of the country, with safe

and convenient energy at the least cost in a technically efficient, economically viable and environmentally

sustainable manner.

CONCEPTUALIZATION

Introduction to ARR and Tariff orders

An ARR petition is a request to regulatory body made by a utility/licensee for approval of all its annual

expenses to be recovered from consumers through tariff. It also includes a normative profit (ROE) for the

utility. Through an ARR file the licensee shows its various expenses & costs in detail along with the details

of number of consumers, quantum of power purchase & sale, losses, ROE, etc. The respective regulatory

commission of a state studies the ARR petition filed by the Petitioner to check that whether the projections

of costs are in accordance with the terms & conditions of tariff or not and to what extent these are meeting

the norms of Regulations. After going through the ARR file, the commission approves the expenses of a

licensee after some corrections, suggestions and modifications, if felt necessary for Meeting the regulatory

norms. This document of approved ARR petition is sent back to the licensee as an order from the

Commission and it is commonly known as the tariff order. The honorary commission may issue tariff order

every year based on the ARR petition filed by the licensee or on suo moto basis.

The Commission of all states in exercise of the powers vested in it under section 62(1)(d) read with Section

62(3) and Section 64 (3)(a) of the Electricity Act, 2003 and Electricity Regulatory Commissions (Terms

and Conditions for Determination of Tariff) Regulations and other enabling provisions in this behalf, issues

the tariff order, determining the Aggregate Revenue Requirement (ARR) and the Distribution Tariff of

Financial Year for supply of electricity. The Tariff Regulations specify that the Distribution Licensee shall

file Aggregate Revenue Requirement (ARR) and the Tariff Petition complete in all respect along with

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requisite fee as prescribed in the Commissions Fees, Fines and charges, Regulation on or before 15th

November of the preceding year.It means if Licensee want to file for FY 2011-12 then he should have filed

the ARR and Tariff Petition on or before 15th November, 2010.

The ARR report shall contain the following information:

The licensees demand forecast by consumer class for the succeeding twelve month period ensuing

financial year and the derivation of the forecast;

A calculation of expected aggregate revenue that would result from the above demand during the

same period under the currently approved tariff by consumer class;

A calculation of the licensees estimated costs of providing the service required by the level of

demand for each consumer class during the same period calculated in accordance with the financial

principles and their applications in the Sixth Schedule to the Electricity (Supply) Act, 1948 or such

other principles the Commission may prescribe from time to time;

The licensee shall furnish to the Commission when required such information, particulars, and documents as

the Commission may require from time to time for the purpose of validating the report submitted

Once the licensee has provided all the requisite information, particulars, and comments required by the

Commission, the Commission shall notify the licensee of its decision within the time set forth in the Act.

If the Commission determines that a licensees expected revenues differ significantly from the revenue it is

permitted to recover under its licence, it may order the licensee to file an application again within the

specified time to amend its tariffs appropriately.

Within 7 days after the Commission has notified the licensee that it has received all necessary information,

the licensee shall arrange for publication of a notice of its tariff application and send copies to the

Commission Advisory Committee and relevant local authorities in accordance with the Conduct of Business

Regulations. The notice shall include a general description of the tariff amendment being applied for and its

effect on the typical residential consumers bill, and an invitation to submit written comments and objections

to the tariff application to the Commission within 30 days. The licensee shall also post the notification in

each of its offices. After receiving all the comments and objections commission should organize the public

hearing process. The time and venue of the hearing will be advertised by the licensees. In the public hearing

licensee will respond to all the objections raised by the stakeholders. And commission will take the note of

all the objections and responses given by licensees depending on whether its satisfied or not. After the

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public hearing process, commission should hold a meeting with state advisory committee. After considering

all the conclusions in this meeting commission should come out with the final tariff order.

Structure of tariff orders

In a broad sense a Tariff Order consists of following items in sequence:-

1. Background & features

i. Functions of the commission

ii. Regulations

iii. Advices

iv. Procedural background

v. Salient features of the order

2. Public hearing process

i. Objections and issues raised by consumers during public hearing

ii. Response of licensee over the issues raised

iii. Commissions ruling on the issues

3. True up of year preceding to the preceding year of ensuing year

4. Annual performance review for the preceding year

5. Determination of ARR for the ensuing year

i. Components of ARR

ii. Summary

6. Tariff philosophy and design

i. MYT framework

ii. TOD tariff

iii. Subsidy schemes

iv. Incentives/disincentives

7. Tariff schedule

i. Category wise fixed/demand charges

ii. Category wise energy charges

iii. Scheme for rebates/penalties

25

8. Other issues related to tariff determination

The above mentioned 8 basic elements of a TO explain the design and structure of any tariff order (TO). As

my project is based on determination of ARR so our basic focus area will be components of ARR.

POWER PURCHASE COST

Cost of power is the most important item of expenditure for the licensees. Every Commission examines the

projected availability of power from different sources in details & the requirement of sales. In the ARR

power purchase are reckoned only from those sources which have long term contracts with the DISCOMs.

The rates of power purchases from individual generators are on the basis of their respective agreements. As

regards energy costs for DISCOMs, the methodology adopted is to take the total energy cost, commonly

known as Bulk Supply Tariff (BST), comprising:

1. Energy costs;

2. Transmission costs;

3. SLDC charges.

While approving the cost of power procurement, the Commission determines the quantum of electricity to

be procured, consistent with power procurement plan, from various sources of supply in accordance with the

principle of merit order scheduling and dispatch, based on a ranking of all approved sources of supply in the

order of their respective variable costs, with certain exceptions, as in the case of Non-Conventional Energy

(NCE) projects, Nuclear projects & some hydro projects accorded by various general and specific orders of

the Commission the status of must-run projects. In order to arrive at the quantum and cost of power

procurement, the Commissions had adopted the Sales Forecast, the Transmission & Distribution loss

trajectory. The power purchase cost is an uncontrollable expenditure item & is trued up through Fuel

Surcharge Adjustment (FSA) mechanism.

The relevant clause of National Tariff Policy (Clause 5.3 (h) (4) and Clause 8.2.1 (1))

says:

Uncontrollable costs should be recovered speedily to ensure that future consumers are not burdened with

past costs. Uncontrollable costs would include (but not limited to) fuel costs, costs on account of inflation,

26

taxes and cess, variations in power purchase unit costs including on account of hydro-thermal mix in case of

adverse natural events.

And

All power purchase costs need to be considered legitimate unless it is established that the merit order

principle has been violated or power has been purchased at unreasonable rates.

Variations in power purchase costs for the purpose of true-up will rarely occur as the Fuel Surcharge

Adjustment (FSA) formula issued by the Commission attempts to capture both the price variance and the

fuel variance during the course of the year itself. Any further variations would arise mainly on account of

purchases exceeding the limits approved in the Tariff Order. All extra purchases of power do not

automatically qualify for true-up. If the purchases are for categories where the Commission has fixed a

ceiling or quota as in the case of agriculture in Andhra Pradesh whose consumption is controllable by proper

monitoring and vigilance, extra purchases will not qualify for true-up.

OPERATION & MAINTAINANCE EXPENSES:

The O&M expenses have three components.

1. Employee expenses

2. A&G expenses

3. R& M expenses

The employee expenses includes following components.

Salaries

Overtime

Dearness allowance

Other allowance

Bonus

Medical expenses

Earned leave encashment

Payment under workmen compensation Act

Payment to helpers/Employees of storm & monsoon gang

Staff Welfare expenses

Terminal Benefits

27

Increase in employee cost on account of pay revision

The A&G expenses includes following components.

Rent rates & taxes

Security arrangement

Telephone, Electricity, Water & Postage charges

Legal, audit, consultancy & other professional charges

Travelling, Conveyance & vehicle charges

Vehicle license & registration charges

Books, periodical, computer stationary & printing stationary

Staff expenses

Freight

The A&G expenses also include licensee & Expected Revenue Charges (ERC) filing fees & other

purchase related expenses.

The R&M expenses include expenses on maintenance of T&D network. It includes

Repairs and maintenance of plant machinery

vehicles, furniture and fixtures, office equipment, line materials and cables,

Transformers and related equipment, meters and metering equipment etc.

R & M also stands for Renovation & Modernization expenses which is beyond my scope of analysis.

DEPRECIATION

Depreciation is directly related to the capital assets. The Original Cost of Fixed Assets (OCFA) and

capitalization of capital works form the basis of the Fixed Assets. For Electricity industry, the depreciation

rates are the rates, notified by the Ministry of Power, Government of India(rates specified in 1992 & 1994),

rates specified by the CERC which are generally accepted by the SERCs & are issued in their tariff

regulations. Depreciation is applied on the opening balances of the Fixed Assets for the ensuing year at

specific rates applicable to particular assets subject to a limit of 90% of the Fixed Asset value (the balance

being treated as scrap value). In this regard, the crucial factor that varies the computations is the additions to

the Fixed Assets which are entirely dependent on the capitalization of the Capital Works-in-progress during

the year.

From an accounting perspective, Depreciation is a charge to the Profit and Loss account and represents a

measure of the wearing out, consumption or other loss in value of an asset arising from use, efflux of time or

obsolescence through technology and market changes4. From a regulatory perspective, depreciation is a

28

small amount of the original cost of the capital assets, built into the tariff computation every year with a

view to providing the utility a source of funding to repay installments of debt capital. From the investors

point of view, depreciation is a non cash expense which reduces tax burden but generates internal cash for

investments. The regulators have two view points on depreciation. One view is depreciation is the refund of

capital & the other view is a constant charge against an asset to create a fund for its replacement. As the

asset is used over its operational life, Depreciation is proportionately charged over the useful life of the

asset. Advance against depreciation (AAD)5 is required in certain conditions like if the debt redemption

obligation is not matching with the existing depreciation allowed. It is necessary that all the SERCs should

follow same depreciation rate to bring uniform approach in tariff orders.

INTEREST ON WORKING CAPITAL

Working capital is required to maintain cash flow liquid. Usually the SERCs have taken working capital as a

% of O&M expenses, average cost of store & average cash & bank balance etc. The interest rate for working

capital is the short term Prime Lending Rate of State Bank of India.

Working capital shall be computed as provided in these Regulations and Rate of interest on working

capital shall be equal to the State Bank of India Advance Rate as on April 1 of the relevant Year. The

interest on working capital shall be payable on normative basis notwithstanding that the Licensee has not

taken working capital loan from any outside agency or has borrowed in excess of the working capital loan

computed on normative basis.

INTEREST AND FINANCE CHARGES

Approved interest on loans is directly related to the loans taken into the Capital Base computations. The

loans drawn for CAPEX and interest thereon are a pass-through in the tariffs. The interest rates are

computed on the basis of the rates on loans filed by the Licensees for the current year and the ensuing year.

Lease rentals and other finance charges are also included under this heading. Other finance charges include

discounts to consumers, such as, incentive, etc. The weighted average rate of interest & normative

repayments so worked out is taken to the ARR. The SERCs analyses the source wise break up of loan &

interest thereon. All the Commissions had considered actual loan portfolio & interest to be paid for such

project. Capital projects are being funded from loan, consumer contribution, depreciation (internal accruals)

& Govt. grant & loans etc.

29

It is necessary to consider the difference between the capitalization schedule and the

new borrowings considered for interest expenditure and rules that the SERCs shall not consider borrowings

due to revenue / cash deficit, unapproved investments and capital work in progress for determination of

interest expenditure. Further, the SERCs shall only consider loans borrowed for use and useful assets (assets

capitalized) and any other loans borrowed / swapped for reducing the interest cost on such loans. The

interest amount is subject to claw-back as the interest being allowed is for the capital works, and any

variations in the capital expenditure program (under spending or overspending) have to be adjusted if

Capital Work In Progress (CWIP) remains in the Capital Base computations as per the Sixth Schedule to the

Electricity (Supply) Act, 1948.

In Indian context, loans are available for 10-15 years. In some rare cases long term loan is extended for a

longer period of over 20 years. If loan is available for 15 years annual repayment would be around 4.67% of

the total investments taking into consideration 70% of debt of the total investment. Approved interest on

loans is directly related to the loans taken into the Capital Base computations. The loans drawn for CAPEX

and interest thereon are a pass-through in the tariffs. The interest on loans drawn for other than the regulated

business or for meeting the working capital requirements over and above what has been allowed in the

capital base, shall not be allowed in the tariffs. However, the loans drawn for meeting Debt Redemption

Obligation for which approval has been granted by the Commission shall be allowed to figure in the Capital

Base and the interest thereon shall be allowed in the tariffs. The interest amount is subject to claw-back as

the interest being allowed is for the capital works, and any variations in the capital expenditure programmed

(under spending or overspending) have to be adjusted if CWIP remains in the Capital Base computations as

per the Sixth Schedule to the Electricity (Supply) Act, 1948.

RATE OF RETURN (ROE or ROCE)

The ROCE is allowed on the Net Capital base (Asset base or regulated rate base) for the ensuing year. The

Capital Base of the Licensees is divided into two parts - the positive part and the negative part, to derive the

net capital base on which a return is provided. The positive part consists of the original cost of fixed assets

(OCFA) excluding consumer contributions; intangible assets; the original cost of Capital Works-in-Progress

(CWIP); compulsory investments, and working capital. On the negative side are depicted, the matching

financials of the assets created, like Accumulated depreciation, loans from Government and other approved

30

institutions, consumer deposits by way of security and amounts outstanding in the Tariffs and Dividends

Control Reserve and Development Reserve at the close of the year. The ROE is allowed on the average of

opening& closing equity & free reserves for the ensuing year. The total capital is normatively divided in the

ratio of 70:30 & the equity component is calculated to derive Return on Equity to be allowed.

One of the Key issues related to approach for rate of return-the issue posed was which approach should be

adopted return on capital employed (ROCE) approach or the existing return on equity (ROE) approach.

There are different approaches towards rate of return.

The CERC in its T&C of tariff regulations 2009-14 has preferred ROE approach. Some States like Delhi

used ROCE Approach but mostly states like Haryana,Punjab ,MP used ROE Approach.

In case of both the ROCE & ROE approach the ROE is estimated one. The Cost of Debt

(CoD) in case of ROCE approach is estimated whereas in case of ROE approach CoD is actual .so is the

case of Debt equity mix. The ROCE approach is consistent with the performance based regulations. The

ROCE approach has strong base in economics too.However the ROCE approach sounds theoretical perfect.

In Indian context the cost of debt for PSU is lower compared to cost of debt raised by Private companies

from capital market. So, Normative COD will not work for all companies.

CAPITAL STRUCTURE

Capital Structure includes Debt component & equity component. The utility is allowed to get reasonable

return on the capital investment done. The normative Debt equity ratio is 70:30.

NON TARIFF INCOME

Non tariff income shall be the revenue in excess of the revenue collected on account of tariffs as approved

by the Commission, and shall include such items as Delayed Payment Surcharge (DPS) and Meter rent.

So, NTI (Non Tariff Income) consists of:-

DPS shall be estimated taking into account the uncollected amount and the prevailing bank rate

The meter rent shall be based on the amount being charged on this account and the number of

metered consumers

Supervision charges

31

MADHYA PRADESH

INTRODUCTION

The Madhya Pradesh Electricity Regulatory Commission (MPERC) was Constituted by Govt of

Madhya Pradesh under 20th

August 1998 under Electricity Regulatory Commission Act, 1998.The

Electricity Act 2003 enacted by the parliament came into the force wef 10th

June 2003 and the Commission

is now deemed to have been constituted and functioning under the Provisions of Electricity Act 2003.

The Government of Madhya Pradesh (GoMP) on 31st May, 2005 restructured the functions and undertakings

of Generation, Transmission, Distribution and Retail supply of electricity earlier being carried out by

Madhya Pradesh State Electricity Board (MPSEB) and transferred the same to five following companies:

a) M.P Power Generating Company Ltd , Jabalpur (MPPGCL)

b) M.P Power Transmission Company Ltd , Jabalpur (MPPTCL)

c) M.P Poorv Kshetra Vidyut Vitran Company Ltd , Jabalpur (MPPKVVCL)

d) M.P Madhya Kshetra Vidyut Vitran Company Ltd, Bhopal (MPMKVVCL)

e) M.P Paschim Kshetra Vidyut Vitran Company Ltd , Indore (MPPKVVCL)

32

With effect from 1st June 2005 the Operation and Management Agreement that existed between MPSEB

and the five companies came to an end and three Distribution Companies started functioning independently

as distribution licensees in their respective area of license.

Appropriate estimation of category wise energy sales is essential to arrive at the quantum of power to be

purchased and the likely revenue by sale of energy which shows its importance. The consumers category-

wise energy sales Approved by Commission shown below:

FY 2011-12 2012-13 2013-14

% of total

2011-12

%of total

2012-13

%of total

2013-14

Consumer Categories MUs MUs MUs

LT

LV-1: Domestic Consumers 7790 7899.2 15413.26 28.10 24.70 35.85

LV-2: Non Domestic 1622 2057.2 2283.91 5.85 6.43 5.31

LV-3: PWW and Street Light 641 877.4 1118.19 2.31 2.74 2.60

LV-4: Industrial 867 1067.6 1243.35 3.12 3.33 2.89

LV-5.1: Irrigation Pumps 7526 9834.1 11889.31 27.14 30.75 27.65

LV-5.2 Agriculture related use 32 11.6 12.33 .11 0.03 0.02

LT Units (MU) 18479 21747 31960.35 66.65 68 74.34

HT

HV-1: Railway Traction 1685 1731.9 1896.32 6.07 5.41 4.41

HV-2: Coal Mines 548 531.1 529.25 1.97 1.66 1.23

HV-3.1: Industrial 5076 6599.6 6483.27 18.31 20.63 15.08

HV-3.2: Non Industrial 831 988.72 2.99

2.30

HV-4:Seasonal 14 16.8 19.69 .05 0.05 0.04

HV-5: Irrigation, PWW & Others 355 596.3 520.73 1.28 1.86 1.21

HV-6: Bulk Residential Users 527 584.9 588.63 1.90 1.82 1.36

HV-7: Bulk Supply to Exempted 206 .74 170.5 0 0.53 0

HT Units(MU) 9243 10231 11027.31 33.34 31.99 25.65

Total LT + HT Units (MU) 27722 31978 42987.66 100 100 100

Table 1 Consumer Category wise Energy sales Approved by MPERC

The above table clearly shows the sales are increasing year by year. The % of total Sales shows the

consumer wise sales however here the portion of agriculture sales is small as compare to other states.

33

The Approaches followed by the Commission to determine the key components of ARR are explained in

detailed manner as below:

POWER PURCHASE COST

The power purchase cost has two elements i.e. fixed cost and the variable cost. For Central

Generating Stations and State generating stations the Commission has considered latest available tariff order

issued by CERC for individual station for determination of fixed cost. The rate provided in these orders for

purchase of power from Captive Power Plants is the maximum ceiling rate for firm power during normal

time. Purchase of power from Captive Power Plants should be done as per procedure prescribed in MPERC

(Power purchase and other matters with respect to conventional fuel based Captive Power Plants)

Regulations (Revision 1) 2009 dated 31st January, 2009.

For MP Genco stations (FY 13 & 14) the Fixed Cost has been taken from MYT Tariff order of FY

2011-12. These fixed costs have been adjusted based on availability considered from the Generating Stations

in the order and as per Recovery of Annual Capacity (fixed) charges provided in the Madhya Pradesh

Electricity Regulatory Commission (Terms and Conditions for Determination of Generation Tariff)

(Revision I) Regulations, 2009.

The Variable Energy Charges as computed on the basis of the availability considered for

purchase after applying the principle of merit order dispatch at Ex-Bus.

Interstate transmission charges- The Commission has projected inter-state transmission charges as per the

actual bills of FY 2010-11 for the tariff period FY 12 & 13.For FY 14 the Commission has reviewed inter-

state transmission charges as per the actual bills available for FY 2012-13 up to Dec, 2012.

Intrastate transmission charges-The Commission had determined the annual transmission charges payable by

each Discom to MPPTCL vide Transmission Tariff Order for FY 2009-10 to FY 2011-12.For FY 14

Commission considered Transmission tariff order of previous year and some allowance for expected

increase for FY 14.

SLDC Charges-Commission determined as per SLDC Tariff order.

34

Fig 1 Trend of PPC over three years

O&M COST EXPENSES

The Commissions Regulations on Terms and Conditions for Determination of Tariff for Supply and

Wheeling of Electricity and methods and Principles for Fixation of Charges) Regulations, 2009 define the

norms of O&M Expenses of each licensee.There are three components of o&m expenses which are

explained as below-:

Employee expenses- have been taken as provided in the Regulations. For first financial year of the control

period, the impact of implementation of 6th Pay Commission recommendations has been considered in

employees cost, which has been escalated @ 6.14% in subsequent years.

R&M expenses-shall be allowed on the opening GFA of the financial year @ 2% for East Discom, 2% for

West Discom and 2.3% for Central Discom for FY 12 &13.In FY 14 allowed % is 2.3% for each discom.

A&G expenses-Commission apply escalation rate of 6.14% on previous A&G expenses as per Tariff

regulations.

Total O&M Cost

FY 2011-12 2012-13 2013-14

TOTAL O&M COST 1708.16 1824.08 2391.95

10014.31

13091.04

17077.8

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

FY12 FY13 FY14

PPC

PPC

35

Fig-2 Trend of O&M Cost over three years

DEPRECIATION-As per MPERC (Terms and Conditions for Determination of Tariff for Supply and

Wheeling of Electricity and Methods and Principles for Fixation of Charges) Regulations,2009, depreciation

is to be calculated annually based on straight line method and at the rates specified in Annexure III to these

Regulations for the assets of the Distribution System declared in commercial operation after 31/03/2010,

provided that, the remaining depreciable value as on 31st March of the Year closing after a period of 12

Years from Date of Commercial Operation shall be spread over the balance useful life of the assets.

Commission computed depreciation taking assets base as closing balance of assets existing as on 31st

March 2010 plus the Average of Addition in GFA in last three years of audited balance sheet for FY 11 plus

half of average addition in GFA in last three year for FY12.

For FY13 closing balance of assets of FY12 plus half of average addition in GFA in last three years for

FY13. The GFA has been considered for allowing depreciation for FY 14 on the basis of opening GFA of

FY 2013-14 plus half of the average addition during FY 2012-13 after netting off consumer contribution.

FY 2011-12 2012-13 2013-14

DEPRECIATION 185.19 183.40 240.37

1708.16 1824.08

2391.95

0

500

1000

1500

2000

2500

3000

2011-12 2012-13 2013-14

TOTAL O&M COST

TOTALO&M COST

36

Fig-3 Trend of Depreciation amount over three years

INTEREST ON WORKING CAPITAL-The MPERC (Terms and Conditions for Determination of Tariff

for Supply and Wheeling of Electricity and methods and Principles for Fixation of Charges) Regulations,

2009 provides that the Working capital shall consist of expenses that are required for supply activity and

wheeling activity.

The method used by Commission in the Tariff order to find working capital of wheeling

activity is addition of 2 month inventory and 1 month of O&M Cost then apply Interest rate on this working

capital. Same is for Retail activity and net interest amount on working capital is the addition of wheeling and

retail activity. The Interest rates of FY 12, 13 &14 are 11.75%, 14% and 13.50% respectively.

INTEREST & FINANCE CHARGES-The MPERC (Terms and Conditions for Determination of Tariff

for Supply and Wheeling of Electricity and methods and Principles for Fixation of Charges) Regulations,

2009 allows interest charges only for those loans to be a pass through in the ARR for which the associated

capital works have been completed and put to use.

The Commission takes the following steps to calculate Interest and Finance charges of FY14-

a) Debt identified with GFA as on 1st April, 2013

b) 70% of addition to net GFA considered as funded through loan net of consumer contribution.

c) Debt Repayment

d) Total debt associated with GFA as on 31st march, 2013

e) Average of loan balance for FY 2012-13

f) Weighted average rate of interest (%)

g) Interest Charges

h) Other Charges

i) Interest and Finance Charges on Project loans

185.19 183.4

240.37

0

50

100

150

200

250

300

2011-12 2012-13 2013-14

DEPRECIATION

DEPRECIATION

37

The Commission is aware that the Licensees may have completed some capital works during the course of

previous FY and shall complete some work during present FY, which shall be capitalized and added to the

asset base. The Licensees past performance with respect to actual capitalization of assets is far less than the

projections of assets addition that the Licensee has made. The Commission thus finds it appropriate not to

consider the estimated capitalization that is projected for all three FY.But to consider the interest expenses

attributable to such assets only when such assets are actually added to the asset base. This shall also serve as

an incentive for the Licensee to expedite the completion of works and improve its accounting practices to

ensure quick and efficient transfer of assets from CWIP to GFA.

There is a increase of 56% from FY12 to FY 13 and 68% increase from FY13 to FY14 in

Interest and Finance Charges. This is the 1.7% of net ARR Approved in FY14 which is highest among all

3FYs.

RETURN ON EQUITY-The MPERC (Terms and Conditions for Determination of Tariff for Supply and

Wheeling of Electricity and methods and Principles for Fixation of Charges) Regulations, 2009 provides that

Return on Equity shall be computed on pre tax basis @16%.

The methodology used by Commission to compute ROE is explained below-

Suppose we want to find ROE of FY14, the methodology is:

FY 2013-14 DISCOM

30% of addition to net GFA considered

as funded through equity net of consumer

contribution

Total Equity identified with GFA as on

31st March, 2014

ROE @ 16%

Table no-2 Methodology for Computation of Return on Equity( FY14)

The Petitioner claimed Rs 455 Crore and Commission approved Rs 314 Crore in FY12.In FY13 and 14 the

petitioner claimed more ROE as compare to previous FY which is Rs 561 Crore and Rs 682 Crore and

Commission approved Rs 360 Crore and Rs 509 Crore respectively.

38

The key components of Annual Revenue Requirement filed by Petitioner and approved by MPERC are as follows: Rs Crore

FY 2011-12 2012-13 2013-14

ARR COMPONENT

P S C A DIFF % of net ARR Approved

P S C A DIFF %of net ARR Approved

P S C A DIFF %of net ARR Approved

P P C 11399 10014.31 1384.7 80.4 17642.1 13091.1 4551.03 83.5 19095 17077.8 2017.2 82.9

O&M COST 2303.8 1708.16 595.64 13.7 2756.2 1824.1 932.13 11.6 3047.6 2391.95 655.6 3.1

DEPRECIATION 412.01 185.19 226.82 1.48 470.99 183.24 287.75 1.16 559.13 240.37 318.7 1.16

INTEREST & FINANCE CHARGES 385 138.59 246.41 1.1 524.52 216.99 307.53 1.38 634.05 365.92 268.1 1.7

INTEREST ON WC 59.29 38.84 20.45 .31 105.83 0.32 105.51 .002 15.26 0 15.26 0

ROE 455 314.21 140.79 2.5 561.75 360.35 201.4

2.3 682.26 509.82 172.44 2.47

ARR 17537.8 11851.64 5686.16 26323.3 14916.8 11406.5 24399.4 19874.2 4525.2

NON TARIFF & OTHER INCOME 200 300 -100 317.17 450 -132.83 179.72 725.35 -545.6

NET ARR* 17337.8 12444.28 4893.52 26323.3 15666.6 10656 24219.7 20599.2 3530.4 *Sardar Sarovar order diff. and MP Genco FY 07-08 true up *FY 2013-14 Impact on a/c of true up/final orders of Transco/Genco stations

Table No-3 Diff in amount of ARR Components filed by Petioner and approved by the Commission

39

REASON FOR DIFFERENCES (filed vs. approval)

FY 2011-12 to 2013-14

1) Power Purchase Cost-Petitioner approach is not given in the tariff order therefore; the reason for

such huge difference cant be explained. However sales approved is less as proposed by petitioner

which may one of the reasons for difference.

2) Interest on working capital-The petitioners has stated that the working capital requirement has been

estimated based on the norms as per the Regulations. The Commission considered interest rate which

is different from discoms considerations. The Approach used by Commission to compute interest is

discussed earlier.

HIGHLIGHTS OF THE ORDER

FY 2011-12

New power intensive consumer category under HV tariff.

Revision in structure of load factor incentive.

Reduction in minimum consumption charges.

FY 2012-13

Commission allows billing for rural areas unmetered domestic consumers @ of 42units/connection.

The trading margin is yet to be determined by the commission hence has not been consider in this

order.

Change of slabs in domestic category.

FY 2013-14

Removal of HV-7: Bulk supply to exempted

Change in Tariff category for hostels run by Tribal welfare dept,GoMP

Separate Tariff Schedule for Synchronization and start up power for generators connected to the

grid.

Modification in the load Calculation Formula

40

HARYANA

INTRODUCTION

Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) and Dakshin Haryana Bijli

Vitran Nigam Limited (DHBVNL) are the two State Government owned distribution companies, registered

under the companies Act, 1956, engaged in the business of distribution and retail supply of electricity in the

state of Haryana. UHBVNL hold the Distribution and Retail Supply License No. DRS-1 of 2004 to cater

distribution and retail supply of electricity in the North Zone of Haryana and DHBVNL hold Distribution

and Retail Supply License No. DRS-2 of 2004 to cater distribution and retail supply of electricity in the

South Zone of Haryana.

These two electricity distribution companies (Discoms) were formed upon corporatisation / restructuring of

erstwhile Haryana State Electrical Board (HSEB) carried out by the State Govt. in its pursuit to revamp the

power sector and implement comprehensive power reforms in the State of Haryana under the aegis of

Haryana Electricity Reforms Act (HERA). The corporatisation / restructuring of erstwhile HSEB was

carried out through two statutory Transfer Schemes notified by the State Govt. under the provisions of

HERA. Through the first Transfer Scheme, titled Haryana Electricity Reform (Transfer of undertakings,

Assets, Liabilities, Proceedings and personnel) Scheme Rules, 1998, the Generation business (undertakings,

assets, liabilities, proceedings and personnel) was separated from Transmission and Distribution business

and vested in a separate State Govt. owned company, namely Haryana Power Generation Corporation Ltd.

(HPGCL) while Transmission and Distribution business was vested in another State Govt. owned company,

namely Haryana Vidyut Prasaran Nigam Limited (HVPNL).Through the second Transfer Scheme, titled

Haryana Electricity Reform (Transfer of Distribution Undertakings from Haryana Vidyut Prasaran Nigam

Limited to Distribution Companies) Rules, 1999, the Transmission undertakings and business was

separated from Distribution undertakings and business. While the transmission business was retained by

HVPNL, the Distribution business was segregated into two successor Distribution companies namely

UHBVNL and DHBVNL

After restructuring of erstwhile HSEB, the Distribution and Retail Supply

licence was initially granted to HVPNL by the Commission vide its licensing order dated 04.02.1999

permitting it to carry out the distribution and Retail supply business in the entire state of Haryana.

Subsequently, after the implementation of second transfer scheme, the Commission permitted HVPNL to

continue with the Distribution and Retail Supply business through its newly formed subsidiaries namely

UHBVNL & DHBVNL vide its order dated 21.04.1999. Thereafter, on an application filed by HVPNL, the

Commission accepted the surrender of Distribution and Retail Supply (DRS) license vide its order dated 4th

41

November, 2004 and granted the DRS license no. DRS-1 of 2004 to UHBVNL and DRS license No. DRS-2

of 2004 to DHBVNL to conduct Distribution and Retail Supply business in the Northern and Southern

circles of Haryana respectively.

The rights relating to procurement and bulk supply of electricity or trading of electricity were initially vested

with the HVPNL at the time of restructuring of erstwhile HSEB. However, in view of HVPNL having been

declared State Transmission Utility (STU) vide State Govt. notification dated 9.12.2003 and in view of

sections 31 (2), 39 (1) and 41 of Electricity Act, 2003 which prohibit the STU from engaging in the business

of trading in electricity, the Govt. of Haryana vide its notification no. 1/6/2005-1/Power dated 9th June,

2005, transferred the rights relating to procurement and bulk supply of electricity or trading of electricity

from HVPNL to HPGCL. Subsequently, vide notification dated 11th April 2008 (No. 1/1/2008-1 Power),

the Govt. of Haryana transferred the rights relating to procurement of electricity / UI drawls / dispatches or

trading of electricity from HPGCL to UHBVNL and DHBVNL w.e.f 15/04/2008. Further with effect from

1st April 2008, the rights and obligations under agreements and contracts relating to procurement and bulk

supply of electricity or trading of electricity to which HSEB / HVPNL / HPGCL was originally a party, were

transferred and vested to Transferee companies i.e. UHBVNL and DHBVNL in 1:1 ratio. Firm allocations in

each of the Central Sector Generating Stations along with any allocations from the unallocated quota, as

determined by the Government of India for Haryana, was also reallocated to UHBVNL and DHBVNL in

50:50 ratio. The power sold by HVPNL from its shared projects i.e. IP Station (Delhi) and Bhakra Beas

Management Board (BBMB) to the extent of share owned by it was also allocated to UHBVNL and

DHBVNL for a period of five years w.e.f. 1st April 2008 in 1:1 ratio. The notification also provided that the

day to day procurement of power and related issues shall be the responsibility of Haryana Power Purchase

Centre (HPPC).

The Haryana Electricity Regulatory Commission (HERC) was established in August

1998 to regulate power sector in the state of Haryana, under the provisions of Haryana Electricity Reforms

Act 1997(Act 10 of 1998) which was enacted by the Government of Haryana in 1997 and came into force on

14th August, 1998 after presidential assent on 20th February,1998 .

The Electricity Act, 2003 (EA,2003) was enacted by the Govt. of India in June, 2003. However, the

Government of Haryana, in exercise of the powers conferred by clause (d) of section 172 of the Electricity

Act, 2003 , vide its notification no. 1/4/2003 -1 Power dated 8/09/2003 notified that all the provisions of the

Act except section 121, which had not been enforced by the Central Government vide notification no. S.O

699 (E) dated 10/6/2003 ,shall not apply in the State of Haryana for a period of six months from the

appointed date i.e. 10/6/2003. Resultantly, EA, 2003 came into force in the State of Haryana w.e.f.

10/12/2003. However, as the Haryana Electricity Reforms Act, 1997 (HERA, 1997) is a saved Act under sub

42

section (3) of section 185 of the Electricity Act, 2003 (EA, 2003), the provisions of HERA, 1997 not

inconsistent with EA, 2003 continue to be applicable.

Appropriate estimation of category wise energy sales is essential to arrive at the quantum of power to be

purchased and the likely revenue by sale of energy which shows its importance. The consumers category-

wise energy sales Approved by Commission shown below:

43

In MUs

Consumer Category

2011-12

2012-13

2013-14

%of Total Sales

% of Total Sales

% of Total Sales

UHBVNL DHBVNL UHBVNL DHBVNL UHBVNL DHBVNL UHBVNL DHBVNL UHBVNL DHBVNL UHBVNL DHBVNL

Metered Sales

Domestic 2480 3470 2995 3840 3530 3968 20.99 21.26 23.77 23.52 25.59 19.78

Non Domestic 855 1216 965 2751 1031 2302 7.23 7.45 7.65 16.85 7.47 11.48

HT Industry 3003 5713 2646 4477 2862 5457 25.41 35 21 27.43 20.74 27.21

LT Industry 778 792 804 815 872 867 6.58 4.85 6.38 4.99 6.32 4.32

MITC 4 0 8 0 6 2466 0.03 0 0.06 0 0.04 12.19

Lift Irrigation 34 173 98 160 62 177 0.28 1.06 0.77 0.98 0.44 0.88

Railway Traction 148 203 120 135 115 140 1.25 0.12 0.95 0.82 0.83 0.69

Bulk Supply 266 1307 309 344 341 502 2.25 8 2.45 2.1 2.47 2.5

Street Light 49 37 40 48 44 56 0.41 0.22 0.31 0.29 0.31 0.02

PWW 349 445 486 447 534 383 2.95 2.72 3.85 2.73 3.87 1.91

Metro DMRC 0 26 0 210 0 21 0 0.15 0 1.28 0 0.1

SUB TOTAL 7965 13382 8471 12927 9397 16339 67.41 82 67.24 79.2 68.12 81.48

AP Sales

Agri Metered 1620 1832 1810 2281 2085 2466 13.71 11.22 14.36 13.97 15.11 12.29

Agri Unmetered 2230 1105 2317 1112 2312 1246 18.87 6.77 18.39 6.81 16.76 6.21

SUB TOTAL 3846 2937 4127 3393 4397 3712 32.55 17.99 32.75 20.79 31.87 18.51

TOTAL 11815 16319 12598 16320 13794 20051 100 100 100 100 100 100

Table no-4 Consumer Category wise Energy Sales Approved by HERC

44

The above table clearly indicate that sales mix in Haryana constitute 32.55%(UHBVNL) and

17.99%(DHBVNL) of AP Sales in FY2011-12 which has greater as compared to next FY.The contribution

of DHBVNL has more than UHBVNL in total sales of the State. It is very difficult to determine the Sales of

unmetered AP consumers. The Commission had to rely on the load factor of the metered sales to AP

consumers to assess the consumption of the un metered AP consumers. However Commission clearly

directed that no new unmetered connection should be released.

The Approaches followed by the Commission to determine the key components of ARR are explained in

detailed manner as below:

POWER PURCHASE COST-.

The Commission had laid down the following approach for determination of power purchase cost in its

orders:-

"Where a PPAs / MOUs exist, cost should be determined accordingly".

"In case of CPSUs or other generators, who are supplying power to more than one state, where

payments are governed as per generation tariffs as approved by CERC, the cost should be taken

based on CERC tariffs & the methodology adopted therein".

"Where neither PPA nor CERC Tariff or Notifications are available for any reason, projections can

be made based on the latest available rates as per invoices".

"Estimation should be made for various components separately and a reasonable level of escalation

in costs should be assumed for those elements that are expected to undergo change".

The Commission feels that the most appropriate basis for estimation of power purchase cost would be the

actual annual average cost of power from various generating / trading sources in previous FY and as per the

tariff as applicable as per the approved PPA / generation tariff order in the relevant cases including

renewable sources of power.

There is a increase in the PPC of 23.60% from FY12 TO FY13,an increase of 13.50% from FY13 to

FY14.The PPC constitute 81% of the net ARR approved in FY14 which is highest among all three FYs.

45

Fig-4 Trend of PPC over three years

O&M Expenses-comprises of Employees cost, Repair & Maintenance expenses and Administration &

General expenses which are analyzed under this sub-head.

Employee Expenses-Employees' cost includes cost incurred for the employees presently licensees. The cost

of working employees includes salary, dearness allowance and other allowances such as HRA, CCA, LTC,

medical reimbursement etc. While In the case of retired employees and those who would retire during the

year, the Licensee have to discharge financial liabilities towards pension, gratuity, leave encashment benefit

etc and the same has been taken into account while estimating employees cost in all three FY.

There is a continuous decrement of employee cost of 2.45% from 2011-12 to 2012-13 and 1.40% from

2012-13 to 2013-14.

R&M expenses-For maintaining the distribution system in a proper working condition Repair and

maintenance (R&M) cost is incurred by the distribution licensees. The Commission, in order to evolve a

scientific basis for calculating R&M expenditure had directed the distribution licensees to prepare R&M

norms for the equipments used in the distribution and retail supply business. As per report submitted to the

Commission, the normative expenses worked out to 1.65% of GFA. The expense of Rs 158 Crore, Rs

151Crore and Rs 184Crore are approved by the Commission in FY12, 13 & 14 respectively.

A&G expenses-The Commission believes that A&G expenses do get impacted with the general level of

prices in the economy. Thus considering the inflationary impact at 10% YOY, the Commission allows Rs.

99.58 Crore to be recovered in the ARR in FY 2011-12.The same approach is followed in FY 2012-13 also.

The Commission approves Rs 57.60 Crore as A&G expenses for FY 2013-14 for UHBVNL and Rs. 52.83

Crore for DHBVNL after accounting for 4% increase per annum over the audited expenses of FY 2011-12

in line with the MYT regulations.

The O&M expenses constitute of 10% of net ARR approved in FY 2011-12 which is highest among all

three FYs.

10298.15

12728.92

14451.53

0

2000

4000

6000

8000

10000

12000

14000

16000

FY12 FY13 FY14

PPC

PPC

46

FY 2011-12 2012-13 2013-14

TOTAL O&M COST 1393.69 1405.4 1419.79

Fig-5 Trend of O&M Cost over three years

DEPRECIATION-In FY 2011-12 UHBVNL has claimed depreciation on an opening balance of GFA

which works out to 3.43% of GFA at the beginning of the year. The commission applies the same

depreciation rate 3.43%.DHBVNL has claimed depreciation on the opening balance of GFA of which works

out to an average of 5.07% of opening GFA. The rate of depreciation proposed by DHBVNL is much higher

than the depreciation rate of 2.74%(adopted by Commission) as per audited accounts for FY 2009-10.

Therefore the Commission has based its calculation for depreciation on the average rate of depreciation as

per the last available audited accounts.

In FY 2012-13 The Commission, based on the depreciation rate of 3.45% as per audited accounts for FY

2010-11, has approved de