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APresentation

onARR & Tariff Proposal of NESCO

for FY 2008-09

Analysis/Objections/Suggestions

ByDr. Shibalal Meher

(Consumer Counsel)Nabakrushna Choudhury Centre for Development Studies, Bhubaneswar

APresentation

onARR & Tariff Proposal of NESCO for

FY 2008-09Analysis/Objections/Suggestions

February 4, 2008

ByDr. Shibalal Meher

(Consumer Counsel)Nabakrushna Choudhury Centre for Development Studies, Bhubaneswar

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TARIFF FILING BY LICENSEE BEFORE THE COMMISSION (FY 2008-09)

ITEMS NESCO

Rev. Req. (Rs.Cr.) ( Including Reasonable Return) 897.59

Power Purchase (MU) 4659.50

Anticipated Sale (MU) 3374.04

LT 1078.43

HT 678.10

EHT 1617.51

Distribution Loss (%) 27.59

Collection Efficiency (%) 95.0

AT&C LOSS (%) 31.21

Exp. Rev.at Exist. Tariff (Net) (Rs.Cr.) 924.28

(Exp. Rev+Misc.Rev.) at Exist. Tariff (Net) (Rs.Cr.) 928.78

Revenue Surplus (Rs. Cr. ) 31.19

Previous Losses (Rs. Cr. ) 202.20

Revenue Gap (Rs. Cr. ) including past losses at Existing Tariff 171.01

Exist.Overall Average Tariff (Net) (p/u) 281

Exist.LT Average Tariff (Net) (p/u) 217

Exist.HT Average Tariff (Net) (p/u) 335

Exist.EHT Average Tariff (Net) (p/u) 300

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Annual Revenue Requirement (Rs Crore)

Purchase of Energy 556.48

Employee Cost 139.79

R&M Expenses 32.70

A&G Expenses 27.25

Interest & financial charges 60.61

Bad Debt 46.21

Depreciation 21.73

Reasonable return 10.55

Other expenses 2.27

Total Annual Revenue Requirement 897.59

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Tariff Proposal

The licensee requests the Hon’ble Commission to accept the proposal of ARR and bridge the revenue gap through combination of grant/subsidy from the state govt., reduction in BST and/or increase in RST in appropriate manner.

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Tariff Rationalisation Measures

• Surcharge on delayed payment

• KVAK billing for LT industrial consumers

• Raising of service connection charges

• Raising of reconnection charges

• Rebate on prompt payment

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ANALYSIS OF PROPOSAL BY

CONSUMER COUNSEL

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Revenue Gap of NESCO during 2008-09(Rs in Crore)

Revenue Requirement including reasonable return during 2008-09

897.59

Revenue from Tariff & Others during

2008-09

928.78

Revenue Surplus during 2008-09 31.19

Past Losses 202.20

Total Revenue Gap 171.01

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Deficit Reduction

• Non transfer of past losses (Rs 202.20 Crore)

• Reduction in distribution loss

• Increase in collection efficiency

• Non transfer of past differential interests on NTPC Bond

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Deficit Reduction (Contd…)

• Non allowing of reasonable return (Rs 10.55 Crore)

• Reduction of bad & doubtful debts (Rs 46.21Crore)

• Collection of outstanding arrears

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Sale of Power and Distribution Loss of NESCO (In MU)

2006-07 2007-08 % Change 2008-09 % Change

LT 757.78 891.40 17.63 1078.43 20.98

HT 581.11 679.24 16.89 678.10 -0.17

EHT 1331.28 1585.73 19.11 1617.51 2.00

Total sale 2670.18 3156.37 18.21 3374.04 6.90

Total Purchase

3998.69 4508.20 12.74 4659.50 3.36

Distribution loss

1328.36 1351.83 1.77 1285.46 -4.91

% Loss 33.22 29.99 -3.23 27.59 -2.40

Distribution Loss of NESCO fromFY 2005-06 to FY 2008-09

Distribution loss including sale at EHT (%)

Distribution loss excluding sale at EHT (%)

Distribution loss as per business plan (%)

2005-06 37.08 51.33 35.00

2006-07 33.22 49.80 32.00

2007-08 (Estimated)

29.99 52.42 29.00

2008-09 (Projected)

27.59 42.26

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Distribution Loss of NESCO fromFY 2003-04 to FY 2008-09

Distribution loss (%)

Business Plan Actual/ Estimated

2003-04 43.66 43.66

2004-05 38.0 39.4

2005-06 35.0 37.08

2006-07 32.0 33.22

2007-08 (estimated) 29.0 29.99

2008-09 (projected) 27.59

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Collection Efficiency (%)

Year Approved Actual/Estimated

2006-07 94.00 92.00

2007-08 94.00 94.00

2008-09 95.00

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AT & C Loss (%)

Year Approved Actual/Estimated

2006-07 36.08 40.91

2007-08 33.26 34.19

2008-09 31.21

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Distribution Cost of NESCO (Rs in Crore)

2007-08 2008-09

Estimated

% ChangeApproved Estimated %

Change

Employee Cost

83.37 110.02 31.97 139.79 27.06

(67.67)

R & M Cost

24.43 27.54 12.73 32.70 18.74

(33.85)

A & G Cost

12.83 13.39 4.36 27.25 103.51

(112.39)

Distribution Cost

120.63 150.95 25.13 199.74 32.32

(65.58)

2007-08 (Estimated)

2008-09 (Projected)

Employee Cost

26 41

R & M Cost 08 10

A & G Cost 04 08

Distribution Cost

38 59

Distribution Cost per Unit Sale of Energy by NESCO During 2007-08 & 2008-09

(Paise/Unit)

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Interest and Financial Charges (Rs Crore)

2007-08 2008-09 Difference

Interest on loan/bond

13.28 51.23 37.95 (32.80 as differential interest on power bond)

Interest on security deposit

7.70 9.38 1.68

Total 20.98 60.61 39.63

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BROAD TARIFF BROAD TARIFF RELATED ISSUES RELATED ISSUES

RAISED BY OBJECTORS RAISED BY OBJECTORS (To be addressed by (To be addressed by

NESCO)NESCO)

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• LegalThe ARR application filed by the licensee is not tenable under law due to the following defects:– The licensee has not produced the audited accounts for FY 2005-

06 and FY 2006-07.– The licensee has filed the application to confuse the consumers

without disclosing the purpose of such filing.– The interested persons are being kept in dark and not able to file

effective objection and as such the purpose of such exercise has been frustrated and contrary to law and principle of natural justice.

– The procedure/method so adopted by the Commission be simple and inexpensive.

– The licensee has failed to provide details as required under regulations to the Commission for consideration of his application as such the application may be rejected.

Issues emerge from the objections/ suggestions submitted by the Objectors

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• Distribution Loss– The licensee has failed to arrest the high distribution

loss on account of unauthorized use of power.– The distribution losses should be calculated by

excluding EHT sale to consumers.– The declared loss by the licensee is unrealistic as a

large chunk of consumers are still unmetered and having defective meters.

– It is a common practice of the licensee to raise bogus bills at the year-end to show lower distribution loss.

Collection Efficiency– Licensee should exhibit the collection separately for

current and arrears.

Issues emerge from the objections (Contd..)

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• Pass through of Past Losses– The truing up should not be allowed for inability to meet the

distribution loss and collection efficiency targets.

– Amortization of regulatory assets may be disallowed since it is a reflection of inefficient management of the licensee.

• Arrear Collection– There is huge amount of outstanding arrears, but the licensee has

not disconnected the electric lines of the defaulters due to the willful negligence.

– Adjustment of dues of the Govt. Depts. & Govt. Undertakings against the Power Bonds are not permissible as it is not the responsibility of the GRIDCO to address the liability towards the arrear dues.

Issues emerge from the objections (Contd..)

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• Provision of Bad and Doubtful Debt– Truing up for bad & doubtful debts should be made to

take into account only such dues which are not collectable and have been written off from the books of licensee, based on audited accounts.

•  Power Factor Incentive/ Power Factor Penalty– Increase of the normal power factor to 0.95 will result

in heavy additional investment by the consumers and is uncalled for.

– The practice of permitting computation of power factor incentive above 90% should continue.

Issues emerge from the objections (Contd..)

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Issues emerge from the objections (Contd..)

• Cross Subsidy– The Hon’ble Commission may reduce the cross subsidy

from year to year between the subsidized and subsidizing categories.

• Quality of Services– The supply of electricity is most irregular, and the low

voltage of electricity, poor maintenance of electric line, undeclared power cuts, and frequent tripping of electricity have become the order of the day. It is moral as well as legal obligation of the licensee to maintain the feeders properly to improve the quality of power supply.

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• Consumer Classification– Lowering of load factor for plastic industries and

similar continuous process industries from 50% to 35% to be eligible for discounted tariff.

• Financial Issues– In the absence of unaudited balance sheet and report of

the auditors it is not possible for the objectors to make proper observation on financial matters.

• Interest towards Securitisation– The interest charges towards securitization as well as

capital of securitisation should not be passed on to the revenue requirement for tariff purposes.

Issues emerge from the objections (Contd..)

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• Computation of Load Factor– A lower load factor up to 50% may be

prescribed for the period of annual maintenance, which will be jointly decided by the licensee and the consumers.

– The guaranteed load factor of 80% should be determined on an annual basis.

– If the load factor is maintained at a level of more than 30%, the licensee may be directed to allow the concession.

Issues emerge from the objections (Contd..)

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• Tariff Issues – For determination of average cost of supply, the bulk

supply price should be considered on the basis of average cost of power procurement from different sources plus a trading margin as determined by the CERC.

– The Orders of the Hon’ble Commission determining the incentive tariff for HT & EHT consumers has resulted in increase the Cross Subsidy, which is contrary to the principle annunciated in the OERC (Terms & Conditions of Determination of Tariff) Regulations, 2004 and the National Tariff Policy.

– For the purpose of incentive calculation, the demands recorded in hours other than off peak hours shall be the basis for calculation of incentive.

Issues emerge from the objections (Contd..)

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– The Hon’ble Commission may revert to the system of two-part tariff while approving the Bulk Supply purchase by different Distribution Licensees.

– The Licensee should submit to the Bulk Supplier the monthly demand and energy requirement. Penalty should be imposed for over drawl. The minimum demand charges should be based on 80% projected demand by the Licensee in a particular month.

– Every interruption should be considered as an interruption for a period of 30 minutes and all such periods be deleted from the total hours in a month.

Issues emerge from the objections (Contd..)

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– The demand charges may be calculated prorata if the total of such periods (causing loss of production due to interruptions) and pre-arranged shut downs availed on intimation, or statutory power cuts, exceeds 60 hours in a month.

– There is no justification of increase in the connection and reconnection charges.

– Additional levy by way of DPS is unnecessary and unreasonable. The present practice of DPS and rebate should be continued.

– To impose Demand Charges on the CPPs/ Generating Stations for emergency drawl without any back up data leads to unknown increase in SD.

Issues emerge from the objections (Contd..)

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– There is no justification to accept the prayers of the licensee regarding demand charges @200/KVA for consumers having CD more than 70 KVA through HT supply, fixed charges for LT Industrial and Public Water works, increase in connection charges, tariff for medium industry, MMFC for consumers with CD less than 110 KVA, KVAH billing for LT industrial consumers.

– In case the meter rent is withdrawn on the ground that no sales tax is applicable to the consumer, if there is no change in ownership, the licensee will have no obligation to replace the meter in time which leads to incorrect readings of the energy consumption by the use of old meters.

– The Licensee is still continuing realizing meter rent even after the recovery of the cost of meter. The Licensee be directed to return such excess cost realization.

Issues emerge from the objections (Contd..)

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• Demand Charges– Increase in demand charges for industries are very

much burdensome to consumers without increasing the reliability or quality of supply in any manner.

– It would be prudent to encourage medium industries to graduate to large industries by retaining the present demand charges.

• Railways– Hon’ble Commission may consider suitable reduction

in the proposed demand and energy charges for railway traction.

– Penalty provision on account of over drawl may be withdrawn in case of railway traction.

Issues emerge from the objections (Contd..)

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– Hon’ble Commission may allow to take power supply for traction sub-station directly from GRIDCO through OPTCL as per the tariff applicable to DISTCOs.

– Single part tariff for railway traction may be considered.– Proposal to record simultaneous maximum demand for

railway traction supply may be considered.– Railway may be exempted from payment of security

deposit. – Stipulation of power factor in case if it goes below 0.85 as

against existing 0.90.– Restoration of incentive for improvement in power factor

above 0.85.– Grant of relief to railways for power supply interruption as

well as poor quality of supply.

Issues emerge from the objections (Contd..)

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• General Issues– The licensee is required to notify the consumers 24

hours before the scheduled power cut by print, electronic media and public address system.

– It is requested to operate Camp Courts at Balasore at least 6 times in a year to lessen the burden of the consumers.

– It is neither possible nor desirable that the consumers be made to finance the licensee to meet its obligations. The Hon’ble Commission may direct the licensee to infuse additional funds as may be required to turn around the sector.

Issues emerge from the objections (Contd..)

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– There is ample scope for the licensee to earn substantial miscellaneous revenue through advertisements and communication, which will go a long way in reducing the burden on the consumers.

– The Hon’ble Commission may reject the prayer of the Applicant to allow higher ARR or increase in the RST for the year 2008-09. On the other hand, reduce the RST based on the lower distribution loss.

Issues emerge from the objections (Contd..)

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