COST MANAGEMENT IN ELECTRICITY
DISTRIBUTION BUSINESS
BY
K.C.NANDA
16th Oct, 2015
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Programme on
Business Excellence through Cost Management
SESSION OVERVIEW
Types of Cost in Distribution Business and source
of funding.
All Costs are Regulated by SERC and classified
under controllable and non-controllable.
Allocation of Cost voltage wise and consumer
category wise.
Cost of supply or cost to serve a consumer.
Cost allocation w.r.t Wheeling and Retail supply
business
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FLOW CHART OF ELECTRICITY
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DISTRIBUTION OF ELECTRICITY
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TYPES OF COST IN DISTRIBUTION BUSINESS
All costs are grouped under two category namely
fixed cost and variable cost.
Fixed costs are incurred towards creation of or
upgradation of Net work Assets, Land & Building,
F&F, Vehicles, Office Equ.etc
Costs included under variable cost are Power
Purchase cost, Employee cost, A&G Expenses,
R&M expenses, Depreciation, Interest and Finance
Charges, Provision for bad & doubtful debts, ROI,
contingency reserve etc.
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SOURCES OF FUNDING…
Fixed costs are generally funded through different
types of Govt schemes, Consumer Contribution,
Long term loans and own accruals of the licensee
Some of the Govt Schemes (in Odisha) towards
strengthening of Network assets as follows
Biju GramjyotiYojana (BGJY)
Biju Saharnachal Vidyutkaran Yojana(BSVY)
Development Programme of Energy System
Improvement(DESI)
CAPEX scheme
RLTAP in KBK districts
Dedicated Power Supply to DHQ Hospital (DHH) & (MCH)
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SOURCES OF FUNDING ….
Shifting of lines & S/S from premises of Govt.Schools &
Anganwadi kendras
Strengthening of Infrastructures in Elephant Corridor
Odisha distribution sector strengthening
Project(ODSSP)
Odisha Dedicated Agriculture and Fishery
Feeder(ODAFF)
Apart from the above central Govt funding project
like Dindayal Upadhya (RGGVY phase-II)
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CONSUMER CONTRIBUTION, DEPOSIT &
GRANT
Works executed in part or all from the funds from
the users in the context of deposit works;
Capital works undertaken by utilising grants
received from the State and Central Governments,
including funds under RGGVY, APDRP, etc;
Any other grant of similar nature and such amount
received without any obligation to return the same
and with no interest costs attached to such
subvention
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SOURCES OF FUNDING
Variable expenditures are met through business
operations of the DISCOMs.
Aggregated Revenue Requirement (ARR) of the
DISCOMs approved by SERC.
SERC approves the expected revenue for the
ensuing year along with anticipated expenditures of
the distribution licensee on annual basis.
Expected revenues are from different category of
consumers on the basis of their load and voltage of
supply.
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POWER PURCHASE COST • A distribution licensee used to source the required
power either directly from a generator or from a trader (in case of Odisha GRIDCO is the trader).Following are the component of power purchase cost
• Bulk Supply Price
• Transmission charges
• SLDC charges
• UI or Deviation charges
• Accordingly payment has to be made towards power purchase as per terms of PPA with the generator or trader ( in case of Odisha as per approved BSP to GRIDCO)
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POWER PURCHASE COST
• Along with the bulk supply price transmission charges to STU or CTU as the case may be.
• SLDC charges to SLDC on monthly basis as per approved rate.
• In addition to above UI charges, Deviation charges, additional deviation charges etc are also part of power purchase cost.
• Power purchase cost is the major cost for a distribution licensee which is around 80% of the total cost.
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OTHER VARIABLE COST
Other variable cost comprises of the following items
in a distribution business:
Employee Cost
Repair and maintenance expenditure
Administrative and General Expenses
Depreciation
Provision for bad & doubtful debts
Interest and finance charges.
Return on investment
Contingency reserve
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ANALYSIS OF SHARE OF VARIABLE COST
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a)Power purchase cost
b) Employees cost
c) Repair and Maintenance cost
d) Admn. & General Expenses
e) Provision for bad and doubtful debts
f) Depreciation
g) Interest loans and financial charges
h) Interest on Security Deposits
i) Return on equity
j)Contingency reserve
ALL COSTS ARE REGULATED BY SERC
Costs are categorised as controllable & uncontrollable
Uncontrollable factors include:
Force Majeure events
Change in law/ judicial pronouncements by Govts or
commission
Fuel price variation
Variation in consumer number or mix or quantities of
electricity supplied to consumers/ under open access
Transmission loss
Variation in market interest rate
Taxes & statutory levies
Taxes on income
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CONTROLLABLE FACTORS
Variation in capitalization on account of time or cost
overruns or inefficiencies in implementation
Variation in interest & financial charges on account of
the above
Variation in technical and commercial losses of Discoms
Variations in performance parameters
Variations in working capital requirements
Failure to meet performance standards
Variation in labour productivity
Variation in O&M expenses
Variation in wires availability
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CONTROLLABLE AND UNCONTROLLABLE COSTS
Controllable
Employee Cost
Repair and Maintenance
Administrative & General Expenses
Interest and Finance Charges
Depreciation
Return on Equity
Non-tariff income
Uncontrollable Cost
Power Purchase Costs
Fuel Costs
Taxes on Income
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ALLOCATION OF COST VOLTAGE WISE &
CONSUMER CATEGORY WISE
Variable costs are required to be allocated voltage
of supply wise i.e EHT, HT and LT
Allocation of cost consumer category wise is
required for better cost control but it is a challenge
for the DISCOMs
Category of Consumers
Domestic,Ktj (LT)
General Purposes (LT & HT)
Irrigation pumping and Agriculture(LT & HT)
Small Industries (LT)
Medium Industries (LT & HT)
Public Lighting (LT) 17
ALLOCATION OF COST VOLTAGE WISE & CONSUMER
CATEGORY WISE
Bulk Supply Domestic (HT)
Specified Public Purposes (LT & HT)
Public Water Works and swerage Pumping(LT &HT)
Large Industries (LT, HT & EHT)
Mini Steel Plant (HT & EHT)
Power Intensive Industries (HT & EHT)
Railway Traction (HT & EHT)
Emergency Supply to CGPs
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COST OF SUPPLY OR COST TO SERVE A
CONSUMER
When allocation of all the variable cost would be
completed voltage wise and consumer category wise,
then cost of supply or cost to serve a consumer can be
ascertained.
Whether all consumers are paying the cost of supply or
not?
Is there any category of consumers who are paying
more than the cost of supply?
If yes/no then why?
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RECOVERY OF COST OF SUPPLY THROUGH
TARIFF
Consumers whose tariffs are less than the cost of
supply, they are cross subsidized consumers.
And consumers paying more than the cost of
supply are cross subsidizing consumers.
As mandated in tariff policy average tariff should be
within (+/-) 20% of average cost of supply.
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SEPARATION OF WIRES AND SERVICES Objectives of Policy
The objectives of National Distribution Policy are to create an environment that:
identifies and contains the wheeling costs of power by reeling in losses;
increases focus on wires system strengthening and development;
increases accountability, transparency and commercial prudence and thereby reducing and controlling AT&C losses;
opens up and introducing competition in retail supply;
offers consumers a choice of supplier;
improves customer service;
develops an energy market; and.
achieves long-term commercial viability of the power sector
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Particulars Wires
Business (%)
Retail Supply Business
(%)
Power Purchase Expenses 0% 100%
Standby Charges 0% 100%
Employee Expenses 60% 40%
Administration & General Expenses 50% 50%
Repair & Maintanance Expenses 90% 10%
Depreciation 90% 10%
Interest on Long Term Loan Capital 90% 10%
Interest on Working Capital and on Consumer security deposits 10% 90%
Bad Debts Written off 0% 100%
Income Tax 90% 10%
Transmission Charges intra state 0% 100%
Contribution to contigency reserves, if any 100% 0%
Return on Equity 90% 10%
Non Tariff Income 10% 90%
Wheeling charges of the Distribution Licensee
Allocation Matrix for Segregation of Expenses between wires and supply business
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Thank you