THE HARYANA STATE ELECTRICITY BOARD TARIFF AWARD A CRITICAL REVIEW

Transcription

1 INFRASTRUCTURAL DEVELOPMENT AND FINANCING PROJECT REPORT A Report On THE HARYANA STATE ELECTRICITY BOARD TARIFF AWARD A CRITICAL REVIEW Submitted to Prof. G. Raghuram Prof. Rekha Jain Professor Sebastian Morris In Partial Fulfilment of the Requirements of the Course By Amol Manjrekar Dr. Kiran S. Rao Mohit Taneja Naveen. V Pankaj Duhan Section B Group 4 On 24 th August, 2001 Indian Institute Of Management Ahmedabad

2 TABLE OF CONTENTS S. No Topic Page Number 1 INTRODUCTION Background 1.2 HERC 1.3 Tariffs 2 TARIFF APPLICATION OF HVPNL Proposed Transmission And Bulk Supply Tariff Application 2.2 Proposed Retail Tariff Application for Distribution and Retail Supply Business 2.3 Proposed Retail Tariff Rates 3 A CRITIQUE OF THE HERC TARIFF AWARD Criteria for Setting Tariffs 3.2 Tariff Application for Distribution & Retail Supply 3.3 A Review of HVPNL Tariff Proposals 3.4 Transmission & Bulk Supply Tariff 3.5 Critical Analysis of T&BS Tariffs 4 COMPARISON OF TARIFF AWARD BY MERC WITH HERC 36 AWARD 5 COMPARISON OF TARIFF AWARDS OF HERC AND 45 APERC 6 DELINEATION AND EVALUATION OF THE GERC TARIFF 52 AWARDS 7 CONCLUSIONS 66

3 1. INTRODUCTION 1.1 Background Haryana Electricity Reform Act (HERA) Haryana is the second State in India to initiate the process of Reform & Restructuring of the Power sector in India. The Haryana Electricity Reform Act (HERA)-1997 was passed by the Haryana State Legislative Assembly on July 22, According to HERA, the erstwhile Haryana State Electricity Board was unbundled into two corporate bodies namely Haryana Power Generation Company (HPGC) for the Generation of Power and Haryana Vidyut Prasaran Nigam (HVPN) for the Transmission & Distribution of power within the state of Haryana Power Situation in Haryana Draw backs of power sector as perceived by the public of Haryana: High Power Losses 33% T&D Losses in (as shown in Table-1) Supply Interruptions Frequent power blackouts and interruptions in power supply, affecting industrial output Voltage Fluctuation Frequency Problems HSEB had not been determining revenue requirements and fixing tariffs based on realistic and economic costs of electricity. Historically, the tariffs in electricity industry in Haryana were set with reference to tariff levels prevailing in the neighboring states and in accordance with ability to pay principle. Also, these principles were, in general, at variance with economic principles of tariff settings Tariffs distorted by grant of subsidies and cross-subsidies at the expense of efficiency and cost recovery The efficiency of tariffs and financial viability of the licensees is required to deal with these issues The statistics of the Haryana SEB are shown in Table 1, which indicate that: HPGC has made no meaningful capacity addition over the last five years. The state relies for about three-fourths of its energy availability on outside purchases This reliance on outside purchases has led to a relatively high average cost (Rs 2.89 per unit). The average revenue, however, is much lower. This is a result of a very high share of consumption of the agriculture sector (45 per cent). The rate of return, despite subsidies, was negative 8.9 per cent. Without the subsidies, it was negative 22.1 per cent. Amol,Kiran,Mohit,Naveen,Pankaj 1 Section-B, Group-4

4 According to the Ministry of Power, the state, which hardly had any peaking shortages in , experienced shortages of 8.3 per cent in Table-1: HSEB - Key Statistics Total Capacity (MW) as on March 31, Total Generation (Million Units) during ,397 Total Purchase (Million Units) during ,370 Average PLF (%) 49.2 T&D Losses (%) 33.1 Total Revenue (Rs Million) 18,532 Profit Loss with Subsidy (Rs Million) -2,450 Profit Loss without Subsidy (Rs Million) -6,090 Number of Employees 43, Haryana Electricity Regulatory Commission (HERC) The Haryana Electricity Regulatory Commission was set up on The Commission is a three-member body with specialised supporting staff, designated to function as an autonomous authority responsible for regulation of the power sector in the state Need for HERC The HERA envisaged the need for a regulatory body to be set up to initiate the process of power reforms for the following reasons: 1. Removal of Inefficiency: The State owned industry in the past have often been utilised for achieving social and political ends such as creating avenues for employment and giving subsidy to certain categories of consumers unmindful of the detrimental effects on the industry viz. draw down on resources for sustenance and expansion, lack of accountability in performance, poor quality of service and eventual financial sickness of the industry. 2. Regulatory Autonomy: The new regulatory regime is designed to be different from the command and control exercised by the government and envisages that the Government of Haryana would Amol,Kiran,Mohit,Naveen,Pankaj 2 Section-B, Group-4

5 withdraw from the power sector giving way to privately managed utilities operating in a competitive and appropriately regulated environment of power sector. This would facilitate insulation of the electricity industry from short term and shortsighted political decisions and rigid bureaucratic controls and ensure that the industry operates on commercial lines. 3. Parity among Stakeholders: The new regulatory regime, designed on the pattern prevalent in the USA and UK, is expected to set in position rules and procedures with due public participation by which the Commission can balance and protect the interests of all the stake holders, who participate in this sector and those who are served by it Functions of HERC The functions of the HERC can be summarized as follows: Aid and advise, in matters concerning electricity generation, transmission, and distribution of electricity supply in the State Issue licenses in accordance with the provisions of the Reform Act and determine the conditions to be included in the licenses Regulate the working of licensees and to promote their working in an efficient, economical and equitable manner Regulate the procurement, distribution, supply and utilization of electricity, the quality of service, the tariff and charges payable keeping in view both the interest of the consumer as well as of the licensee Promote competitiveness and progressively involve the participation of the private sector, while ensuring a fair deal to the customers Require licensees to formulate perspective plans and schemes in coordination with other stakeholders for the promotion of generation, transmission, distribution and supply of electricity Set appropriate code of conduct and standards for the electricity industry in the State 1.3 Tariffs The objectives of designing an appropriate tariff structure are sustainability, efficiency and equity. The responsibility of the Haryana Electricity Regulatory Commission (HERC) is to ensure that the regulated utilities are able to finance its operations, and any required investment, so that it can continue to operate in the future. Consequently, the stakeholders should be able to earn at least the interest and cost of capital. However, it has to be ensured that no group of consumers are burdened with a Amol,Kiran,Mohit,Naveen,Pankaj 3 Section-B, Group-4

6 disproportionately large part of payments to the utility, relative to the costs they impose upon it. Tariff design should also take care of productive efficiency i.e. optimisation of resource mix to produce or make available goods or services of a given quality at the least possible cost. The issues that HERC need to consider while awarding tariffs are: Technical & Non-Technical Losses HERC considers the existing losses (33%) to be significantly higher than the loss that should occur in a well performing transmission and distribution system. Transmission loss has two components - Inter-state transmission losses (incurred in wheeling power from out of state generating sources to the Transmission and Bulk Supply licensee in Haryana) and intra state transmission losses (losses taking place within the state). As an interim measure, the Commission allowed an intra-state transmission loss of 5% of the net power available for use in state. HERC has also recognized a distribution a loss level of 35.77%. It is of the firm view that such a high level of distribution losses is unsustainable and puts unnecessary avoidable burden on the consumers because of inefficiency of the licensee Power Metering A large number of consumers at the low voltage level have defective meters or none at all. The bills are prepared for non-metered consumption based on estimates of consumption using parameters such as horse power rating of the hydraulic pumps, load factor or connected load. These do not reflect the actual consumption of un-metered consumers due to aberrations such as consumers replacing pumps with higher rating; others frequently exceed the connected load or load factor used for calculating bills. HERC has directed that HVPNL should complete the installation of interface metering by June Subsidies & Cross Subsidies The prevailing levels of electricity tariff in Haryana contain a large degree of cross subsidy, with some categories of consumers paying well above the economic cost of supply. It has to be recognised that low and subsidised tariff initiate inefficient high demand for power, which puts pressure on the system capacity and the quality of service. An idea of consumer category wise subsidy involved can be had from the following table (See Table 2): Table 2: Extent of Subsidy in HVPNL Tariffs Percentage of Cost of service paid (HERC Order dated ) Category At the existing tariffs At the new tariffs Amol,Kiran,Mohit,Naveen,Pankaj 4 Section-B, Group-4

7 Domestic Consumers 61% 69% Non-Domestic 91% 98% Agriculture (Metered) 10.5% 13.5% Agriculture (UnMetered) 12.7% 19.2% The paradox often faced is that while efficiency criterion calls for a cost based tariff, the social criteria may at times call for relief to certain consumers e.g. low-income group. However, subsidised tariff should not distort the general tariff structure by imposing burden on another set of consumers. Consequently, subsidised tariff should be financed from government's general budget, because raising funds through a general tax system imposes lower cost on the society than creating a sector specific levies. The Commission is addressing the above issues to improve the financial health of the sector as well as promote efficiency, and economy in the use of resources. The two tasks before the Commission in this respect are: Determine a plan for elimination of cross subsidy in electricity tariff in Haryana. Quantify cross subsidies and the short fall in revenue caused by charging subsidised tariff. HERC would like to study steps to initiate elimination of cross-subsidies in view of the long term effect of the system remaining economically viable and efficient. The social and political objectives for cross subsidies needs to be addressed. The options available to deal with the task number one is same as mentioned in the earlier issue. The second task calls for a through examination by the Commission because of its financial impact on the licensee and the transfer from the state government. The licensees are required to quantify cross subsidies and revenue shortfall caused by the subsidised tariff. The quantification of cross subsidies may be done by comparing the prevailing tariffs with the economic costs of the licensee. Similarly, revenue shortfall caused by subsidised tariff may be estimated by comparing the prevailing tariffs with the cost based ones. While the prevailing tariffs are known, the cost and cost based tariff must be determined by using one of the following: Embedded cost. Marginal cost. Marginal cost plus efficient share of revenue gap. General Method of Price Regulation The Commission shall decide the regulatory framework it will use to regulate the price of Haryana licensees in conformity with the Act [(Section 26(6)], which require that tariff " shall be just and Amol,Kiran,Mohit,Naveen,Pankaj 5 Section-B, Group-4

8 reasonable and be such as to promote economic efficiency in the supply and consumption of electricity". While section 26 (2) (a) of the Act sets section 57 and 57A of the Electricity (Supply) Act, 1948 and its sixth schedule as the baseline for Haryana tariff regulation, the act also allows the Commission to depart from the baseline on valid reasons in determining the licensees revenues and tariff [Section 26(3)]. The Commission has a few options in regulating electricity prices of the licensees: 1. Rate of Return Regulation 2. RPI X Regulation 3. Profit Sharing Regulation 4. Revenue Cap 5. Others include price caps, hybrid mixed -controls and trigger points 1. The Rate of Return is the traditional form of regulation that remained dominant regulatory tool for many years. In this approach at short intervals a company s historic costs are reviewed. The price is set to allow profits that delivers the required rate of return if not so i.e. prices move out of line with the company s cost, the company could ask for new set of prices. This is considered to be relatively risk free, as it allows the company to be financed at a lower required rate of return than under any other approaches. However, in this form the regulation becomes intrusive as costs are assessed on their prudence and investments are assessed as to their used and useful status, further, the company has no reason to seek efficiency savings. 2. The idea behind RPI X (retail price index or consumer price index in the Indian context) is to formalise regulatory lags, so that the companies get some incentive to operate efficiently in the interval between reviews. The company is required to keep the weighted increase in a basket of its price to less than the increase in a specified price index i.e. consumer price index, less X percent, so that the price decline by X percent in a year in real terms. In this form of regulation, X is set to pass the expected growth in productivity back to consumer. However, if the company did not expect the price control to be changed in the future, its price would be independent of its action and it would have enough incentive to reduce its cost. On the flip side most price control last for a few year, so any reduction in cost cannot be passed through in the price control for sometime, thereby allowing company to receive a higher profit in the interim. Then once price is reset, they may not fall to level of firm s cost immediately, hence firms are adequately rewarded for their cost reduction. This kind of price control regime provides the option of setting price based on the cost of an efficient firm as against firm s actual cost under rate of return regulation. Amol,Kiran,Mohit,Naveen,Pankaj 6 Section-B, Group-4

9 3. In the Profit sharing kind of regulation, within a band say A to B, the company keeps what it earns, below A, the company is allowed to achieve a greater return and above B, the company is forced to share some of the profit. However, determining the size of the band, degree of sharing and source of sharing becomes contentious issues (should the excess fund be placed in an account that can then be drawn in bad years or customers immediately pay or receive the amount). 4. Revenue cap method of regulation attempts to establish a fixed revenue profile for the life of the price control instead of setting a price path for the next 3 to 5 years. This removes any incentive to under forecast demand and limits the upside potential to the company to those cost aspects that are actually under the control of the company. However, it requires a correction factor in the formula so that any over recovery of revenue can be corrected within the life of the price control. The Commission is examining all the established methods of regulation in the light of the unique situation prevailing in the electricity sector in the state of Haryana to arrive at an appropriate methodology. Amol,Kiran,Mohit,Naveen,Pankaj 7 Section-B, Group-4

10 2. TARIFF APPLICATION OF HVPNL 2.1 Proposed Electricity Transmission And Bulk Supply Tariff Application The Commission determined the existing Bulk Supply Tariff (BST) in its Joint ARR and Tariff Order dated December 14, 2000, as provided in the following table. Table 3: Proposed Tariffs Tariff Bulk Supply Transmission Wheeling Consolidated Fixed Charge Variable Charge (Rs./unit) In addition, the Commission has authorised HVPNL to apply Fuel Surcharge Adjustment (FSA) to these tariffs in accordance with the FSA formula notified by the Commission in its Tariff Regulations. The design of the BST was significantly constrained due to the lack of adequate implementation capability of interface meters to measure the simultaneous maximum demand of the system. Accordingly, for such time till an improved basis becomes available for implementing the two-part tariff the Commission has used an easily available proxy for levying the fixed charge, i.e., the connected load. As directed by the Commission in its Joint ARR and Tariff order, HVPN expects to complete its interface metering by July 31, These meters once installed would have the capability of recording demand on a 15-minute basis. Accordingly, on the installation of these meters, it would become possible for HVPNL to levy and implement a two-part BST to its two customers, viz., the two distribution zones/companies - UHBVNL/North Zone and DHBVNL/South Zone on the basis of their contribution to system peak. HVPNL recognizes that it should replace the existing connected load based charge with a charge calculated based on system peak demand at the earliest. Accordingly, HVPNL is proposing a phased approach for designing the BST for the financial year , as follows: Calculate the proposed tariffs for the full year with a two part tariff structure a demand charge based on the simultaneous maximum demand of Discoms and a variable charge, which shall be effective for the full financial year Amol,Kiran,Mohit,Naveen,Pankaj 8 Section-B, Group-4

11 The interface meters shall be in place only after July 31, 2001, change in tariff has been proposed from 1 st August Thus, a part year revised two-part BST is being proposed for the remaining eight months of the financial year , i.e., with effect from August 1, 2001 till March 31, HVPNL proposes a part year tariff for FY wherein a fixed charge is based on the averaged forecasted system peak for the remaining eight months; and the variable charge per unit will be levied based on the balance revenue requirement after realisation from the tariffs for the first four months and the fixed charge recovery as proposed for these eight months. Table 4: Summary of Existing and Proposed Tariff Particulars Full-Year Proposed Tariff Existing Tariff Part-year Proposed Tariff Full year Proposed Current Part year Proposed Fixed Variable Fixed Variable Fixed Variable Effective Single Part Rs/kW/ Rs./unit Rs/kW/m Rs./unit Rs/kW/ Rs./unit Rs/unit Rs/unit Rs/unit mth th mth Bulk Supply Transmission Wheeling Consolidated Need for Tariff Application One of the main objectives of the reform process being pursued by the Government of Haryana is to transform the power utilities (the successor entities of erstwhile HSEB) into operationally efficient, financially viable and commercially disciplined companies that are not dependent on state subsidies and other external sources of finance. Given the deep-rooted financial problems of the sector and the history of inadequate commercial and operational discipline, it will require significant amounts of time, effort and funding to help these utilities achieve a financial and operational turn around. Substantial capital investment and implementation is required in a time-bound manner for critical activities like system augmentation, rehabilitation and modernization of existing facilities, and loss reduction initiatives through up-gradation of metering infrastructure. Besides the capacity augmentation requirements, even to ensure that the transmission and bulk supply businesses remain cash neutral and their financial viability is maintained it would be necessary to ensure full recovery of the input costs. An analysis of the factors that contribute to the input costs and the recovery mechanism of such costs would reveal that though the input costs have been steadily Amol,Kiran,Mohit,Naveen,Pankaj 9 Section-B, Group-4

12 increasing the recovery mechanism has not kept pace with it. This resulted in significant underrecovery of revenue from the consumers impacting the overall financial condition of the company/ies. HVPNL filed its first BST application with the Commission in June, 2000 and set out the broad objectives of such a tariff to: Improve its liquidity position; Develop a representative tariff structure to discharge its own purchase obligations; and Recover its full reasonable costs. The Commission also in its Joint ARR and tariff order noted that a BST is necessary to: Ensure adequacy of revenue recovery; Send efficient price signals to distribution companies and wheeling customers; Develop cost reflective tariffs; Follow the principle of cost causation in recoveries to be made through tariffs; and Minimize the incidence of FSA. Recognizing this need, the Commission determined two-part T&BS charges and a wheeling charge for the financial year Though the Commission calculated these tariffs on an annualized basis for the financial year , these still need to be realigned for the financial year in view of the following reasons: The aggregate revenue requirement representing the costs to be recovered for the T&BS businesses for the financial year is different from the aggregate revenue requirement for the financial year ; The individual parameters used for the calculation of tariffs such as the connected load as well as the units projected to be sold are different for the two financial years; Due to implementation constraints, the tariff for the financial year was based on easily available proxy (i.e., connected load based fixed charge). This needs to be replaced, either for the full year or part year, with more efficient tariff design, particularly as the interface meters which were limiting the implementation ability of a more efficient tariff structure are expected to be in place by July, Proposed Retail Tariff Application for Distribution and Retail Supply Business Amol,Kiran,Mohit,Naveen,Pankaj 10 Section-B, Group-4

13 2.2.1 Tariff Award for While the broad attempt to rationalize tariffs with cost of service was made, the Commission also recognized that tariff shock is not desirable in the short-term and hence adopted the following approach: The deferred payment liability of government subsidy ascertained at Rs crore was allowed as one time exception to be liquidated by adjustment against the return and electricity duty payable by licensee to the government. The pre-subsidy full year revenue gap was placed at Rs crores for the consolidated distribution business after taking into account the fact that the new tariffs would be applicable only for last quarter of the FY The residual revenue gap after adjusting for Rs crores of government subsidy, and allowed deferred payment of Rs crores comes to Rs 432 crores. The Joint D&RS ARR and Tariff Order envisaged that 60 percent of this residual gap i.e. Rs crores would be allowed to be carried forward as a regulatory asset and the balance has to be made up through the efficiency gain of the licensee. The Commission, through its Joint D&RS ARR and Tariff Order sought improvements in the following areas of tariff design: Reduction of cross subsidy: The Commission had stipulated that if the government wishes to administer tariffs lower than cost of service, it has to provide consumer specific government subsidy or else the tariffs would be raised to appropriate cost recovering levels Rationalization of monthly minimum charges for all categories Discounts (lower tariff per unit) for supply at higher voltage for HT consumers, bulk supply and railway traction Creation of a three-layered telescopic tariff structure for domestic consumers Need For Filing Tariff Application With current tariffs applicable for full FY , the revenue gap before subsidy would be Rs crores (See Table 5). After taking into account government subsidy of Rs crores, revenue gap at current tariffs for full year for FY would be Rs crores. The D&RS licensee has the following options to cover this gap: a) Direct Government Support: The total government subsidy for FY is limited to Rs crores for both the distribution companies Amol,Kiran,Mohit,Naveen,Pankaj 11 Section-B, Group-4

14 Table 5: Annual Revenue Requirement for FY 2002 UHBVN DHBVN Total Rs. Crores Rs. Crores Rs. Crores Revenue Required [a] Expected Revenue [b] at Current Traffic Revenue Gap [c] = [a] Before Tariff [b] Increase Subsidies [d] Gap after Subsidy b) Efficiency improvement: The licensee recognizes that improvement in efficiency is the only sustainable solution to bridging revenue gaps and generating sufficient resources for running the business. The licensee has undertaken a variety of steps to try and bring down both technical and nontechnical losses in the system, which are described in detail in Section 6 of the accompanying ARR application. With these steps, licensee expects to bring down the losses by about 5 percent in FY as against percent determined by Commission in its Joint ARR (See Table-6). Table 6: Projected Losses in FY2001 and FY Transmission (Inter/Intra State) Distribution Technical Losses Distribution Non-Technical Losses Total c) Tariff Increases/Rebalancing: If the options above do not eliminate the gap, the licensee has to file this application requesting an increase/rebalancing of tariffs. However, while filing this RTA, he should be aware that some consumers are paying tariffs, which are more than the cost of service, while certain others are paying much below the cost of service. Accordingly, while requesting for tariff modifications, licensee s major guiding principles have been : Creating publicly acceptable schedule of tariffs Avoiding rate shock for certain category of consumers whose tariff was significantly re-aligned with their cost of service by the Commission through its Joint ARR and Tariff Order Amol,Kiran,Mohit,Naveen,Pankaj 12 Section-B, Group-4

15 Passing on the inflationary costs to all categories of consumers 2.3 Proposed Retail Tariff Rates Current Schedule Of Charges The Commission through its ARR and Tariff Order for FY brought improvements in the following areas of tariff design: The Commission had stipulated that if the government wishes to administer tariffs lower than cost of service, it has to provide consumer specific government subsidy or else the tariffs would be raised to appropriate cost recovering levels Rationalization of monthly minimum charges for all categories Discounts (lower tariff per unit) for supply at higher voltage for HT consumers, bulk supply and railway traction consumers Creation of three tariff slabs with telescopic structure for domestic consumers. The current schedule of charges has the following components: Energy charges in ps/kwh for all categories;.36 Demand charges (for Railway) in Rs/kVA/month; Monthly minimum charges; Overdrawal charges for certain categories; Flat rate tariffs for Agricultural and Irrigation consumers in Rs./BHP/month Proposed Retail Tariff Rates The following modification have been suggested to the existing retail tariff structure and rates (See Table-7): Table - 7: Percent Increase In Tariff For Each Retail Customer Category Category Current Tariff Increase In tariff Proposed Tariff % age Change Paise/kwh Paise/kwh Paise/kwh DOMESTIC Upto 40 units per month % From 41 to 300 units per % month Above 300 units per % month NON DOMESTIC % HT INDUSTRY (above 70 KW) At 11 KV % At 33 KV % At 66/132 KV % At 220 KV % Amol,Kiran,Mohit,Naveen,Pankaj 13 Section-B, Group-4

16 Furnace (at 33 KV and % above) Special Agreement % LT INDUSTRY (up to % KW) AGRICULTURE Metered Agriculture Upto 100' % 101' to 150' % 151' to 200' % Over 200' % Direct Irrigation Tubewells % Augementation Canals % Lift Irrigation % Unmetered Agriculture (Rs./BHP/month) Upto 100' % 101' to 150' % 150' to 200' % Over 200' % RAILWAY TRACTION* At 11 KV % At 33 KV % At 66/132 KV % At 220 KV % Table - 8: Percent Increase In Tariff For Bulk Supply Category Current Tariff Tariff Increase Proposed Tariff %age Change BULK SUPPLY At LT % At 11 KV % At 33 KV % At 66/132 KV % At 220 KV % STREET LIGHTING % SUPPLY OTHER SALES % (PUBLIC WORKS) Note: -No changes have been proposed in the existing MMC rates. HVPNL, to capitalise on the efficiency enhancement measures envisaged in FY to improve commercial performance, has proposed to generally retain the tariff rates for all categories at the existing levels with minor adjustments. It expects the revised tariffs to be applicable from August 1, HVPNL expects that the remaining gap between the revenue requirements for FY 2002 as approved by the Commission and the revenues from the proposed tariffs, if any, will be met through efficiency improvements and through external subsidies made available by the GoH (See Table-9). Amol,Kiran,Mohit,Naveen,Pankaj 14 Section-B, Group-4

17 Table - 9: Additional Revenues Expected for D&RS from Each Category due to Category MU sales to category Proposed Tariff Increase Revenues from current tariffs (Rs. Cr.) Full year expected revenues from proposed tariffs (Rs. Cr.) Part year Increase in revenue (Rs. Cr) Percenta ge Increase in Revenues DOMESTIC Up to 40 units per % month From % units/month Above 300 units/month % NON-DOMESTIC % H.T. INDUSTRY Above 70 kw % Furnace % Special Agreement % L.T. INDUSTRY Up to 70 KW % AGRICULTURE Metered Up to 100' % 101' to 150' % 151' to 200' % Over 200' % Un-metered Up to 100' (BHP % in 000) 101' to 150' (BHP % in 000) 151' to 200' (BHP % in 000) Over 200'(BHP in % 000) Irrigation Direct Irrigation Tube % wells Augmentation Canals % Lift Irrigation % RAILWAY TRACTION % BULK SUPPLY % STREET LIGHTING % SUPPLY PUBLIC WATER % WORKS TOTAL % Amol,Kiran,Mohit,Naveen,Pankaj 15 Section-B, Group-4

18 3. A CRITIQUE OF THE HERC TARIFF AWARD Criteria for Setting Tariffs We feel that any rational tariff setting mechanism should satisfy the following criteria in order to become truly fair to all its stakeholders: 1. The pricing mechanism should bring about an efficient allocation of the resources being used to generate electricity. 2. It should avoid pricing policies, which are diversely related to costs for some sectors or for some specific segments of the market. 3. The prices should be such as to avoid significant shift of benefits between customers on one hand and the employers and investors on the other 4. The prices that the State Electricity Board can charge should be such that there is always a pressure (and may be even incentive) for it to reduce costs. 5. The Government, if necessary, should give subsidy, in a direct manner rather than disguising it in the form of different cost relief. As an example we can see that in case of Haryana, the cost relief to the agriculture sector is disproportionately disguised which leads to electricity being wasted in large quantities. If properly given the subsidy can still provide the same relief while simultaneously avoiding wastage 6. The pricing mechanism should ensure that in situations of scarcity the price controls that are put in place should not lead to a decline in the capacity addition to tide over the scarcity. 7. The prices should be such that they reflect the actual cost to society for production of the item. 8. The pricing mechanism should ensure that the required rate of return is earned on the invested capita i.e. the prices must include a profit element. 9. The prices should in the long-term result in increasing quality, continuity and reliability of the service. 10. The pricing mechanism should enthuse confidence among private investors, which in turn will lead to more participation from the private sector. 11. Due to the natural monopoly nature of some portions of the electricity industry (and hence absence of a market driven solution), proper regulation should build in the necessary efficiency that the market would otherwise have provided. 12. The prices should be such as to smoothen out the variations in the demand seasonally (considering Haryana s seasonal nature of demand) and daily. Amol,Kiran,Mohit,Naveen,Pankaj 16 Section-B, Group-4

19 13. The pricing mechanism should be adjusted to prevent too frequent tariff shocks to the consumers. 3.2 Tariff Application for Distribution & Retail Supply Various elements go into making up the total expenditure of the Distribution and Retail Supply (D&RS) business. These form a part of the total expenditure, which is used to calculate the revenue requirements of the licensee. The various elements are discussed below: Employee Cost Here, HVPNL had given an estimate of Rs million as against which HERC revised the estimate to Rs million. HERC estimated the cost by back calculating the components of the cost for using actual costs for D&RS business from the Profit and Loss Account, and then projecting them for Whereas HVPNL had assumed a growth rate of 10% for both the basic pay and the Dearness Allowance, HERC assumed a growth rate of 2% for the basic pay and 8% for Dearness Allowance. We feel that HERC was correct in assuming the increase in dearness allowance as 8% since it is line with the average inflation rate of around 6%. However, we feel that an increase of only 2% in the basic pay is too unrealistic. An increase of 2% may not be enforceable considering that a significant portion of HVPNL s staff has very low basic salaries. Thus, we propose that the commission for the basic pay component should have considered an increase of 5%. The other allowances have been considered at 10% of basic and DA by the commission, instead of the proposed 15% by HVPNL. We feel that this is correct considering the fact that after pay revision, these had been fixed at 10% by HVPNL and these allowances by their very nature do not change from year to year (it is only the basic and DA on which they are applied that changes). Further, the terminal cost of Rs million as estimated by the commission seems to be based on the correct fundamentals. The commission has allowed capitalization of employee costs to the extent of 9.57% of the total capital expenditure (Rs million). This figure seems to be on the higher side considering that the nature of capital expenditure that takes place in this industry. The commission further agreed to the claim of HVPNL as regards to providing free electricity to all of its employees. We feel that this is not correct and instead of accepting, the commission should have directed HVPNL to phase out the free supply system over a period of three years. The estimated loss per annum considering the free supply scheme for the employees is: (a) No. of employees of HVPNL (as of March 2000): (b) Average consumption per employee per month: 95 units Total consumption by all the employees per annum: a * b = MU Energy charge: Rs per unit (approx.) Amol,Kiran,Mohit,Naveen,Pankaj 17 Section-B, Group-4

20 Total revenue loss due to free power supply: Rs million Total revenue as proportion of total employee cost: 4.3% Repairs and maintenance The commission has rightly set the repairs and maintenance (R&M) costs as 2% of Gross Fixed Assets (GFA) for The commission has noted that the very high rate of transformer burn-outs is a major cause of the very high R&M costs. We feel that commission should also link the approved R&M costs to the age of the equipment, since more of R&M is required, as the equipment gets older. A constant proportion of the GFA may not be the right method to be blindly followed. Maintenance instead of just being considered as a repair function should be viewed as combination of activities that is carried out to retain an item, or restore it to acceptable conditions. The maintenance system should also ensure that all systems are available to further ensure that the returns on investment are maximized. The Commission has rightly advised HVPNL to prepare norms for R&M and submit the same for approval Interests on Loans The commission has approved the following amounts to be considered as interest expense: Table 10: Approved interest expense for FY (Rs. million). Source HERC approval REC HUDA HRDFA Total for capital works IDBI+SIDBI HSEB bonds Private placements Market Committee Loans from banks Total for working capital Total loans Add finance charges Less capitalised interest Interest expensed The commission has rightly instructed HVPNL to consider State Government Loans in the same manner as other loans. The commission has upheld the right of HVPNL to borrow from the State Government. We feel that in the long term HVPNL should borrow only at rates which reflect its true Amol,Kiran,Mohit,Naveen,Pankaj 18 Section-B, Group-4

21 credit rating. The availability of soft loans from the State Government will affect the drive with which HVPNAL will try to reduce its costs and increase efficiency. In the absence of any further details on the rates being presently charged by the various institutions, we cannot say how much these rates really reflect the credit worthiness of HVPNL. We feel that in the initial years HVPNL will not be able to get funding at rates lesser than 3 to 4% above Prime Lending Rate (PLR) of the various financial institutions Depreciation The commission has awarded a depreciation rate of 8.38% (the exact figure proposed by the licensee HVPNL). The licensee is believed to be depreciating land assets, which is against standard practices. The Commission has not pressed the licensees (DHBVNL & UHBVNL) for details of the land being held by them. This should have been used to deduct the appropriate depreciation amount on land assets from the total depreciation amount. Further, the commission has rightly pointed that since this amount of depreciation is being allowed to be recovered through tariff, this should be used for redemption of loan liabilities of the utility to reduce the interest burden ultimately borne by the consumers of Haryana Bad Debts We feel that the commission has acted rightly in its refusal to accept the claim of HVPNL to include 10% of incremental receivable from sale of power as bad debt. HVPNL has not been showing the realization of the dues of the current year separately from the arrears of the previous years. This masks the overall picture of the actual receivables. Also, the licensee has not segregated its sundry debtors into good, doubtful and bad. The commission has rightly observed that HVPNL needs to disconnect those consumers whose dues are classified as doubtful or bad. Also, all avenues for recovery of dues outstanding after adjustment of available security deposits etc. with the licensee should be explored. Allowing for a provision for bad debt as a percentage of the total amount billed will result in the licensee further ignoring the pressing need for improving its collection efficiency. A summary of the total expenditure as filed by the licensee and as finally approved by HERC appears below: Table 11 Approved expenditure for FY (Rs. million). Particulars Original licensee Revised Licensee HERC approval proposal proposal Purchase of energy 30, , , Wages, salaries and related costs 3, , , Amol,Kiran,Mohit,Naveen,Pankaj 19 Section-B, Group-4

22 Other expenditure (R&M) Approved loan interest Bad debts Depreciation Other expenses (A&G) Total Expenditure 35, , , Special Appropriations Contribution to Contingency Reserve Total Special Appropriations Total "expenditure" (including special appropriation) 35, , , Capital Base (Original Cost of Fixed Assets) This element is very essential for calculating the Rate of Return. This forms the base on which the Rate of Return is calculated. The process is to be handled carefully since any deviations at this stage shall get magnified in all subsequent calculations and affect reliability. The values of assets of the utility are required to be accounted for in the process of determination of the tariff under the Performance Based Regulation (PBR) and Rate of Return (RoR) systems of costing. Any under-valuation or over assessment of the assets may lead to perpetual losses or undue enrichment of the utility or its successor in interest. In calculating the Net Capital Base the commission has used the Original Cost minus Depreciation method. This method is the simplest and can easily be based on documented records. Also, it provides an incentive to the licensee to earn incentive on the original investment. However, valuations may be different due to the difference in the economic and the depreciated cost of assets. We feel that the commission has acted rightly in using this method for valuation of assets, since at this stage there is a lack of current information and the legacy that has passed from HSEB to the new licensees can be used to implement this method easily. However, we would like to point out that since this capital base is being used to calculate the return that is to be allowed to the licensees, hence a lot of attention should be paid in its calculation. In this regard, we would like to suggest an alternative option of valuing the assets also on the Reproduction or Replacement Cost basis. This method, though leading to problems like proper fixation of current costs and difficulty in fixing replacement items, will definitely churn out a figure against which a comparison can be made. Amol,Kiran,Mohit,Naveen,Pankaj 20 Section-B, Group-4

23 3.2.8 Stores The commission has accepted HVPNL s estimate of Rs million as the cost of stores for This figure is absurdly high when compared with the value of R&M allowed by the commission (Rs million) and even when compared with HVPNL s own estimate of R&M (Rs million). These figures indicate that a lot of non-moving and unserviceable items presently form a part of the stores. The commission should ask HVPNL to submit a list of such items and should remove the same from inclusion in the cost of stores. This will give a more realistic picture Loans The Commission has rightly asked HVPNL to submit instrument-wise details of each loan that it has taken. Also, the commission has raised correctly its objection to the fact that there has been a rising trend in the working capital loans vis-à-vis the loans for the purpose of capital expenditure. This shows that HVPNL has been managing its receivables poorly, due to which it has to rely heavily on working capital loans. Further, a lack of capital expenditure at this stage may spell trouble for HVPNL in the long run. The Net capital base as submitted by HVPNL in its ARR and as approved by HERC appears below: Table 12 Capital base for HVPNL for (Rs. in million). Particulars Licensee proposal HERC approval Fixed assets (excluding 12, , consumers' contributions) Work in progress 1, , Compulsory investment Working capital Average cost of stores 1, , Average cash and bank - (291.09) balance Positive elements of 15, , Capital Base Less Accumulated depreciation 2, , Approved loans 5, , Consumers' security deposits 2, , Negative elements of 10, , Capital Base Net Capital Base 5, , Return On Capital Base The commission has approved HVPNL s claim of a return of Rs million on its capital base. In doing so, the commission has used the Rate of Return Regulation in calculating the return requirement Amol,Kiran,Mohit,Naveen,Pankaj 21 Section-B, Group-4

24 for the licensee. Using this regulation and a 16% return rate, the return allowed on capital base could be upto Rs. 925 million. Since the licensee has asked for a return significantly less than this, the commission had no hesitation in accepting the claim of the licensee. According to this regulation: RR = [RB x RoR] + E D + E O&M + T where i) RR = the total annual revenue requirement of the utility (after taking credit for any subvention from State Government) ii) RB = the rate base (required investment) of the utility = Capital base in case of a licensee and Fixed assets in case of the Board iii) RoR = the allowed rate of return on investment (debt and equity) = Reasonable return in case of a licensee and not less 3% surplus for the Board iv) E D = annual depreciation expense v) E O&M = annual operation & maintenance (O&M) expense vi) T = annual taxes paid by the utility A test year has to be identified and based on past data and measurable changes that are expected to take place in the future, each component of the cost has to be carefully ascertained. The RoR method is the right choice for calculating the revenue requirement because it meets many of the criteria laid out earlier. We feel that the RoR method provides the following advantages: Consumer s interest is protected since each item of the cost is carefully analyzed This system is easily enforceable by the regulatory agency (HERC in this case) Some of the disadvantages of this method are: This method of regulation is very time consuming and the cost for gathering detailed information is significant. Based on RoR being more or less than cost of capital, the licensee may resort to either unnecessary or restrain from necessary investments. We further feel that the RoR method is required in the initial stages of regulation. As time passes, the commission should gradually switch over to a Performance Based Regulation (PBR). This provides for granting incentives to the licensees for better performance of the system. This could also be setup to penalize the licensee for under performance from the set norms. Under this form of regulation, the need for regulation itself is significantly reduced. The base line rates can be set for a longer period using the RoR route. The yearly tariff can then be adjusted based on the performance parameters. Amol,Kiran,Mohit,Naveen,Pankaj 22 Section-B, Group-4

25 The advantages that can result are: No need to undergo the process of estimating costs every year The performance parameters can be chosen by the regulator based on what it considers most important for development and where it feels that the licensee is lacking Some of the disadvantages of this system are: The regulator may not be in a position to test the achievability of the target it sets for the licensee The consumers do not benefit directly, although they do get the benefits of performance improvement in the long run The licensee can ignore improvement in areas which are not specified as performance parameters by the regulatory agency Other Income The other income comes from two sources. These are: Meter Rental and other miscellaneous charges Ancillary and incidental income including surcharges on delayed payments (mainly DPS) The commission has approved a delayed payment surcharge (DPS) income of Rs. 326 million. The licensee had proposed a DPS income of Rs million. The commission has taken a value of 20% of that proposed by the licensee. We feel that this figure is too low and the commission is acting rather conservatively. Given the fact that the erstwhile utility has been corporatised, we feel that there will be significant increase in delayed collections, which would give rise to a larger DPS income. We propose a figure of Rs. 815 million. We feel that the commission has rightly estimated the rest of the components of the Other Income. In light of the above a summary of the aggregate revenue requirement (ARR), which forms the basis for tariff setting, appears below: Table 13 Aggregate revenue requirement of the distribution and retail supply Licensee for F (Rs. in million) Particulars Original Licensee Revised Licensee HERC approval proposal proposal Reasonable return Total expenditure , , Minus Non-tariff income Total Aggregate 34, , , Revenue Requirement Amol,Kiran,Mohit,Naveen,Pankaj 23 Section-B, Group-4

26 3.3 A Review of HVPNL Tariff Proposals Principles of Tariff Setting HVPNL in it s tariff filing has adopted certain principles. The tariffs in Haryana have been historically based on perceived payment capacity of the consumers. This has resulted in large cross subsidization in the system. HVPNL had proposed proportionately less increase to those consumers whose tariffs are above the cost of supply compared to categories that are subsidized and/or cross subsidized. The principles HVPNL followed for setting the tariffs were as follows: The price was a signal for promoting efficient use of electricity with cost of service as the basis for that price Recognition of the impact of tariffs on the competitiveness of the Licensee for those customers with alternative sources of power through captive generation Licensee s metering capacity Mitigation of rate shock when rebalancing The tariff schedule proposed by HVPNL was: Table 14 Tariff Proposed by HVPNL Category Existing tariffs Proposed tariffs Change Domestic Upto paise/kwh 202 paise/kwh 11 paise/kwh units Others excluding 306 paise/kwh 317 paise/kwh 11 paise/kwh Village Chaupal Village Chaupal 191 paise/kwh 202 paise/kwh 11 paise/kwh (Upto 40 units) Village Chaupal 306 paise/kwh 317 paise/kwh 11 paise/kwh (Others) Non-Domestic 392 paise/kwh 419 paise/kwh 27 paise/kwh HT Industry 70 KW 392 paise/kwh 419 paise/kwh 27 paise/kwh and above Furnace 392 paise/kwh 419 paise/kwh 27 paise/kwh Special Agreement 392 paise/kwh 419 paise/ kwh 27 paise/kwh LT Industry Less 392 paise/kwh 419 paise/kwh 27 paise/kwh than 70 KW Agriculture 50 paise/kwh 62 paise/kwh 12 paise/kwh (Metered) Upto 100 depth of water table For depth from paise/kwh 50 paise/kwh 12 paise/kwh to 150 For depth from paise/kwh 43 paise/kwh 12 paise/kwh to 200 For depth above paise/kwh 35 paise/kwh 12 paise/kwh Direct Irrigation 50 paise/kwh 62 paise/kwh 12 paise/kwh Tubewells Amol,Kiran,Mohit,Naveen,Pankaj 24 Section-B, Group-4

27 Augmentation Canals 208 paise/kwh 220 paise/kwh 12 paise/kwh Lift Irrigation 208 paise/kwh 220 paise/kwh 12 paise/kwh Agriculture Rs 65/BHP/Month 106/ BHP/ Month 41 / BHP/ Month (Unmetered) Upto 100 depth of water table For depth from 101 Rs 50/BHP/Month 91/ BHP/ Month 41 / BHP/ Month to 150 For depth from 151 Rs 40/BHP/Month 81/ BHP/ Month 41 / BHP/ Month to 200 For depth above 200 Rs 30/BHP/Month 71 / BHP/ Month 41 / BHP/ Month Bulk Supply Railway 392 paise/kwh 419 paise/kwh 27 paise/kwh Traction* Bulk Domestic 277 paise/kwh 288 paise/kwh 11 paise/kwh Bulk Non-Domestic 359 paise/kwh 386 paise/kwh 27 paise/kwh Bulk Others 392 paise/kwh 419 paise/kwh 27 paise/kwh Street Lighting 392 paise/kwh 419 paise/kwh 27 paise/kwh Supply Public Water Works Sewerage Treatment and Disposal Water Supply by PWD/ Public Health Water Supply by Municipal Corporation/Municipa l Committee/ Council 392 paise/kwh 317 paise/kwh -75 paise/kwh 392 paise/kwh 419 paise/kwh 27 paise/kwh 392 paise/kwh 317 paise/kwh -75 paise/kwh There was no change in the components of the tariff charges i.e. energy charges, fuel surcharge adjustment and monthly minimum charge. We feel that the commission has rightly pointed out that it intends to rationalize the tariffs to reflect the cost of service but that this cannot be done in one shot but slowly. The commission fears that it cannot suddenly increase tariff of the subsidized class to the full cost level as that would lead to a severe rate shock. On the other hand, it cannot suddenly lower the tariffs of the cross-subsidizing class to the cost level since that would lead to a significant revenue loss to the licensee. The objectives of tariff setting as claimed by the commission are: Rationalisation of the tariff structure, the minimum consumption charges and other terms and conditions of supply Avoidance of steep hike in tariffs Simplicity, understandability, public acceptability, feasibility of application, freedom from ambiguities Provide incentive to move agricultural consumers from unmetered to metered tariff Amol,Kiran,Mohit,Naveen,Pankaj 25 Section-B, Group-4

28 Curb pilferage of power Encourage larger consumers to connect at HT rather than LT to reduce distribution losses The commission has used the embedded cost technique for the assignment of revenue. Under this, the revenue requirement is allocated to the various classes of service. We feel that the output from such an allocation would only be as good as the data considered and assumptions made to allocate the revenue. There is also the possibility that consumer behavior input of various elements as reflected in the economic costs may be substantially different in the subsequent years as compared to the test year. This deviation would considerably alter the structure of final output of the utility and the allocation done earlier would lead to a certain group of consumers benefiting more than the others (thus defeating the very purpose of the whole exercise). We feel that the commission should have laid more emphasis on a marginal cost based tariff for the assignment of the revenue. Though the commission has used marginal revenues to set tariffs, it has not used marginal costs for allocating the revenue. This system assesses the revenue requirements of the various consumers based on the marginal costs relevant for that group of consumers. The sum total of the revenue realization thus calculated is compared to the revenue requirement of the utility. Regulators try to bridge the gap by way of internal adjustments. It also ensures that the services remain financially viable. This technique is to be run alongside the objective of promotion of efficiency so that the licensee is assured of cost recovery while the consumer satisfaction level is simultaneously maximized. The only drawback is the revenue gap that tends to be positive in capacity constrained systems. We also feel that the commission should direct the licensee to implement the Time-Of-Day (TOD) charge since that would reflect a more realistic costing of the energy consumed. Also, it would help in levelling the load curve that would result in efficient use of the installed capacity. A model for the same in which the demand charge is being kept constant and the energy charge varies according to the time of the day has been proposed in case of Maharashtra Domestic Tariff The commission has rightly set a telescopic tariff for the domestic consumers based on their marginal revenues paid by the consumers at different levels of consumption. The tariffs approved by the commission are: Table 15 Approved Domestic Tariffs (paise / KWh) Slab Rates First 40 units 260 Amol,Kiran,Mohit,Naveen,Pankaj 26 Section-B, Group-4

29 units 360 Above 300 units Non-Domestic Tariff Here the commission has accepted a tariff of 419 paise per KWh as compared to cost of service of 428 paise/kwh. This sector usually cross-subsidizes the other sectors. Thus we feel that the commission under no circumstance, should have agreed to a tariff less than the cost of service LT Industries Tariff The commission has rightly increased the tariff for this segment to 425 paise/kwh thus eliminating the cross-subsidization of this sector HT Industries Here the commission has kept the tariff only marginally lower for supply at 11 kv than the tariff for LT supply. We feel that since the losses in case of HT supply are significantly less than LT supply and hence the cost of service is also lower, the HT tariffs should be kept at their existing rates and not increased (4.34% in case of 11kV) Agriculture The commission has rightly recognized that the pricing in the segments metered and flat rate, the tariffs should be such that to prevent undue exploitation by the farmers. It has been observed that the flat rate system leads to faster depletion of the water table. Thus, the flat rate and the metered tariffs should be such that there is incentive for the farmer to switch to metered connection. Further, the commission has also taken into account the Rs. 423 crore subsidy to be given by the Government for private agricultural pump sets. Also the commission has rightly pointed out to the Government that it wishes to provide relief to any consumer category, it will have to compensate the Licensee the full financial loss; otherwise the tariff will be raised to the appropriate level. Though there has been increase in the agricultural tariffs, yet there is tremendous pressure on HVPNL to roll back prices to the original level. We feel that this should not be done as it will set a bad precedence and defeat the very purpose of the whole reform process Railway Traction The commission has revised the charges to be in line with the HT supply. A demand charge is additionally levied on the Railways for the fact that they receive a much more Bulk Supply Amol,Kiran,Mohit,Naveen,Pankaj 27 Section-B, Group-4

30 The commission has increased the tariffs for the bulk supply to be in line with the cost of service at 419 paise/kwh. Also, a discount is being given to bulk supply at 11kV level if it is metered on the HT side of the transformer. We feel that the tariffs for the non-domestic bulk supply could have been raised further to the level of 425 paise/kwh as usually the marginal revenue that can be taken from these consumers is large Street Lighting Supply We feel that this should be charged at the cost of service since the major consumers for this type of electricity are municipals and corporations. The commission has fixed a tariff of 415 paise/kwh for this Public Water Works The commission has rightly set the tariff for this category at 400 paise/kwh. This is near the cost of service calculated for this category. The commission has taken the right step since there is no logic in providing subsidized tariffs to Government organisations. If tariffs are to be subsidized then the Government should give direct subsidy to the concerned department and not through the licensee Monthly Minimum Charges (MMC) The commission also reviewed the MMC applicable to different categories and approved changes in line with the tariff revision. Since these changes were announced Suo-moto, and since HVPNL had not sought any increase in these in its tariff filing, hence the objections to these by the public could not be raised at any of the commission s hearings. One of the petitioners challenging this change has alleged that MMC is like a tax, and the commission is overstepping its role in setting the MMC. It contends that HERC should limit itself to setting only the tariffs. We feel that the commission should have the right to set the MMC, since a control by the utility would again result in the overall tariff being susceptible to political and other pressures. Also, we feel that MMC is not like tax since it is not being levied as a percentage on some other charge. It is like a separate minimum charge applicable on the consumers. However, we do have our reservation on the fact that the commission has expressed that the MMC should be in line with the tariff revisions. Since the energy tariffs correspond at least partly to the variable part of the cost and the MMC to the fixed part, hence revising the MMC in line with the tariff revisions does not make sense. Another area of concern is that since the entire aggregate revenue requirement is being allocated through the tariffs, hence the licensee has no right to collect the MMC. Other areas of reservation against the MMC include: Amol,Kiran,Mohit,Naveen,Pankaj 28 Section-B, Group-4

31 In case of seasonal industries surrendering the load during the off-peak time is difficult and for that also they are charged the MMC for one month For small-scale LT industries, MMC is calculated based on connected load that does not represent a true picture since the load factor for these industries is very low and the use of the entire connected load simultaneously practically never happens. We feel that HVPNL should go ahead with replacing the conventional meters with integrated meters since these can then record the peak demand of the consumer and the MMC can then be easily calculated based on this. We further feel that the industries themselves would be willing to bear the one time cost of these meters considering the savings they would make in the MMC over a much longer period. The commission assumes a consumption of 47 units in a month for each KW of connected load. The actual load factor for the LT industries is of the order of 25% and hence the industry requires 7 hours of supply instead of 2 hours as assumed by the commission for consuming the 47 units. If the MMC is increased then the consumers would have no incentive to save power upto the MMC level and this will result in wastage. We feel that despite the above reservations, MMC is a valid concept and it has to be included for recovery of the fixed part component of the costs of the licensee. The prescription of MMC is necessary in case of single part tariff for the recovery of fixed costs that are recovered through demand charges in case of two-part tariff. Further MMC is only implemented in case the consumer is unable to reach the MMC level at the prevailing tariff. Also, we agree with the commission that the RoR taken on the entire aggregate revenue requirement would only materialize if the entire sales projection of power materializes. In case these projections do not match the estimates, then it may result in the licensee not recovering its fixed costs for the year Cross Subsidies Cross subsidies have the following adverse effects: Higher tariffs for consumers who are perceived as having ability to pay Wrong signals to those consumers who are paying less Inefficient and unproductive use of electricity Revenue yielding categories may switch to alternative sources of power due to higher tariffs while more subsidized consumers may join. This will ultimately result in an unviable situation for the licensee. Amol,Kiran,Mohit,Naveen,Pankaj 29 Section-B, Group-4

32 We feel that the commission should ask the licensee to upgrade its management information systems on an urgent basis so that the data related to different areas is available and then the marginal cost of each class of consumer can be estimated. Based on this, the true costs for each class can then be found and tariffs can accordingly be set Treatment of Revenue Gap The licensee has proposed to treat the revenue gap as a regulatory asset to be recovered sometime in the future. The licensee believes that this will result in mitigating the rate shock, as it will result in pushing some of the tariff increase to future years. We agree with the commission when it has raised the following points regarding the regulatory asset: This regulatory asset should not be made a part of the capital base as that would result in its double counting The idea of depreciating the regulatory asset is not correct since this asset is not being used to create any physical assets If the entire losses are treated as a regulatory asset then the licensee would become indifferent to any actions to improve efficiency and productivity 3.4 Transmission & Bulk Supply Tariff This is the second component on which HVPNL had submitted its Aggregate Revenue Requirement (ARR) and tariff estimates to HERC for approval. HERC had made certain observations and modifications before approving the document. HERC had passed orders on both the tariff filings - Distribution & Retail Supply business and Transmission & Bulk Supply business. The commission had made a lot of similar comments when analysing the two filings. The commission s D&RS tariff order (including the similar comments) has already been analysed earlier under the D&RS section. In this section, we will be analysing only those aspects of the commission s T&BS tariff order which are unique to the T&BS business and which have not been covered earlier. The total expenditure of the T&BS business consists of the cost of purchased energy, transmission losses, operating and maintenance expenditure, interest on loans, depreciation, contribution to contingency services and other expenditure. Amol,Kiran,Mohit,Naveen,Pankaj 30 Section-B, Group-4

33 3.4.1 Cost of Purchased Energy The two factors influencing this cost are the volume of energy purchased and the rate at which it is bought. A. Volume of Power Purchase: Haryana being a power deficit state, HVPNL believes that it will be able to sell all the power that it is able to purchase. Thus forecasting availability of power from various sources becomes an important task for estimating the power purchase cost. We agree with the commission s view that there is no problem in this estimation from a dedicated source while the estimation from a shared source can be complicated due to the following: Distribution of unallocated power Utilization of other member s unused share We feel that the estimates made by the commission for FY is realistic since it is based on the actual power purchased during the first six months of FY The commission has rightly pointed out to HVPNL that it is illegal to buy power from HPGCL without a proper Power Purchase agreement (PPA). We feel that the commission should have made an alternative estimate of the projection made by NERB. The commission is already making the estimates for projections not provided by NERB. We feel that the commission should look at the past trends over a period of at least 10 years for estimating a pattern of drawings from the shared resources. This estimate should then be adjusted for any unusual drawings to derive the final estimates. A summary of the power purchase volume appears below: Table 16 Comparison of HERC approval of power purchase volume and HVPNL proposal (MU) for FY (in MU). Source of power Original HVPNL Revised HVPNL HERC approval proposal position Singrauli 1, , , Rihand Dadri Thermal Unchahar Anta Auraiya Gas Dadri gas Sub total for NTPC 4, , , existing plants Faridabad Gas 2, , , Sub total for NTPC 2, , , new plants Salal 1& Bairasuil Project Tanakpur HE project Chamera URI Amol,Kiran,Mohit,Naveen,Pankaj 31 Section-B, Group-4

34 Sub total for NHPC 1, , , Narora Atomic PP RAPP Sub-total for NPC HPGCL Sub total for HPGCL 3, , , Bhakra (hydro) 1, , , Dehar (hydro) 1, Pong (hydro) IPS Sub total for shared 3, , , utilities Liquid fuel plant (Magnum) Maruti Sub total for others Other imports Total power 16, , , purchase volume Less exports (69.00) (69.00) (69.00) Purchase net of exports 15, , , B. Power Purchase Cost: This is not a very complicated factor to estimate since this is to a large extent known beforehand. We feel that the commission has rightly directed the licensee to use the following steps for projecting the cost of power: If PPA exists, costs to be based on the PPA CPSU s costs to be based on rulings by CERC In the absence of these two, costs to be based on latest rates from invoices The estimates made in this fashion should consider the possible escalation in the prices Wheeling Charges: The licensee pays these charges to Power Grid Corporation of India Ltd. (PGCIL) for transferring power from NTPC, NHPC and NPC stations to its boundaries. This should be shown separately and not clubbed together in the general power purchase cost. The wheeling charge should be in line with that proposed by PGCIL and should be steady for a year. Based on this and the volume of power being bought from NTPC, NHPC and NPC, the total wheeling cost can be estimated reasonably. The total approved cost of purchased power is Rs million as against HVPNL s revised estimate of Rs million. Based on this the average cost of power purchase comes to around Rs per unit. Amol,Kiran,Mohit,Naveen,Pankaj 32 Section-B, Group-4

35 3.4.3 Transmission Losses: Transmission loss has two components: Inter-state transmission loss which is incurred in the wheeling of power from outside sources to HVPNL s boundaries Intra-state transmission loss, which is the loss-taking place in the state. We agree with the commission in that the licensee should be more concerned about the intra-state losses as these are the ones, which are quite heavy in magnitude, and in that the licensee can have a direct influence over these. We feel that the commission has been too conservative in its estimate of the intra-state losses at 5%. In the absence of interface meters, the task of segmenting the losses into various segments is extremely difficult. Hence, fist preference should be given to the installation of these meters. Since the commission has used similar arguments for both D&RS and T&BS, we are not covering the other elements of the total T&BS expenditure as they are common with the D&RS business and our analysis of the commission s order on these appears in the section on D&RS. Also, the analysis of capital estimation process as approved by the commission is as discussed earlier. A summary of the net capital base for the T&BS business appears below: Table 17 Capital base for HVPNL for FY (Rs. in million). Particulars HVPNL proposal HERC approval Fixed assets (excluding 15, , consumers' contributions) Intangible assets Work in progress 2, , Compulsory investment Working capital Average cost of stores Average cash and bank (6.76) (53.87) balance Positive elements of 17, , Capital Base Less Accumulated depreciation 1, , Approved loans 13, , Negative elements of 15, , Capital Base Net Capital Base 2, (12,383.62) We agree with the commission in indicating that since the net capital base is negative hence no return is to be allowed. In light of the above analysis the approved estimates of the total aggregate revenue requirement for FY are: Amol,Kiran,Mohit,Naveen,Pankaj 33 Section-B, Group-4

36 Table 18 Total aggregate revenue requirement for FY (Rs. in million) Particulars HVPNL proposal Revised HVPNL position HERC approval Reasonable return Total expenditure 30, , , Minus Non-tariff income (219.27) (219.27) (219.27) Minus Outstanding - customer rebates Total Aggregate Revenue Requirement 30, , , Critical Analysis of T&BS Tariffs Objectives The commission in its order stated what it believes to be the major objectives in setting T&BS tariffs. Each of those is analysed below: Revenue adequacy: We agree with the commission in that the revenue should match the costs over an yearly basis rather than a month to month basis Efficient signals to Distribution licensees and Wheeling customers: We agree that this is true, but this should not be the main driver behind rationalising the rates Cost-reflective: We concur with the commission that the variation in costs for the differences in voltage, reactive power etc. should be reflected in the tariffs Consistency with Fuel Surcharge Adjustment (FSA): We agree that the tariff structure should take into account application of quarterly FSA, but we feel that the tariffs should not be varying too much and stability should be maintained somewhat over the short term We believe that separate accounts for the bulk supply and transmission, as accepted by the commission, are very essential as in this age of reforms further unbundling may create players other than the present distribution licensee to whom the T&BS licensee can supply power directly. Also, some other players may only utilize the T&BS wheeling services Allocation of Costs The commission has used the following process for allocating the costs: Entire power purchase cost, other than that attributable to intra-state transmission losses, has been allotted to bulk supply. 10% of employees cost and A&G have also been attributed to bulk supply operation Amol,Kiran,Mohit,Naveen,Pankaj 34 Section-B, Group-4

37 Interest on capital-related loans is attributed to transmission business. Interest on working capital is attributed to bulk supply business, considering that most of the working capital loans were raised for paying the generators supplying power. Interest on PF has been allocated in the same manner as the employees cost has been assigned to bulk supply and transmission business. We feel that the commission has overall acted in a simplified manner. The historic data for the actual proportion of costs incurred in each category should be analysed and an alternative estimate for benchmarking purpose should be made available Disaggregation of Costs: For disaggregation of costs into fixed and variable, the commission has again made assumptions based on data that is not available in their tariff order. In the absence of information, we are not in a position to comment on the same Tariff Design We feel that a two-part tariff is better as it reflects more closely the actual costs of the licensee. Thus, we agree with the commission s adoption of a two-part tariff comprising fixed and variable charge. The commission has based the fixed charges based on connected load. We feel that this is too crude. Now with the installation of the interface meters, this problem is solved and the fixed charge can now be allocated based on the actual peak demand. The commission has rightly taken into account the system load factor while calculating the tariffs, since to meet the peak demand the capacity has to be 33% higher than to meet the average demand (considering a system load factor of 67%). The final rates as approved by the commission are given in Table 4. Recently HVPNL has proposed a revised tariff schedule for the T&BS business, based on the installation of interface meters. These interface meters will permit the consumers to be charged fixed costs on the basis of their actual peak consumption rather than their connected load. The revised proposal is also given in Table-4. We feel that the rise in fixed costs is justifiable considering the fact that most of the industries have demand factors (demand factor is the ratio of maximum demand to connected load) of less than 50%. This partly compensates for the rise in the fixed costs. Also, due to significant reduction in the variable charge (19.6%) the consumer is bound to benefit overall. In conclusion, we recommend that the commission approve the new tariff schedule prepared by HVPNL. Amol,Kiran,Mohit,Naveen,Pankaj 35 Section-B, Group-4

38 4. COMPARISON OF TARIFF AWARD BY MERC WITH HERC AWARD All areas of the State of Maharashtra except the areas covered by the licencees like the Mumbai Electric Supply & Undertaking, Mumbai Suburban Electric Supply, Mula-Pravara E.C. fall within the Maharashtra State Electricity Board (MSEB) area of power supply. Though actual supply is made by MSEB, the State Government has directed that beyond the prescribed limits, previous sanction of the Government should be taken before supplying power. In matter of the Revision of tariff application to various categories of consumers of Maharashtra State Electricity Board with effect from , the MERC after taking into consideration all the objections, responses of the MSEB, issues raised during public hearings, subsequent rejoinders and all other relevant materials, made the following tariff order on April 28, 2000 The following is a comparison between the framework used by MERC in evolving the tariff policy and declaring the tariff order and tariff schedule, and the tariff award by HERC: 4.1 Single Bulb Consumers MERC intends to create a separate category of single bulb consumers. The creation of this category has been postponed by one year due to absence of requisite data. MSEB has been directed to collect the data to enable the Commission to introduce this category in the next tariff order. HERC can also consider introducing a similar category in its next tariff order, keeping in mind the welfare of the lowest class of consumers. 4.2 Seasonal Consumers The concept of seasonal consumers has been removed by MERC. All such consumers will be billed at the rates applicable to the category to which they belong. HERC does not have such a category currently. But given the fact that a significant number of its consumers are in the LT category, and a lot of these are seasonal small-scale industries, a separate category for seasonal consumers may be required. 4.3 Cross-Subsidy MERC has stated that cross-subsidy will be eliminated gradually over a period of 5 years for all categories of consumers and tariff for all categories will be progressively increased or decreased, as the case may be, to reflect the average cost of supply. The prevailing levels of electricity tariff in Haryana contain a large degree of cross subsidy, with some categories of consumers paying well above the economic cost of supply. It has to be recognised that low and subsidised tariff initiate inefficient high Amol,Kiran,Mohit,Naveen,Pankaj 36 Section-B, Group-4

39 demand for power, which puts pressure on the system capacity and the quality of service. Like the MERC, HERC needs to realize that subsidised tariff should not distort the general tariff structure by imposing burden on another set of consumers. Consequently, subsidised tariff should be financed from government's general budget, because raising funds through a general tax system imposes lower cost on the society than creating sector specific levies. 4.4 Tariff Categories MERC has initiated rationalisation of tariff categories by merging HT mines with HT industrial, merging SP-I and SP-II, merging power looms with LTP-G and reducing the domestic slabs from five to four. HERC needs to take a cue from this and reduce the multitude of categories currently part of the tariff order. 4.5 Public Institutions The Commission intends to create a separate category of consumers to be named Public Institutions. This category will cover consumers like Zilla Parishads, Religious places, Govt. and Municipal hospitals. Due to non-availability of sufficient data, the Commission is not in a position to introduce this immediately and will do so during the next tariff process. It has directed the MSEB to make available this data by 30th September The HERC should also consider a similar process for providing benefit to such a class of consumers, which are part of the social infrastructure. 4.6 Power Metering Billing data submitted by the MSEB revealed that more than 50% of metered consumers are being billed on the basis of either average or minimum charge. The MERC has done away with minimum charges. Further, the MSEB has been asked to review the meter reading process and submit to the Commission its report of action taken to improve the metering and billing efficiency. MERC has directed that the MSEB will release all new connections on a metered basis only and all consumers will be required to pay tariff on the basis of metered consumption. This requires the MSEB to embark on a meter installation programme so that all consumers would be metered within a period of 3 years. The MSEB is to prepare a Master Metering Plan (MMP) within a period of 3 months and submit it to the Commission for its approval. The Commission will issue guidelines for the preparation of MMP in the detailed tariff order to follow. In cases where the flat rate tariff is being levied, the MSEB will continue to bill at such rates as the Commission determines till such time the meters are installed. This is similar to the situation in Haryana. A large number of consumers at the low voltage level have defective meters or none at all. The bills are prepared for non-metered consumption based on estimates of consumption using parameters such as horse power rating of the hydraulic pumps, load factor or Amol,Kiran,Mohit,Naveen,Pankaj 37 Section-B, Group-4

40 connected load. These do not reflect the actual consumption of un-metered consumers due to aberrations such as consumers replacing pumps with higher rating; others frequently exceed the connected load or load factor used for calculating bills. HERC has directed that HVPNL should complete the installation of interface metering by June Subsidies & Cross Subsidies The prevailing levels of electricity tariff in Haryana contain a large degree of cross subsidy, with some categories of consumers paying well above the economic cost of supply. It has to be recognized that low and subsidized tariff initiate inefficient high demand for power, which puts pressure on the system capacity and the quality of service 4.8 Time of Day Tariff MERC has introduced the Time of Day (TOD) tariff for HT industrial (HTP - I & HTP - II) consumers. The Commission intends to use the TOD tariff as a critical tool for Demand Side Management. The Commission expects HT industrial consumers to avail of this facility by shifting consumption from peak period to off peak period. This will not only benefit the industrial consumers but also help the MSEB in flattening the load curve. The Commission also intends to review definition of billing demand, so as to enable the consumer to shift his consumption to non-peak hours. The Commission hereby directs the MSEB to install TOD meters for all HT industrial consumers by September 2000 and, for all other HT consumers except Railways, by December The MSEB must furnish quarterly to the Commission information regarding the population of TOD meters and the data obtained from these meters. The Commission intends to progressively expand the TOD tariff to encompass all categories consuming more than 300 units per month. HERC should also try to incorporate the TOD tariff in its next order to enable better load balancing and avoid unnecessary load shedding. 4.9 Receivables Management and Cash Position In order to assist the MSEB to reduce its receivables, MERC has directed the MSEB to publish, every quarter, the names and addresses of the 10 biggest defaulters in each category, in each billing unit, in the local newspaper and file a report enclosing a copy of such news clippings with the Commission. To improve cash collection, MSEB may consider rounding off adjustment of the bills to the nearest ten Rupees instead of one Rupee as at present. This will help reduce the collection time at the cash collection centers. The MSEB may also consider putting up more cash collection centers. HERC has also noticed similar problems of poor receivables management in HVPNL as shown by the increasing Amol,Kiran,Mohit,Naveen,Pankaj 38 Section-B, Group-4

41 amount of loans for working capital. It could consider adopting some of the measures suggested by MERC T&D Loss The T&D loss computed by MERC, after incorporating the revised norms for LT agricultural consumption, results in an estimate of 31.87%. The Commission has directed the MSEB to take all necessary steps to reduce the T & D loss below 26.89% and has accordingly disallowed all losses in excess of this target. The Commission has assumed that the MSEB will earn at least the average realization for reduction of every kilowatt-hour of loss. Achieving the targeted T&D loss of 26.89% will fetch Rs 600 crores of additional revenue for the MSEB. This exercise should be considered by HERC before drafting its next tariff order, since as part of its current order; it has allowed T&D loss of 33.1% 4.11 Customer-oriented outlook MERC has directed that the MSEB should release new connections within a stipulated period. In case of a delay beyond the stipulated period, the consumer should be informed of the reasons for the same and the likely date of new connection. HERC s tariff order finds no mention of anything similar. For a more professional management of HVPNL, it needs to become a more customer-facing institution. Hence, HERC should introduce similar norms in its next tariff order. Table - 19: Summary of Expenses Approved by the Commission for MSEB Proposal (Figures in Rs. Crores) MERC Approval Remarks Generation of 3,540 3,387 Based on the Commission's targets for generation. Power Purchase of Power 3,798 3,542 Based on the Commission's approval of power purchase. Repairs & Maintenance Employee costs 1,519 1,419 Additional expenses arising out of implementation of 5th Pay Commission may be recovered through efficiency improvement. Admin & Gen Expenses Depreciation 1,294 1,293 Token deduction of Rs. 1 Crore for non-submission of information to the Commission to ascertain the prudency of the capital investment during last five years. Amol,Kiran,Mohit,Naveen,Pankaj 39 Section-B, Group-4

42 Interest Charges 1,239 1,127 Interest on investment in DPC has been disallowed. Also token reduction of Rs. 1 crore for non-submission of information to allow the Commission to ascertain the prudency of the capital expenditure investment. Token reduction for working capital on account of poor receivables management Provision for doubtful debts Other debits Cost of recovery from agricultural consumers has been disallowed. Total Expenses 12,733 12,071 Allowed Note: All expenses have been shown net of capitalization Table 20: Summary of Energy Balance Description MSEB Proposal MERC Approval 42,120 Generation 42,705 43,583 14,768 Power Purchase 16,435 15,657 56,888 Total Energy Requirement 59,140 59,240 38,760 Sales 42,782 41,112 Improvement in T & D loss over , % T & D loss as % of available energy 27.66% 26.89% Note: Figures in Million Units Existing Tariff with M.S.E.B. Forecast Table - 21: Summary of Revenue Statement for Year Description MSEB Proposal & Forecast MERC Forecast & Approval 10,703 Revenue from sale of power 12,721 11, Miscellaneous Revenue Other Income Additional Revenue from T&D loss reduction ,137 Total Revenue (Rs. Crores) 13,155 12,360 12,733 Total Expenses 12,733 12,071-1,596 Surplus Average Realisation (Rs./ unit) Average Cost of Supply (Rs./Unit) Tariff Hike Description MSEB MERC Proposal Approval Tariff Increase in Rs. Crore 2, Tariff Hike in % 18.9% 6.5% Amol,Kiran,Mohit,Naveen,Pankaj 40 Section-B, Group-4

43 Proposed Category of Consumers Domestic (LD 1) Table - 22: Summary of LT Tariff for the year Demand Charge (Rs/KVA/month) Rs/HP/month 0-30 Units Rs. 20 per service connection for single phase Units Rs. 50 per service connection for three phase Units Additional Fixed charge of Rs. 50 per 10 KW 300 Above 300 units load or part thereof above 10 KW load shall be 460 payable. Non Domestic (LD 2) Units Rs. 50 per service connection for single phase Units Rs. 100 per service connection for three phase460 Above 200 units Additional Fixed Charge of Rs. 100 per 10 KW 600 load or part thereof above 10 KW load shall be payable. General Motive Power (LTP-G) Units Rs. 60 per HP per month Units Units Optional MD based tariff will be available at above Units (only Rs. 220 /KVA/ month 360 balance Units) Powerloom Flat Rate* Public Water Supply Urban P. W Schemes For Connected Load 0-67 HP For Connected Load > 67 HP Flat Rate Tariff (Rs/HP/month) Rural P. W Schemes Grampanchayat 88 0 'C' class Municipal Councils ** Metered Tariff Agriculture Flat Rate Tariff (Rs/HP/month) For Load upto 5 HP 75 0 For Load more than 5 HP upto 7.5 HP For Load more than 7.5 HP upto 10 HP For Load more than 10 HP ** Energy Charge Ps/U Amol,Kiran,Mohit,Naveen,Pankaj 41 Section-B, Group-4

44 Metered Tariff Street Light Tariff Grampanchayat & C Class MC "A" & "B" Class Municipal Council Municipal Corporation Areas Poultry Farms Notes: *: Flat rate tariff for power loom category will be applicable during the intervening period till the meters are installed. Thereafter, they will be billed at the rates applicable for LTP-G category. **: Flat rate tariff shall be applicable till the time, meters are installed. FCA shall be applicable to all categories of consumers. The methodology for charging FCA shall be determined by the Commission on a quarterly basis. Table - 23: Summary of HT Tariff for the year Proposed Category of Consumers Demand Charge Energy Charge Ps/U (Rs/KVA/month) Rs/HP/month HTP I (Industrial - BMR/PMR) Base Tariff TOD Tariff hrs 0600 hrs hrs 0900 hrs hrs 1200 hrs hrs 1800 hrs hrs 2200 hrs 0 60 HTP II (Industrial Others) Base Tariff TOD Tariff hrs 0600 hrs hrs 0900 hrs hrs 1200 hrs hrs 1800 hrs hrs 2200 hrs 0 60 HTP III (PWW-BMR/PMR) HTP IV (PWW-Others) Amol,Kiran,Mohit,Naveen,Pankaj 42 Section-B, Group-4

45 HTP - V (Railway Traction) HTP VI Residential Complex Commercial Complex HTP VII (Agriculture) Flat Rate Tariff (Rs/HP/month)*** Metered Tariff HTP VIII Poultry Layers & Broilers HTP IX (TEC) SP-I Agri (HT/LT) HighTech, Cold Staorage Mula Pravara Electric Co-op Soc Inter State Sale Note: ***: Flat rate tariff shall be applicable till the time meters are installed. FCA shall be applicable to all categories of consumers. The methodology for charging FCA shall be determined by the Commission on a quarterly basis. Amol,Kiran,Mohit,Naveen,Pankaj 43 Section-B, Group-4

46 Table - 24: Generation, Transmission & Distribution cost for & (tentative) Sr. Stage Units in MKWH Cost (Rs. in Crore) Per unit in paise No A) 1) Purchase ) Generation TOTAL (A) Less: losses B) Units transmitted C) Energy sold at HT Proportionate Cost for HT Units sold Cost of Consumer Billing D) Total E) Energy sold at LT Proportionate Cost for LT units sold Distribution LT cost Cost of Consumer Billing F) Total G) Total (D + F) H) Surplus required Average cost of per unit Amol,Kiran,Mohit,Naveen,Pankaj 44 Section-B, Group-4

47 5. COMPARISON OF TARIFF AWARDS OF HERC AND APERC 5.1 Background The Government of Andhra Pradesh has enacted the Andhra Pradesh Electricity Reform Act, 1998 to provide for the Constitution of an Electricity Regulatory Commission, Restructuring of the Electricity Industry, Rationalisation of the Generation, Transmission, Distribution and supply of electricity. 5.2 Power situation in AP The Andhra Pradesh State Electricity Board is vertically integrated as a result of this the functional priorities were found to be getting distorted due to resource crunch. This has resulted in inadequate investment in transmission and distribution which has adversely affected the quality and reliability of supply. It is, therefore, considered necessary to unbundle the integrated power sector, reorganise generation, transmission and distribution functions into compact commercially viable entities, providing operational, managerial and functional autonomy to the successor entities. The Government of Andhra Pradesh constituted the following companies For generation of electrical energy For transmission of electrical energy Subsidiary distribution of electrical energy The first two have been incorporated by the State Government under Companies Act, The subsidiary distribution companies will function as wholly owned subsidiaries of the State Government but in due course they will be open for private sector participation. The Government of Andhra Pradesh has also constituted an autonomous statutory Electricity Regulatory Commission, called The Andhra Pradesh Electricity Regulatory Commission on to balance the interest of all the stake holders in the electricity industry and to promote healthy growth of the power sector in the State. 5.3 The concerns regarding APSEB The annual revenue deficit of APSEB had steadily increased from Rs. 857 Cr. in year to Rs Cr. in year The increase in tariff from time to time was neither regular nor adequate. The deficit amount was met by Government of Andhra Pradesh (hereinafter called GoAP) as subsidy, which had also not been paid in cash most of the time. The reasons for the huge deficits were heavy subsidization of power to Agricultural and Domestic consumers and growing transmission and distribution losses. The consumption pattern of power in the Amol,Kiran,Mohit,Naveen,Pankaj 45 Section-B, Group-4

48 State showed that about 39% of power sold was consumed by the Farm sector but it contributed only about 3% of the revenues because of highly subsidized tariffs. The domestic sector was also subsidized substantially. The levels of subsidization both in Agricultural and Domestic tariffs were as given below: REVENUE RECOVERY PER UNIT TABLE 25 S. No. Details Rs/ (KWH)(Provisional) % of average cost per unit L.T. 1 Domestic Non-domestic Industrial Agricultural H.T. 1 Industrial Category-I Industrial Category-II Traction-V Average realization per Unit Average Cost per Unit The consumption mix of power in the State was quite adverse. While the Farm sector consumption was 40% of the total consumption, the Industrial consumption remained almost stagnant at 22%. It appeared that bulk of the increase in purchase of power was to meet the growing demand of Farm and Domestic sectors, thereby causing more revenue losses through increased purchase of power. There being no corresponding increase in the consumption of industry, the burden of increasing crosssubsidization fell on existing industries and therefore there had to be a limit to the cross-subsidization Amol,Kiran,Mohit,Naveen,Pankaj 46 Section-B, Group-4

49 in tariff. The tariff for industrial sector had already reached a level where any further increase was likely to render existing industries to go in for captive power generation or relocation. The transmission and distribution losses were high at about 33%. 5.4 Andhra Pradesh Electricity Regulatory Commission The Government of Andhra Pradesh the Andhra Pradesh Electricity Regulatory Commission on Aims of setting up the APERC: to balance the interest of all the stake holders in the electricity industry to promote healthy growth of the power sector in the State. The State has been divested of its regulatory functions. However, the State Government retains the power to issue policy directions and over all planning and co-ordination on the matters concerning electricity in the State Functions of APERC: To issue and enforce licences for transmission and distribution of electrical energy in the state To optimise costs and improve consumer service by promoting competition. To prescribes standards of performance for the licensees and gather information periodically to ensure compliance to the prescribed standards. To prevent monopoly abuse and to regulate and adjudicate on tariffs and related issues. To act as a body to resolve or to set-up machinery for speedy resolution of disputes between the licensees Tariffs: TABLE 26 SCHEDULE OF TARIFFS FOR THE PERIOD 4 th JUNE, 2000 TO 31 st MARCH, 2001 Category Purpose Fixed Demand Energy (Rs/HP/ (Rs/kVA) ps/kwh Month) Amol,Kiran,Mohit,Naveen,Pankaj 47 Section-B, Group-4

50 Low-Tension Supply LT-I Domestic > LT-II Non-Domestic > LT-III Industrial First 1000 units Balance units LT-IV Cottage Industry LT-V Agricultural 1 (Rs/HP/Annum) DPAP Areas Up to 3 HP > 3 HP up to 5 HP > 5 HP up to 10 HP 10 HP and above Other Areas Up to 3 HP > 3 HP up to 5 HP > 5 HP up to 10 HP 10 HP and above LT-VI Local Bodies Street Lighting Minor Panchayats 148 Major Panchayats 198 Nagarpalikas and 260 Municipalities Gr.3 Municipalities Gr.1 & Municipalities Selection 335 Spl.Gr. Corporations 360 PWS Schemes Amol,Kiran,Mohit,Naveen,Pankaj 48 Section-B, Group-4

51 Minor Panchayats Agri.tariff as applicable in other areas Major Panchayats Agri.tariff as applicable in other areas Nagarpalikas and Municipalities Gr.3 Upto 1000 units Balance units 385 Municipalities Gr.1 & 2 Upto 1000 units Balance units 385 Municipalities Selection Spl.Gr. Upto 1000 units Balance units 385 Corporations Upto 1000 units Balance units 438 LT-VII General Purpose 430 LT- Temporary 620 VIII High-Tension Supply HT-I Industrial For first 1 lakh units Next 1 lakh units 390 Balance units 395 HT-II Industries Non Segregated Rs.400/HP HT-IV Agricultural/Irrigation HT-V Railway Traction 460 HT-VI Townships/Colonies 320 Private Educational Institutions - shifted to LT tariff will be at 35 ps/kwh and is an optional tariff Amol,Kiran,Mohit,Naveen,Pankaj 49 Section-B, Group-4

52 5.5 Comparison of AREPC and HERC Transmission losses: The HERC has considered a transmission loss of only net power available in the state. The APERC has been more practical in their consideration of these losses. After taking into account the metering accuracy, meter reading cycle time, input of energy to DISCOMS at 33 kv and 11 kv from other generating sources like mini hydro and wind farms, the overall transmission losses are estimated to be 8.92 percent for FY Accordingly, a figure of 8.5 per cent has been projected for FY Distribution losses: The HERC has considered distribution losses of 35.77%, this is too high a level and imposes a burden on the paying public. The APERC on the other hand had given directions for significant reduction in such losses. Although APTRANSCOs submitted an increased loss of 8.5%, the APERC has pegged distribution losses at 33.9% for the year and projected to 32.3% during FY Power metering: HERC has stated that all interface load meters have to be installed by June The APERC was more proactive, they have issued the following directions to ensure beter metering: Metering for individual agricultural services is completed by March, All new agriculture connections including unauthorized agriculture connections, if any regularised, are metered with immediate effect. All dysfunctional meters are set right within 3 months of this Order. All new meters to be fixed within the same period of 3 months. All service connections to all consumer categories except LT Agriculture are metered, as per schedule given below: Sugarcane crushing is metered with immediate effect. Aquaculture is completely metered within 3 months i.e. by June 30, All street lights and public water supply (PWS) schemes are metered. In case of towns and municipal corporations, all streetlights and PWS are metered within 6 months. The balance are metered by December 31, Amol,Kiran,Mohit,Naveen,Pankaj 50 Section-B, Group-4

53 5.5.4 Cross subsidy: The Commission has decided the following approach to cross subsidies in Andhra Pradesh. The Commission after considering all relevant aspects fixes constraints on increase of tariff in respect of subsidizing categories. The tariff increase in these categories upto the constraint level provides an amount of cross subsidy. The quantum of cross-subsidy so arrived is distributed among the crosssubsidised consumer categories in proportion to the deficit of the respective category to total deficit of the system. The amount of cross-subsidy and efficiency gains incorporated into the model leave the amount that needs to be further covered by tariff increase. The Commission then increases the tariff in case of subsidized categories to the extent of the balance revenue requirement. This is called the Fully Allocated Cost Tariff. The Fully Allocated Cost Tariff is indicated to the Government for directions in respect of provision of subsidy for any class or classes of consumers etc., under Section 12(3) of the Reform Act. The Government decides the levels to which the Fully Allocated Cost tariff in respect of the subsidized categories are to be reduced. The resultant gap in the revenue requirement would be made good by GoAP as government subsidy. On the basis of the directions of the GoAP for provision of subsidies, the Commission modifies the Fully Allocated Costs by reduction of tariffs in respect of the subsidized categories to the extent of the subsidy provided by the government. The tariff so arrived, is approved by the Commission and notified accordingly. As a result of this model, the extent of differential in the Bulk Supply Tariffs charged to distribution companies will be progressively reduced, in tune with the reduction in the cross subsidy between various classes of consumers and reduction in external subsidy from the Government. Thus, the Bulk Supply Tariffs may eventually move towards a uniform level (or more accurately, an actual Discom cost-based level) as the retail tariffs move closer to the actual cost of service. This however will not prevent a concessional tariff within a class of consumers without affecting the aggregate revenue realisation from the class. This is a step in the right direction. Any benefit to certain class of consumers should come from direct government subsidies rather than through cross subsidies. This will improve the tariffs for industry which are essential for a developing state like Andhra Pradesh. With respect to HERC however, there is a very powerful agricultural lobby and the state is relatively poorly industrialized. As a result HERC does not have concrete steps to stop cross subsidies. However to ensure an undistorted power scheme, we believe that HERC should follow in the footsteps of MERC and APERC. Amol,Kiran,Mohit,Naveen,Pankaj 51 Section-B, Group-4

54 6. DELINEATION AND EVALUATION OF THE GERC TARIFF AWARDS 6.1 Introduction The Gujarat Electricity Board is a vertically integrated utility catering to the electricity needs of Gujarat (except area of A.E. Co., Ahmedabad and S.E.Co.,Surat) by generating, transmitting and supplying the electricity. TABLE 27 Amol,Kiran,Mohit,Naveen,Pankaj 52 Section-B, Group-4

55 Reasons for the Deficit : The reasons for the growing deficit as mentioned by the GEB are as follows: Distortion between sale and revenue. Amol,Kiran,Mohit,Naveen,Pankaj 53 Section-B, Group-4

56 Presenting sale and revenue analysis for the year , GEB mentioned that while 46% electricity was sold to agricultural use, the revenue from them was only to the extent of 4%. Similarly, while 22% electricity was sold to HT industries, income from them was 47% T& D loss. GEB mentioned that in view of the higher proportion of agricultural sales, which were un-metered, the figures for loss were very approximate and represented only the technical loss in the system Tariff structure There was a needfor rationalizing the tariff structure, as the existing structure had resulted in the increase in the capacity of captive power plants from 422 M.W in to 2043 M.W in It was also pointed out that while agricultural consumption accounts for 46% of the total consumption, its total contribution to the revenue was only 4% as the consumption is not metered and a flat HP based tariff is levied, there is no incentive for the consumer for conservation and optimum use Complexity of tariff structure. The existing tariff structure had a large number of sub-categories and billing determinants, which had evolved over the years due to various reasons Mismatch between fixed cost and recovery through demand charges. While the fixed cost were approximately 46% of the total cost, the revenue through demand charges was only 18% of the total revenue Fuel cost adjustment charges. The existing formula for this charges for fuel cost was based on a historical base year rather than on shifting year basis It was desirable to re-design the formula appropriately having regard to rate of fuel and other incidental costs, relating thereto Structure of electricity duty. The duty in the State ranged from 5% in respect of pumping water for irrigation purpose to 60% for consumption for commercial use which was deemed as very high. Formation and Purpose of GERC: The Gujarat Electricity Regulatory Commission was constituted under section 17 (1) of the ERC Act to for the establishment of State Electricity Regulatory Commissions to function and discharge duties regarding Rationalization of electricity tariff Transparent policies of subsidies Amol,Kiran,Mohit,Naveen,Pankaj 54 Section-B, Group-4

57 Promotion of efficient and environmentally benign policies and for matters connected therewith or incidental thereto Classification, Rationalisation and Simplification of tariff In the existing tariff structure of GEB, there are number of tariff components.the tariff is, therefore, highly complex, unveiling and consumers find it difficult to understand. The present GEB electricity tariff is, thus, complex and confusing. While determining new tariff structure, the Commission has made effort to rationalize the existing structure and made it simple to the extent possible at the same time keeping minimum tariff components needed for various services. Also, the existing GEB tariff is not cost related. L.T. consumers such as agricultural, water works, streetlight and domestic categories are cross subsidized by H.T. consumers, L.T. industries and commercial consumers. Though the Electricity Regulatory Commissions Act, 1998 provides to correlate electricity rate as per the cost of supply, it may take some time to achieve this target. The Category wise distribution of the proposed tariff is as given below. TABLE 28 Amol,Kiran,Mohit,Naveen,Pankaj 55 Section-B, Group-4

58 6.3 Principles for determination of tariff The principles guiding the tariff revision were as under: That the tariff progressively reflects the cost of supply of electricity at an adequate and improving level of efficiency. The factors, which would encourage efficiency, economical use of resources, good performance, optimum investments and other matters, which the State Commission considers, appropriate for the purposes of this Act. The interests of the consumers are safeguarded and at the same time the consumers pay for the use of electricity in a reasonable manner based on the average cost of supply of energy. The electricity generation, transmission, distribution and supply are conducted on commercial principles. National power plans formulated by the Central Government. Adjustment of tariff rates by the Board in a manner so as to earn a minimum return of 3%. The need to rationalize the tariff structure on the basis of cost of supply at different voltage ends and also to reflect the difference in cost of supply at different timings. The tariff should be fair, just and non-discriminatory. The sudden shocks in tariff structure need to be avoided. Ensuring the stability of the tariff regime with the need for dynamic improvements in the efficiency of supply and demand. 6.5 Comparison with HERC proposed Tariff Structure Parallels between HERC and GERC tariff awards The Tariff in both the statres progressively reflects the cost of supply of power at adequate and improving level of efficiency Electricity generation, transmission, distribution and supply are conducted on commercial principles in both Haryana and Gujarat. Reduction in cross-subsidies is to be done in a gradual and phased manner without causing cost shocks to households and industry in both the states. This has been done to allow a smooth transition from a cultivated economy to an independent one Care has been taken in both the states to ensure that the tariff should be easy to implement shocks to be avoided Amol,Kiran,Mohit,Naveen,Pankaj 56 Section-B, Group-4

59 6.5.2 Points of divergence between HERC and GERC tariff awards It has been specified in the GERC awards to rationalize the tariff structure on the basis of cost of supply at different voltage ends and also to reflect the difference in cost of supply at different timings. However, the same has not been done in the HERC awards. In the GERC awards there is a phased plan to reduce revenue deficit from existing Rs crore. However, no such plan has been envisioned for HERC Other Category specific Observations General: The Commission has accepted the suggestion and wherever possible attempt has been made to rationalize the tariff structure. It is in this direction that discount has been introduced for the consumers availing power at high voltages where the cost of supply is less and for those using power at night, the night rebate has been made more attractive. While it is true that the HT Industries has got a very high tariff, but looking at the fact that the tariff structure for other consumers have not been changed for a long time and a fairly large amount of revenue requirement has now accumulated with GEB it is not possible to offer reduction to any category of consumers atleast immediately. However, the fact that the HT Industry is paying very high tariff has been kept in view and in such cases the increase has been restricted to minimum. For the same reason it has not been possible to avoid tariff increase in case of all other consumers. T&D losses: The Commission is deeply concerned about the high level of losses and has therefore allowed only 30% losses to the GEB as against their level of 34%. The Commission also wants the GEB to reduce their losses in a phased manner over the next few years. It is the high level of losses, which is one of the factors responsible for making electricity costly in Gujarat. Therefore reducing the loss must be of paramount importance. In Haryana, transmission losses of 0.33/unit (consolidated price of 1.89/unit) have been provided for. Agriculture: as demanded by the farmers of the North Gujarat, the HP Rates for all capacity of pumps have been made uniform. Incentive has been provided by offering a fairly low rate for those willing to use meters and for the farmers availing electricity under the Tatkal Scheme it has now been decided that after five years they can pay for the power at normally metered rate and not at a higher rate as presently provided. These facilities are not available under the proposed HERC tariff scheme. Additional Charges: As per the suggestions made by the consumer organizations in the wake of Amol,Kiran,Mohit,Naveen,Pankaj 57 Section-B, Group-4

60 Rationalization, most of the additional charges and surcharges has been merged in the tariff and a single rate has been provided. It is, however, not possible to abolish the Time of Use charges since it has a specific purpose of keeping the peak load within certain ceiling. TABLE 29 Summary of the tariffs approved by the Commission LT Tariff Amol,Kiran,Mohit,Naveen,Pankaj 58 Section-B, Group-4

61 Amol,Kiran,Mohit,Naveen,Pankaj 59 Section-B, Group-4

62 Amol,Kiran,Mohit,Naveen,Pankaj 60 Section-B, Group-4

63 Amol,Kiran,Mohit,Naveen,Pankaj 61 Section-B, Group-4

64 Amol,Kiran,Mohit,Naveen,Pankaj 62 Section-B, Group-4

65 H.T Tariff Amol,Kiran,Mohit,Naveen,Pankaj 63 Section-B, Group-4

66 Amol,Kiran,Mohit,Naveen,Pankaj 64 Section-B, Group-4

67 Amol,Kiran,Mohit,Naveen,Pankaj 65 Section-B, Group-4

68 7. CONCLUSIONS The present study critically reviews the tariff application of HVPNL, in accordance with HERA-1997, and the HERC s response through its tariff award. This has been analysed with reference to a standardised set of criteria, which have been widely perceived to be fair to all stakeholders concerned. The study examines the aggregate revenue requirement process undertaken by HVPNL in detail, looking at each revenue and cost item, and evaluating its applicability in the context of the overall objectives of tariff setting. We feel that the commission has not acted rightly while approving some of the elements of the total expenditure. Regarding the capital base calculation, we feel that in the long term the commission should look at the reproduction or replacement cost basis for valuing the assets of the licensee. This would help in a better estimation of the actual costs. In calculating the return on the capital base, the commission has used the Rate of Return regulation. In our opinion, this method suffices in the initial stages of the regulation process. As time passes the commission should move over to a Performance Based Regulation mechanism as this provides incentives for better performance for the licensee. Also under this system the very need for regulation is drastically reduced. The commission has used the embedded cost technique for the assignment of revenue. We feel that the output from such an allocation is only as good as the data and assumptions considered. Also, there is the possibility that the consumer behaviour input of various cost elements as reflected in the economic costs may be substantially different in subsequent years as compared to the test year. We feel that the commission should place more emphasis on the marginal cost based tariff. Though the commission has used marginal revenues to set tariffs, it has not used marginal costs for allocating the revenue. We also feel that the commission should direct the licensee to implement the time-of-day charge since it would reflect a more realistic costing of the energy consumed. Regarding monthly minimum charges (MMC) we feel that valid concept and it has to be included for recovery of the fixed part component of the costs of the licensee. The prescription of MMC is necessary in case of single part tariff for the recovery of fixed costs that are recovered through demand charges in case of two-part tariff As regards the cross subsidies, the commission should ask the licensee to implement better Management information systems so that the data related to different areas is available and then the marginal cost of each class of consumer can be estimated. Based on this, the true costs for each class can then be found and tariffs can accordingly be set. Amol,Kiran,Mohit,Naveen,Pankaj 66 Section-B, Group-4

69 Recently HVPNL has proposed a revised tariff schedule for the T&BS business, based on the installation of interface meters. These interface meters will permit the consumers to be charged fixed costs on the basis of their actual peak consumption rather than their connected load. We feel that the rise in fixed costs is justifiable considering the fact that most of the industries have demand factors (demand factor is the ratio of maximum demand to connected load) of less than 50%. This partly compensates for the rise in the fixed costs. Also, due to significant reduction in the variable charge (19.6%) the consumer is bound to benefit overall The study also compares the HERC Tariff Award process with those of other states, which have embarked on similar reforms Gujarat, Maharashtra and Andhra Pradesh. An evaluation of the tariff applications and awards, along with references to strengths and lacunae of the HERC process has been discussed. We have also tried to evaluate the tariff setting process of each state with our standardised criteria for evaluation. Based on this evaluation we feel that HERC could consider the following issues while awarding tariffs: HERC should consider introducing a category of single bulb consumers in its next tariff order, keeping in mind the welfare of the lowest class of consumers. Given the fact that a significant number of consumers in Haryana are in the LT category, and a lot of these are seasonal small-scale industries, a separate category for seasonal consumers may be required. The prevailing levels of electricity tariff in Haryana contain a large degree of cross subsidy, with some categories of consumers paying well above the economic cost of supply. It has to be recognised that low and subsidised tariff initiate inefficient high demand for power, which puts pressure on the system capacity and the quality of service. HERC needs to realize that subsidised tariff should not distort the general tariff structure by imposing burden on another set of consumers. Consequently, subsidised tariff should be financed from government's general budget, because raising funds through a general tax system imposes lower cost on the society than creating sector specific levies. HERC needs to take a cue from MERC and reduce the multitude of categories currently part of the tariff order. HERC should consider for providing benefit to Public Institutions like Zilla Parishads, Religious places, Govt. and Municipal hospitals, which are part of the social infrastructure Amol,Kiran,Mohit,Naveen,Pankaj 67 Section-B, Group-4

70 HERC should try to incorporate the TOD (Time of Day) tariff as implemented by MERC and GERC, for HT Industrial in its next order. This will not only benefit the industrial consumers but also help HVPNL in flattening the load curve and in avoiding unnecessary load shedding Amol,Kiran,Mohit,Naveen,Pankaj 68 Section-B, Group-4