1 APresentationon ARR & Tariff Proposal of NESCO for FY 2007-08 BroadSuggestions/Objections Broad Suggestions/Objections Feburary 12, 2007 Together, let.

1

A A Presentation Presentation

on on ARR & Tariff Proposal of ARR & Tariff Proposal of

NESCO for FY 2007-08NESCO for FY 2007-08

BroadBroad Suggestions/ObjectionsSuggestions/Objections

Feburary 12, 2007Feburary 12, 2007

Together, let us light up our lives.

ORISSA ELECTRICITY REGULATORY COMMISSIONORISSA ELECTRICITY REGULATORY COMMISSION

2

TARIFF FILING BEFORE THE COMMISSION (FY 2007-08)

ITEMS NESCO

Rev. Req. (Rs.Cr.) ( Including Reasonable Return & excluding Previous Losses) 963.32

Power Purchase (MU) 4760

Anticipated Sale (MU) 3332.67

LT 882.84

HT 658.37

EHT 1791.45

Distribution Loss (%) 29.99%

Collection Efficiency (%) 94.00%

AT&C LOSS (%) 34.19%

Exp. Rev.at Exist. Tariff (Net) (Rs.Cr.) 851.43

(Exp. Rev+Misc.Rev.) at Exist. Tariff (Net) (Rs.Cr.) 854.60

Revenue Gap ( +/- ) (Rs. Cr. ) -108.7151

Previous Losses (Rs. Cr. ) -360.65

Revenue Gap ( +/- ) (Rs. Cr. ) including past losses at Existing Tariff -469.37

Exist.Overall Average Tariff (Net) (p/u) 255.00

Exist.LT Average Tariff (Net) (p/u) 221.00

Exist.HT Average Tariff (Net) (p/u) 323.00

Exist.EHT Average Tariff (Net) (p/u) 248.00

NOTE: NESCO has not proposed any change in RST but to bridge the Revenue Gap through increase in tariff, reduction in BST, Govt. subsidy etc.

3

Data SourcesData Sources

• As stated by NESCO

– The Accounts up to September 2005 have been audited as

per Companies Act

– The accounts up to March 2006 have been audited as per

Income Tax Rules

– It has relied upon the audited accounts upto September

2005 as per Companies Act and accounts upto March 2006

as per Tax Audit for preparation of ARR

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Category FY 2005-06 FY 2006-

07(April-Sept)FY 2006-07(Prop)

Growth (%)FY 2007-08(Prop)

Growth (%) Remarks(Basis)

LT 735.031 380.318 778.932 6.000 882.844 13.000

Domestic 548.444 280.645 572.504 4.000 658.573 15.000 Impact of electrification under RE programme

Irrigation 38.951 19.642 40.070 3.000 44.077 10.000 Metering of Irrigation

consumers

HT 463.088 263.205 563.060 3.000 658.374 16.930 Trend of FY 05-06& growth

from existing and new consumers

Large Ind. 279.167 157.840 347.248 24.000 468.785 35.000 Growth from existing and

many new <1MVA consumers

Power Int. - - - - - -

Mini Steel 43.262 23.772 47.544 10.000 52.584 11.000 Addition of new consumer

EHT 946.091 630.239 1,350.233 43.000 1,791.453 33.000 Trend of FY 05-06& growth from existing and 5 new

consumers

Large Ind. 47.617 168.331 351.261 638.000 645.284 84.000 Addition of 3 new

consumers

Heavy Ind. - - - - - -

Power Int. 114.873 67.142 134.131 17.000 137.597 3.000

Spl. Tar. 757.329 349.999 773.569 2.000 830.013 7.000

Total Sale(MU) 2,144.210 1,273.762 2,692.220 26.000 3,332.671 24.000

Power Purchase(MU)

3,407.570 3,990.000 17.092 4,760.000 19.298

Energy input has beenestimated based on theestimated consumption of3333 MU and distribution lossof 29.9%.

Dist. Loss (%) 37.080 32.530 29.990

Growth(%) in Sale(MU) as proposed by NESCO

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Tariff StructureTariff Structure

• NESCO has proposed – • No change in tariff structure• No special tariff should be allowed to the industries having

own CPPs• Demand charge of Rs 200/- per KVA to be applicable for

consumers having contract demand 70 KVA and above under HT Industrial (M) and GP category

• The provisions of tariff applicable to large industries should be made applicable to above consumers.

• Fixed charges for LT Industrial(S), LT Industrial(M) & PWW to be levied on KVA in place of KW.

• Demand charges @ 120% of demand charges to be made applicable on MD recorded along with applicable energy charges for CPPs

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Tariff Structure .. Contd..Tariff Structure .. Contd..

• The minimum demand charges concept i.e. 80 % of CD should

not be made applicable to CPPs

• Service connection charges for single phase Domestic / GP

consumers upto 3 KW load to be revised from Rs 500/- to Rs.

1000/-.

• The rate of labour component to be taken by the consumers

equivalent to Rs. 400/-where single phase consumers come

forward and provide service connection materials.

• Monthly minimum fixed charges for consumers with contact

demand < 100 KVA should be levied on CD or MD whichever

higher

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Tariff Structure .. Contd..Tariff Structure .. Contd..

• Tariff for medium industries (LT) may be considered at par with GP (LT)category.

• The over drawl energy should be considered in cumulative basis for all DISTCOs together instead of considering DISTCO wise over drawl till to Intra-State ABT is implemented.

• Rebate @ 2% for payment of BST bills within three working days from the date of presentation of bill.

• Delayed Payment Surcharge to be levied to LT industrial (Small) supply category.

• Bridge the Revenue Gap through combination of increase in Retail Supply Tariff, Reduction in Bulk supply Tariff, Government Subsidy etc.

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Reconnection Charges

Class of Consumers Existing Rate Proposed Rate

Single Phase Domestic Consumers

Rs. 50/- Rs. 75/-

Single Phase Other Consumers

Rs. 100 Rs. 150/-

3 Phase Line Rs. 200/- Rs. 300/-

HT & EHT Lines Rs. 1000/- Rs. 1500/-

9

BROAD TARIFF BROAD TARIFF RELATED ISSUES RELATED ISSUES

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

Licensees )Licensees )

10

Legal Issues• The ARR application filed by the licensee is not tenable under

law due to the following defects:– The licensees account has not been audited for FY 2004-05

and 2005-06. – The licensee has filed the application to confuse the

consumer public without disclosing the purpose for such filing.

– The interested persons are being kept in dark and not able to file effective objection and as such the purpose of such exercise has been frustrated and contrary to law and principle of natural justice.

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

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

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Issues raised by Objectors

• Military Engineering Services

– There should be discriminatory Tariff between consumers of general category and of the defence.

• Distribution Loss:

– The licensee has miserably failed to arrest high Distribution loss on account of unauthorized use of power.

– Distribution loss should be calculated by taking ratio of units lost in distribution system excluding EHT sale.

– Since, a large chunk of consumers are still unmetered and having defective meters, the declared loss by the licensee is unrealistic.

• Collection Efficiency:

– The consumers are not to be burdened for in-efficiency of licensees to collect their energy dues from consumers every year.

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Issues raised by Objectors.. Contd..

• AT&C Loss

– AT&C concept should not be implemented as it hides the inefficiency of the Licensee.

• Power Factor Incentive/ Power Factor Penalty

– Power Factor incentive has to be calculated upto two decimal fraction

– Power factor penalty is levied for power factor less than 90% & power factor incentive should be given for power factors above 90% at the same rate.

– Power factor penalty for the small and medium industry consumer may be introduced.

• Cross Subsidy

– Bench Marks for gradual reduction of cross subsidy may be fixed from this year to achieve Zero level by 2009-10.

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• Quality of Services:

– The industries are put to financial burden for being unable to

achieve 80% Load Factor due to the inability of the licensee to

supply proper quality power.

– Due to slow up gradation of the system and sub-station, the new

industries are finding difficult to get power connection.

– Voltage/frequency fluctuation –The accountability should be fixed

with the License in terms of financial compensation for the

fluctuation beyond standard norms.

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• Consumer Classification

– Electricity tariff for poultry may be at par with agriculture.

• The State Government has decided to classify poultry as agriculture

– Reliance Telecom Ltd. and Reliance Infocomm Ltd. - Electricity energy may be charged at Industrial Rates instead of General Purpose rates to the IT & ITES Industries operating in the State

– BSNL Orissa Circle, Bhubaneswar• BSNL may be treated as an industrial undertaking as power is substantially

utilized as motive force for Industrial purpose and without supply of power it is not possible to run the Telecom services.

• The BSNL is coming under the purview of industry as per the verdict of the Hon’ble Supreme Court in several cases.

• So also as per the finance Act, 2002 w.e.f. 01.4.03, the business of providing Telecommunication Services has been declared as industrial undertaking.

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• Financial Issues

– In absence of the audited balance sheet and report of the

auditors it is not possible for the objector to make proper

observation on financial matters.

• Interests attributable to bonds:

– The interest attributed to bonds against arrear of power

purchases cost and capital value of bonds are not payable

by consumers.

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Issues raised by Objectors.. Contd..• Interests towards securitization

– The interest towards securitization as well as capital of securitization should not be passed on to the revenue requirement for tariff proposes.

– Infusing additional funds - The licensee may be directed to infuse additional funds as may be required to turn around the sector.

– Regulatory assets - Any losses that the distribution licensee likes to incur after complying with the orders of the Commission, can only be considered for the purpose of computing the Regulatory Assets.

– Employees cost - It is suggested that an increase of about 6% over last year’s provision may be allowed while fixing the employees cost for the FY 2007-08.

– Past Losses - Past losses should be paid through tariff by consumers only if these losses have been incurred due to reasons beyond the control of licensee and in spite of licensee having performed as per bench marks fixed by OERC.

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Issues raised by Objectors.. Contd..• Computation of Load Factor

– Load factor or consumption ratio to be determined on the basis of Maximum Demand recorded in the meter in accordance with Regulation 2(y) of the OERC Distribution (Conditions of Supply) Code, 2004.

– It will be just and proper to calculate the load factor on the basis of Maximum Demand or 80% of the Contract Demand whichever is higher.

– A lower load factor upto 50% may be prescribed for the period of annual maintenance, which will be jointly decided by the licensee and the consumer.

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

– Load factor may be computed separately for peak and off peak hours and the overall load factor be computed by integrating the above data.

– The LF be calculated based on the actual period of availability of unrestricted power supply during the month.

– The MD during the off peak hours should not be considered for computing the LF.

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• Tariff Issues

– The gap of electricity charges between high consumption and low

consumption should be reduced to minimum level, which will

discourage theft of energy.

• Contract Demand

– Time frame for reducing the contract demand may not be imposed.

• Provision for Rebate

– Seven clear days may be given from the receipt of the bill to get the

rebate on prompt payment.

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• Emergency Supply to CPPs

– The proposal of demand charges for emergency drawal to CPPs should be rejected.

– Emergency power requirement for CPP/Generating stations are very low and for short duration only, it is not at all justified to propose demand charges for emergency power to CPP’s.

• Rail-ways:

– Adoption of single part tariff for Railway traction.

– Proper adoption of simultaneous maximum demand for Railway traction supply.

– Railway may be exempted from payment of Security deposit.

– Stipulation of penalty on power factor if it goes below 0.85 as against 0.90.

– Stipulation of incentive for improvement in power factor above 0.85.

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– Grant of relief to railways for power supply interruption as well as poor quality of supply.

– The tariff applicable to Railway Traction should reflect the cost of supply without any cross subsidy.

– As far as supply to Railway Traction Sub-station is concerned, the distribution companies are not entitled to any wheeling charges as non of their own asset is involved in the supply process.

– Ignoring of maximum demand of TSS’s during feed extensions as Railways are constrained to extend feed from adjacent TSS to the failed TSS zone.

– The tariff clause for industrial colony consumption should be applicable to Railway colony.

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• General Issues

– The additional costs actual or estimated on account of the inefficiency/inability of licensee should not be passed on to the consumers through the tariff, either as a direct cost or a so called Regulatory Asset.

– Any cost due to additional power purchase, beyond the allowable distribution loss should not be included in the ARR of the licensee.

– Increase in the reconnection charge – no justification.

• The charges to the consumers should reflect the cost to the licensee.

– DPS for LT consumers – no justification.

• A LT consumer loses the rebate of 10 p/kwh in a month. Additional levy of DPS is thus unnecessary and un reasonable.

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

– The street light burning hours should be on actual time i.e. for 10 hours a day.

– The ceiling limit of 10% of total consumption for the colony consumption should be waived

– Electricity charges for the colony consumption should be at per with domestic rate because the electricity used in the colony is never used for any industrial purpose.

– Special tariff for running of FOUNDRY –A special tariff structure @50% of the existing tariff, may be introduced for running of the furnaces.

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– Demand charges –

• The demand charges may be calculated on prorate basis for the actual period of power availability.

• The demand charges may be exempted if there is power interruption for more than 50 hours in a month.

– To have a uniform tariff for all consumers based on commercial principle of cost plus benefit basis.

– Separate Tariff may be introduced for Specified Public Purpose consumers under private sector especially for Educational Institutions.

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– Service Connection charges - It is suggested that a realistic

amount in place of Rs500/- may be fixed so that the

Licensee can procure quality materials in time.

– Uniform rate may be introduced for LT (domestic) without

any slab system.

– Tariff Revision - The proposed tariff revision is not at all

desirable as there is no improvement in services.

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• OERC Regulations

– During the initial period of supply, which is prescribed for five years, an Exit Clause should be provided since the consumer has right to choose it’s supplier.

– Customer’s Security Deposit – Consumers may be permitted to furnish bank guarantee or to open revolving letter of credit in favour of licensee in lieu of security deposit as it becomes extremely difficult for small and medium scale industry to invest such huge sum for purchase of power in cash.

– Period of agreement – The validity of power agreement is presently 5 years, should be reduced to 1 year in view of the changing market scenario and fluctuating market demands.

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BROAD TARIFF BROAD TARIFF RELATED ISSUESRELATED ISSUES

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THE FOLLOWING AREAS HAVE NOT BEEN ADEQUATELY ADDRESSED

• D.T. wise Energy Audit & Consumer Indexing for loss reduction

• Spot Billing & Collection for improvement of Collection Efficiency

• Repair & Maintenance

• Arrear Collection & Liquidation of power purchase dues

• Man power deployment ( Both Executive & Non Executive ) for

reducing AT & C Loss

• Non Investment in system improvement for Quality Supply

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2005-06 2006-07 2007-08A. Expenditure Tax Audited Approved Proposed

Cost of Power Purchase 416.41 470.85 651.71Cost of Transmission 91.72Employee costs 66.51 69.6 101.07Repair & Maintenance 11.03 24.48 28.94Administrative and General Expenses 9.41 10.48 17.78

Provision for Bad & Doubtful Debts 44.48 19.13 51.08Other expenses 5.39Depreciation 17.56 17.18 19.22

Interest Chargeable to Revenue including INT on SD 26.73 34.35 71.74Carrying cost 0 2.68 11.25Sub-Total 597.52 740.47 952.79Less: Expenses capitalised 1.41 1.62 2.02Total expenses 596.11 738.85 950.77

B. Special appropriation

Amortisation of Regulatory Asset 41.36 265.97Truing up of Regulatory gap for 2006-07 94.68Contingency reserve 0.28 2.01Total 0.28 41.36 362.66

C Return on equity 10.55 10.54TOTAL(A+B+C) 596.39 790.76 1323.97

D. Less Miscellaneous Receipt 23.04 17.76 3.17E. Total Revenue Requirement 573.35 773 1320.8F. Expected Revenue(Full year ) 571.21 765.22 851.43G. GAP(+/-) -2.14 -7.78 -469.37

REVENUE REQUIREMENT OF NESCO FOR 2007-08 (Rs in Crore)

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Revenue Requirement for 2007-08..Contd..• Bifurcation of the amount towards cost of power purchase and cost of

transmission for FY 2007-08 has not been furnished. The same may be submitted.

• Actual expenditure against the above heads of expenditure for first six months of FY 2006-07 has not been provided by the licensee. The same may be submitted.

• The reason for making higher provision in employee cost of Rs.101.07 crore proposed for FY 2007-08 as against the approved amount of Rs.69.60 crore for FY 2006-07 and Rs.66.51 crore appeared in the tax audit report needs to be justified.

• The proposed rise in A&G expenses for an amount of Rs 17.78 crore for FY 2007-08 as against the approved amount of Rs 9.41 crore for FY 2006-07 and Rs. 10.48 crore for the FY 2005-06 based on Tax Audit reports needs to be explained.

Similarly, the quantum proposed for interest amounting Rs.71.74 crore for FY 2007-08 is nearly Rs.37 crore more than the approved amount of Rs.34.35 crore for FY 2006-07 and Rs. 45 crore more than the tax audited figure for the FY 2005-06. This needs to be explained.

• It may be justified as to why the amortization of regulatory asset and truing up of revenue gap for the FY 2006-07 be allowed and if so how far it is reasonable.

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Year Approved ActualFY 1999-00 14.22 16.19FY 2000-01 14.22 11.02FY 2001-02 16.32 7.02FY 2002-03 14.62 5.65FY 2003-04 17.59 8.84FY 2004-05 17.66 11.13FY 2005-06 22.63 11.03FY 2006-07 24.48 26.02 (Estimate)FY 2007-08 28.94 (Prop)

R&M Expenses of NESCO (Rs. Cr.)

Note: (i) Cause of declining expenditure in R&M ??(ii) Non utilisation of the approved amount towards R&M is affecting Quality of Supply & increasing interruption.

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Fixed Assets addition during the Financial Years in Rs. Cr. - NESCO

Approved Actual

FY 2001-02 61.59 30.63

FY 2002-03 50.11 30.55

FY 2003-04 29.69 28.63

FY 2004-05 92.06 55.09

FY 2005-06 72.0829.60 (Tax

audit)

FY 2006-07 (Proposed )

57.3954.03 (Revised

Estt.)

FY 2007-08 (Proposed )

152.22

Note: Why the Gap Between the approved and actual figures of various heads of expenditures have not been adjusted in the Revenue Requirement filing ?

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Provision for Bad & Doubtful Debt

Approved (Rs. in Cr.) Actual (Rs. in Cr.)

1999-00 8.10 38.58

2000-01 10.01 50.10

2001-02 8.61 45.69

2002-03 9.53 74.55

2003-04 11.50 46.09

2004-05 11.82 27.77

2005-06 13.17 44.48 (Tax Audit)

2006-07 19.13 41.60 (Est.)

2007-08 51.08 (Prop.)

NB : In the audited A/C upto FY 2005-06, the licensee has made huge amount of provision towards Bad & doubtful debt as against the normative level of 2.5% on sale revenue approved by the Commission . This results an inflated loss for the year. The reason of higher provision has neither been explained nor supplied by audited data.

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Miscellaneous Income & SMD

• Miscellaneous Income– At the time of determination of RST for 2006-07 for the purpose of

computation of misc. income the latest available audited data for FY 2003-04 was taken into consideration. Now, that audited accounts for FY 2004-05 and accounts upto March 2006 as per tax audit are available and even after deduction of DPS from the misc. income for FY 2004-05 as per audited account is much higher than what has been approved for 2006-07.

• Determination of Simultaneous Maximum Demand (SMD)– Whether increase/decrease in energy consumption has got direct

link with SMD. • Comments on the above subjects are invited for determination of tariff.

34

Business Plan Vrs. ARR

• A comparison of figures in Business Plan and ARR from FY 2004-05 to 2007-08 with regard to Distribution Loss, Collection Efficiency and AT&C Loss, present two different sets of figures with wide margins as follows :

35

NESCO ARR FILING VRS BUSINESS PLAN

Dist. Loss

(%)Col. Efficiency

(%)AT&C Loss

(%)

FY 2004-05 (ARR) 39.4 91 45

FY 2004-05 (B.Plan) 38 92 42.96

FY 2005-06(Prop) 36.55 93 41

FY 2005-06(B.Plan) 35 93 39.55

FY 2006-07(Prop) 33.58 94 37.56

FY 2006-07(B.Plan) 32 94 36.08

FY 2007-08 (Prop) 29.99 94 34.19

FY 2007-08 (B. Plan) 29 94 33.26

36

Finance related issues

• Investment details have not been specified.

• Capital Works In Progress - capability of huge investment proposal has not been justified.

• Action plan for settlement and collection of arrears outstanding with the consumers have not been spelt out.

• No Action Plan for establishment of Special Police Station & Special Court has been given

37

Issue of Regulatory Assets • National Tariff Policy on Regulatory Assets stipulates

Pass through of past losses or profits should be allowed to the extent caused by uncontrollable factors.

The facility of a regulatory asset should be done only as exception, and subject to the following guidelines.

– should only include natural causes or force majeure conditions

– Carrying cost of Regulatory Asset should be allowed to the utilities

– Recovery of Regulatory Asset should be time-bound and within a period not exceeding three years at the most and preferably within control period.

– The use of the facility of Regulatory asset should not be repetitive.

• Does the claim of Licensee conform to the National Tariff Policy?

38

Issue of Regulatory Assets . Contd..

• Whether the past losses be treated as regulatory asset and

allowed in tariff along with carrying charges?

• Whether the interest cost an account of the regulatory asset

should be allowed to be recovered as a pass through

39

Average Revenue Billed (P/U) Vrs Actual as filed by NESCO in ARR filings

Voltage Category

2002-03 2003-04 2004-05

2005-06 (April’05 - Jan.’06)- Actual

2005-06 (April’05-March’06) (Actual)

2006-07 (April -

Sept'06) –(Actual)

2007-08 (Licensee’s

Estt.)

LT 232 226 218 216.2 221 225 221

HT 324 338 342 347.5 334 347 323

EHT 239 238 246 271.8 268 271 248

Overall 257 255 255 270.6 266 273 255

Note: What is the cause for reduction of HT/EHT average between (April'05-March'06) & (April'05-Jan'06) ? Financial Impact on account of reduced unit rate at HT & EHT works out to Rs. 6.25 Cr. and 3.6 cr. respectively. This needs to be clarified by the Licensee.

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Power Purchase Cost and Revenue billed in Rs.cr

FY 2002-03

FY 2003-04

Difference w.r.t previous FY

FY 2004-05


FY 2005-06


Cumulative Difference

BST bill (Rs cr.) 298.28 326.09 27.81 363.37 37.28 415.86 52.49 117.58

EHT/HT billing 229.44 237.39 7.95 320.22 82.83 437.44 117.22 208

LT billing 144.29 145.22 0.93 141.96 -3.26 152.78 10.82 8.49

NOTE : The above table indicates that the billing in HT/EHT is much higher through the years than the rise in BST bill whereas, the growth in LT is at much lower side, which indicates incremental Distribution loss and poor collection efficiency at LT.

41

1 APresentationon ARR & Tariff Proposal of NESCO for FY 2007-08 BroadSuggestions/Objections Broad Suggestions/Objections Feburary 12, 2007 Together, let.

Documents

tariff net rs

tariff filing

existing tariff

arr tariff proposal

transmission tariff

transmission tariff

overall average tariff

previous losses rs