6.0

COMMISSION'S OBSERVATION AND ANALYSIS OF GRIDCO'S PROPOSAL

On detailed scrutiny and examination of the BST application for the FY 2001-02 and the revenue requirement application for the FY 2002-03 along with clarifications submitted by GRIDCO before the Commission, the written and oral submissions of the objectors and the views of the Members of the Commission Advisory Committee, the Commission passes this order, with reasons as detailed below :-

6.1

Scenario of the Power Sector Reform in Orissa

6.1.1

The State of Orissa was the first to initiate power reform in the country. The Orissa Electricity Reform Act, 1995 was put into the statute with a view to restructure the electricity industry in the state and rationalize the generation, transmission, distribution and supply of electricity and to create avenues for participation of private sector entrepreneurs and create infrastructure for development and management of electricity industry in an efficient, economic and competitive manner. Orissa Electricity Regulatory Commission has been constituted under the Act for overseeing and regulating the affairs of electricity industry in the State including rationalisation/setting of tariff.

6.2

Restructuring of the Power Sector

6.2.1

Prior to coming into force of the OER Act, 1995 on 01.4.96, the Thermal Station at Talcher of 460 MW capacity owned by OSEB was sold to NTPC in June, 1995 at a consideration of Rs.356.00 Crore.

6.2.2

The OSEB was dissolved and unbundled with the take over of hydro stations owned by the OSEB and the Government by the Orissa Hydro Power Corporation and its transmission and distribution business was taken over by GRIDCO with effect from 1 April 1996. Thereafter, the distribution and retail supply of electricity was vested in four distribution companies initially as wholly owned subsidiary companies of GRIDCO. Three of these distribution companies were privatised on 1 April 1999 and the fourth one on 1 September 1999 after disinvestment of its 51% share. The state owned Orissa Power Generation Corporation created in 1984 continued to operate as a separate entity and managed the Ib Thermal Power Station of capacity 420 MW near Jharsuguda.

6.2.3

The assets of the erstwhile OSEB including those of the hydro generating stations were taken over by the State Government, revalued and transferred to GRIDCO and OHPC. The upvalued amount was adjusted in favour of the state Government through grant of equity share and issue of bonds bearing no interest with a moratorium period of five years with provision of subsequent conversion in phases into equity and issue of debentures bearing interest. Revaluation of assets was considered to enable the Government of Orissa to realize more realistic value for its past investment at the time of privatization and also enhance the creditworthiness of the utilities. The revaluation was based on the revenue earning potential and was intended as a means of raising revenue through higher level of depreciation, higher operation and maintenance cost, higher return on equity for smooth functioning of the power sector. To sum up the revaluation was also done with the objective of eliminating GRIDCO's and OHPC's dependence on budgetary support from Government of Orissa.

6.2.4

The process of reform and restructuring paved the way for commitment of World Bank loan of 350 US million dollars for long term capital investment in the power sector in Orissa along with 65 million sterling pound funding from the DFID to meet urgent needs of repair & maintenance expenses and consultancy support. The World Bank also prepared a report known at the Staff Appraisal Report in April 1996 on the Orissa Power Sector Restructuring Project and made financial projections based on certain assumptions of power purchase, power sale, level of transmission and distribution loss, collection efficiency and operating expenses which envisaged that GRIDCO after meeting all costs will turn around from FY 1997-98 onwards. There was no provision of transitional support whatsoever during this period. On the contrary, State Government adjusted a sum of Rs.340.2 Crore payable to GRIDCO against the upvaluation. All the liabilities of erstwhile OSEB were also passed on to GRIDCO based on the above financial analysis and projections.

6.2.5

In reality, the projections did not materialize as envisaged. The financial health of GRIDCO is far from satisfactory as the accumulated losses of GRIDCO has increased to Rs.1197 Crore by the year FY 1998-99 and is likely to be Rs.1378 Crore by 2001-02. It faces acute liquidity problem as the DISTCOs have paid to GRIDCO towards purchase of power only about 65.21% of BST bills upto FY 2001 and 46.42% upto December 2001.

6.2.6

However, in the post-reform period from 1 April, 1996 to 31 March, 2001, the state generators, namely, OPGC and OHPC have earned profit of Rs.768 Crore in books which should have made them financially viable but in reality, OHPC is faced with cash crunch due to non-payment of its energy dues by GRIDCO.

6.2.7

Private capital has been infused in the form of disinvestment of 49% of equity shares of OPGC (Rs.603 Crore) and sale of 51% share of distribution business of GRIDCO (Rs.159 Crore).

6.2.8

In OSEB days, the State Government was required to provide necessary subvention under Section 59 of the Supply Act 1948 so as to leave a surplus of not less than 3% on Net Fixed Assets to OSEB after meeting all expenses properly chargeable to revenue including O&M and management expenses, taxes, depreciation and interest etc. for sustenance of the power sector to meet its socio-economic obligations of giving power supply to the vulnerable sections of the society. But in the post-reform era, the Government of Orissa has totally divested itself from the burden of such payment which on a rough estimate would have come to Rs.2770 Crore had the OSEB continued as an entity.

6.2.9

The Commission reiterates its observation made in the order No.27 dt.19.01.2001 that payment of subsidies are not in consonance with the spirit of the Reform Act, 1995 but the State Government's financial back-up in the form of subvention or subsidy during the transitional period could have substantially eased the situation as has been realised and is being implemented in many reforming States like Andhra Pradesh (Rs.1585 Crore), Gujarat (Rs.1260 Crore), Uttar Pradesh (Rs.790 Crore), Haryana (Rs.769.3 Crore), for one year and Rajasthan (Rs.3496.6 Crore in four years), Delhi (@ Rs.500 Crore per annum for five years). This was necessary because the social policies, such as, Rural Electrification, Lift Irrigation, Kutir Jyoti carried out at the behest of the State as a matter of state policy for the benefit of a larger section of the state's population was continued in the post-reform period and also tariff can not be made cost reflective in one go, as it would generate a price shock to consumers.

6.2.10

The single most important factor that raised the revenue requirement of all the licensees in the post-reform era was the substantial rise in the cost of hydro power as well as in the cost of transmission and distribution on account of revaluation of assets as on 01.4.96 and also providing an accelerated rate of depreciation. Further, in the pre-reform era, power requirement of the state was met mostly from sources within the State and limited procurement from Central Generating Stations and CPPs. However, with the passage of time, the State became more dependent on drawal of power from the Central Generating Station due to delayed commissioning of the Upper Indravati Hydro Electric Project. The NTPC power remained costlier as their power stations in the eastern regions were new stations and continued to operate at low PLF accentuating the fixed cost per unit. On the revenue side, the single most important factor has been the lack of growth in EHT and HT loads as envisaged in the SAR.

6.2.11

The forecast of consistent reduction in transmission and distribution loss from an estimated level of 39.5% for the FY 1996-97 to 22.7% by the FY 2000-01 has not worked out. Even the initial assessment of loss as 39.5% for the FY 1996-97 turned out to be 49.4% as revealed from the audit report during the corresponding year.

6.2.12

The transmission and distribution sector continued to bear further financial liabilities due to interest burden on account of debt servicing of past loans & liabilities and large scale investment in transmission and distribution for improvement of quality of power supply without corresponding rise in sale of power.

6.2.13

The anticipation that the impact of revaluation of assets would be offset with the growth of EHT and HT loads has not worked as the expected load growth like installation of steel plant at Gopalpur, Duburi projected in pre-1996 era did not materalize coupled with recession in the industrial sector severely hurting the anticipated growth at HT & EHT. Further, to make the matters worse, the loads in the subsidised categories have increased. This has adversely affected the revenues of the utilities.

6.2.14

The actual sale of 2760 MU to the industrial HT & EHT bulk supply and railway in 2000-01 was far below the load projection of 7009 MU for these categories made in the Staff Appraisal Report. This has seriously affected the revenue earning potential of the licensees, widened the gap between the cost of supply and revenue realisation and reduced the scope of cross-subsidy to low voltage classes of consumers.

6.2.15

Had the load projection contemplated in the Staff Appraisal Report materialized, the revenue position of the utilities would have been much better and it would have contributed to an overall reduction in T&D loss figure.

6.2.16

Some HT/EHT consumers preferred generation of power from their own Captive Power Plants rather than avail power from DISTCOs on cost consideration though the Eastern Zone continues to be surplus in generation.

6.2.17

Though collection efficiency is around 98% to 99% in privately managed utilities like CESC, Calcutta and BSES. Bombay, the DISTCOs in Orissa have achieved only 75% for 1999-00 and 76% for the year 2000-01. Their failure to collect the revenue at the tariff permitted by the Commission from year to year and to convert the lost units by regularizing unauthorized connection and reducing load have magnified the liquidity problem.

6.2.18

The affordability of a large section of consumers mostly from domestic, irrigation, small industrial segments, etc. constituting more than 90% of the total consumers strength happened to be the weakest link in attaining a cost based tariff structure, which in effect would result in reduction of Industrial Tariff and substantial increase in LT Tariff.

6.2.19

It was expected that a vibrant industrial sector would support and make the power sector self-sustaining for which no provision was kept to provide financial support to GRIDCO during the transition year, though GRIDCO in its new incarnation was still required to undertake socially purposive but unremunerative measures such as Rural Electrification and supply to the rural poor. The state's economy had received tremendous setback due to occurrence of natural calamities like super cyclone, drought and flood in succession affecting both the utilities and the consumers. Besides, the customer care of the distribution companies has left much to be desired raising questions on efficacy of privatisation.

6.2.20

It may be reiterated that the asset revaluation, absence of subvention from the Government, high level of transmission and distribution loss, non-maturing of HT & EHT loads, coupled with poor billing and collection of the distribution companies are the causes of imbalancing factors leading to the losses in the GRIDCO and distribution utilities.

6.2.21

  1. Therefore, it is felt that a mid course correction of the Power Sector Reform in Orissa is urgently necessary to strengthen the power sector in the interest of the consumers, investors and the state's economy.

  2. In fact, GRIDCO came up with a Financial restructuring Plan (FRP) for mid-course correction way back in October 1999. It had the general approval of the Government of India. OERC had also communicated its approval. State Government did not commit itself to some stipulations in the FRP an as a result it could not be implemented.

6.2.22

From 01.04.2001 onwards, the moratorium period of five years allowed on the zero coupon bond issued to GRIDCO as well as the convertible bonds issued to OHPC was to expire by 31 March 2001 and its treatment like conversion of bond to equity and collection of interest on the balance portion of bond in accordance with the Government Notification, and realization of interest on loans allowed for completion of Upper Indravati and Potteru Hydro Electric Project would further aggravate the situation by substantially raising the revenue requirement for the licensees to meet the extra burden of interest costs. As disclosed from the revenue trend of last five years even without the impact of the servicing of those bonds, the licensees were neck deep in meeting their financial obligations and accretion of those new liabilities would add to the further woes of the sector.

6.2.23

With this scenario in view, the committee of independent experts (hereafter called the Kanungo Committee) appointed by the Government of Orissa have very aptly recommended, as a mid-course correction, certain measures setting aside the revaluation assets of OHPC, payment of interest to the State Government on the loans imposed on the licensees due to revaluation to provide requisite support to the power sector for its resuscitation and among other things have made the following significant recommendations :

  1. Revaluation of GRIDCO and OHPC assets to be kept in abeyance till the system is brought to balance.

  2. State Government to agree to allow moratorium on debt servicing to the State except the amounts in respect of loans from the World Bank.

  3. An interim financing other than debt amounting to Rs.3240 Crore (estimated) to be availed from World Bank and the DFID to bridge the cash gap in order to keep the tariff at the same level for the period from 2001-02 to 2004-05.

  4. Instituting regular systems of monitoring consumer grievances and services to be supplemented by test checks.

  5. Setting up of Rural Engineering Planning Organisation (REPO) and Rural Electrification Planning Units (REPU) under Government of Orissa to monitor RE and LI works.

  6. At this point of crisis, all agencies such as State Government, the Central Government, the World Bank and DFID should get together to rescue the reform process.

  7. Reduction of distribution loss @ 5% p.a. with a base level of 42.2% in the year 2001-02.

  8. Collection efficiency to increase from 76% to 95% by 2005-06.

6.2.24

The inescapable conclusion emerges from the aforesaid observation is that support for sectoral revival can be possible with reduction in input cost to the distribution companies which has occurred on account of exponential rise in (a) cost of power (b) cost of transmission (c) cost of distribution. The rise in power purchase cost has been more steep in respect of Orissa Hydro Power Corporation (old stations) where the per unit cost of power purchase went up from 22 paise/unit as on 31 March, 1996 to 38 paise/unit as on 1 April, 1996 and 49 paise/unit between 1997-98 to 2000-01. GRIDCO has proposed to raise the cost of OHPC power to 72 paise/unit with effect from 1 April, 2001 as a result of expiry of the period of moratorium on Government loans.

6.3

Strategies for Improvement of Power Sector

6.3.1

Against this backdrop, the Commission deems it fit to have a review of the various policy options being followed in the post reform era in the best interest of the power sector in the state within the frame work of existing Act, Rules and Regulations. In fact, Commission in its tariff order and conceptual paper of August, 1998 had reserved the right to review those points in respect of upvaluation of assets at an appropriate time.

6.3.2

Multi-year Tariff Strategy

6.3.3

In course of the hearings, the utilities as well as some of the respondents spoke about the element of uncertainty and risk inherent in an annual tariff setting exercise and they pleaded for introduction of a multi-year tariff regime which would reduce such uncertainty. The Commission is conscious of the need for greater certainty in the regulatory treatment of a host of issues having direct impact on tariff setting. The Commission shall endeavour to set in motion a multi-year tariff regime effective from April, 2003 for FY 2003-04 after wide publicity and consultation with all the stakeholders. The Commission initiated preparation of a five-year sectoral plan covering generation, transmission and distribution which will provide key inputs to this exercise. The draft consultation document which is currently under finalisation will also be brought out to facilitate the process of such consultation and obtain comments from the various stakeholders.

6.3.4

The utilities have to improve upon their own performance within a stipulated time frame by upgrading their managerial skills and efficiency by scrupulously adhering to certain operational norms like reduction in the level of loss, attaining certain level of billing and collection efficiency, setting a target for investment and avoiding time and cost overrun in execution of projects, etc. This calls for not a single year target but fixing a target to be achieved over a control period to provide a kind of predictability to the consumers and to their own shareholders and to the Commission. The Commission considers it prudent and desirable to go for a multi-year tariff principle regime for which the utilities should conform themselves to a multi-year target setting in the areas stated above. The Commission also feel that the FY 2001-02 should be considered as the base year for all calculations as suggested by the Kanungo Committee.

6.3.5

It is also felt at this stage that steep hike in tariff would not be implementable. A reasonable level of tariff rise that prescribes a competitive tariff for the industrial and commercial enterprises coupled with rationalization of the tariff structure can help in growth of these categories. This calls for support to the transmission and distribution utility in the form of reduced cost input in the power purchase which can help in bringing about sectoral revival including improvement in quality of supply and service to the customer.

6.3.6

The options available are :-

  1. suggest and adopt means for neutralization of the effect of asset revaluation.

  2. examine the issue of securitisation of power purchase liability of GRIDCO for improvement of the liquidity of the licensee to long term bonds in consonance with the recommendations of Ahluwalia Committee.

  3. direct the utilities to commit to definite and unambiguous target like reduction of transmission and distribution loss in a time bound period.

  4. confirmation from the utilities for achieving certain minimum level of collection and billing from year to year.

  5. direct the utilities to bring in working capital to ensure 100% payment to GRIDCO for purchase of power and repayment of loans, etc.

  6. determination of revenue requirement from year to year based on the level of transmission and distribution loss, level of billing in collection in accordance with the parameters stated above.

6.3.7

The Commission considers the necessity of certain short-term measures for immediate implementation to reduce the revenue requirement of the utilities to contain the tariff rise at a reasonable level without affecting the financial viability of the Generators, GRIDCO and DISTCOs. The Commission, therefore, first would like to anaylise the impact of revaluation of assets and explore means of neutralising its adverse effect in increasing the revenue requirement of the utilities.

6.3.8

A historical perspective of the revaluation of asset is given hereafter.

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