7.0

REVENUE REQUIREMENT

SOUTHCO has submitted its revenue requirement for the year 2000-01 in October, 2000. The Commission has for the purpose of analysing the revenue requirement has relied on audited accounts submitted by SOUTHCO for the Financial Year 1999-00 as well as data & records presented to the Commission and has carefully considered the facts and arguments placed by the objectors during the hearing.

7.1

Quantum of Power Purchase

7.1.1

SOUTHCO purchases power at different supply points from GRIDCO for supply to consumers in its area of licence. The requirement of power purchase is directly related to the quantum of energy sold to the consumers and the transmission & distribution loss occurring in the licensee’s system. While estimating energy sale for 2000-01, SOUTHCO has analysed the pattern of consumption of various groups of consumers for the year 1998-99, 1999-00 and projected these figures for the financial year 2000-01 in the format prescribed by OERC. According to the analysis of energy sale mix between LT, HT, EHT consumers for the FY 2000, LT consumption accounted for 62.34% while HT & EHT consumption accounted for 22.15% and 15.51% respectively.

7.1.2

The Commission in its query to the licensee pointed out that there appears to be no correlation between the growth projected for the year 2000-01 and the growth achieved during the year 1999-00. This was also raised by some of the objectors who stated that by projecting a higher than expected growth rate in LT, the licensee is trying to project a higher revenue requirement in the form of higher power purchase and trying to show a lower estimate of expected revenue due to low tariff rate of this sector.

7.1.3

In case of domestic consumers a growth rate was 4.35% in consumption was recorded in the year 1999-00 over the previous year due to cyclone of 17.10.1999. The growth could have been more with change in load factor for unmetered consumers, growth of consumers, regularisation of unauthorised consumers and increase in consumption by existing consumers. SOUTHCO in OERC form No. T-1 has given the number of consumers, their connected load and estimated the consumption for the year 2000-01 which works out to a rise of 18.68% for the year 2001 compared to the year 1999-00.

7.1.4

SOUTHCO estimates a growth of 19.66% for commercial consumers based on the trend of consumption of the first quarter of the year 2000-01 although there has been a fall of 2.0% in consumption in the current year over the previous year due to cyclone on 17.10.99.

7.1.5

In case of irrigation consumers SOUTHCO is reportedly taking steps for metering of unmetered ones. The base figure for 1999-00 was lower due to cyclone on 17^th October’99. They estimate that the metering of the consumers in this category will substantially raise the billing position compared to the load factor billing. Taking the growth in number of consumers and contract demand SOUTHCO estimates a rise of 16.59% in this category as submitted to OERC in FormNo.T-1.

7.1.6

In case of HT category of consumers the growth rate of 11.73% is estimated for the year 2000-01 based on the trend of consumption of 1^st quarter of the year 2000-01. Similarly, in case of EHT category of consumers SOUTHCO presumes a growth rate of 0.35% for the FY 2000-01 based on the trend of consumption of the 1^st quarter of the year FY 01.

7.1.7

The Commission analysed the consumption of various groups of consumers and studied the consumption of all HT & EHT consumers. A detailed analysis of the billed units of the LT consumers particularly the domestic and commercial consumers without meters or with defective meters was also carried out. Consumers with correct meters are billed on the basis of actual meter reading whereas others with defective meters or no meters at all are billed on the basis of a load factor. The Commission has prescribed detailed formats to determine the consumption for all such consumers. After examination of the details submission and after examining the view of the objectors the Commission accepts the figure of consumption proposed by the licensee for the purpose of revenue requirement for the year 2000-01 as furnished in OERC Form No. T-1.

7.1.8

Estimated level of consumption at various service level of voltage are given below :-

7.1.9

This is an increase of about 14.2% over the sale in FY 1999-00. This aspect was examined at the Commission’s end. A comparative picture of the consumption of the previous two years along with projection of 2000-01 as presented by the licensee in it’s filing in October-2000 is given in Table : 3.

Table : 3

Consumption in MU

7.1.10

SOUTHCO has given an analysis about the pattern of consumption for the consumers covered under LT category, HT category and EHT category in para 8.1 of their RST application and details in OERC Form No. T-1. SOUTHCO have stated that the distribution system of the licensee is charaterised by high degree of non-technical distribution energy loss. Reduction in commercial losses mostly in LT would contribute either in reduction of purchase of energy or increase in the quantum of energy billed in LT segment. On that consideration they propose a higher growth rate in LT category than HT category.

7.2

Transmission & Distribution Loss

7.2.1

SOUTHCO has estimated T&D loss at 38% for 2000-01. It has stated that for the year 1999-00, the estimated loss figure is 41.8%.

7.2.2

SOUTHCO’s estimation of the overall loss percentage of 38% does not include the loss at EHT which is being recovered by the Transmission and Bulk Supply Licensee i.e. GRIDCO, through the Bulk Supply Tariff. In effect, therefore, the end-use consumers as per SOUTHCO’s proposal would have to bear the EHT loss passed through in the BST in addition to 38% loss proposed by SOUTCO.

7.2.3

Majority of the objectors were concerned about the reporting of very high level of loss in the transmission and distribution system of the licensee particularly after the privatisation which under SEB management used to be recorded at lower level.

7.2.4

The authenticity of loss level projected by the licensee has not been supported with verifiable data to ascertain correctness of the projection in the absence of metering in large number consumer premises. The Commission’s suggestion to conduct a fresh pilot study to establish commercial and technical loss should have been completed. Such a study requires 100% metering for consumers connected to a selected number of distribution transformers in selected feeders with mixed load.

7.2.5

It was also pointed out by the objectors that three distribution utilities namely WESCO, SOUTHCO and NESCO have reported an overall distribution loss level of 38% while their direct sale to EHT consumers are different. If EHT sale is taken out from the total sale from these companies then the distribution loss as a percentage loss of HT and LT input works out to 47.72% for WESCO, 48.1% for NESCO and 41.47% for SOUTHCO.

7.2.6

The objectors also pointed out that the loss is being computed taking into account even the zero loss EHT energy input into the system to show reduced level of loss. Secondly, this number is arbitrarily fixed and the data is manipulated to justify the loss figure. Therefore, the loss projection is entirely arbitrary and without any basis and hence it should not be accepted.

7.2.7

There were variations in the loss projection made by the objector though there were general suggestions of adopting overall loss level of 32% including 3.5% towards transmission loss. The objectors were unanimous in their opinion that this high level of T&D loss has remained uncontrolled during the past three year and should have been brought down.

7.2.8

The Commission is very much concerned about the reported high loss level in the system and is also concerned that there is no appreciable decline in the level of loss which has a serious bearing on the revenue and finance of the licensee and hence the tariff.

7.2.9

The Commission, therefore, has the unenviable task of fixing a level of loss in the absence of verifiable and reliable data and apply value judgement that should be fair, reasonable, acceptable, achievable and financially sound. Any arbitrariness on the part of the Commission will either affect the financial viability of the licensee or unduly burden the consumers.

7.2.10

It may be relevant to note that high T&D loss is not an isolated phenomenon in Orissa. The T&D loss figures being gradually revealed in reforming states of Andhra Pradesh, Delhi, Haryana, Maharashtra and Uttar Pradesh are presently at the level of 52%, 55%, 36.6%, 32% and 36.5% respectively even before privatisation of distribution has taken place.

7.2.11

In fact it is this Commission which for the first time in India identified and quantified the crucial importance of T&D loss level and linked it to tariff fixation. T&D losses of more than 35% have never been allowed by this Commission to be passed on in tariff in spite of reporting as high as 47.31% (1997-98 audited account). On the contrary, this level of benchmark has been perceived to be unrealistic and unacceptable by the World Bank team, by GRIDCO and by the Distribution Companies. Even with the said 35% benchmark there might be substantial gap between revenue requirements of Licensees and anticipated revenue at the existing tariff rate.

7.2.12

The reporting of loss level and target reduction by 2000-2005 as proposed by the various distribution companies are given below. This does not include losses in EHT transmission.

Distribution Loss (%)

7.2.13

The Commission directed during the course of hearing that the distribution licensees must now carry out pilot studies for determination of technical and non-technical loss in their system within a period of six months from April, 2001 to September, 2001 and submit the same to the Commission after which the Commission will determine the target level of loss reduction from year to year. For the purpose of calculation of revenue requirement, the Commission has decided to adopt an overall loss level of 34% including the losses in EHT transmission system which is around 3.7% for the year 2000-01. On this basis, the distribution loss works out to 31.46%.

7.2.14

Since SOUTHCO proposes to sale 951.74MU, power to be purchased by GRIDCO for supply to SOUTHCO after adding 34% loss is determined as 1442.03 MU. SOUTHCO’s purchase from GRIDCO should be limited to 3.7% (being the approved transmission loss in EHT) less than what is purchased by GRIDCO for supply to SOUTHCO. For the purpose of revenue requirement, SOUTHCO has to purchase only 1388.68 MU to meet its sale requirement of 951.74 MU for the year 2000-01. The system loss in SOUTHCO is 1388.68–951.74 = 436.94 MU. This loss of 436.94 MU expressed as a percentage of input to the SOUTHCO system is 31.46%. Therefore, the distribution loss allowed to SOUTHCO for the purpose of revenue requirement is 31.46%. The end use consumer has to pay for 34% of T&D loss as approved by the Commission. For simplicity of presentation, we have abstracted the above calculation in Table : 4.

Table: 4

7.3

Cost of Power

7.3.1

SOUTHCO has to purchase 1388.68MU from GRIDCO at the rate of Rs.200/KVA/month + 90 paise/unit approved separately by the Commission in BST Order dtd.19.01.2001 (Case No.27/2000). The Commission has examined the power purchase bills of SOUTHCO for April, 1999 to March, 2000. The bill details have been supplied by SOUTHCO in its clarification submitted to the Commission in Schedule-D (Annex.-III) of the clarification on Retail Supply Tariff of 2000-01. The average cost per unit of power purchased from GRIDCO for the months of April, 1999 to March, 2000 is 128.32 paise/unit. The rate/unit payable by SOUTHCO under revised tariff would be 132.76 paise/unit. The cost of power @ 132.76 paise/unit for purchase of 1388.68 MU would, therefore, be Rs.184.36 crores instead of Rs.190.22 crores asked by SOUTHCO at an average rate of 124 paise/unit. The impact of Bulk Supply Tariff was not taken into consideration while the filing for the Retail Supply Application was made by SOUTHCO in the month of October, 2000. The DISTCOs have stated that the OERC has been disallowing power purchase expenses on the basis of consideration of distribution loss benchmark. While considering the purchase cost of power, the Commission instead of considering the energy charge and demand charge separately as a composite rate of energy charge and demand charge. Thus the proportionate maximum demand charges also get automatically disallowed. This is not in line with ground realities or technical basis for the process of distribution loss reduction. Most of the commercial loss is in LT segment where there is no maximum demand charge. As measures are taken for reduction of distribution loss, the consumers economise on energy consumption by reducing the hours of usage and very rarely the maximum demand during peak hours gets reduced. Therefore, there is no valid basis for disallowing maximum demand charges payable to bulk suppliers on account of consideration of distribution loss benchmark.

7.3.2

The submission made by SOUTHCO is without any relevant basis as in case of a two part tariff, the per unit average rate of a consumer is dependent on the load factor of its operation. Accordingly, the Commission decides that for the purpose of calculation of revenue requirement 132.76 paise/unit is considered for determination of revenue requirement of SOUTHCO for the FY 2000-01.

7.4

Operating Expenses

The operating expenses for distribution and retail supply may be considered under the following heads:-

Employees Cost
Administration & General Expenses
Repair & Maintenance Expenses
Less expenses capitalized

7.5

Employees Cost

7.5.1

SOUTHCO has proposed Rs.52.02 crores for the FY 2000-01 (Form.F-12) towards Employees Cost which includes a sum of Rs.5.65 crores towards contribution to PF and Pension, and Rs.1.19 crores on account of gratuity. SOUTHCO has stated that actual employees expenses are based on book of account and verified by their internal auditors and SOUTHCO projects an estimated increase of 7% over the actual expenditure for the year 2000-01, principally on account of higher payment of DA to employees. SOUTHCO has also stated that due to structural changes and packages of employees since 1997-98, extrapolation of data pertaining to the previous year of 1997-98 as was done for the year 1999-00 will not be correct. As per the audited accounts submitted by SOUTHCO for the year 1999-00 the expenses on employees including PF and gratuity is Rs.49.60 crores charged to revenue. In response to the Commission’s query SOUTHCO has submitted item wise detail of employees cost for the year 1999-00 based on audited accounts.

7.5.2

Employees expenses includes Basic Pay, DA, Bonus, Reimbursement of Medical Expenses, Reimbursement of House Rent Allowance, Encashment of Earned Leave, Staff welfare, Terminal Benefit (PF contribution/pension, gratuity) and other expenses.

7.5.3

The employees strength of SOUTHCO was compared with that of NESCO. With almost same number of employee Commission allowed Rs.46.26 crores to NESCO. Commission approves the same figure of Rs.46.26 crores towards employees cost for the year 2000-01.

7.6

Administration & General Expenses

7.6.1

SOUTHCO has proposed A&G expenses for 2000-01 as Rs.6.53 crores. These expenses include expenses on communication, professional charges, property related expenses, conveyance and travelling, training, other expenses and material related expenses. The A&G expenses are said to be based on actual expenses incurred during current year and budget estimate for ensuing year.

7.6.2

The Commission has examined the Licensee’s proposal on A&G Expenses. A&G expenses as per the audited accounts for 1999-00 submitted by SOUTHCO was Rs.4.31 crores. The Commission in its last tariff order of 1999-00 approved Rs.2.01 crores towards A&G expenses, considering the disaggregated audited figures of 1997-98 as base and allowing 6% over it to factor in for inflation.

7.6.3

Objectors in general expressed concern about rising trend in A&G expenses and requested that this expenditure should be kept under control preferably limiting to the percentage hike or about 5%.

7.6.4

The Commission finds the projected A&G expenses rather excessive with reference to earlier expenditure and volume of transaction which has not increased. The projection includes lease rental of Rs.89.34 lakhs for the year 2000-01. There is no justification of lease rental for meters when a sum of Rs.3.50 crores is being allowed as capital expenditure under the head metering.

7.6.5

A&G expenses includes a sum of Rs.0.35 crores as expenditure relating to consultancy charges, micro-privatisation and organisational development for the year 2000-01. The Commission appreciates introduction of innovative schemes particularly those which are participative consumer friendly and aims at reaching the rural consumer while safeguarding financial interest of the company. But at the same time, Commission observes that the benefit accruing on account of introducing the scheme should offset the expenditure proposed to be incurred. The tangible benefits like improvement in percentage of billing and collection, reduction in bad debt, reduction of transmission and distribution loss etc. should have been projected along with the proposed expenditure. The licensee should have particularly brought out the additional revenue earned from the area where the micro-privatisation scheme is in operation over the corresponding figure of the previous year. Such a reporting has not been done. Before admitting an expenditure on such a new and innovative scheme, the Commission would like to be convinced of the cost-effectiveness of the scheme. Within six months from this tariff order a report must be filed proving the utility and cost-effectiveness of this venture of micro-privatisation.

7.6.6

The Commission considers it reasonable to allow an increase of 8% over the approved figure of 1999-00 to factor in inflation. Over and above the figure, an amount of Rs.0.50 crores is allowed for licence fee and Rs.0.35 crores towards organisational development expenses of micro-privatisation. The total A&G expneses is approved Rs.3.02 crores against amount of Rs.6.53 crores proposed by licensee.

7.7

Repair and Maintenance Expenses

7.7.1

The R&M expenses proposed by SOUTHCO is Rs.14.72 crores for the FY 2000-01 as against actual expenses and approved expenses for 1999-00 at Rs.16.75 crores and Rs.12.63 crores respectively. The projected estimate of Rs.14.72 crores is based on 5.4% of Gross Fixed Asset.

7.7.2

The Commission examined the licensee proposal on R&M expenses and considers it reasonable to allow 5.4% of gross fixed asset as at the beginning of the year 2000-01. SOUTHCO in their audited accounts of 1999-00 continues to show the fixed asset at Rs.233.84 crores. The fixed asset upto 31^st March, 1999 is Rs.233.82 crores. In the annual accounts of 1999-00, only Rs.0.02 crores of assets addition is shown during 1999-00. Therefore, the Commission allows Rs.12.63 crores i.e. 5.4% on a base of Rs.233.84 crores for the year 2000-01 and not on the projected asset base of Rs.272.58 crores.

7.8

Interest on Loan

7.8.1

SOUTHCO proposed an amount of Rs.24.32 crores towards interest on loans taken from GRIDCO, World Bank and IFC to be charged to revenue. The interest amount on the loan from GRIDCO has been calculated as per the loan agreement with GRIDCO and the interest amount on loan from World Bank has been calculated @ 13% as per the subsidiary loan and project implementation agreement with Govt. of Orissa. Interest on loan from IFC has been calculated @16%. Regarding interest capitalised SOUTHCO has stated that the interest on loan obtained to finance capital works which could not be put to use during the year has been capitalised.

7.8.2

It is seen from the Form F-12 of the filing that out of Rs.24.32 crores, R.19.95 crores relates to interest on loan advanced by GRIDCO, Rs.4.37 crores relates to interest on loan from World Bank. Interest during construction proposed during the year 2000-01 is Rs.1.88 crores. Total amount of interest both charged to revenue and capital expenditure is of the order of Rs.26.20 crores.

7.8.3

An extract of loan & interest details as submitted by SOUTHCO in OERC Form No.F-27 is given in Table : 5.

Table : 5

7.8.4

The Commission examined the calculation and also the audited accounts of 1999-00 submitted by licensee. It is found from the audited accounts that SOUTHCO has added only Rs.0.02 crores of assets during 1999-00. As on 31.3.2000, fixed asset position has gone up marginally by Rs.0.02 crores over the figure shown in transfer notification dt.25.11.98.

7.8.5

SOUTHCO has proposed charging of Rs.17.02 crores as interest for the FY 2000-01 excluding penal interest. This amount of Rs.17.02 crores includes interest during construction of Rs.1.88 crores as given in Form No. F-2. In form No.F-2, SOUTHCO has indicated that asset worth Rs.38.76 crores has been transferred to fixed asset during the year 1999-00. As verified from accounts of 1999-00 submitted by SOUTHCO there is only Rs.0.02 crores of asset addition during the said year. Therefore Commission considers the entire expenditure during 1999-00 and proposed expenditure during 2000-01 is to be treated as CWIP and the interest thereon for the year 2000-01 is to be treated as interest during construction.

7.8.6

It is seen from filing of SOUTHCO (Form F-2) amount spent towards PMU work for the year 1999-00 is Rs.9.87 crores. For the year 2000-01 it proposes to spend Rs.37.48 crores. Commission in its tariff order 1999-00 allowed Rs.13.87 crores towards PMU. But the actual execution of SOUTHCO is below the amount allowed by the Commission. Therefore Commission considers figure of 1999-00 to be appropriate and allow Rs.10 crores towards PMU works for the year 2000-01. Accordingly it approves Rs.10 crores of loan projected for PMU work during 2000-01. Interest on loan taken into 1999-00 and loan allowed for PMU work during 2000-01 are recalculated which works out to Rs.1.29 crores. As stated in above para Commission consider the capital expenditure of 1999-00 and 2000-01 as CWIP. Hence the entire amount of Rs.1.29 crores should be charged to capital works.

7.8.7

SOUTHCO has taken loan from GRIDCO Rs.5.74 and projected during 1999-00 for undertaking rural electrification work. The issue of rural electrification has been discussed in para 7.15.2. Therefore Commission considers to exclude interest on loan from GRIDCO taken for the purpose of RE works after 01.04.1999.

7.8.8

The Commission examined the issue of penal interest of Rs.9.18 crores as stated in above para. The licensee is bound by agreement to pay the interest in time to the lenders and penal interest if any cannot be passed on to the revenue requirement to burden the consumers. Accordingly, the sum of Rs.9.18 crores claimed by the licensee for passing to the revenue requirement is disallowed.

7.8.9

Thus the Commission recalculates and approves a figure of Rs.15.90 crores as interest chargeable to revenue excluding Rs.1.29 crores due to capitalisation of expenses. The details are given below.

7.8.10

While proposing an amount of Rs.3.57 crores towards interest on working capital, SOUTHCO have stated that they have not availed any working capital loan from bankers to pay to GRIDCO the full amount of BST bill. They have estimated an amount of Rs.3.57 crores towards DPS for the year 2000-01, being 2% per month as outstanding amount of power bill.

7.8.11

SOUTHCO stated that they are forced to pay DPS to GRIDCO because of serious liquidity problem faced by company. This has happened due to severe loss by company. As stated in the application licensee has approached UBI, IFC, SBI, etc. for raising working capital loan which has not been materialised so far. The only alternative available to them was to pay DPS to GRIDCO. The Commission also examined the points raised by the objector that no DPS payable to GRIDCO should be allowed to be passed on to the consumers as the Commission has provided adequate revenue for prudent operation. Additional cash by way of depreciation and return are available for the SOUTHCO to have adequate cash flow. The Commission is of the opiinon that the working capital of Rs.3.57. requested by SOUTHCO for their failure to discharge power penalty to GRIDCO in the form of interest on working capital cannot be treated as an expenditure properly incurred on running the business of the company.

7.8.12

The Commission while considering the capital base as provided in the Sixth Scheduled of the Act, 1948 made provision towards working capital on which the licensee is entitled to get reasonable return.

7.9

Depreciation

SOUTHCO has proposed depreciation of Rs.21.07 crores on an asset base of Rs.272.58 crores as on 31.3.2000. SOUTHCO has adopted for calculating depreciation the straight line method as prescribed by Central Govt., Ministry of Finance, Notification No. SO-765-E dtd. Nov. 6, 1997.

7.9.1

The provision of depreciation was raised by many of the objectors during the course of the hearing.

7.9.1.1

One of the objectors claimed that depreciation should have been calculated on the basis of notification Ministry of Power, Govt. of India dtd. March, 1994 and not on notification dated 6.11.97 of Govt. of India. He stated that asset being second hand the rate of depreciation has to be determined by the competent Govt. in each case "having regard to the nature, age and conditions of the assets at the time acquisition". He had also made a point that in case of 30-40% of the total assets procured by OSEB depreciation upto 90% of asset value must have been recovered on which no depreciation should be charged. He also raised the issue of maintenance of fixed asset register and stated that cumulative depreciation of any asset should not exceed 90% of the original cost of asset.

7.9.1.2

One suggestion was that correct calculation of depreciation as per Govt. of India’s circular should be made after dividing the assets into blocks at the time of revision of percentage of depreciation, if it is not possible for OERC to deviate from Govt. of India norms. Depreciation already collected and balance to be collected for each block of assets should be exhibited in registers by GRIDCO and DISTCOs within a time frame to be fixed by OERC.

7.9.2

The Commission noted the objections filed with the Commission and raised during the course of hearing, the rejoinder submitted by the licensee, took note of the auditor's observations for the year 1999-00 and would like to state that the Govt. of India, Ministry of Power Notification No. 265-E dtd.27.3.94 shall be applicable for the purpose of calculation of depreciation of the licensee.

7.9.3

The provisions of CBDT notification quoted by the licensee and raised by the objectors is not applicable in this case as depreciation for companies engaged in the generation or supply of electricity, is guided by provisions of the Electricity (Supply) Act, 1948 (LIV of 1948)" and not Companies Act.

7.9.4

The Commission in its conceptual issues on tariff paper in Issue No. 6 has stated that "tariff will be based on depreciated book value as set out in the transfer scheme adjusted for subsequent addition and depreciation." The Commission in its previous tariff order has already accepted the transfer value of assets appearing in the Transfer Scheme notification by Govt. of Orissa for determination of the book value assets. Obviously the base line for calculation of fixed assets has been the Transfer Scheme Resolution of March, 1996 which has been sanctioned by legislation.

7.9.5

The Commission took note of the observation noted in the audit report for the year 1999-00 that the gross block of fixed assets and the depreciation on the same are subject to finalisation and that the Fixed Assets Register is not maintained and individual break up of fixed assets is not available.

7.9.6

The Commission, directs SOUTHCO to comply with the observation raised by their statutory auditors before 30^th of September, 2001 i.e. well before the filing of revenue requirement (15^th December to 31^st December, 2001) for the year 2002-03. Once an asset register is built, recovery upto 90% of the asset value can be monitored.

7.9.7

According to the provisions of the Electricity (Supply) Act, 1948, depreciation for the year should be calculated on the gross fixed asset existing at the beginning of the year. Audited Accounts of SOUTHCO for the year 1999-00 reveals that the gross fixed asset of the licensee as on 31.3.2000 is Rs.233.84 crores and only Rs.0.02 crores has been transferred to fixed assets during the year 1999-00. The Commission accordingly approves an amount of Rs.18.05 crores for depreciation for the year FY 2001 as shown in Table : 6.

Table : 6
Calculation of Depreciation

7.10

Bad and Doubtful Debt

7.10.1

SOUTHCO has proposed Rs.12.23 crores as Bad & Doubtful Debt during 2000-01. In the audited accounts of SOUTHCO for 1999-00, Rs.11.01crores has been provided for the purpose of Bad & Doubtful Debt.

7.10.2

SOUTHCO has provided an age wise analysis of outstanding debts. As per the said analysis SOUTHCO has stated that Rs.60.45 crores are outstanding for more than 24 months out of the total outstanding of Rs.203.20 crores.

7.10.3

In their application SOUTHCO had proposed 5% of the total billing to be provided for Bad & Doubtful Debt for an amount of Rs.11.01 crores increasing the provision from Rs.90.07 crores to Rs.101.07 crores as on 31.3.2000. For the year 2000-01 Bad & Doubtful Debt are claimed at 4% of the total billing for an amount of Rs.12.23 crores.

7.10.4

Many objectors have questioned the provision of such a high amount of Rs.12.23 crores towards Bad and Doubtful debt. They have urged to disallow the provision except a token amount so that the licensee is not allowed a premium on its inefficiency in collection.

7.10.5

The Commission examined the proposal submitted by the licensee and analysed the suggestions and objections raised by the objectors during the hearing. The Commission is also concerned at the inefficiency of the licensee in collecting the arrear dues. However looking at the reality of the situation and as approved in the last tariff order it decides to permit a provision of 2.5% of gross sales as provision for bad debt as against 4% claimed by the licensee. Accordingly, the Commission approves Rs.6.38 crores as Bad & Doubtful Debt allowed for recovery through tariff.

7.11

Contribution to Contingency Reserve
SOUTHCO has proposed a statutory appropriation towards contribution to contingency reserve calculated at 0.375% on the opening gross block for the applicable year. This works out to Rs.1.12 crores and the amount requested is within the limit prescribed in the Sixth Schedule to the Act, 1948 and hence the sum of Rs.1.12 crores is accepted in full for recovery through tariff.

7.12

Carry Forward of Past Losses

7.12.1

SOUTHCO has made a provision of Rs.9.02 crores being 10% of past losses to be recovered through tariff in Form No. F-12. It has stated that as per the provision of the Sixth Schedule of the Act, 1948, special appropriation can be made sufficient to cover previous losses (that is to say excess of expenditure over income) which has arisen from the business of electricity supply to the extent in any year. As per the Audited Balance sheet the losses incurred by SOUTHCO during the year 1999-00 were Rs.87.37 crores and as per filing Rs.90.19 crores (Form F-38). SOUTHCO proposes to carry forward the balance loss for recovery through future tariff. SOUTHCO confirms that all the expenses incurred are prudent and the losses have been due to inadequate tariffs and the same need to be recovered through tariffs only.

7.12.2

We are unable to agree with the proposal high T&D loss. The losses of the company could have been on account of inefficiency in operation, non-observance of the parameter prescribed by the Commission, inadequate measure for reduction of cost, etc. Nowhere in the filing the licensee has brought out details justifying recovery of this loss through tariff. As such, the Commission cannot allow recovery of losses from the consumers of the licensee for the year 2000-01. Logical interpretation of appropriation provision in the Sixth Schedule leads us to believe that if there is excess of income order expenditure, a part of the excess amount can be appropriated towards past losses. In this case there is no excess over income and hence there is no scope for special appropriation.

7.13

Capital Base

7.13.1

Original Cost of Fixed Assets

7.13.1.1

SOUTHCO has projected its original cost of fixed assets at Rs.299.39 crores as on 31.3.01 in Form No.F-14. Fixed asset as on 31.3.99 was Rs.233.82 crores (F-37). SOUTHCO shows an asset addition of Rs.38.76 crores during 1999-00 and projects an addition of Rs.26.81 crores during FY 2001 (F-2) bringing the total asset position to Rs.299.39 crores as on 31.3.01.

7.13.1.2

This has been examined with reference to the audited accounts for the year 1999-00 submitted by SOUTHCO. It is pointed earlier in the preceeding para that there has been only Rs.0.02 crores of addition to the fixed asset during 1999-00. Since very negligible amount has been transferred to fixed asset during 1999-00, the position of the fixed assets remains at Rs.233.84 crores as on 31.3.2001.

7.13.1.3

Audited reports for 1999-00 does not reflect transfer of any fixed asset except Rs.0.02 crores under vehicles head though it was planned to transfer for Rs.38.76 crores in the year, Therefore Commission considers that the proposition of transfer of fixed asset of Rs.26.81 crores for the year 2000-01 is likely to continue to remain in working progress.

7.13.1.4

Therefore, the position of fixed asset as on 31.3.2001 is treated as Rs.233.84 crores. However, the capital expenditure during the year 1999-00 and the expenditure proposed during 2000-01 will be treated as CWIP for treatment in capital base until audited accounts for the year 2000-01 reveals transfer to fixed assets.

7.13.2

Receipts against Consumers Contribution
Contribution from consumers of Rs.47.46 crores as on 31.3.2001 has been deducted by the licensee from fixed asset for calculation of capital base. This is accepted by the Commission for calculation of capital base for the year 2000-01.

7.13.3

Original cost of Work in Progress

7.13.3.1

For the purpose of Capital Base calculation, SOUTHCO has projected Rs.18.95 crores towards original cost of work in progress as on 31.3.2001. The comparative position of capital expenditure during the year 1999-00 as per tariff filing and proposed during 2000-01 is given in the Table : 7.

Table : 7
(Rs.in crores)

7.13.3.2

The expenditure of Rs.5.74 crores shown against R.E. works during 1999-00 in the above table should not be taken into consideration in CWIP as the Commission has recommended to the Govt. to provide grant in aid/capital subsidy to the licensee the entire capital expenditure incurred during 1999-00. The Commission has also recommended that the licensee shall not claim any subsidy from State Govt. for future years. This will obviate the necessity of annual revenue subsidy payment by govt. from year to year. It was also stated that the assets created out of the grant-in-aid will not be considered for the purpose of capital base and hence will not earn any return. Any revenue loss for undertaking such un-remunerative R.E. work shall be subsidised by general pool of consumers. Same approach will also be applied for R.E. works for the year 2000-01. Accordingly, for the purpose of calculation of capital base Rs.5.74 crores will be taken out from CWIP. It is seen from the above table that SOUTHCO has spent 9.87 crores towards PMU work. Commission in their last tariff order allowed Rs.13.87 crores towards PMU work. SOUTHCO in the year 2000-01 purpose to spend Rs.28.00 crores towards PMU work, which Commission considers to be a optimistic projection. Commission therefore consider Rs.10 crores as prudent investment and allow the same for PMU work during 2000-01. CWIP as on 31.3.99 was Rs.28.38 crores. The total CWIP as on 31.3.2001 will be Rs.59.73 crores excluding Rs.5.74 crores for R.E. works. The calculation is given below.

CWIP as on 31.3.99	Rs.28.38 crores
Expenditure for 1999-00	Rs.19.06 crores
Capital expenditure 2000-01	Rs.16.16 crores
IDC for 1999-00	Rs.0.58 crores
IDC for 2000-01	Rs.1.29 crores
Sub-total	Rs.65.47 crores
Less R.E. works	Rs.5.74 crores
Total	Rs.59.73 crores

7.13.3.3

This figure of Rs.59.73 crores will be considered for calculation of capital base. The licensee proposes huge expenditure without corresponding load growth which will bring a burden to the consumers of the State unless there is reduction in transmission and distribution loss. The licensee is also showing an expenditure of Rs.3.50 crores on metering during 2000-01. This itself should bring about perceptible improvement in reduction in commercial losses, improved billing and revenue to the licensee. It is, therefore, necessary that a higher targeted level of loss reduction should be aimed by the licensee.

7.13.4

Compulsory Investment under Para IV

7.13.4.1

In OERC Form No. F-33 SOUTHCO has shown balance of contingency reserve as on 01.4.99 as Rs.0.84 crores. During the year 1999-00 SOUTHCO shows an appropriation of Rs.1.02 crore. Thus the balance at the end of 31.3.00 is Rs.1.86 crores which should have been invested in accordance with para IV(2) of the Sixth Schedule of the Act, 1948 for inclusion in the capital base. No document regarding this investment has been produced to the Commission.

7.17.4.2

The appropriation for the year FY 2000-01 is shown as Rs.1.12 crores to be deposited before September, 2001. As such the Commission does not consider it necessary to take this Rs.0.83 crores shown by the licensee in form F-14 of the filing, for the purpose of capital base for FY 2000-01.

7.14

Working Capital

7.14.1

Average cost of stores

7.14.1.1

According to para XVII(e)(i) of the Sixth Schedule of the Act, 1948, a sum equal to of one-twelfth of the sum of book cost of stores, materials and supplies including fuel on hand at the end of each month of the year of account should be taken into account as working capital for calculating the capital base. SOUTHCO has proposed Rs.6.92 crores on this head.

7.14.1.2

The Commission examined the proposal of SOUTHCO. A stock of three months’ consumption of materials at any particular point of time can be considered reasonable. Accordingly the Commission approves one-forth of the total annual consumption of materials i.e. Rs.3.16 crores as reasonable for the purpose of working capital for stores to be included in the capital base.

7.14.2

Average Cash and Bank Balance

7.14.2.1

SOUTHCO has proposed Rs.5.92 crores for the FY 2000-01 computed on the basis of the provisions laid down in Sixth Schedule of the Act, 1948. SOUTHCO in form F-19 has given the provision of monthly cash balance from April, 99 to March, 2000 and projection from April, 2000 to March, 01. As stated in para XVII(1)(e)(ii) of the Sixth Schedule of the Act, 1948, an amount equal to 1/12 of the sum of cash & bank balances and call and short term deposits at the end of each month of the year of account, not exceeding the sum specified therein can be included in capital base.

7.14.2.2

The Commission feels that liquid funds are needed for the payment of Employees' Cost and Administrative & General Expenses pending collection of receivables from the consumers. The normative lead time between the supply of electricity to the consumers and collection of tariff is considered two months. Hence, the fund requirement for two months payment of Employees’ Cost and Administrative & General Expenses would be appropriate for meeting working capital requirement in the form of cash and bank balance. Calculated on the aforesaid basis, the amount works out to Rs.8.21 crores. The Commission, therefore, approves a sum of Rs.8.21 crores as cash and bank balance for meeting working capital requirements.

7.14.3

Accumulated Depreciation
SOUTHCO has proposed a sum of Rs.88.32 crores towards amounts written off or set aside on account of depreciation as on 31.03.2001. The audited accounts for the year 1999-00 shows an accumulated balance of Rs.67.25 crores. A provisions of Rs.18.05 crores is considered reasonable as depreciation for the FY 2000-01 as there has been no change in the asset base. Hence the Commission approve Rs.85.30 crores as accumulated depreciation as on 31.3.2001 for the purpose of calculation of Capital Base.

7.18.4

Loans and Bonds

7.14.4.1

SOUTHCO has stated that the loans and bonds for its distribution and retail supply business as per the transfer scheme notification for the period ending 31.3.99 amounted to Rs.170.42 crores (Form No. F-3). Information on receipt/repayment of loan as submitted by SOUTHCO in OERC form No. F-3 is reproduced in Table : 8.

Table : 8
(Rs. in Crores)

7.14.4.2

As discussed in earlier paragraph interest on loan taken for R.E. works are to be disallowed. Out of Rs.26.60 crores of loan proposed to be taken from World Bank for the years 2000-01, the entire amount of loan is towards PMU works. Commission allows Rs.10.00 crores of capital expenditure towards PMU works for 2000-01. Accordingly, the loan proposed to be received from World Bank should be limited to Rs.10.00 crores as against Rs.26.60 crores proposed by SOUTHCO. Commission therefore considers an amount of Rs.148.08 crores for the purpose of calculation of capital base shown under the Table : 9.

Table : 9
(Rs. in Crores)

7.14.5

Consumers’ Security Deposit

7.14.5.1

SOUTHCO while calculating the capital base as on 31.3.2001 has not deducted a sum of Rs.22.30 crores deposited with the licensee by way of security as required under para XVII(1)(iii) Sixth Schedule to the Act, 1948. In clarification to queries by OERC, SOUTHCO has stated that as per the provisions of Sixth Schedule to the Act, 1948, "Capital base" means the capital investment made for long term use by the licensee for the creation of long term assets as well as fund committed for long term working capital use. The spirit of the law is that the licensee is eligible to get reasonable rate of return on its long term capital investment.

7.14.5.2

The Commission observes that the amount deposited in cash with the Licensee by the consumers as security is clearly deductible for the purpose of determination of Capital Base as per provision of para XVII(1)(iii) of the Sixth Schedule of the Act, 1948. Accordingly, an amount of Rs.22.30 crores is deducted in the computation of Capital Base.

7.14.5.3

Based on the forgoing observations, the Commission finds that Capital Base for 2000-01 for the purpose of Sixth Schedule has to be taken at Rs.1.80 crores (vide Annex to this order) as against Rs.5.26 crores proposed by SOUTHCO.

7.14.6

Reasonable Return

7.14.6.1

SOUTHCO has claimed the reasonable return by multiplying the standard rate of 15.5% to the Capital Base of Rs.5.26 crores in addition to 0.5% on loans approved by the State Govt. Thus, SOUTHCO has proposed an amount of Rs.1.75 crores towards reasonable return. We are unable to accept this figure as we have not approved the base figure of capital base. The Commission considers 8% as Bank Rate for the year 2000-01 and allows 5% over the same for the purpose of calculation of Reasonable Return. Accordingly, reasonable return is approved for Rs.0.97 crores as indicated in Table : 10.

Table : 10
(Rs. in crores)

7.14.7

Miscellaneous Receipt
In OERC Form No.F-13, the licensee has shown Rs.2.26 towards miscellaneous receipt during 2000-01 commission approve the same.

7.14.8

Revenue Requirement, Reasonable Return and Clear Profit

7.14.8.1

In the light of above decisions and calculation, the Commission approves expenditure for the purpose of revenue requirement for the year 2000-01 at Rs.286.60 crores as against Rs.324.68 crores proposed by SOUTHCO. At para 7.11 above special appropriation of Rs.1.12 crores has been approved on account of contribution to contingency reserve as proposed by SOUTHCO. Reasonable return has been approved in para 7.14.6 at Rs.0.97 crores against Rs.1.75 crores proposed by SOUTHCO. As explained in para 7.12.1 the Commission has disallowed previous losses of Rs.9.02 crores claimed by SOUTHCO under special appropriation. The calculation of expenditure for revenue requirement, reasonable return and clear profit as approved have been reflected in Annexe A, B & C respectively.

7.14.8.2

The total revenue requirement of SOUTHCO including special appropriation and reasonable return has been reduced by Rs.47.88 crores from Rs.336.57 crores proposed by the Licensee, to Rs.288.69 crores.