1 BACKGROUND

1.1

The Commission in its Tariff Order of 2002-2003 dated 19 April 2002 noted the need for having a multi-year tariff regime.

“Multi-year Tariff Strategy
…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 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.”

This is also in conformity of the Electricity Act 2003.

1.2

The Commission prepared a draft Consultation Paper on Long Term Tariff Strategy (dated 30 July 2002). This was discussed in the Commission’s Advisory Committee on 3 October 2002. A workshop was arranged on 25 January 2003, where the salient features of the Consultative Paper and simulation runs were presented. A hearing on the Long Term Tariff Strategy Paper was conducted on 27 January 2003. The Commission noted that CERC has already adopted a 3-year period as the period during which the norms and conditions determined by them will remain valid.

1.3

The Commission took note of the order dated 14 March 2003 of the Hon’ble High Court of Orissa in Miscellaneous Cases 414 and 560 arising out of OJC 6751, wherein the court had directed that "though the OERC can continue the exercise for determination of the tariff, the same shall not be given effect to without leave of this court". Hence, the tariff principles enunciated in this document shall be subject to the orders of the Hon'ble High Court. These principles are also subject to changes in accordance with the Tariff Policy to be framed by the Central Government under Electricity Act 2003.

2  OBJECTIVES OF LONG TERM TARIFF STRATEGY (LTTS)

2.1

The philosophy of the LTTS is to promote the objectives of the Orissa Reform Act, 1995 i.e., to encourage efficiency, economic use of the resources, good performance, optimum investments, observance of license conditions and the interest of the consumers. 

2.2

In this context, the LTTS aims at providing regulatory certainty to the consumers and the Licensees. It also proposes to provide a more quantitative and unambiguous description of the operation of tariff policy and methodology that are easy to understand, can give a fair estimate of the future position by making reasonable assumptions and avoid different interpretations. 

2.3

The LTTS aims to promote sustainable and meaningful efficiency improvements, help the Licensees and the power sector in Orissa achieve financial stability and safeguard the consumers’ interests through better quality service and competitive tariffs.

2.4

The LTTS should be viewed as providing a transition from annual cost plus regulation to competition in electricity markets. It marks a shift in the focus of regulations from being costs plus in nature to being performance oriented. In this regulatory evolution, the Commission believes that this may lend greater transparency to the process of tariff setting and may provide meaningful guidance to the Licensees and to the consumers about the long- term goals of the Commission.

3 OBSERVATIONS ON LTTS

3.1

The Commission has taken note of the oral and written observations and suggestions made by the Commission Advisory Committee, participants in the Workshop and in the hearing. The Commission views the general support for the LTTS and its principles by the various representatives as a positive step. 

3.2

The Commission also appreciates specific and detailed suggestions made by some participants on the LTTS design and has taken due note of the relevant suggestions in designing these LTTS principles. 

3.3

Points made at the hearing during the Consultative Process:

The Commission, in its communication dated 8 January 2003, invited comments and objections from persons representing a cross section of the public on the proposed LTTS. Comments and objections received in response, in both written and oral form, were heard by the Commission on 27 January 2003. 

Sri Jayadev Mishra, Sri B N Das, Sri S K Nanda (Convener, Energy Panel, CII), Sri M V Rao (Chairman, Power Committee, Utkal Chamber of Commerce and Industries), Sri P K Das (Chief Resident Representative, Tata Steel) and Sri K P Rath gave their suggestions orally as well as in writing. Sri S K Mohapatra, Sri D N Padhi (Principal Secretary, Department of Energy, Govt. of Orissa), and the representatives of the five licensees made oral suggestions. The points they made are dealt with in the following paragraphs.

3.3.1

LTTS Principles 
The need for LTTS was generally acknowledged by all the participants. However, Sri Jayadev Mishra suggested that the transition period should be for two years, till 2005, which will provide sufficient time to watch the pace of progress and pave the way for a more reliable long-term strategy. Sri B N Das was generally against altering the benchmarks in the first year of the control period except for very valid reasons. Sri Nanda wanted OERC to negotiate with the State Government regarding the subsidy payable to the Distcos for taking up un-remunerative activities. OERC should accept only authentic audited figures for the purpose of computing subsidy. In this context, Sri S K Mohapatra commented on the information imbalance between OERC and the utilities; OERC was often at a disadvantage vis-à-vis the utilities, who had much more information than OERC. Sri P K Das opposed any incentive scheme for the Licensees for doing their normal duty while Sri K P Rath was of the view that a system of rewards and penalties will result in improvements provided there is regular monitoring of the performance backed by strict enforcement. 

3.3.2

 T & D Losses and Commercial Losses 
Sri Jayadev Mishra was of the view that the critical area of improvement is reduction in non-technical T&D loss, which is currently at a level of 30% and is worsening. He favoured targets being set for Aggregate Technical and Commercial (AT&C) losses for LT, HT and EHT separately. Annual targets should be fixed to achieve AT&C losses up to 25% by 2005 and 15% by 2007. Collection efficiency should be 100% considering the arrears to be collected. Sri K P Rath also was in favour of using the AT & C losses for measuring performance as in Delhi, but he was clear that only audited figures should be accepted for computing the losses. Sri S K Mohapatra was in favour of adopting AT&C losses but after excluding EHT consumption as well as consumption by State Government and PSUs. Sri B N Das held that Technical and Commercial losses should not be combined as their causes and remedial measures are different. Besides, collection inefficiency is not a loss. Both Sri Nanda and Sri Rao held the same view on this point. Sri B N Das advised that targets for T&D loss should be set after collecting information of private distribution companies within the country as well as in other developing countries. Like Sri Mishra, he also favoured voltage-wise targeting of losses and 100% Collection Efficiency. Sri Nanda wanted T&D losses to go down by 5% every year from the level of 42% in 2001-2002.

3.3.3

Quality of Supply 
Sri B N Das and Sri M V Rao observed that some quantitative measures of quality of supply and consumer services are specified in the Indian Electricity Rules, 1956 and some have been developed by the Commission. However, this has not been followed by regular reviews and corrective action for failure to meet standards. Parameters suggested by Sri B N Das include – Length (in kms) of 33 kV, 11 kV and LT lines taken up for system improvement to improve voltage of supply, the transformer capacity (in KVA) to be added to meet additional demand, the number of interruptions in a feeder lasting for more than 1 hour, the total period of interruptions in a month and the number of interruptions of more than 3 hours' duration for a consumer. Sri Nanda wanted that penalties should be built into the tariff order itself for unscheduled interruptions, voltage and frequency fluctuations and other shortfalls in quality of service. Sri K P Rath and Sri S K Mohapatra emphasised regular monitoring and enforcement of unscheduled interruptions, voltage and frequency fluctuations and other shortfalls in quality of service. They noted that while OERC has set standards for safety, consumer services, planning, security, etc., only rigorous monitoring and enforcement will bring in the desired results. Sri Mohapatra, in fact, wanted these standards to be published periodically for the benefit of the consumers. Sri D N Padhi suggested that expenses incurred by the licensees in improving the quality of service should be a pass through into tariff as part of the O&M Costs of the licensees.

3.3.4

O & M Expenses 
Sri Jayadev Mishra wanted O&M expenses to be set at the present level till 2005 while Sri B N Das wanted the levels to be fixed after analysing past growth trends and cost levels for other private distribution companies. Both Sri B N Das and Sri M V Rao advised against pegging growth of network costs to consumer price index or inflation rate since the items constituting CPI are different from those that are relevant for calculating network costs. Sri Rao cautioned against accepting the network costs claimed by the Licensees.

3.3.5

Capital Investment
Sri B N Das and Sri S K Nanda wanted capital investment to be approved by OERC. Sri Nanda specifically referred to Para 4.35 of the Report of the Sovan Kanungo Committee, which analysed the reasons for the delay in the utilisation of World Bank funds and had suggested that new investments should not be taken up till a majority of the works commenced under World Bank funding have been completed. Sri K P Rath wanted investment plans to be backed by appropriate data. Investment in lines and substations, for example, should be backed by load development pattern. Sri S K Mohapatra advised that plans and estimates for capital expenditure furnished by the licensees as well as their procurement procedures should be scrutinised by OERC to ensure that they are prudent and are in conformity with the industry’s best practices. Sri D N Padhi stressed on the prudence of the capital investments being made by the licensees and that the Commission should only allow those investments which would benefit the consumers at large through better service.

3.3.6

Interest on Loans 
Sri Nanda suggested that Government should be requested to waive the loans outstanding against Gridco and OHPC as a result of the up-valuation of their assets so that the interest is not passed on to the consumers. Sri Nanda did not also want interest on the bonds issued by the Licensees against power purchase dues to be passed on to the consumers. Sri D N Padhi wanted that in a regime of falling interest rates, the benefit of lower interest should be passed on to the consumers. Similarly, the benefit of funds released from the National Calamity Fund (NCF) as well as any support from the Government on account of other support, if any, should go to the consumers.

3.3.7

Depreciation 
Sri Nanda wanted that depreciation on assets should be calculated on the original value of the assets and not on their jacked up value.

3.3.8

Past Losses
Sri Jayadev Mishra was of the view that the present accumulated losses as well as future losses up to 2005 should be treated as “Regulatory losses” and financed by all the stakeholders, namely, generators, public debt, World Bank, DFID, Government of India, Government of Orissa and the Distcos. While Sri B N Das suggested that past losses on account of causes beyond control of licensees should be reimbursed to them after its quantification by Government audit. Sri Rao advised that recovery of past losses should not be allowed, as the Licensees did not meet the norms set by Commission. He too wanted the figures to be scrutinized by a high level Government audit. Sri Nanda's view was that in the absence of audited accounts, determination of past loss is not possible. He was emphatic that expenditure incurred beyond the Commission’s stipulation in the tariff order and losses incurred due to non-compliance of targets should not be allowed to be passed on to the consumers nor should such items be considered for reimbursement in future years. 

3.3.9 

Short Term Loans / Cash Credits for Working Capital 
Sri Jayadev Mishra was of the view that shortfall in the revenue of Distcos should be financed through debt. As regards servicing such borrowings, Sri B N Das suggested that the cost of working capital should be collected from consumers through revenue requirement. Sri Nanda stated that revenues outstanding for more than two months from consumers cannot be treated as non-receivable and should not be included in computing working capital. Amounts collected against previous years' arrears should also be taken into account while deciding interest on working capital. 

3.3.10 

Return on Capital 
Sri B N Das wanted Return on Equity to be reduced to 12% (as the Reserve Bank rate has gone down) while Sri Rao wanted it to be less than 16%. Sri B N Das as well as Sri Nanda and Sri Rao held that the cap on profit as provided in Schedule VI should be retained. According to Sri Rao, the retention of excess profit by the Licensee beyond 5% is not in the interest of consumers. Sri Nanda wanted Return on Capital to be calculated on the original value of assets and not their jacked up value. Sri S K Mohapatra suggested that equity should be the ideal rate base for returns since both the capital base and the net worth of the utilities are negative. 

3.3.11

Power Purchase Costs 
There was general agreement that the Licensee should be compensated for factors that are not within their control like changes in power purchase mix and sales mix. Sri B N Das suggested that fuel price adjustment should be allowed, but large correction factors should be spread over a few years. Sri K P Rath agreed that power purchase costs should be a pass through, but cautioned that in the ABT regime, consumers should not be made to pay for the carelessness of the licensees. If the scheduling of drawl is not done carefully, it can result in huge losses to the licensee on account of payment of unscheduled interchange (UI) charges. These losses should not be a pass through for the purpose of tariff determination. Sri S K Mohapatra was unsure about the wisdom of asking the distribution utilities to purchase off-grid power when GRIDCO, the sole bulk purchaser / seller, is bound by subsisting PPA's with a number of generators. While theoretically the DISTCOs can buy cheaper power from off-grid sources or from CPPs and trade more costly power, GRIDCO's experience in selling surplus power has not been a happy one.

4 LTTS PRINCIPLES

4.1 

The LTTS sets out the principles by which the Annual Revenue Requirements of the Licensees will be determined for each of the Control Period. The Retail Supply Tariffs and Bulk Supply Tariffs will continue to be awarded through the Commissions Orders on ARR filings/ Tariff Proposals during these years of the Control Period, i.e., for the years FY 2003-’04, FY 2004-’05, FY 2005-’06 and FY 2006-‘07. 

4.2

Tariffs are essentially a risk-sharing mechanism. Efficient risk allocation principles dictate that in order to minimize the overall costs, only those risks should be allocated to the Licensee where it is best placed to manage and mitigate them. It is important to be sensitive to the fact that the Licensees had urged before the Commission that their risk bearing capacity stands greatly reduced. Therefore the risk elements that are allocated to Licensees (Controllable) should be such that that they are directly within the control of the Licensees or can be managed by the Licensees and have significant impact on the system performance and financial stability. The LTTS seeks to incentivise licensees to reduce “Controllable Costs”. For the purpose of the LTTS, network and financing costs and Aggregate Technical & Commercial (AT&C) losses are considered as “Controllable”. Any financial loss arising from the performance falling short of the targets in these areas will, normally, not be recoverable through tariffs. Similarly, any financial gain arising from performing better than targets will not be adjusted against revenue requirement, and licensees will retain such gains during the Control Period. 

4.3

The gains or losses arising from factors that are not under the control of the Licensees shall be deemed as “Uncontrollable” and will be recoverable through tariffs in the ensuing year(s) of the Control Period as special appropriation. These primarily relate to fuel cost changes that affect the cost of power purchase, inflation, exchange rate variations, etc that may affect networking and financing costs. If and where uncontrollable elements / costs are forecasted for the computation of revenue requirement, corresponding adjustments to reflect actual values will be made in the ensuing year(s) revenue requirement. The forecasts should be done with adequate due-diligence so as to reasonably reflect expected normal business operations in electricity sector in Orissa. There are also a number of uncontrollable risk events arising out of force majeure conditions changes in the laws of the land, judicial pronouncements, Government policies and directions, and economy-wide influences, which have cost implications. These too will be recoverable through tariff of future year(s), to the extent they are not covered by Governmental subventions.

4.4

Comprehensive, timely and reliable data capable of independent verification is an essential requirement under the LTTS framework. Reliable and timely information will help the Commission effectively design the LTTS framework and the Performance Targets as well as make appropriate adjustments allowed under these Principles. The Licensees must take steps and set up systems and procedures to ensure availability of timely and reliable data. 
4.5 Standards for quality of supply and consumer service will be monitored closely and penalties for not achieving the targets will be introduced in a phased manner.

5 PERFORMANCE TARGETS

5.1

Performance improvements hold the maximum potential for improving the viability of the Orissa power system. The Commission therefore proposes to establish performance improvement as the focus of LTTS and develop Performance Targets for the Control Period.

5.2

Performance Targets should meet the following criteria – a) they should be real, measurable and subject to independent scrutiny, b) they should have the maximum impact on the quality and cost of electricity, c) they are set at a level that is challenging yet achievable and are cognizant of the differences between the Licensee’s electricity business and the markets that they serve, and d) the Licensee is best placed to manage and mitigate the risks in achieving Performance Targets. 

5.3

For the Control Period, the Performance Targets shall relate to:

• the Quality of Supply and Consumer Service standards,

• the Aggregate Technical & Commercial loss (AT&C), and

• Network Costs.

5.4

QUALITY OF SUPPLY AND CONSUMER SERVICE

5.4.1

The Commission considers quality of supply and consumer service as essential elements of the LTTS design. The emphasis on improvement in quality is important. In addition to the obvious direct benefits to the consumers in terms of longer life of electrical appliances, lower investments in protective measures and lower downtime, improvement in quality would enhance productivity in all sectors of economy, help attract new industrial and high technology investments, and provide better living and working conditions for users.

5.4.2

The Commission has already set in place the Orissa Electricity Regulatory Commission (Consumers' Rights to Information and Standards of Performance) Regulations, 1998 that spell out consumer rights to information and standards of performance, such as serving notice before disconnection, notice for prior entry into any consumer’s premises, notice to consumers on scheduled outages, time for restoration of supply, time for attending metering / billing complaints, time limit for new connections, etc.

5.4.3

The Commission intends to use quality of supply and customer service to evaluate performance of Licensees rather than the inputs. The Commission may decide to use the Performance Targets relating to Quality of Supply and Consumer Service as a proxy for effectiveness of the capital investment and operations and maintenance of the Licensees and justification of such costs.

5.4.4

The Commission recognizes that this involves preparatory work and proposes to introduce quality of supply and customer service as Performance Standards in a phased manner. The Commission proposes to undertake three initiatives to benchmark and monitor quality of supply and customer service. 

5.4.5

The first initiative involves recording and monitoring of select quality parameters on a regular basis. 

5.4.5.1

The Licensees will establish suitable systems to track performance against the quality parameters listed below: 

• Interruptions: It shall cover the following quality parameters on 11 kV and 33 kV networks, namely:

  • System Average Interruption Duration Index (SAIDI)
    This represents the average time each consumer is interrupted. SAIDI is expressed by the following formula:
     

  • System Average Interruption Frequency Index (SAIFI)
    This represents the average number of interruptions per consumer SAIFI is expressed by the following formula:
     

  • Consumer Average Interruption Duration Index (CAIDI)
    This represents the average interruption duration or average time to restore service per interrupted consumer. CAIDI is expressed by the following formula:

  • .

• Voltage: Voltage variations and number / extent of excursions beyond the range permitted in the Overall Performance Standards set by the Commission.

• Transformer Failure: Number of Distribution Transformers (DTR) failures as percentage of total DTRs in service and time taken for replacement.

• New Connections: Average period of fully compliant applications for new connections pending with the Licensee for domestic, commercial and industrial categories.

• Metering: Percentage of non-working / defective meters, separately for domestic, commercial and industrial categories.

• Billing Errors: Number of billing errors identified and/or reported and prompt rectification.

• Consumer Service: Bill payment facilities and Consumer service facilities introduced and percent of consumers availing such services;

5.4.5.2 

The Licensees shall commence collection of data on above measures immediately. The Commission will assign an independent agency within three months from the date of this order to collect information on a sample basis for each Licensee. The sample will cover representative 33/11KV substations, section offices and consumer contact facilities, relevant for the quality parameter under discussion. The Commission will require the Licensees to ensure that proper systems for recording and reporting information against these parameters are put in place as soon as possible, if the sampling exercise brings out inadequacy in such systems.

5.4.6

The second initiative of the Commission involves a Consumer Satisfaction Survey to be conducted by an independent agency at the beginning of each Control Period. 

5.4.6.1

The Consumer Satisfaction Survey would entail:

• Eliciting consumers’ views on the quality of service, and identifying the concerns or shortfall in expectations.

• Gauging the awareness of consumers of their rights, performance standards, and of the Licensees’ procedures for handling complaints.

• Obtaining feedback for improvement in any specific aspect of quality of supply and consumer service.

5.4.6.2

The Consumer Satisfaction Survey should help to bring out several aspects of performance and service that are not easy to capture through the first initiative of obtaining information of select quality parameters from the Licensees. The Commission is conscious that the results of the Survey are likely to be subjective and may not be entirely comparable across Licensees and over time. However, the Commission believes that the benefits will far outweigh such concerns.

5.4.6.3

The results of the sampling exercise and the Consumer Satisfaction Survey shall be used for setting a baseline for Performance Targets for Licensees on quality of supply and consumer service. Based on this, the Commission will review the performance improvement against the identified quality parameters separately for each Licensee, over which the annual targets for improvements would be set.

5.4.7

The third initiative of the Commission arises from the belief that it is critical to have a closer involvement of various sections of the consumers in improving quality of power supply and customer service. The Commission therefore would take the initiative of setting up systems and procedures to take feedback directly from identified consumers on select parameters on a regular basis. While the Commission encourages retail consumers to participate in the feedback, it would urge institutional consumers and government departments to participate in this initiative.

5.5

AGGREGATE TECHNICAL & COMMERCIAL LOSS 

5.5.1

Distribution System Losses have traditionally been used to measure the efficiency of distribution systems. Reliable data on the input units and the cash collected alone are available. Distribution losses are computed in terms of the difference between the energy input (in units) and the energy sold (in units), as a percentage of the total input energy (in units). This ratio does not reflect collection efficiency achieved by the distribution licensees. This limitation is addressed by using Aggregate Technical & Commercial (AT&C) loss as a measure of efficiency. AT&C losses are computed as follows:

5.5.2

The Commission noted that there are three different but interconnected performance criteria, namely, billing efficiency, collection efficiency and AT&C loss, which is derived from a product of the first two. As a benchmark, AT&C loss gives the licensee the freedom to utilise his resources and plan his strategy in a way best suited to the licensee. The licensee could concentrate on improving billing efficiency, which can be achieved in more ways than one, including the conversion of LT consumers into HT consumers at some capital cost. On the other hand, the licensee could stress improvements in collection efficiency through systems and procedures, which may not have a significant cost implication. It would, in all probability, prefer a combination of the two. For this reason, the Commission has decided to use AT&C losses as the benchmark to assess the performance of the licensees during the Control Period (i.e., from 1 April 2003 to 31 March 2007). Ideally, AT&C losses should be computed by each voltage category. However, given the inadequacy of reliable information, the Commission will combine together all three voltages, namely LT, HT and EHT for monitoring AT&C losses during the first Control Period. The Commission shall also approve the improvements to be made in the AT&C losses by the licensees during each of the four years in the Control Period. Once the metering of the feeders and distribution transformers is completed in accordance with the schedule laid down by the Commission, it will be possible to use these three indices to monitor the performance of the licensees separately for LT, HT and EHT voltages.

5.5.3

The Licensees shall have metered all 33/11 kV feeders by 31 October 2003 and LV side of the distribution transformers by 31 March 2004 to enable precise measurement of these performance indicators during the Control Period. 

5.5.4

No adjustments in the Annual Revenue Requirements shall be made during the Control Period on account of actual achievement of total system losses or collection efficiency being different from these Performance Targets or the resulting impact of such difference on the cost to Licensees within the Control Period.

5.6

NETWORK COSTS

5.6.1

The Commission believes that the Licensees can be reasonably expected to manage network related costs including O&M costs, provisioning for bad & doubtful debts, investments and financing. The Commission therefore proposes to determine allowable levels of these costs for the Control Period ex ante.

5.6.2

O & M COSTS

5.6.2.1

These comprise the Wages and Salaries, Repairs and Maintenance and Administrative and General expenses and prudential norms of provisioning for bad debts. With regard to O&M Costs, the Commission shall determine the Base Year Values for the Control Period and these values shall be based on the audited accounts for FY 2002-‘03.

5.6.2.2

For Wages and Salaries during the Control Period, the base year values of Basic Pay and Dearness Allowance escalated for annual salary increments and inflation based on Govt. notification shall be allowed. Provisioning for terminal liabilities like pension and gratuity liabilities, based on a periodic actuarial valuation in line with the prevailing Indian Accounting Standards, shall be allowed.

5.6.2.3

For Repairs and Maintenance, 5.4% applied on the opening gross asset value shall be allowed. 

5.6.2.4

For Administrative and General Expenses, the base year value escalated by 7% every year for the Control Period.

5.6.2.5

No adjustments in the Annual Revenue Requirements shall be made on account of actual values being different from these Performance Targets for the O&M costs during the Control Period.

5.6.3

PROVISION FOR BAD AND DOUBTFUL DEBTS 

5.6.3.1

The Commission shall allow 2.5 % of the total annual revenue billings from sale of power as prudential norm for provisioning of bad and doubtful debts to Licensees for the Control Period. The Performance Standards in relation to the collection efficiency have been arrived at after considering this provisioning requirement. 

5.6.3.2

The provisioning of bad and doubtful debts shall be on the revenue from sale of electricity forecast and shall be subject to adjustment in the Annual Revenue Requirements on account of any changes to be made to the forecast of sale of electricity on the basis of actuals.

5.6.4 

CAPITAL INVESTMENT

5.6.4.1 

The Commission shall approve the capital investment plans for on-going and future investments for the Control Period subject to the tests of reasonableness. The Commission expects the Licensees to provide a detailed investment plan that is consistent with meeting the Performance Targets and addresses the needs for load growth, refurbishment, metering and communications, etc. The Commission is of the view that the Licensees may be provided flexibility over the timing and amount of investments during the Control Period so that they can meet the Performance Targets.

5.6.4.2

The Commission encourages investments in specific areas that would lead to improvements in efficiency of the Licensees. Specifically, investments in areas critical for efficiency improvement would be encouraged / mandated: Spot billing, Mobile Fuse Call Centers, Innovative Metering, Energy Auditing Practices, High Voltage Distribution System, etc. 

5.6.4.3

The Commission shall monitor the implementation of the investment plan. Adjustments in the Annual Revenue Requirements shall be made for variations in actual and forecast values and the impact of such variations on the annual revenue requirements at the end of the Control Period. The Commission will however allow the Licensee to retain financial benefit arising out of savings in financing costs due to faster implementation of projects or implementation at lower costs because of better project management or procurement practices. Similarly, financial losses on account of time and cost over-runs will be to the account of the licensee. However, the licensee shall present a case to the satisfaction of the Commission on both savings and losses.

5.6.4.4

The Licensee may approach the Commission for additional capital expenditure during the Control Period to meet regular or emergency requirements. The Commission will review these in the same manner and approve for inclusion in the Annual Revenue Requirements.

5.6.5

DEPRECIATION 

The Hon'ble High Court, in their Order dated 28 February 2003 modified by their Order dated 14 March 2003, had directed that depreciation will be calculated for the assets in accordance with the State Government’s Department of Energy notification No. 1068/E dated 29 January 2003 and at the pre-1992 norms as notified by the Government of India.

The Department of Energy’s notification No. 1068/E dated 29 January 2003 states that, “The effect of up-valuation of assets of OHPC and GRIDCO indicated in Notification No.5210 dated 01.04.1996 and No. 5207 dated 01.04.1996 would be kept in abeyance from the financial year 2001-2002 prospectively till 2005-2006 or the sector turns around, which ever is earlier to avoid re-determination of tariff for past years and also re-determination of assets of various DISTCOs. For this purpose depreciation would be calculated at pre 1992 norms notified by Government of India.”

Any variations between the projected and actual costs for depreciation shall be adjusted at the end of the Control Period to reflect the actual assets at the end of the Control Period.

5.6.6

FINANCING COSTS OF LONG TERM LIABILITIES

5.6.6.1

The Commission shall approve the Financing Plan for implementing the forecast Capital Investment Plan. The interest costs for the forecast Financing Plan shall be approved. Adjustments in the Annual Revenue Requirements shall be made for variations in actual and forecast values of interest costs for loans raised for financing capital investments at the end of the Control Period.

5.6.6.2

The interest costs of approved loans existing in the beginning of the Control Period shall be forecast and shall be allowed. No adjustment in the Annual Revenue Requirements shall be made to the forecast interest costs relating to loans existing on the beginning of the Control Period except if there are any significant changes, such as on account of Government policy or securitisation of past dues. In such events, appropriate adjustment in the Annual Revenue Requirements shall be made to reflect the same at the end of the Control Period.

5.6.7

FINANCING COSTS OF SHORT TERM LOANS / CASH CREDITS FOR WORKING CAPITAL

5.6.7.1

The Commission shall allow interest on approved short-term loans / cash credits based on the forecast for requirements of short-term loans/cash credits to meet Working Capital requirements. 

5.6.7.2 

Working Capital proposed by the Commission shall cover the shortfall in cash collections beyond the target set for collection efficiency during the Control Period. This shortfall shall be determined after considering the provisioning for bad and doubtful debt as laid down in para 5.6.3 above. This is a departure from the Sixth Schedule of the Electricity (Supply) Act, 1948, which defines Working Capital only in terms of Cash in Bank and Stores.

5.6.7.3

No adjustments in the Annual Revenue Requirements shall be made for variations in actual and forecast values of interest costs on short-term loans / cash credits.

5.6.8

SHAREHOLDER RETURNS

5.6.8.1

The Commission is aware that the Capital Base of all the Licensees are negative and their net worth has been eroded. Under this rate base, no returns are possible to the Licensees and they earn only 0.5% on the approved loans. The Commission has considered that an appropriate base for returns is required for enabling fresh infusion of capital and proposes a 16% return on equity instead of a return on capital base. In this, it has departed from Schedule VI. 

5.6.8.2

There is no guarantee or limits on the Licensees’ Clear Profits under the LTTS for the Control Period. The level of Clear Profits of the Licensees shall be determined solely by performance of the Licensees. This is another deviation from Schedule VI, which limits the extent of Clear Profit a licensee can retain at its disposal to five percent of the amount of reasonable return. Depending on the performance of the Licensees, the Commission may consider Special Appropriations, including a part of past losses within the Control Period.

5.6.8.3

The Commission shall approve the forecast equity capital infusions that are provided as part of the Financing Plan. The Commission shall allow return on forecast level of equity capital outstanding for the Control Period. Adjustments in the Annual Revenue Requirements shall be made to account for variations between the actual and forecast values of equity capital outstanding.

6 SALES AND POWER PURCHASE

6.1 

The Commission shall approve an annual retail electricity sales forecast for each of the Licensees for the Control Period. The sales forecast shall be made consumer category-wise and slab-wise. At the beginning of the Control Period, the Commission will also approve the forecast of power purchase and power purchase costs for each year of the Control Period. The forecasts should be done with due diligence so as to reasonably reflect expected normal business operations in electricity sector in Orissa. These forecasts would not normally undergo annual revision, except in the case of variations in excess of 10% in the quantum of purchase of electricity. This will encourage the licensee to attract subsidising consumers and to improve the sales mix by conversion of consumption in the LT categories to the HT categories through the introduction of LT-less distribution systems, thereby reducing the overall system losses.

7 COSTS ARISING OUT OF FORCE - MAJEURE CONDITIONS

7.1

There are a number of risk events that can give rise to exceptional costs. Some of them like extreme and/or disruptive weather conditions; cyclones, earthquakes, etc. are acts of God, which can result in extensive grid damages and large variations in demand or supply of electricity in excess of 20%. 

7.2

If any such event occurs during the Control Period, the Commission shall conduct a complete review of its impact on the entire tariff structure and formulate ways of mitigating the impact. In such cases where the differences are large, such as caused by natural factors, and it is not feasible to recover in the ensuing year alone, the Commission may take a view to create a regulatory asset, which will be recovered over a few years and may extend beyond the Control Period, and shall also compensate for the carrying costs that will be incurred thereon.

8 REVISED FORECASTS

8.1

The Commission may consider stipulating submissions based on revised forecasts for power purchase, power purchase costs and electricity sales for the Control Period at each ARR/Tariff Proposal filing, subject to para 6.1 above. The Commission shall, however examine these forecasts for reasonableness and consistency before approving the Annual Revenue Requirement of the licensees.

8.2

The Commission may consider using these revised forecasts instead of the forecast approved at the beginning of the Control Period, if after examination of all relevant information the Commission is convinced that there are reasonable grounds for revision.

9 TRADING OF POWER

9.1

The Distribution and Retail Supply License sets out the intent of the Commission for introducing competition in Bulk Supply by modifying or amending the conditions of the Distribution & Retail Supply License. Besides, the Electricity Act 2003 recognises trading as a distinct licensed activity, and under these provisions, a distribution licensee does not require a separate license to carry out the function of trading in electricity. The Commission intends to implement competition in Bulk Supply during the Transition Period. 

9.2

The Distribution & Retail Supply license does not allow a licensee to procure electricity from any source other than the specified Bulk Supply licensee or a generator with an installed capacity of 5 MW or less. It further restricts providing electricity to any person other than pursuant to the Distribution & Licensee or third party access to the licensee’s Distribution System. The Commission shall review the present license conditions and introduce appropriate amendments. The Commission expects the licensee to benefit by enhancing its capacity to schedule and despatch energy to meet the situation.

9.3

The Electricity Act 2003 envisages that generators will have open access to the transmission and distribution networks which will lead to competition in bulk supply and a consequent fall in prices. Towards this end, the Commission intends to introduce competition in Bulk Supply in the Transition Year itself by allowing the Distribution Licensees to procure their incremental power requirements, i.e., beyond the approved level of power purchase, from any source. 

9.4

The Commission also intends to allow the Licensees to sell the incremental power to any entity outside the State, subject to the proviso that the losses and gains arising therefrom shall not form a part of the licensee’s revenue requirement. 

• This provides the licensee with the incentive to improve its capacity to schedule and despatch energy and to make accurate forecasts of power purchase and sales. This has become all the more essential in the context of Availability based Tariff (ABT) regime, which has been implemented in the State from 1 April 2003. 

• This also provides an incentive for the licensee to access cheaper sources of power for his additional requirements thereby reducing power purchase costs, which account for a major share of the licensee’s expenses.

9.5

Purchasing power directly (as distinct from buying through the specified bulk supply licensee) will also initiate the licensee into the operation of a multi buyer market as envisaged under the Electricity Act 2003.

9.6

Any gains or losses on account of such procurement and supply of incremental power shall not be considered towards the Annual Revenue Requirement. 

9.7

The Licensees must ensure that they utilise this opportunity to improve their finances and their ability to carry out their obligations under the Distribution and Retail Supply License.

10 PROCEDURE AND REVIEW

10.1 

The Control Period shall begin from 1 April 2003 and shall end on 31 March 2007. LTTS shall apply to the Annual Revenue Requirement determination of the Distribution and Retail Supply Licensees in the state of Orissa from 1 April 2003.

10.2

The Base Year for the applicability of the LTTS is the Financial Year 2002-2003, ending on 31 March 2003. The Licensees shall provide complete audited accounts for all years including for financial year 2002-03 in the LTTS filing. Several elements of the Performance Targets that impact the Annual Revenue Requirements of the Licensees in a given year of the Control Period are structured in accordance with the Base Year values linked to appropriate escalation factors. The Base Year therefore assumes significance as it provides the starting point for the entire Control Period.

10.3 

BEGINNING OF THE CONTROL PERIOD

10.3.1

The Licensees shall file Aggregate Revenue Requirement and Tariff Proposals (if deemed necessary) for year 2004 - 05 in December 2003.

10.3.2

In addition, each Licensee shall make a separate LTTS filing that is consistent with the procedure provided in this Order, guidelines for ARR and tariff filing and Commission’s directions on the subject for an initial period of 3 years, i.e., FY 2005 - 2007. The information requirements and formats for LTTS filing shall be issued by July 2003 and the Licensees shall make the LTTS filing no later than 31 December 2003.

10.3.3

In the LTTS filing, the Licensees may propose appropriate targets, forecasts, indexation parameters and initial values applicable for the control period. In doing so, the Licensees are expected to take into consideration the specific conditions, requirements and future plans of their business and licensed area in preparing their proposals. The proposals submitted must be supported by reasons, proper evidence and plans for implementation.

10.3.4

Based on the Licensees’ LTTS filings, objections, suggestions from public hearings, staff analysis and other expert advice, the Commission shall approve the detailed proposals viz. Performance Targets, Base Year values, indexation parameters, etc for implementation of the LTTS. The Commission proposes to complete review of LTTS filings, and finalise the Performance Targets by April 2004. This shall be applicable for the remaining duration of the Control Period.

10.3.5

The Commission expects that the results from its two initiatives to establish baseline data for Quality of Supply and Consumer Service shall become available by June 2004. As and when more information relating to Performance Targets becomes available, the Commission may modify the Performance Targets during the Control Period.

10.4

TRANSITION PERIOD FY 2003-‘04

10.4.1

The Commission shall treat the first year of the Control Period FY 2003-’04 as the Transition Year. During this Transition Period, the Commission shall monitor application of LTTS in shadow operation. This shall help make an easy transition and gives time to fill data gaps. The Licensees have adequate time to compile the required information, prepare long-term forecasts and propose suitable targets based on their field conditions and business plans. 

10.5

ANNUAL SUBMISSIONS DURING THE CONTROL PERIOD

10.5.1

There shall be no change in the present practice of annual submissions for annual revenue requirement and proposal for tariffs. The Annual Revenue Requirement (ARR) for any year will necessarily have to be submitted by the licensee by 31 December of the preceding year in line with the present regulations and license conditions. The Commission will require the licensees to issue notices of the filings and their proposals in the newspapers and make available the filed documents to the public. The Commission will conduct a public hearing, in line with the current practice. The Commission, in keeping with the provisions of the Reform Act, shall review the proposals of the licensee, and after discussions with the Commission Advisory Committee (CAC), give its order within 90 days from the date of acceptance of the proposal by the Commission.

10.5.2

Each licensee shall continue to make the following annual submissions by 31 December of every year:

1. The details of its calculation for the ensuing financial year of the Expected Aggregate Revenue from Charges (i.e., Annual Revenue Requirement), which the licensee believes to have been permitted to recover in accordance with the terms of the licence, and

2. Proposal for revision of tariffs (if any) by consumer category, taking into account the cost of supply.

10.5.3

The Licensees shall be guided by these principles, along with the Performance Targets and procedures specified under the LTTS in preparing the ARR and Tariff Proposals. The Tariff Proposals must, inter alia, cover the following:

• Description of costs at actual or estimate for the past and current year, and as per approved targets for the ensuing year,

• Forecast for parameters as required in the guidelines and formats, such as inflation, interest rates, etc., for the ensuing year,

• Achievement on quality of supply, consumer service and other Performance Targets and achievements proposed for the ensuing year,

• Actual profits recorded / estimated, respectively for the past / current year, and the corresponding financial benefit.

10.6

PERIODIC REVIEWS DURING THE CONTROL PERIOD

10.6.1

The Commission shall undertake detailed periodic reviews of Licensees’ performance during the Control Period to address any practical issues, concerns or unexpected outcomes that may arise, and in general to assess the efficacy of the LTTS. 

10.6.2

The Commission proposes to draft a report each year summarising its observations on the functioning of the LTTS.

10.6.3

If the structure of electricity industry in the State undergoes any change on account of state or national regulation or legislation, the Commission shall study the nature of such changes and the impact it may have on Licensees business and in consultation with Licensees, make appropriate modifications to the LTTS.

10.7

END OF CONTROL PERIOD

10.7.1

The Commission shall undertake a comprehensive review of the implementation of the LTTS towards the end of the Control Period. The objective of such review shall be to assess the achievement of intended objectives, analysis of the reasons for any deficiency in results or in the process, and from such learning to improve the framework that shall apply to subsequent Control Period. 

10.7.2

The approach for this review shall be through a consultative process, covering all stakeholders and the results shall be posted on the Commission website for public access.

10.7.3

Based on the results of this review, and the conditions in the power sector at that time, the Commission shall work on the details that shall apply for the second control period. 

10.8

The principles of the LTTS set out in this Order should be read together with the requirements of the Schedule VI of the Electricity (Supply) Act 1948, OER Act 1995, OERC (Conduct of Business) Regulations, and other relevant Acts, Rules and Regulations. 

11 APPLICABILITY OF THE LONG TERM TARIFF STRATEGY

11.1 

The Long Term Tariff Strategy shall apply to the four Distribution and Retail Supply Licensees in the State, namely CESCO, NESCO, SOUTHCO and WESCO. These principles shall apply from 1 April 2003 and shall remain in force until a subsequent amendment or revision at the end of the Control Period. 

11.2

The Distribution and Retail Supply Licensees shall file Annual Revenue Requirement and Tariff proposals (if deemed necessary) for the financial year FY 2004-’05 by 31 December 2003, along with the LTTS filings for a period of 3 years, i.e., from FY 2004-’05 to FY 2006-’07.

11.3

The Commission shall undertake the circulation of the formats to the licensees for the filing of the LTTS information and other requirements immediately after this order. The base year data for the purpose of the First Control Period is the financial year FY 2002-’03 (i.e., the period from 1 April 2002 to 31 March 2003). The Commission intends to use the first year of the Control Period, namely FY 2003-’04 (i.e., the period from 1 April 2003 to 31 March 2004) as a Transition Period to educate the licensees on the application of the LTTS and to validate the base year data. To achieve this, the licensees need to complete their audited accounts for all the years including for financial year 2002-’03, within time for filing under the LTTS.

11.4

The Commission will initiate simultaneous review of the ARR for FY 2004-’05 and the LTTS filings. While the review of the ARR for FY 2004-’05 will be completed within the time period of 90 days, the review for Long Term Tariff Proposal filings will require a longer time frame. In particular, a detailed review for efficiency improvement plan, capital investment plan, sales & power purchase forecast and quality improvement plan, will be required. The Commission shall commence the detailed review of the operations under the first Control Period in October 2006. The Commission may also pre-pone the commencement of the review process in case all required information is made available earlier to the Commission. The Commission would then come out with a Review Consultation Paper subsequently. The licensee shall be given adequate opportunities to explain and justify the proposals in course of this review.

11.5

Without prejudice to the above, the Commission reserves the right to make any amendment to this Order consistent with the objectives of the Orissa Electricity Reform Act, 1995 and the Electricity Act 2003.