Analysis of ARR & Tariff Proposal of SOUTHCO for FY February 10, 2011 By World Institute of Sustainable Energy (Consumer Counsel)

ARR submission and Proposal of SOUTHCO

ARR submission of SOUTHCO ARR Projected Power purchase cost Employee Cost A&G Cost R&M Cost Depreciation Bad Debts Interest & Finance charges Reasonable return 8.11 Amortization of Regulatory Asset Truing up of Revenue Gap for FY Contingency Reserve 2.1 Total ARR Sale of Power at existing tariff Other Revenue6.5 Total Revenue Relisation Revenue Gap with existing Tariff In Rs. Cr.

Tariff Proposal of SOUTHCO The licensee requests the Hon’ble Commission to accept the proposal of ARR and bridge the revenue gap through combination of – grant/subsidy from the state govt., – reduction in BST and/or – increase in RST in appropriate manner.

Proposed Tariff Rationalisation Measures – Computation of Over drawl penalty – Delayed payment surcharge – KVAH billing for three phase LT & HT industrial consumers – Demand charges for consumers having contract demand more than 70KVA through HT supply – Payment of demand charges for CPPs – Discontinuance of load factor incentive in Energy Charges – Fixed charges for LT industrial (S & M), specified public purpose and public water works – Tariff for Medium Industries Consumers – Monthly Minimum Fixed Charges for consumers with contract demand < 110 kVA – Security deposit for providing meter and metering installations – Demand charges and monthly minimum fixed charges – Inspection fees of lines and substations – Billing of lift irrigation points – Over Drawl Penalty for Drawl over and above OERC approved Quantum (MU) & (MVA) – Back to back DPS adjustment between GRIDCO, GOO and Licensee – Initiatives to increase collection efficiency through Jan Seva Kendra in DISCOMS – Power factor penalty – Fuel price adjustment – Rebate on prompt payment

Analysis of ARR by Consumer Counsel

Observation: 44.33% is the distribution cost of proposed ARR

Revenue GAP of SOUTHCO for FY (in Rs Cr)

Annual Revenue Requirement SOUTHCO ARR Approved Projected % Change Power purchase cost Employee Cost A&G Cost R&M Cost Depreciation Bad Debts Interest & Finance charges Reasonable return Amortization of Regulatory Asset Truing up of Revenue Gap for FY Contingency Reserve 02.1 Total ARR Observation: -SOUTHCO has proposed 118% hike in ARR for

ARR cost component-Power Purchase Cost Issues: 1.Utilization of proposed power 2.Higher demand forecasts 3.Higher Distribution Loss 4.Lower Collection Efficiency 5.Higher AT & C Loss 6.Higher loss in LT and HT network

Utilization of Proposed Purchased Power Observation: - 43% power purchased is loss and actual sale is 57%

Demand Forecasting (In MU) Sale/ Purchase FY FY Projection in ARR % Change over Revised Estimates Number of Consumers Projection in ARR Revised Estimates (Based on actual data of Six months) % Change in (Rev Est. over Projection) As on 1/4/2010 As on 1/4/2011 % Change LT ,824856,59738% HT % EHT % Total Sale Total Purchase Observation: Utilities demand forecast is on higher side and also have some discrepancies in terms of % rise in Consumption Vs % rise in number consumers in EHT category. This will result in higher power purchase cost in ARR and corresponding impact on consumers Submission: Excess power purchase cost is mainly due to excess loss at LT level. Utilities should be directed to drastically reduce the LT loss level.

Distribution Loss (%) Approved in ARR Approved in BP Actual AuditedPerformance ? ? Observation: -There is huge gap in projected (42.62%) and approved (26.5%) distribution loss. -Trend of actual distribution loss is increasing. -There is no financial provision for SI in ARR and in BP. Submission: -Loss of revenue realization / higher energy purchase due to (16.17 %, MU, 53.62Cr ) higher distribution loss should not be allowed to passed on to consumer.

Collection Efficiency (%) Approved in ARR Approved in BP Actual AuditedPerformance ? ? Observation: -Collection efficiency proposed is lower by 1 % than that of approved in BP. -LT collection efficiency up to Sept 09 (Actual) is 83.96%. Which clearly shows the reason for lower overall collection efficiency. -Further the gap between the approved and actual collection efficiency is increasing from which indicates that measures taken by the utility are not effective to that extend. Submission: -Loss of revenue realization due to 1% lesser collection efficiency (than that of approved in BP)should not be passed on to consumer -Nominal DPS to LT consumers if allowed could help to improve the collection efficiency.

AT & C Loss (%) Approved in ARR Approved in BP Actual AuditedPerformance ? ? Observation: -Licensee has proposed 43.82% AT&C Loss. -93% Metering covered till Sept Low Agriculture Consumption. -This implies that the reason for higher AT&C loses could be 1)Lower HT to LT ratio. 2)Poor Power factor 3)Aged transmission lines and poor jointing 4)Less energy Audits 5)Faulty meters and metering 6)Higher thefts - Six energy police stations are functioning out of proposed Nine.

Distribution Loss excluding EHT Consumption FY Actual FY Proposed FY Revised Estimates FY Proposed Overall Distribution Loss 48.02%42.76%46.61%42.67% Distribution Loss Excluding EHT consumption 53.56%48.29%52.45%49.43% Distribution Loss Approved in BP 27.83%26.50% Observation: Distribution loss in HT and LT level is much higher than the overall distribution loss (taking together LT, HT and EHT consumption) and approved distribution loss in BP. Submission: Utility needs to find out reasons for high losses in HT and LT level. Faulty metering, meter tampering, power theft needs to be drastically reduced with the help of regular inspection, dedicated flying squad and energy police stations. Such energy police stations should be directly controlled by senior police officer attached to energy department.

ARR cost component – Employee Cost Observation: The utility has proposed the Employee cost of Rs Cr in ARR with % hike from the earlier FY Employee Cost per unit of Energy Purchase (Paise/Unit) % Rise in FY over FY FY (App)FY (App)FY (App)FY (Prop) CESU SOUTHCO NESCO WESCO

ARR cost component – A&G Cost Observation: Utility has proposed A&G expenses of Rs Cr for FY which are % higher than that of approved expenses for FY Submission: Most of the A&G expenses projected by the utility are based on 7% hike from the current year in line with LTTS order. Further, utility has proposed higher expenses under the heads Franchise expenses, Training Expenses, Special police stations, organizational development expenses, additional expenses etc without any detailed supporting plan and breakup of cost components. These expenses shall not be allowed to pass through in the ARR. A&G Cost (Paise/Unit) % Rise in FY over FY FY (App)FY (App)FY (App)FY (Prop) CESU SOUTHCO NESCO WESCO

ARR cost component – R&M Observation: Utility has proposed Rs Cr as R&M expenses. These expenses were projected as 5.4% of the opening GFA. (Rs Cr. at the beginning of FY ) Submission: Utilities GFA approved by commission as on were Cr. Utility has projected the GFA as Rs Cr. at the beginning of ensuring year. Which seems to be on higher side. Therefore Hon. Commission should consider the new additional GFA (during FY 10-11) over and above approved GFA of Rs and equivalent R&M be allowed to pass through in the ARR.

ARR cost component–Interest & financial charges Observation: Utility has proposed Rs Cr as net interest charges in the ARR. This includes the major component of Rs Cr towards differential interest payment of power bond. Submission: Rs Cr towards differential interest payment of power bond should not be allowed to pass through in ARR.

ARR cost component – Provision for Bad Debt Observation: Utility has proposed Rs Cr as provision for Bad Debt by considering 98% collection efficiency as against 99% approved in BP. Submission: Provision of bad dept 1% (due to the 1% lower collection efficiency) should not be allowed to be passed on to consumer through ARR which accounts to Rs Cr.

ARR cost component-RoE Observation: As proposed equity capital is constant for the current and ensuring year. There is no new equity capital infusion from DISCOM. Hence the Return on Equity should remain same as that of approved for FY Submission: Proposed higher RoE (Rs – Rs 6.03 Cr)should not be allowed to pass through in ARR

Per Unit Distribution Cost Per Unit Distribution Cost (Paise /Unit) % Rise in FY over FY % Rise in FY over FY10-11 FY (App)FY (App)FY (Prop) CESU SOUTHCO NESCO WESCO

Tariff proposal – Other Issues

Growth in LT consumers Consumer category Number of Consumers FY FY Difference % Increase in Consumers Total LT consumers622,824856,597233,77338% Total HT consumers % Total EHT consumers12 00% Grand Total623,375857,178233,80338% Observation: -About 63 % of energy is proposed to be sold to LT consumers. - Year on Year growth in LT consumers is 38% -Minor change in LT tariff has considerable impact on ARR. -As the LT consumer base is increasing there is likely possibility of further reduction of collection efficiency -This will increase pressure of cross subsidy on HT and EHT consumers.

Consumer category Number of Consumers Position as on Position as on Addition in FY % Increase (1/4/10 to 1/4/11) Proposed Addition during FY % Increase (1/4/11 to 1/4/12) LT Domestic537,541587,54150,0009%50, % Kutir Jyoti <=30 kWh22,823202,897180, %4,00, % Total LT domestic560,364790,438230,07441%4,50, % Observation:  The growth of BPL consumers is increasing due to GoI / GoO rural electrification schemes : growth in FY ( 789%) & anticipated in FY ( 197% ) as per submission in ARR.  It is predicted that the cumulative BPL consumer in Orissa will raise to 40 lakh by end of , accordingly the BPL consumers in SOUTCO area will further increase. Submission:  In above situation, it will be difficult to maintain the EHT, HT & LT tariff so as to keep the cross subsidy within (+ / - ) 20% of average cost of supply.  The subsidized BPL tariff should be strictly made applicable to the consumer having monthly energy consumption of 30 units.  The OERC may recommend GoO to give upfront subsidy to DISCOM to cater the BPL consumer in the state. Growth in Kutir Jyoti / BPL consumers

27 Submission of Consumer Counsel SOUTHCO’s projection of purchase forecasts are on higher side due to higher losses at HT and LT level. Cost of power of Rs Cr due to higher distribution loss should not be allowed to pass through in ARR. Loss of revenue realization due to 1% lesser collection efficiency should not be allowed to pass through in ARR. Nominal DPS to LT consumers if allowed could help to improve the collection efficiency. The Utility has not taken any step to reduce distribution loss in the line of recommendations of the Kanungo Committee and OERC.. Utility needs to explore various measures to reduce LT and HT distribution loss. Faulty metering and power theft needs to be drastically reduced with the help of dedicated flying squad and energy police stations. Such energy police stations if directly controlled by senior police officer attached to energy department could improve the efficiency. Higher A&G expenses should not be allowed to pass through in the ARR. Higher R&M should not be allowed to pass through in the ARR. Rs Cr towards differential interest payment of power bond should not be allowed to pass through in ARR. Rs Cr higher provision for bad debt should not be allowed to pass through in the ARR.. Rs 2.08 Cr of Proposed higher RoE of Rs (Rs – Rs 6.03 Cr)should not be allowed to pass through in ARR Licensee should make effort to collect arrears in order to reduce deficit. ARR can be reduced by increasing collection efficiency, reducing losses and measures suggested by consumer counsel in the submission.. Hon. Commission may kindly consider all above facts and decide the retail tariff in the best interest of all category of consumers.