Depreciation of Distcos


Government of India, Ministry of Power in their letter dt.01.6.99 addressed to the CMD, OHPC stated that the rates of depreciation as notified by the Central Government can only be a guiding factor and not be a binding factor on the Regulatory Commission. If the circumstance warrant CERC or SERC may, for the purpose of determination of tariff allow a different rate of depreciation. However, they will have to justify the same with reasons.


Further, it was clarified in the said letter that the power to determine the tariff includes the power to apply rate on depreciation and other concepts such as reasonable return. When Section 43A sub-section 2 is deleted, it will not be assumed that the Central Government looses power to fix depreciation principles for SEBs. It merely means that Central Government will have no authority to fix depreciation for the generating company selling power in SEB for the State.


As stated earlier, the objective of revaluation for GRIDCO that also included the distribution business was to help the sector to provide more self-financing for new investment with higher depreciation, which the owner could recover through tariff. The provisions of the Sixth Schedule of the Supply Act, 1948 para VI(a) states “The licensee shall provide each year for depreciation such sum calculated in accordance with the principles as the Central Government may, after consultation with the Authority, by notification in the Official Gazette, lay down from time to time”.


In the instant case, depreciation is being calculated at post’94 rate as prescribed by the Government of India on the asset base that was revalued on 01.4.96 which has substantially raised the revenue requirement of the transmission and distribution business. The Government of India notification on depreciation issued in pre-1992 links the rate of depreciation to the age of the asset. The Commission in the public interest decides that the licensees will be allowed to recover 90% of the asset value within the life period of the asset as determined in the Government of India notification of 1992. This will avoid front loading of the tariff, but at the same time will ensure necessary cash flow for the licensee over a longer period of time. Accordingly, the Commission directs that the depreciation of the assets should be limited to 90% of the revalued cost of the assets. The depreciation should be calculated from 01.04.2001 onwards after taking into account the extent of higher depreciation already recovered during 01.04.1996 to 31.3.2001 at pre-92 rate.


Securitisation of Power Purchase dues :

In OERC Order No. Case No.29 & 30/2000 dtd.16.03.2001 on FRP and securitisation, the Commission observed in the concluding remarks “the Commission grants in principle approval of the Financial Restructuring Plan indicated in paras 12 and 13 of this order and plan for rescheduling of loans as contained in their application dtd.19.09.2000 vide Case No.30/2000 dtd.30.09.2000 and 29/2000 dtd.19.09.2000 respectively. GRIDCO with the support of GOO must plead with the GOI and the funding agencies for one time settlement, waiver of dues and fresh loans and after taking the results into account, implement the financial restructuring plan to revise GRIDCO so as to put it on recovery path towards viability”.


Further, the Commission has observed, “the retail tariff levels as proposed in the FRP is based on the BST calculation. The projection has not taken into account the debt service due to the tax free bonds to be issued by GRIDCO. On the other hand, they have proposed additional borrowing to the tune of Rs.929 Crore in the year 2001 and further Rs.631 Crore in the year 2002. This will definitely impact the BST as well as the retail tariff thus upsetting some of the crucial FRP assumptions. We are not in a position to give clearance and commitment for future tariff, as these will be dealt separately on a year to year basis in accordance to the OER Act”.


A submission was made on behalf of GRIDCO during the course of the public hearing that GRIDCO has not been able to pay the dues to generators due to non-payment by the DISTCOs to GRIDCO. The power purchase payables as on 28 of February 2001 is given below :

Table : 5
(Rs. in Crore)

Power Purchase Payables
(As on 28th Feb,2001 without March,01 bill)

Central Sector Generators

Principal outstanding

DPS outstanding

40% DPS applicable for securitisation

Total outstanding for securitisation





















Total CPSUs payables






GRIDCO pleaded that NTPC has been regulating power supply to Orissa due to non-payment of dues and in accordance with the CERC order dt.11 January 2002 a utility will be required to bear the fixed cost of the generators in proportion to the share allocation during the period of energy regulation by the central generators. In this situation, the liability of GRIDCO will further increase if the Commission does not reconsider its own decision of not allowing the interests on account of securitization of power purchase liabilities. In view of the regulation of power by NTPC, it has become extremely urgent on the part of GRIDCO to create special purpose vehicle for securitizing power purchase liability of NTPC through issue of bonds and the Commission may permit the interest on bond as a pass through in the revenue requirement for the year 2001-02 and 2002-03. As indicated in para above, 6.4.5 the Commission being concerned about the mounting liabilities of GRIDCO accepts securitisation of current liabilities as on 28.2.2001 payable to CPSUs like NTPC and NALCO through issue of new bonds. In addition to this, the Commission also accepts the interest liability of the past bonds issued by GRIDCO which was earlier disallowed provided these bonds are converted in line with recommendation of Ahluwalia Committee.


The financial position of GRIDCO is such that the liability on account of power purchase is on the rise as already indicated earlier due to non-payment of BST bills by the distribution companies creating a debt trap both for GRIDCO as well as for the generators. At the time of passing of the FRP order indicated in para 6.4.5 above the issue of pass through of the burden of interest on power bonds on account of non-payment of power dues is required to be addressed in this tariff order. The Commission has come to a conscious decision that unless the power purchase liabilities are allowed to be securitised in full, the problem of liquidity cannot be addressed. In any case, this has to be a one time settlement in accordance with the policy followed at the national level where the GOI has very categorically accepted the ground realities and allowed securitisation of power dues as well as other dues payable to the GOI organisations by the SEBs. The case of Orissa is no different except that it has taken an advance step of reforming its own power sector for which SEB has been replaced by the GRIDCO and the DISTCOs. Accordingly, this principle should be applicable mutatis mutandis to GRIDCO which is purchasing bulk power from generators.


This will have the advantage of retiring high cost debts carrying surcharge as high as 24% per annum, (LPSC @ 2% p.m.) for the central generators. Securitisation of these dues will reduce the interest burden to 8.5% as recommended by the Ahluwalia Committee in its report for one time settlement for CPSU dues and accepted by the Government of India. The Commission would further expect that the dues of CPSUs like NALCO should also be securitised by GRIDCO in a similar manner.


As far as the recovery of interest from DISTCOs is concerned, the analogy as applied for GRIDCO shall apply in this case, since there is a back to back arrangement between GRIDCO and DISTCOs for recovery of the institutional loans handed over at the time of separation of distribution business from GRIDCO. Interest shall be calculated during the year 2002-03 on the loans and pass bonds securatized carrying a lower rate of interest of 8.5%.


Reasonable Return

With regard to reasonable return it is clarified that the same has to be calculated on the basis of the capital base arrived at in accordance with the provision of Sixth Schedule to the Supply Act, 1948.


Treatment of Working Capital


The Commission believes that the companies must commit themselves to a higher level of efficiency, bring loan to meet the working capital needs so that the transmission utility and the generators are not starved of funds. There is a gap between the revenue billed and the revenue realised due to inefficiency on the part of the licensees for failing to take appropriate and expeditious steps like disconnection in time or initiation of civil suits to realise the arrear dues. Domestic, irrigation and agricultural consumers are not required to pay any DPS for delay in payment, whereas small and medium industries and other categories only pay one time DPS. This is a disincentive for revenue collection especially when the licensees are not capable of realising the dues after the due date of payment is over. The Commission also may at appropriate time consider for levy of DPS for those consumers who are at present not covered under DPS for delay in payment.


The distribution companies have failed to bring required working capital to ensure cash balance in the system to meet all expenses. The licensee can get rebate on prompt payment from GRIDCO @2% per month, which will reduce its power purchase liability. In a sense if the licensee arranges working capital from the commercial and financial institutions they can save not only the DPS but will earn a rebate from the GRIDCO that will compensate the interest on working capital and may accrue some revenue in the form of rebate. The Commission also may at appropriate time consider for levy of DPS for those consumers who fail to pay the bills during the stipulated period.


T&D loss


The next issue is determination of the total cost of distribution and retail supply. The supply business requires purchase of power by the DISTCOs from the transmission company (GRIDCO) for supply to consumers. The energy received at grid sub-stations at 33 kV by the DISTCOs and supplied to the end-use consumers at different voltage levels entails both technical and commercial losses. The Commission hitherto have been following the concept of determination of power procurement after applying a normative loss level to the total power proposed to be sold by the licensee, irrespective of the quantum of actual power purchase by DISTCOs from GRIDCO. This quantum of power purchase is metered in each grid sub-station and is reflected in the various data recorded in the energy billing centre (EBC) of GRIDCO and also in the BST bill of GRIDCO raised on DISTCOs.


The World Bank Staff Appraisal Report of April 1996 projected different levels of transmission and distribution loss for the year 1996-97 to the FY 2002-03 based on the studies made by a group of reputed consultants. The Commission while approving the tariff application in the year 1997-98 took cognizance of these projected loss figures. While adopting a loss level of 35% for the year 1997-98, the Commission went by the estimate of 34.8% made in the SAR as against the claim of 47% made by GRIDCO for that year. The projections made in the SAR, the level of T&D loss as established by the audit report of GRIDCO gives a wide disparity in the projections and actual performance as can be revealed from the table below.

Table : 6
As per SAR of 1996


FY 97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

Energy available for sale (MU)








T&D losses (%)








Electricity sale (MU)








Table : 7
Actual performance


FY 97

FY 98

FY 99

FY 00

Energy available (MU)

9651 Audited

10324 Audited

  BST order 2000-01

  BST order 2000-01

T&D losses (%)





Electricity sale (MU)



  RST filing 00-01

Tax audit RST filing of CESCO 00-01


The members the Commission Advisory Committee specifically discussed the issues of high percentage of T&D loss, Distribution loss, poor performance of Distcos, subsidy, cross-subsidy. Majority of the members suggested that the recommendation of the Kanungo committee should be kept in view while finalising the tariff and revenue requirement of DISTCOs as neither the Government of Orissa filed any objection nor depute any representative to appear in the hearing. Members also advocated in favour of uniform retail tariff for the whole State. Some of the Members raised issues specific to the interest groups they represent. But there was near unanimity with regard to the certain issues. It was felt that T&D loss was still high and while fixing the target level of loss, the Commission should not go back to the level already set. Rather the target level of loss be set at still lower. It was also felt that installation of meters and consumer services were far from satisfactory. Most of the members opined that there should be thorough scrutiny on the input cost of the licensees, while Some suggested that depreciation should not be charged on the assets those have already outlived. The Chief Electrical Engineer, S.E. Railways raised certain vital issues to be tackled while passing this tariff order to give benefit to the Railways.


The objectors in general were of the opinion that the adoption of a uniform loss figure for the four distribution companies with a different load mix was hiding the inefficiency of the companies with higher components of HT and EHT load. EHT component of load makes a big difference to the overall loss figure for the company as loss in EHT category is practically negligible. The overage loss as a percentage of the total power procurement from the GRIDCO by DISTCOs as well as the direct sale figures at EHT as projected by the four DISTCOs are given in the table for the FY 2001-02.(RR02-03 filing of DISTCOS).

Table : 8







Input for the DISTCOs (MU)






Sale at EHT (MU)






Proposed Distribution Loss (%)







Some of the objectors have pointed out that the distribution loss is being computed after taking into account even the zero loss EHT energy input into the system to show a reduced level of loss. The total power sale to a DISTCO is arrived at the Energy Billing Centre of GRIDCO by integrating the EHT drawal at 132/220 kV and bulk power drawal at 33 kV in any grid sub-station. Therefore, sale at EHT can be taken out from the total power purchase figures to determine the energy input to various DISTCOs for supply to HT and LT consumers. If the EHT sale projected by the four DISTCOs are taken out from the total sale projected by these companies then the distribution loss as the percentage loss of HT and LT input works out to 53.3% for NESCO, 56.3% for WESCO, 44.1% for SOUTHCO and 48.2% for CESCO with an overall loss figure of 50.6% for the State as a whole under HT & LT category.


As we will be determining the energy input into the DISTCOs system based on the billing figures of GRIDCO for the FY 2001-02, it will be appropriate to determine the loss as a percentage of HT and LT input after deducting the direct sale at EHT to show a comparative picture of performance of the four DISTCOs and also plan for bringing down the distribution loss at the HT & LT level, which will ultimately bring down the overall distribution loss in a DISTCO.


Identical comparison can be done for the FY 2002-03 by determining distribution loss as a percentage of HT and LT input.


The Commission in the tariff order dtd.19.01.2001 had observed that the task of fixing a level of loss in the absence of verifiable and reliable data has led it to apply a value judgement that should be fair, reasonable and financially sound. Any arbitrariness on the part of the Commission will either affect the financial viability of the licensee or sustain undue burden on the consumers.


The Commission had also observed in the last tariff order that the high T&D loss is not an isolated phenomena in Orissa. Higher level of loss figures are being gradually disclosed in all most all the reforming states in the country. The Commission was also of the view that the benchmark of T&D loss at 35% was as a measure of performance perceived to be unrealistic and unacceptable by GRIDCO and the DISTCOs. The World Bank on whose SAR Commission relied in fixing an overall loss level of 35% in FY 1997-98 subsequently came out in its midterm review report dtd.31.10.1998 that it underestimated the actual loss level. The World Bank states “Consultation with the Commission on the issue of recognizing the actual system loss levels and pass through of prior years’ financial losses, given that we all so severely underestimated GRIDCO’s system losses in 1996 and set unachievable performance targets”.


Therefore DISTCOs all along complained about to unrealistic loss level of 35% adopted by the Commission while adopting a loss level of 34% for the FY 2000-01 including the losses at EHT transmission system of 3.7%, the Commission had directed the DISTCOs during the course of the hearing to carry out pilot studies within a period of six months from April, 2001 to September, 2001 and submit the same to the Commission for its appraisal while determining the target level of loss reduction from year to year. The Commission is constrained to place on record the utter failure of licensees to address this most important and crucial issue which was being raked up by them time and again. DISTCOs have not initiated any concerned and vigorous effort to fix meters in feeders, LV side of transformer and consumers served by the feeder to ascertain the actual level of loss.


Due to insistence by Commission the DISTCOs started determination of loss on a selected feeder. It was a much delayed exercise by all the licensees. Also Commission’s effort to engage outside consultants to oversee the pilot loss study could not take off due to the financial problem of the licensees. Only WESCO initiated a study by engaging an outside agency.


However, the Commission with the assistance of the Department for International Development (DFID) has conducted pilot study in one 11 kV feeder for WESCO, NESCO and SOUTHCO and two feeders of CESCO by appointing its own consultants. The report of this pilot study demonstrates that there is ample scope and opportunity for quick reduction of loss by the DISTCOs.


The distribution companies while submitting the business plan for a period of 5 years to the Committee of independent expert in the month of October, 2001 have supplied the following distribution loss figures for the year 2001-02 to 2004-05:-

Figure of distribution loss projected by DISTCOs before the Committee of Independent Expert

Name of the company

FY 01-02

FY 02-03

FY 03-04

FY 04-05



























This, however, excludes the transmission loss of 4.65%, projected by GRIDCO from 2001-02 to 2005-06.


The committee, however, accepted a distribution level loss of 42.21% for the base year of FY 2001-02 after hearing the DISTCOs and suggested reduction of distribution loss by 5% each year from FY 2002-03 to reach a level of 22.21% in the year 2005-06. Similarly, the committee had also approved a reduction of transmission loss at a rate 0.3% each year from FY 2002-03 till the losses reach 3.7% by 2005-06. This is projected in the table below.

Table : 10
Loss figures approved by the Committee of Independent Experts


FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

Distribution loss






Transmission loss







As explained in para 6.7.6, computation of loss after deducting the zero loss EHT energy from year to year is given below.

Table : 11
Computation of loss as a percentage of HT & LT input based on the Business Plan submitted by DISTCOs to the Committee of Independent Experts


FY 01-02

FY 02-03

FY 03-04

FY 04-05

FY 05-06

Loss as a %age HT & LT input







The committee of independent experts appointed by the Government of Orissa to review the power sector reform in their report have suggested reduction of distribution loss at the rate of 5% per annum. The pilot study conducted by the Commission brings out very clearly that the scope of reduction of distribution loss is enormous provided the companies take effective steps such as technical, financial and managerial decisions for reduction of distribution loss. Any number of alibis expressing inability for not reducing the distribution loss are not acceptable to the Commission. Besides higher level of loss found out on the basis of pilot study is purely indicative as the number of feeders selected were very few compared to the existing number of feeders. Pilot study results cannot be taken as basis of loss levels existing in different DISTCOs, as study on one feeder out of hundreds of feeders in the company with varied load mix, concentration of loads, length and size of feeders cannot be a representative one. But this study brought to the fore very interesting facts like direct tapping of 11 kV feeder by industrial consumers, by-passing of meter CTs. It so happened in some areas where pilot study was being taken up, the consumers locked their houses and went away forbidding the utility staff and Commission consultant to check the status of the meter. Pole scheduling in the study area revealed unauthorized abstraction of energy by the illegal consumers, consuming energy far more in excess of what was shown in the consumer ledger of the DISTCOs.


In the 2001-02 tariff filing, WESCO had reported a loss level of 38% for that year. But while submitting the revenue requirement application FY 2002-03, WESCO have reported distribution loss for the year 2001-02 as 45%. This kind of irresponsible reporting for a particular year has been made within an interval of 3 months. It implies that the DISTCOs have demonstrated a very casual attitude in projecting the figure to the Commission for the purpose of determination of tariff or revenue requirement. The case of other companies are also not different.


The Commission accepts the distribution loss figure as approved by the Kanungo Committee as 42.21% for the FY 2001-02 which is treated as the base year. This figure of 42.21% represents the overall average distribution loss for the entire State but varies across the four distribution companies. The variation in loss figures across the DISTCOs are exhibited in Table-8. The Commission also adopts the recommendation of the committee for reduction of distribution loss at least at the rate of 5% per annum from 2001-02 to 2002-03. The Commission therefore directs that for the purpose of determination tariff and the revenue requirement the rate of loss reduction will be calculated at the rate of 5% (overall average for the state) starting from the FY 2001-02 and 2002-03. Accordingly, the following loss figures are approved for the aforesaid purpose for the year 2001-02 and 2002-03. While formulating the multi-year tariff proposed to be effective from 01.04.2003, this aspect of loss reduction along with collection efficiency etc will be decided for subsequent years.

Table : 12



FY 2001-02

Expected/Projected for FY 2002-03


Purchase (MU)



Purchase (MU)







































Commission wants to make it expressly clear that there is no shortcut way unless a systematic drive is made to reduce the distribution loss. This should necessarily include metering of 11 kV feeders, metering at LV side of transformers, pole scheduling, verification if deemed necessary of consumer connected loads, rectification or replacement of consumer meters so that each feeder is converted to a Profit Centre as has been very aptly stated by the Ministry of Power, Government of India, which is allotting large sum of funds to meet cost of metering etc. to achieve the goal in a time bound manner, which will be available through State Govts. to utilities and SEBs under APDRP programme.


There are 846 Nos. of 33/11 kV feeders in the State under the four DISTCOs. There are about 900 field sections in the DISTCOs. This means that there may be 1 to 2 Nos. of 11 kV feeders under each section and 1 No. of 33 kV feeder and 9 Nos. of 33/11 kV transformers and at least 30 Nos. of distribution transformers in each feeder. Once members and other supporting staff including MRT personnel are made available, it would be possible to complete within one year for monitoring of all feeders along with complete pole scheduling leading to identification and regularisation of unauthorised connection. Progressive achievements will bring substantial in reduction of loss in feeders.


Commission, among other things shall attach highest priority on these aspects and would expect the licensee to aggressively start taking up related activities. Commission would, on its part approach DFID to provide support to temporarily hire services of technical personnel by the Commission to oversee the progress made in this regard by the licensee on a day to day basis.


Although the Commission in deference to the spirit of OER Act, 1995 would have liked for a hands-off regulation while dealing with DISTCOs. But it finds to its dismay that utilities have taken advantage of this liberal gesture and have done precious little to address this single major factor of loss reduction which constitutes a menace to the viability of the power sector. Therefore, Commission would closely associate itself in monitoring the activities of DISTCOs in this regard.


As indicated in para 6.7.16 the loss as a percentage of HT & LT input for the year 2005-06 approved by the Kanungo Committee should be targeted at 28.39% to be attained by all the DISTCOs.


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