6.0

COMMISSION’S OBSERVATIONS

The filings of SOUTHCO made under Section 26(4) of the Reform Act, 1995 and subsequent information and clarifications filed before us have been scrutinised, written and oral representations of the objectors have been carefully examined and the views expressed in the meeting of the Commission Advisory Committee convened for the purpose of consultation on the tariff determination have been taken into account.

6.1

The Commission Advisory Committee specifically discussed the issues of subsidy, cross-subsidy, percentage of T&D loss, percentage of transmission loss, advisability of differential BST among the distribution companies and 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 should be brought down at least by 5% every year so as to justify tariff increase. It was also felt that installation of meters and consumer services were far from satisfactory. While the suggestion for uniform retail tariff for the whole State was put forward by most of the members, the proposal did not find favour with the representatives of the DISTCOs.

6.1.1

Before we record our observations and orders on general and specific aspects of SOUTHCO proposal and proceed to determine tariff, we may indicate the perspective, principles and the regulatory environment in which tariff has been determined by us in the later part of this order.

6.1.2

During the state-owned SEB days, tariff in Orissa was historically based on nature and purpose of use. The State Govt. subsidised the consumers belonging to the economically weaker domestic class and agricultural irrigation to a considerable extent possibly on considerations of affordability and public policy.

6.1.3

The present reform scenario under Reform Act, 1995 has given a go by to the administrative price mechanism, Govt. intervention and subsidy of any kind except cross-subsidy. GRIDCO is a corporatised entity which has taken over the transmission and distribution business on 01.4.96. It was expected that the newly formed GRIDCO would turn around by 1997-98 based on assumption of substantial reduction in T&D loss, increased load growth, investment for system improvement and tariff increase. The assumptions were not realistic and did not materialise to a great degree. The cost of power substantially went up due to revaluation of assets of OHPC and transfer of TTPS to NTPC. The revenue requirement further went up due to additional depreciation on account of revaluation of assets of GRIDCO and distribution companies. For instance, the cost of power which was Rs.469 crores in the FY 1994-95 went up to Rs.1199 crores by the year 1997-98. Unfortunately the assumption of load growth failed to materialise and the pace of reduction of T & D loss has not been upto expectation. The quantum of purchase of power remaining same, total cost went up substantially on account of revaluation of assets as a part of the reform process.

6.1.4

No provision was made by the Government of Orissa to provide subvention or subsidy to GRIDCO, successor of State Electricity Board during the transitional phase from a state-owned, state supported entity to a viable transmission and distribution licensee. Such support was needed for socially purposive but un-economic measures such as rural electrification, supply to urban poor, for meeting massive debt service burden and for meeting accumulated losses.

6.1.5

The Commission is convinced that subsidies are not in harmony with the spirit of the Reform Act, 1995. In any case, the government cannot afford to grant subsidies to companies or consumers for the electricity they consume. However, it is also quite clear that during the transition from the highly subsidised State monopoly situation to an economically viable self sustaining electricity industry, there has to be certain amount of financial support in the form of subsidy and subvention. Investments to improve the system have immediate impact on tariff whereas the effect of improvement and the gains of efficiency take considerable time. It was perhaps necessary for the State government to give some sort of financial support in the form of subvention or subsidy during the transitional period. This is why the Governments of Andhra Pradesh, Gujarat and Utter Pradesh have been providing subsidies during the first few years of reform. The above named states have provided Rs.1585 crores, Rs.1260 crores and Rs.790 crores respectively as subsidy in the FY 2000-01. As a result of total withdrawal of subsidies in Orissa, the tariff rise has to be of considerable magnitude if cost reflective tariff has to be adopted for 2000-01. In response to the Commission’s query to ascertain whether Govt. was prepared to grant subsidy or subvention to reduce the impact of tariff increase, the State Govt. has clearly stated that they are not in a position to provide subsidy or subvention which could have resulted in lower Retail Supply Tariff and enhanced financial viability of SOUTHCO.

6.1.6

In the post-reform era the Orissa Electricity Regulatory Commission has been addressing the issue of tariff setting in accordance with the Reform Act, 1995 in a pragmatic manner. Sec. 26 of the Reform Act, 1995 and the financial principles laid down in Sec. 57 & 57(A) of the Act, 1948 have been the guiding factors in tariff setting. Further, it is the economic and financial principles which have played key role in deciding the tariff structure and in determining charges for various categories of consumers.

6.1.7

It was discernible from the filings before OERC that the currently proposed tariff would have to be much higher as compared to those of the immediate previous years even after pruning all expenditure items by the Commission on the same lines as in the past. The Commission is faced with a formidable predicament in balancing the interest of the ultimate end-users i.e. the consumers vis-a-vis the financial health of the licensee as defined under Sec.26(2) and Sec.11(1)(e) of the Reform Act, 1995. Many objectors had alleged that there should be no revision in tariff since licensees have not brought about desired improvements and had not been able to reduce the T&D loss substantially. We ourselves have been very much concerned with the performance of the licensees and have been suo motu monitoring in various ways. We agree that price of electricity has to be linked to performance. But ground realities have to be considered and it has to be admitted that Distribution Companies cannot bring about improvement overnight because of historical, technical and socio-economic reasons. Secondly, tariff fixation and other aspects cannot wait till after performance improves to the desires extent. We may quote, the authority of Hon’ble Orissa High Courts’ observations in Appeal No.51 of 2000 decided on December 22, 2000:

" One cannot but agree with the sentiments expressed by Shri. K.N. Jena regarding the inefficiency in the services provided as well as inaction/failure on the part of the various Distribution Companies in checking the growing menace of pilferage of electric energy by unauthorised persons. This is a matter which can be looked into by the Regulatory Commission in future, but this cannot be a ground to set at naught the fixation of tariff".

6.1.8

Another recurring objection against tariff increase has been the constraint of affordability. The domestic consumers have urged to leave them out of tariff increase because they cannot afford and they cannot pass on the burden which the commercial and industrial consumers can do. On the other hand commercial and industrial consumers have pleaded that their products cannot be competitive and, therefore, their tariff should be reduced rather than increased. Every category has pleaded that tariff, if increased, should be for other categories. We cannot ignore the affordability factor because safeguarding interest of consumers is one of the main parameters in tariff fixation. But affordability cannot be the prime consideration. We are constrained to observe that these objections are mostly due to inadequate understanding of financial, economic and legal parameters of tariff determination. Electricity industry licensees may be expected to gird up their loins, reduce expenditure, reduce T&D loss and improve consumer service. But that industry also has to survive and that is why Section 11(1)(e) of OER Act mandates that the supply and distribution industry cannot be maintained unless the charges for the electricity supplied are reasonably levied and collected. Licensees of electricity supply and distribution cannot be expected to forego their legitimate dues and charge low rate to ameliorate financial stringency of any category of consumers or to make industrial consumers competitive in national and international market.

6.1.9

It is the duty of the Commission to scrutinise the claims of licensee with a fine tooth-comb and allow only useful assets for capital base and only properly/prudently incurred expenditure for revenue requirement. But after we do so whatever Revenue requirement finally is determined has to be allowed to be raised through tariff. This is the position in Law and has to be appreciated by the consumers of all categories. Keeping the above objective in view, the Commission has gone ahead in deciding the various parameters regarding determination of revenue requirement and tariff of the licensee in an endeavour to strike a balance between the interests of end consumers on one hand and financial viability of licensee on the other.

6.1.10

It is because of our concern for the views of various categories of consumers that the Commission has decided to leave a gap between the approved revenue requirement and the revenue to be garnered through this tariff order for recovery in future. This decision has been taken in exercise of power vested in the Commission under subsection (3) of Section 26 to depart from the factors specified in the Sixth Schedule. Strict adherence to the Sixth Schedule will result in what may be called tariff shock in view of sudden rise in tariff. The industrial load growth in Orissa has been in the negative and hence full increase to fill the revenue gap may allow further shrinkage in the electricity demand. We therefore consider it appropriate not to permit the entire gap to be recovered in this year’s tariff. Once efficiency gains bridge the gap such departure will possibly not be needed.

6.1.11

The Commission’s analysis of SOUTHCO’S proposal and its finding as to reasonableness of various items and determination of the extent to which the expenses projected shall be considered to be "properly incurred" in the context of the Sixth Schedule as well as other parameters stipulated in Section 26 of the OER Act, 1995 need to be given at length.

6.1.12

Keeping the above objective in view, the Commission has gone ahead in deciding the various parameters regarding determination of revenue requirement and tariff for the licensees. The task of balancing interest of ensuring financial viability of licensee through cost reflective tariff on the one hand and ensuring a reasonable and affordable tariff linked to quality of supply has been extremely difficult.

6.2

Consumer Classification and Tariff

6.2.1

Various Municipalities and Govt. offices have been raising complaints about their billing at commercial tariff. The nomenclature ‘Commercial’ has led to a considerable misunderstanding and consumer complaint. The term ‘Commercial’ is a misnomer. Category "Commercial" refers to supply of power upto 110 KVA on the premises which are used for office, business, commercial or other purpose not covered under any category where the non-domestic load exceeds 10% of the total connected load. The purpose of use is no more very relevant for rate of tariff and accordingly Commission is deciding tariff only with interest to cost of supply depending on voltage level of supply. The Commission has separately taken decision to soon rename the existing category as General Purpose – LT. We are moving away from purpose of use and wherever possible fixing according to the cost of supply excepting for very special reasons. It is necessary that the nomenclature should be such that the present confusion arising out of the classification is over. Steps are being taken to do away with the misnomer caused by the present nomenclature and hence we are unable to sustain the objection.

6.2.2

The industry representatives submitted that categorisation for electricity tariff should match the criteria fixed by the Industries Department of Govt. for classifying small industries and medium industries. For instance, industries with connected load upto 22 KVA are categorised as small industries as per the OERC Code but the Govt. of India guidelines fixed small industries with an investment limit of Rs.0.75 crores, where the load requirement may be higher than 22 KVA. It is not possible for us to agree with the suggestion due to many reasons. Firstly, price of electricity has to be fixed with relation to cost of supply and not purpose of use. The cost of supply can be determined with reference to quantum of connected load and voltage at which it is supplied. Hence, electricity price has to be in relation to these factors. Secondly, the purpose of classification by Industries Department and other departments of Govt. are for the purpose of preferential treatment in financing, taxes, regulations etc. which have no relevance for determining price of electricity. Thirdly, industrial policy differentiating categories and conferring benefits change from time to time on various considerations of economics, politics and geographical region etc. Electricity charges are to be non-discriminatory from economic point of view and it is neither desirable nor possible to synchronize the pricing in keeping with changes from industrial and financial angle.

6.2.3

The Commission carefully examined the submission made by the Humma & Binchanapalli Salt Production & Sale Cooperative Society Ltd., Ganjam and other manufacturers requesting for a treatment of salt industry at par with Irrigation pumping & Agriculture category and not under general industry. They submitted that electricity is used only for lifting of brine to the salt field for manufacture during salt production season i.e. normally from January to June every year. There is no use of electricity during off-season. They have also stated that this industry also employs large number of seasonal labourers and the process of production of salt is very similar to agricultural production for which they should be treated at par with irrigation pumping & agriculture and not under general industry category. We would like to observe that the salt industry does not fit into the present classification of agricultural irrigation pumping category as defined in OERC Distribution (Condition of Supply) Code, 1998. Further, the classification of "irrigation" separately with lower tariff is a historical legacy from the days of subsidy for that category of consumers. The Commission is moving towards removal of anomaly of differential price at same voltage level and cannot take a retrograde step of classification on purpose of use. We would like to clarify that if the nature of their operation is seasonal they will not be paying any energy charges during the off-season period when no energy is consumed. Hence, we are unable to accede to the request.

6.2.4

The Reform Act, 1995 aims at managing the electricity industries in the State in an efficient, economic and competitive manner. As a corollary to this, it follows that the pricing policy should help improvement in efficiency of the electricity sector and one of the objectives of the Reform Act, 1995 is that the tariff must reflect the cost. In keeping with the above objectives, tariff structure is being rationalised and the basis of such rationalisation is fixation of tariff according to be cost of supply as indicated earlier. For this purpose the voltage of supply is taken as a benchmark and tariff in general is being linked to the voltage at which power is bring supplied to a consumer with exceptions to some categories where the Commission considers it appropriate for historical or other compelling reasons.