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6.0
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COMMISSION’S OBSERVATION AND ANALYSIS OF LICENSEE’S
PROPOSAL On detailed scrutiny and examination of
the RST application for the FY 2001-02 and the revenue requirement application for the FY
2002-03 along with clarifications submitted by the licensee before the Commission, the
written and oral submissions of the objectors and the views of the Members of the
Commission Advisory Committee, the Commission has passed the order, as detailed below. |
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6.1
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Scenario of the Power Sector Reform in Orissa
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6.1.1
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All the distribution licensees have made a
strong plea that the sectoral survival is possible in the present Orissa situation only
when the input cost of power purchase is brought down by reducing the bulk supply tariff
charged by GRIDCO to the DISTCOs. |
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6.1.2
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The State of Orissa was the first to initiate power reform in
the country. The Orissa Electricity Reform Act, 1995 was put into the statute with a view
to restructure the electricity industry in the state and rationalize the generation,
transmission, distribution and supply of electricity and to create avenues for
participation of private sector entrepreneurs and create infrastructure for development
and management of electricity industry in an efficient, economic and competitive manner.
Orissa Electricity Regulatory Commission has been constituted under the Act for overseeing
and regulating the affairs of electricity industry in the State including
rationalisation/setting of tariff.
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6.2
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Restructuring of the Power Sector
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6.2.1
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Prior to coming into force of the OER Act, 1995 on 01.4.96,
the Thermal Station at Talcher of 460 MW capacity owned by OSEB was sold to NTPC in June,
1995 at a consideration of Rs.356.00 Crore.
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6.2.2
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The OSEB was dissolved and unbundled with the takeover of
hydro stations owned by the OSEB and the Government by the Orissa Hydro Power Corporation
and its transmission and distribution business was taken over by GRIDCO with effect from
1st April 1996.Thereafter, the distribution and retail supply of electricity was vested in
four distribution companies initially as wholly owned subsidiary companies of GRIDCO.
Three of these distribution companies were privatised on 1st April 1999 and the fourth one
on 1st September 1999 after disinvestment of its 51% share. The state owned Orissa Power
Generation Corporation created in 1984 continued to operate as a separate entity and
managed the Ib Thermal Power Station of capacity 420 MW near Jharsuguda.
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6.2.3
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The assets of the erstwhile OSEB including those of the
hydro generating stations were taken over by the State Government,
revalued and transferred to GRIDCO and OHPC. The upvalued amount was
adjusted in favour of the state Government through grant of equity share
and issue of bonds bearing no interest with a moratorium period of five
years with provision of subsequent conversion in phases into equity and
issue of debentures bearing interest. Revaluation of assets was considered
to enable the Government of Orissa to realize more realistic value for its
past investment at the time of privatization and also enhance the
creditworthiness of the utilities. The revaluation was based on the
revenue earning potential and was intended as a means of raising revenue
through higher level of depreciation, higher operation and maintenance
cost, higher return on equity for smooth functioning of the power sector.
To sum up the revaluation was also done with the objective of eliminating
GRIDCO’s and OHPC’s dependence on budgetary support from Government of
Orissa.
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6.2.4
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The process of reform and restructuring paved the way for
commitment of World Bank loan of 350 US million dollars for long term capital investment
in the power sector in Orissa along with 65 million sterling pound funding from the DFID
to meet urgent needs of repair & maintenance expenses and consultancy support. The
World Bank also prepared a report known at the Staff Appraisal Report in April 1996 on the
Orissa Power Sector Restructuring Project and made financial projections based on certain
assumptions of power purchase, power sale, level of transmission and distribution loss,
collection efficiency and operating expenses which envisaged that GRIDCO after meeting all
costs will turn around from FY 1997-98 onwards. There was no provision of transitional
support whatsoever during this period. On the contrary, State Government adjusted a sum of
Rs.340.2 Crore payable to GRIDCO against the upvaluation. All the liabilities of erstwhile
OSEB were also passed on to GRIDCO based on the above financial analysis and projections.
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6.2.5
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In reality, the projections did not materialize as envisaged
the financial health of GRIDCO is far from satisfactory as the accumulated losses of
GRIDCO has increased to Rs.1197 Crore by the year FY 1998-99 and is likely to be upto
Rs.1378 Crore by 2001-02. It faces acute liquidity problem as the DISTCOs have paid to
GRIDCO towards purchase of power only about 65.21% of BST bills upto FY 2001 and 46.42%
upto December 2001.
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6.2.6
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However, in the post-reform period from 1 April, 1996 to 31
March, 2001, the state generators, namely, OPGC and OHPC have earned profit of Rs.768
Crore in books which should have made them financially viable but in reality, OHPC is
faced with cash crunch due to non-payment of its energy dues by GRIDCO.
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6.2.7
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Private capital has been infused in the
form of disinvestment of 49% of equity shares of OPGC (Rs.603 Crore), sale of 51% share of
distribution business of GRIDCO (Rs.159 Crore). |
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6.2.8
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In OSEB days, the State Government was required to provide
necessary subvention under Section 59 of the Supply Act 1948 so as to leave a surplus of
not less than 3% to OSEB after meeting all expenses properly chargeable to revenue
including O&M and management expenses, taxes, depreciation and interest etc. for
sustenance of the power sector to meet its socio-economic obligations of giving power
supply to the vulnerable sections of the society but in the post-reform era, the
Government of Orissa has totally divested itself from the burden of such payment which on
a rough estimate would have come to Rs.2770 Crore had the OSEB continued as an entity.
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6.2.9
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The Commission reiterates its observation made in the
order dt.19.01.2001 that payment of subsidies are not in consonance with
the spirit of the Reform Act, 1995 but the State Government’s financial
back-up in the form of subvention or subsidy during the transitional
period could have substantially eased the situation as has been realised
and is being implemented in many reforming States like Andhra Pradesh
(Rs.1585 crore), Gujarat (Rs.1260 crore), Uttar Pradesh (Rs.790 crore),
Haryana (Rs.769.3 crore) for one year and Rajasthan (Rs.3496.6 crore in
four years), Delhi (@ Rs.500 crore per annum for five years), This was
necessary because the social policies, such as, Rural Electrification,
Lift Irrigation, Kutir Jyoti carried out at the behest of the State as a
matter of state policy for the benefit of a larger section of the state’s
population was continued in the post-reform period and also tariff can not
be made cost reflective in one go, as it would generate a price shock to
consumers.
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6.2.10
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The single most important factor that raised the revenue
requirement of all the licensees in the post-reform era was the substantial rise in the
cost of hydro power as well as in the cost of transmission and distribution on account of
revaluation of assets as on 01.4.96 and also providing an accelerated rate of
depreciation. Further, in the pre-reform era, power requirement of the state was met
mostly from sources within the State and limited procurement from Central Generating
Stations and CPPs. However, with the passage of time, the State became more dependent on
drawal of power from the Central Generating Station due to delayed commissioning of the
Upper Indravati Hydro Electric Project. The NTPC power remained costlier as their power
stations in the eastern regions were new stations and continued to operate at low PLF
accentuating the fixed cost per unit. On the revenue side, the single most important
factor has been the lack of growth in EHT and HT loads as envisaged.
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6.2.11
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The forecast of consistent reduction in transmission and
distribution loss from an estimated level of 39.5% for the FY 1996-97 to 22.7% by the FY
2000-01 has not worked out. Even the initial assessment of loss as 39.5% for the FY
1996-97 turned out to be 49.4% as revealed from the audit report during the corresponding
year.
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6.2.12
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The transmission and distribution sector continued to bear
further financial liabilities due to interest burden on account of debt servicing of past
loans & liabilities and large scale investment in transmission and distribution for
improvement of quality of power supply without corresponding rise in sale of power.
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6.2.13
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The anticipation that the impact of
revaluation of assets would be offset with the growth of EHT and HT loads has not worked
as the expected load growth like installation of steel plant at Gopalpur, Duburi projected
in pre-1996 era did not materialize coupled with recession in the industrial sector
severely hurting the anticipated growth at HT & EHT. Further, to make the matters
worse, the loads in the subsidised categories have increased. This has adversely affected
the revenues of the utilities. |
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6.2.14
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The actual sale of 2760 MU to the industrial HT & EHT bulk
supply and railway in 2000-01 was far below the load projection of 7009 MU for these
categories made in the Staff Appraisal Report which has seriously affected the revenue
earning potential of the licensees, widened the gap between the cost of supply and revenue
realisation and reduced the scope of cross-subsidy to low voltage classes of consumers.
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6.2.15
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Had the load projection contemplated in the
Staff Appraisal Report materialized, the revenue position of the utilities would have been
much better and it would have contributed to an overall reduction in T&D loss figure. |
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6.2.16
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Some HT/EHT consumers preferred generation of power from their
own Captive Power Plants rather than avail power from DISTCOs on cost consideration though
the Eastern Zone continues to be surplus in generation.
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6.2.17
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Though collection efficiency is around 98% to 99% in privately
managed utilities like CESC, Calcutta and BSES. Bombay, the DISTCOs in Orissa have
achieved only 75% for 1999-00 and 76% for the year 2000-01. Their failure to collect the
revenue at the tariff permitted by the Commission from year to year and to convert the
lost units by regularizing unauthorized connection and reducing load have magnified the
liquidity problem.
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6.2.18
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The affordability of a large section of
consumers mostly from domestic, irrigation, small industrial segments, etc. constituting
more than 90% of the total consumers strength happened to be the weakest link in attaining
a cost based tariff structure, which in effect would result in reduction of Industrial
Tariff and substantial increase in LT Tariff. |
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6.2.19
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It was expected that a vibrant industrial sector would
support and make the power sector self-sustaining for which no provision
was kept to provide financial support to GRIDCO during the transition year
though GRIDCO in its new incarnation was still required to undertake
socially purposive but unremunerative measures such as Rural
Electrification and supply to the rural poor. The state’s economy had
received tremendous setback due to occurrence of natural calamities like
super cyclone, drought and flood in succession affecting both the
utilities and the consumers. Besides, the customer care of the
distribution companies has left much to be desired raising questions on
efficacy of privatisation.
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6.2.20
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It may be reiterated that the asset
revaluation, absence of subvention from the Government, high level of transmission and
distribution loss, non-maturing of HT & EHT loads, coupled with poor billing and
collection of the distribution companies are the causes of imbalancing factors leading to
the losses in the GRIDCO and distribution utilities. |
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6.2.21
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Therefore, it is felt that a mid course correction of the
Power Sector Reform in Orissa is urgently necessary to strengthen the
power sector in the interest of the consumers, investors and the state’s
economy.
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6.2.22
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From 01.04.2001 onwards, the moratorium period of five years
allowed on the zero coupon bond issued to GRIDCO as well as the convertible bonds issued
to OHPC was to expire by 31 March 2001 and its treatment like conversion of bond to equity
and collection of interest on the balance portion of bond in accordance with the
Government Notification, and realization of interest on loans allowed for completion of
Upper Indravati and Potteru Hydro Electric Project would further aggravate the situation
by substantially raising the revenue requirement for the licensees to meet the extra
burden of interest costs. As disclosed from the revenue trend of last five years even
without the impact of the servicing of those bonds, the licensees were neck deep in
meeting their financial obligations and accretion of those new liabilities would add to
the further woes of the sector.
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6.2.23
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With this scenario in view, the committee of independent
experts (hereafter called the Kanungo Committee) appointed by the Government of Orissa
have very aptly recommended, as a mid-course correction, certain measures setting aside
the revaluation assets of OHPC, payment of interest to the State Government on the loans
imposed on the licensees due to revaluation to provide requisite support to the power
sector for its resuscitation and among other things have made the following significant
recommendations :
Revaluation of GRIDCO and OHPC assets to be kept in abeyance till the
system is brought to balance.
State Government to agree to allow moratorium on debt servicing to
the State except the amounts in respect of loans from the World Bank.
An interim financial package amounting to Rs.3240 Crore (estimated)
to be availed from World Bank and the DFID to bridge the cash gap in order to keep the
tariff at the same level for the period from 2001-02 to 2004-05.
Instituting regular systems of monitoring of consumer grievances and
services supplemented by test checks.
Setting up of Rural Engineering Planning Organisation (REPO) and
Rural Electrification Planning Units (REPU) under Government of Orissa to monitor RE and
LI works.
At this point of crisis, all agencies such as State Government, the
Central Government, the World Bank and DFID should act together to rescue the reform
process.
Reduction of distribution loss @ 5% p.a. with a base level of 42.2%
in the year 2001-02.
Collection efficiency of DISTCOs to increase from 76% to 85% by
2004-05.
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6.2.24
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The inescapable conclusion emerges from the aforesaid
observation is that support for sectoral revival can be possible with reduction in input
cost to the distribution companies, which has occurred on account of exponential rise in
(a) cost of power (b) cost of transmission (c) cost of distribution. The rise in power
purchase cost has been more steep in respect of Orissa Hydro Power Corporation (old
stations) where the per unit cost of power purchase went up from 22 paise/unit as on 31
March, 1996 to 38 paise/unit as on 1 April, 1996 and49 paise/unit between 1997-98 to
2000-01. GRIDCO has proposed to raise the cost of OHPC power to 72 paise/unit with effect
from 1 April, 2001 as a result of expiry of the period of moratorium on Government loans.
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6.3
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Strategies for Improvement of Power Sector
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6.3.1
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Against this backdrop, the Commission deems it fit to have a
review of the various policy options being followed in the post reform era in the best
interest of the power sector in the state within the frame work of existing Act, Rules and
Regulations. In fact, Commission in its tariff order and conceptual paper of August, 1998
had reserved the right to review those points at an appropriate time.
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6.3.2
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In course of the hearings, the utilities as well as some of
the respondents spoke about the element of uncertainty and risk inherent in an annual
tariff setting exercise and they pleaded for introduction of a multi-year tariff regime
which would reduce such uncertainty. 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 endeavor to set in motion a multi-year tariff principle
regime effective from April, 2003 for FY 2003-04 after wide publicity and consultation
with all the stakeholders. The Commission initiated preparation of a five-year sectoral
plan covering generation, transmission and distribution which will provide key inputs to
this exercise. The draft consultation document which is currently under finalisation will
also be brought out to facilitate the process of such consultation and obtain comments
from the various stakeholder.
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6.3.3
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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. The Commission also feel that the FY 2001-02
should be considered as the base year for all calculations as suggested by the Kanungo
Committee.
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6.3.4
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It is also felt at this stage that steep hike in tariff would
not be implementable. A reasonable level of tariff rise that prescribes a competitive
tariff for the industrial and commercial enterprises coupled with rationalization of the
tariff structure can help in growth of these categories. This calls for support to the
transmission and distribution utility in the form of reduced cost input in the power
purchase which can help in bringing about sectoral revival including improvement in
quality of supply and service to the customer.
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6.3.5
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The options available are :-
suggest and adopt means for neutralization of the effect of asset
revaluation
For improvement of the liquidity of the licensee to examine the issue
of securitisation of power purchase liability of GRIDCO in respect of long term bonds in
consonance with the recommendations of Ahluwalia Committee.
direct the utilities to commit to definite and unambiguous target
like reduction of transmission and distribution loss in a time bound period.
confirmation from the utilities for achieving certain minimum level
of collection and billing from year to year.
direct the utilities to bring in working capital to take up required
repair and maintenance work.
determination of revenue requirement based on the level of
transmission and distribution loss, level of billing in collection in accordance with the
parameters stated above.
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6.3.6
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The Commission considers the necessity of certain short-term
measures for immediate implementation to reduce the revenue requirement of the utilities
to contain the tariff rise at a reasonable level without affecting the financial viability
of the Generators, GRIDCO and DISTCOs. The Commission, therefore, first would like to
analyse the impact of revaluation of assets and explore means of neutralising its adverse
effect in increasing the revenue requirement of the utilities.
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6.3.7
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It is an undisputed fact that the
revaluation of assets of OHPC/GRIDCO has substantially raised cost of
power from OHPC which in turn resulted in enhancement of GRIDCO’s cost
of power procurement and the revenue requirement of the transmission and
distribution business of GRIDCO and DISTCOs. At para 8.4 of order No.009
dt.12.03.1997 in case No.4 of 1997, revaluation of asset was dealt which
is quoted below :-
“Objections with regard to reform, restructuring and
steps for privatisation programme, and various facets of transfer scheme,
revaluation of assets, etc. are beyond the scope of this Commission as these
have been done either in consequence or through an Act of the legislature of
which the Commission is a creature.” |
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6.3.8
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The Commission being acutely aware of
the adverse impact of upvaluation had dealt the issue in the conceptual paper for tariff
setting. Asset valuation and its treatment as per Conceptual Issues of Electricity Tariff
issued by OERC in August, 1998 in consultation with GRIDCO and with economists, industry
association, power professionals and consumer groups are reproduced as below :-
“If the overall revenue requirements are to be set
using accounting costs, then what measure of plant value should be included
in the rate base component used in the determination.” |
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6.3.9
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There are four possible measures of plant value for the
calculation of the rate base viz. original cost less depreciation, reproduction or
replacement cost less depreciation, the value assigned by the Government when it was
transferred to GRIDCO and the certified values being produced by GRIDCO for privatization
under the Companies Act. The Commission first encountered this issue in the last GRIDCO
tariff proceeding when it had faced with a decision on whether to value GRIDCO's
investment in plant at the original cost at the time the property was put in service or at
the value assigned to the investment by the Government when it was transferred to GRIDCO.
As new values are being developed for the four distribution entities, this issue will
surely come up again as potential purchasers of the GRIDCO system consider the level of
their offers.
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6.3.10
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While arguments can be made for the use of other measures of
plant value for rate base, the Commission has no choice but to accept the plant values
certified by Government for GRIDCO at the time of transfer of assets plus any prudent
capital additions made by the licensees at original cost less depreciation. The value set
by Government under the scheme to transfer assets from the erstwhile OSEB to GRIDCO formed
the basis of the calculations in the last consideration and the Commission will continue
to use the transfer value until it is demonstrated before it that regulatory principles or
public interest requires a change to be made. Such changes will not be made lightly as the
Commission places substantial weight on the principle of predictable and stable tariffs
and tariff methods.
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6.3.11
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While GRIDCO agrees with the Commission
that the total value of the zonal assets should not exceed the total value
of the distribution assets as set out in the Transfer Scheme as adjusted
for subsequent additions and depreciation, it may be worthwhile to use the
revalued fair price of the assets to avail of short- and long-term loan
from financial institutions. The latter will enhance creditworthiness of
the licensee while tariff will be based on depreciated book value as set
out in the Transfer scheme adjusted for subsequent addition &
depreciation.” |
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6.3.12
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In accordance with the policy guidelines set out in the
conceptual issues, the Commission used the transfer values for the purpose of
determination of tariff till 2000-01. But as stated earlier, the following projections as
per SAR (Staff Appraisal Report) of the World Bank did not materialize viz.
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6.3.13
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The Commission makes it abundantly clear that it proposes
not to disturb the revaluation of the asset, which definitely enhances the
creditworthiness of the licensee including the privatised distribution utilities. But the
Commission has also to place substantial weight on the principle of predictable and stable
tariff affordable by the consumers. It has, therefore, become imperative in the public
interest to keep in abeyance the effect of the revaluation for the purpose of
determination of tariff until the sector turns around.
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6.3.14
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Hence the Commission in exercise of its power under Section
11 of the OER Act, 1995 advises the Government to take necessary actions to make suitable
amendment to the transfer notification issued by the Deptt. of Energy, Government of
Orissa order dt.1.4.96 as mentioned in para 6.3 (a) and (b) so as to provide necessary
support for the success of the power sector reform in Orissa.
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