6.15

Bad and Doubtful Debt

6.15.1

SOUTHCO has proposed Rs.10.52 Crore as Bad & Doubtful Debt during 2001-02. In ARR filing 2002-03 it has also been proposed an amount of Rs.15.80 Crore for the year 2002-03. Subsequently, SOUTHCO revised its figure to Rs.10.00 Crore.

6.15.2

SOUTHCO has provided an age wise analysis of outstanding debts in F-25. As per the said analysis SOUTHCO has stated that Rs.71.00 Crore are outstanding for more than 24 months out of the total outstanding loan Rs.238.67 Crore.

6.15.3

In their application, SOUTHCO had proposed Bad and Doubtful Debt of 4% on the total billing for the year 2001-02 and 4.48% of total billing for the year 2002-03.

6.15.4

Many objectors have questioned the provision of such a high amount towards Bad and Doubtful debt. They have urged to disallow the provision except a token amount so that the licensee is not allowed a premium on its inefficiency in collection.

6.15.5

The Commission examined the proposal submitted by the licensee and analysed the suggestions and objections raised by the objectors during the hearing. The Commission is also concerned at the inefficiency of the licensee in collecting the arrear dues. However, looking at the reality of the situation and as approved in the last tariff order it decides to permit a provision of 2.5% of the gross sales to be as provision for bad debt. On this basis, the Commission approves Rs.6.52 Crore and Rs.7.76 Crore for the year 2001-02 and 2002-03 respectively as Bad Doubtful Debt allowed for recovery through tariff.

6.16

Previous Loss

SOUTHCO has proposed Rs.301.05 Crore of previous losses to form a part of the revenue requirement under Special Appropriation for the year 2002-03. As mentioned in foregoing para without audited accounts the losses as claimed by the licensee cannot be authenticated. Moreover, Commission may consider only those losses which occur due to the reasons beyond the control of the licensee to be passed on to consumers through tariff. Any loss due to inefficiency of the licensee and beyond the normative level of expenditure approved by the Commission cannot be allowed under Special Appropriation. Hence, the Commission disallows previous losses under Special Appropriation.

6.17

Contribution to Contingency Reserve

SOUTHCO has proposed a statutory appropriation towards contribution to contingency reserve calculated at 0.375% on the opening gross block for the applicable year. This works out to Rs.1.09 Crore and Rs.1.26 Crore for the year 2001-02 and 2002-03 respectively and the amounts are within the limit prescribed in the Sixth Schedule to the Act, 1948. Hence, the Commission approves a sum of Rs.1.09 Crore for the year 2001-02 and Rs.1.26 Crore for the year 2002-03 towards contribution to contingency reserves under special appropriation.

6.18

Capital Base

6.18.1

Original Cost of Fixed Assets

6.18.1.1

SOUTHCO has projected its original cost of fixed assets at Rs.338.29 Crore as on 31.03.2002 and Rs.368.45 Crore as on 31.03.2003 as depicted in Form No.F-14 and F-35 in their tariff filing for the year 2001-02 and
ARR filing for 2002-03. Subsequently in their clarification dated 8 April 2002 SOUTHCO changed the aforesaid figures to Rs.339.83 Crore and Rs.369.99 Crore for the year 2001-02 and 2002-03 respectively. As per the audited account of 2000-01 this figures of gross fixed asset as on 31.3.2001 was Rs.288.38 Crore. SOUTHCO shows an asset addition of Rs.49.91 Crore during 2001-02 and Rs.30.16 Crore during the year 2002-03. Considering the opening balance as per audited account as on 1 April 2001 the balance of gross fixed asset after addition of new assets during 2001-02 and 2002-03 as projected above would be Rs.338.29 Crore and Rs.368.45 Crore as on 31.03.2002 and 31.03.2003 respectively.

6.18.1.2

The Commission, therefore, accepts Rs.338.29 Crore and Rs.368.45 Crore as original cost of the fixed asset as on 31 March 2002 and 31 March 2003 respectively for the purpose of calculation of capital base.

6.19

Receipts against Consumers Contribution

Contribution from consumers of Rs.47.26 Crore as on 31.3.2002 and Rs.48.79 Crore as on 31.03.2003 has been deducted by the licensee from fixed asset for calculation of capital base. Schedule 2 to the Annual Accounts of 2000-01 of SOUTHCO duly audited by the tax auditors, shows a balance of Rs.45.75 Crore under consumer contribution. Comparing the figure of consumer contribution for the year 2001-02 and 2002-03 with that of FY 2001-02 the Commission considers it reasonable to accept the figure of Rs.47.26 Crore and Rs.48.79 Crore for the respective years to be deductible from the asset base for the purpose of calculation of capital base.

6.20

Original cost of Work In Progress

6.20.1

SOUTHCO has projected Rs.14.31 Crore and Rs.31.53 Crore towards original cost of work in progress for the year 2001-02 and 2002-03 respectively which form a part of asset base. The comparative position of capital expenditure during the year 2000-01, 2001-02 and 2002-03 as per tariff filing and ARR is given in the Table below.

Table :22
(Rs. In Crore)

6.20.2

As per the audited accounts of 2000-01 prepared for the purpose of Tax Audit the capital work in progress position as on 31.3.2001 is Rs.40.85 Crore which corresponds to the opening balance as proposed by the licensee. In form F-2 SOUTHCO has submitted that the expenditure on capital projects for the year 2000-01 was Rs.19.93 Crore and Rs.25.86 Crore were transferred to fixed asset. The Commission therefore consider it reasonable to accept Rs.14.31 Crore and Rs.31.53 Crore as balance of capital work in progress as on 31.3.2002 and 31.3.2003 respectively for the purpose of calculation of capital base.

6.21

Compulsory Investment under Para IV

6.21.1

In OERC Form No.F-14, SOUTHCO has shown balance of contingency reserve as on 31.03.2002 as Rs.2.92 Crore and Rs.4.19 Crore as on 31.03.2003 to form a part of asset base. From form F-33 of the tariff filing 2001-02, it is revealed that the balance in the contingency reserve as on 31.03.2001 has been Rs.1.69 Crore. Thus the balance at the end of 31.03.2001 is Rs.1.69 Crore should have been invested in accordance with para IV(2) of the Sixth Schedule of the Act, 1948 by 30 September 2001 for inclusion in the capital base. No document regarding this investment has been produced to the Commission.

6.21.2

The Commission does not consider it prudent to allow any amount under compulsory investment for the purpose of calculation of capital base as nothing has been invested under this head as per the provisions of Schedule VI.

6.22

Working Capital

6.22.1

Average cost of stores

6.22.1.1

According to para XVII(e)(i) of the Sixth Schedule of the Act, 1948, a sum equal to of one twelfth of the sum of book cost of stores, materials and supplies including fuel on hand at the end of each month of the year of account should be taken into account as working capital for calculating the capital base. SOUTHCO has proposed Rs.5.96 Crore for the year 2001-02 and Rs.4.05 Crore for the year 2002-03 in their retail tariff filing 2001-02 and ARR 2002-03 respectively. Subsequently the figure for the year 2002-03 was revised to Rs.5.76 Crore.

6.22.1.2

The Commission examined the proposal of SOUTHCO. A stock of three months consumption of materials at any particular point of time can be considered reasonable. Accordingly the Commission approves one-forth of the total annual consumption of materials i.e. Rs.3.89 Crore for the year 2001-02 and Rs.4.20 Crore for the year 2002-03 as reasonable for the purpose of working capital for stores to be included in the capital base.

6.23

Average Cash and Bank Balance

6.23.1

SOUTHCO has proposed Rs.4.96 Crore and Rs.4.05 Crore for the FY 2001-02 and 2002-03 respectively computed on the basis of the provisions laid down in Sixth Schedule of the Act, 1948. SOUTHCO in form F-19 has given the provision of monthly cash balance from April 2001 to March 2002 and projection from April 2002 to March 2003. As stated in para XVII(1)(e)(ii) of the Sixth Schedule of the Act, 1948, an amount equal to 1/12 of the sum of cash & bank balances and call and short term deposits at the end of each month of the year of account, not exceeding the sum specified therein can be included in capital base.

6.23.2

The Commission feels that liquid funds are needed for the payment of Employees' Cost and Administrative & General Expenses pending collection of receivable from the consumers. The normative lead time between the supply of electricity to the consumers and collection of tariff is considered two months. Hence, the fund requirement for two months payment of Employees' Cost and Administrative & General Expenses would be appropriate for meeting working capital requirement in the form of cash and bank balance Calculated on the aforesaid basis, the amount works out to Rs.8.45 Crore for the year 2001-02 and Rs.8.64 Crore for the year 2002-03. The Commission, therefore, approves a sum of Rs.8.45 Crore for the year 2001-02 and Rs.68.64 Crore for the year 2002-03 cash and bank balance for meeting working capital requirements.

6.24

Accumulated Depreciation

SOUTHCO has proposed a sum of Rs.106.15 Crore and Rs.132.50 Crore towards amounts written off or set aside on account of depreciation as on 31.3.2002 and 31.3.2003 respectively. The audited accounts for the year 2000-01 shows an accumulated balance of Rs.83.69 Crore. The licensee has calculated depreciation as per the rate prescribed in the latest GOI notification and claimed depreciation for the year 2001-02 for Rs.22.45 Crore and Rs.26.35 Crore for the year 2002-03. The Commission, as mentioned in para 6.14.5 has calculated depreciation at pre-92 rates for the year 2001-02 and 2002-03 accepted a figure of Rs.10.85 Crore and Rs.12.74 Crore for the respective years. Accordingly accumulated depreciation as on 31 March 2002 would be Rs.94.54 Crore (Rs.83.69+Rs.10.85 Crore) and Rs.107.30 Crore (Rs.94.54+Rs.12.74) as on 31 March 2003. Hence the Commission approve Rs.94.54 Crore and Rs.107.30 Crore as accumulated depreciation as on 31.3.2002 and 31.3.2003 for the purpose of calculation of Capital Base.

6.25

Loans and Bonds

6.25.1

SOUTHCO has proposed Rs.244.83 Crore and Rs.376.42 Crore as loan and bonds to be deducted from the asset base in order to arrive at the capital base for the year 2001-02 and 2002-03 respectively. Subsequently, SOUTHCO gave a revised figure of Rs.354.94 Crore for the year 2001-02. For the year 2001-2002 the total loan and bond constitute Rs.150.08 Crore of loan advanced by GRIDCO, Rs.74.86 Crore of loans given by World Bank and Rs.130 Crore of power bond issued to GRIDCO. Similarly, as on 31 March 2003 the balance of loan advanced by GRIDCO would be Rs126.27 Crore, World Bank Loan Rs.120.15 Crore and power Bond would be Rs.130.00 Crore.

6.25.2

On scrutiny of the statements (F-3 & F-27 of RST 2001-02 & ARR 2002-03 & Audited Account of 2001-02) submitted by the licensee and comparing the loan figures with that of the audited accounts of 2000-01, it is revealed that the opening balance of loan advanced by GRIDCO as on 31 March, 2001 was Rs.161.75 Crore which includes accrued interest Rs.40.12 Crore. The loan balance as on 01.4.2001 after deducting the accrued interest would be Rs.121.63 Crore. SOUTHCO during 2001-02 has shown nothing towards anticipated receipt but proposed Rs.19.59 Crore towards repayment of loan. This was revised to Rs.21.29 Crore subsequently by SOUTHCO. Considering the receipt and payments of loans proposed by the licensee for the 2001-02 the balance of loan on advanced by GRIDCO as on 31 March, 2002 would be Rs.100.34 Crore. Similarly, for the year ending 31 March, 2003 the loan balance is estimated as Rs.71.87 Crore by deducting repayment of Rs.28.47 Crore as proposed by the licensee.

6.25.3

So far as the World Bank loan is concerned the balance as on 31 March, 2001 was Rs.48.15 Crore which includes accrued interest of Rs.6.49 Crore (F-3 & F-27 of RST 2001-02 & ARR 2002-03 & Audited Account of 2001-02). In other words the principal amount of World Bank loan as on 31 March, 2001 was Rs.41.65 Crore. After taking into account the estimated receipt during the 2001-02 & 2002-03 the balance of the said loan as on 31 March, 2002 and 31 March, 2003 would be Rs.61.65 Crore and Rs.96.65 Crore respectively.

6.25.4

The power bond issued by the licensee for Rs.130 Crore to GRIDCO is deductible from the asset base as interest has been allowed in the revenue requirement.

6.25.5

Thus, the Commission approves an amount of Rs.291.99 Crore and Rs.298.53 Crore of loans and bonds to be deducted for the year 2001-02 and 2002-03 respectively from the asset base for the purpose of calculation of capital base. The calculation of loan approved by the Commission is given in the Table below.

Table : 23
(Rs. in Crore)

6.26

Consumers' Security Deposit

6.26.1

SOUTHCO while calculating the capital base as on 31.3.2002 and as on 31.03.2003 has not deducted security deposits made by the consumers and lying with the licensee as on respective dates. As reported by the licensee in F-37 balance of security deposits as on 31 March, 2002 would be 29.80 Crore and Rs.30.92 Crore as on 31 March, 2003.

6.26.2

The amount deposited in cash with the Licensee by the consumers as security is clearly deductible for the purpose of determination of Capital Base as per provision of para XVII(1)(iii) of the Sixth Schedule of the Act, 1948. Accordingly, an amount of Rs.29.80 Crore and Rs.30.92 Crore has been deducted for the year 2001-02 and 2002-03 respectively in computation of Capital Base.

6.26.3

Based on the forgoing observations, the Commission finds that Capital Base for 2001-02 and 2002-03 would be Rs.(-)98.65 Crore and Rs.(-)72.69 Crore respectively as against Rs.(-)140.38 Crore and Rs.(-)142.18 Crore proposed by SOUTHCO.

6.27

Reasonable Return

As capital base of the licensee for the year 2001-02 and 2002-03 has become negative, the licensee has not claimed bay return as per the standard rate. Only 0.5% on the loan outstanding as on 31st March 2002 and 2003 has been taken as reasonable return for the year 2001-02 and 2002-03 amounting Rs.1.46 Crore and Rs.1.67 Crore respectively. This confirms to the provisions of Sixth Schedule to the Act, 1948 and hence, the Commission approves a figure of Rs.1.46 Crore and Rs.1.67 Crore towards reasonable return for the year 2001-02 and 2002-03 respectively.

6.28

Miscellaneous Receipt

SOUTHCO proposed Rs.2.55 Crore and Rs.3.55 Crore to be received during the year 2001-02 and 2002-03 towards miscellaneous receipt. The Commission considers it reasonable to accept Rs.2.55 Crore and Rs.3.55 Crore for the respective years towards miscellaneous receipt.

6.29

Revenue Requirement, Reasonable Return and Clear Profit

In the light of above decisions and calculation, the Commission approves expenditure for the purpose of revenue requirement for the years 2001-02 and 2002-03 at Rs.314.05 crore and Rs.324.58 crore as against Rs.362.72 crore and Rs.382.30 crore respectively proposed by SOUTHCO. Commission has disallowed previous losses of Rs.301.05 crore claimed under special appropriation by the licensee. Special appropriation to the extent of Rs.1.09 crore and Rs.1.26 crore have been allowed for the year 2001-02 and 2002-03 respectively. Reasonable return has been approved in para 6.27 at Rs.1.46 crore and Rs.1.67 crore for the year 2001-02 and 2002-03 respectively. In other words total revenue requirement of SOUTHCO including return is approved at Rs.316.60 crore for the year 2001-02 and Rs.327.51 crore for the year 2002-03 after applying correctives assumed by the Commission. If the correctives do not materialise the revenue requirement with return for the year 2001-02 and 2002-03 will rise to Rs.323.52 crore and Rs.393.81 crore respectively. The calculation of expenditure for revenue requirement, reasonable return and clear profit as approved have been reflected in Annexe-A1, B1, C1 and A2, B2, C2 for the year 2001-02 and 2002-03 respectively.

6.30

TARIFF ISSUES

6.30.1

In addition to the above, the Commission would like to address the various issues raised during the course of public hearing on other commercial matters which are given hereafter.

6.30.2

Commission does not find it necessary to specifically comment on each one of the objections. The objections with regard to financial aspects and with regard to tariff design as well as various suggestions on these aspects shall be dealt in the later part of the order while dealing with the revenue requirement and determining tariff. However, we may record our observations specifically on a few issues which do not conveniently fit into the module of either revenue requirement or tariff.

6.30.3

In course of the hearing, consumers of different categories have highlighted the impact of tariff with reference to financial viability, commercial consideration and ability to pay. While we have taken into account the overall interest of the consumers, we have also given equal consideration to the financial viability of the Licensee and the necessity of the State for fostering a healthy electricity industry. Ability to pay, lack of funds or competitiveness of any particular industry either in the domestic or in international market cannot be the guiding consideration in designing tariff. The Commission does not find it desirable to go beyond the principles incorporated in Section 26(2) and Section 26(5) of the Reform Act.

6.30.4

The Reform Act, 1995 envisages a tariff structure that would bring about efficiency and economy in the supply and consumption of electricity. The Reform Act, 1995, also aims at a tariff that would reflect cost, would be linked to efficiency and would eliminate inter-class and intra-class subsidies. At the cost of repetition we would like to state some of the observations of the Commission in the previous tariff orders.

6.30.5

The Commission is also acutely aware of its role in balancing the conflicting interest of various stakeholders, bringing about efficiency and economy in the use of electricity and designing a tariff structure that should be just, fair and reasonable. The low voltage consumers expect a tariff that is affordable and the high and extra high voltage consumers are pleading for a tariff that should reduce their burden of cross-subsidy. While taking note of these factors, we have to go by the mandate in law to allow reasonable return to the investors in the electricity industry in the State.

6.31

Tariff Hike

6.31.1

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. Many objectors had alleged that there should be no revision in tariff since licensees have not achieved 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.

6.31.2

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 fully 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. Sec. 11(1)(e) of Reform 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 any category of consumers or to make industrial consumers competitive in national and international market.

6.31.3

It is the duty of the Commission to scrutinize 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, Revenue requirement finally 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 financially viability of licensee on the other.

6.31.4

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 Reform Act, 1995 need to be given at length.

6.32

Wheeling charges

6.32.1

It was opined by some objectors that law does not provide for fixation of tariff for transmission or wheeling charges separately.

6.32.2

It may be noted that the provision under section 26(7) of OER Act authorises the Commission to ensure that the licensees comply with the provisions of their licensees regarding their charges for the sale of electricity, both wholesale and retail, and for the connection to and use of their assets or system in accordance with the provisions of this Act.

6.32.3

Thus, the provision of transmission or wheeling charges are built under the scope of tariff setting.

6.32.4

The issue of fixation of wheeling charges for utilisation of the distribution system by small generators namely mini/ micro/ small hydro generators and non-conventional sources of generation has been examined by the Commission. In this connection, the Commission would like to clarify that a policy paper prepared by GoO was sent to the Commission for its views which has been duly scrutinised and forwarded to the Government for issue of appropriate policy guideline in this matter.

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