HARYANA  ELECTRICITY  REGULATORY  COMMISSION
SCO 180, SECTOR 5, PANCHKULA 134 109, HARYANA 

Case No.  HERC/PRO 5  of 1999 

Date of argument             : 12.10.99
Date of Order          :  26.11.99

Shri V.S.  Ailawadi, Chairman
Shri  R. Chandra, Member
Shri K. S. Chaube, Member

In the matter of Annual Revenue Requirement filing by Haryana Vidyut Prasaran Nigam Limited, having its registered office at Shakti Bhawan, Sector 6, Panchkula, for the Transmission and Bulk Supply business for the financial year 1999-2000.

Haryana Vidyut Prasaran Nigam Limited                             Petitioner                 
Staff of Haryana Electricity Regulatory Commission             Intervenor

On behalf of the Petitioner were present: 

     a)      Shri Y. S. Malik, Chairman-cum-Managing Director,
b)     Shri R. S. Pabla, Chief Engineer (Commercial)
c)      Shri M. K. Mittal, Company Secretary
d)     Shri M. M. Kapoor, S.E.

On behalf of the Intervenor were present:

     a)      Shri S. Verma, Jt. Director
b)     Shri A. K. Rampal, Jt. Director
c)      Shri A. Singh, Jt. Director

ORDER

This order relates to the application filed by the Haryana Vidyut Prasaran Nigam Limited (hereinafter referred to as HVPNL) with regard to the determination of revenue requirements for the transmission and bulk supply business for the financial year 1999-2000.

1.  Background

Haryana Vidyut Prasaran Nigam Limited is the holder of the Haryana Transmission and Bulk Supply Licence [Licence No. 1 of 1999] and the Haryana Distribution and Retail Supply Licence [Licence No. 2 of 1999].

Section 26(5) of the Haryana Electricity Reform Act, 1997 (“the Act”) requires that “every licensee shall provide to the Commission at least 3 months before the ensuing financial year full details of its calculation for that financial year of the expected aggregate revenue from charges which it believes it is permitted to recover pursuant to the terms of its licence”. Determination of the annual revenue requirement is an important task because through this exercise licensee’s annual expenditure, the reasonable return on the Capital Base and the aggregate revenue requirement are ascertained. A comparison of this approved revenue requirement and the expected revenue from existing tariffs reveals whether the existing tariffs are sufficient to cover the expenses of the licensee and whether there is any need for tariff revision. Any proposal for tariff revision is then based on the approved aggregate revenue requirement of the licensee.

In order to provide guidance to the licensee to prepare for such an important task, the Commission issued Guidelines for filing Annual Revenue Report (hereinafter referred to as Guidelines) on December 14, 1998. The Guidelines included formats for various Sixth Schedule-related elements - such as Capital Base, reasonable return, expenditure, employment, non-tariff income, customer rebates owed from previous year, and the aggregate revenue requirement – and transmission and distribution losses. It also provided detailed guidance for  preparing the ARR. The licensee is required to file financial information pertaining to three periods – previous year, current year and the ensuing year. Information relating to the previous year should be based on the audited accounts. Estimated figures should be provided for the current financial year.  These estimates should be based on actual figures for the first six months of the current financial year and estimated figures for the second six months of the current financial year. Forecast figures are to be provided for the ensuing financial year.  These figures should be based on the current year figures, with adjustments that reflect known and measurable changes expected to occur between them. These adjustments must be specifically documented and justified.

To comply with the above obligations, HVPNL had submitted a composite application for annual revenue requirement (ARR) for the FY 2000 (i.e. the financial year starting from 1st April 1999 and ending on 31st March, 2000) on December 30, 1998 under cover letter no. CH-1/SE/TF/HERC dated 30.12.1998.

On January 14, 1999 the Commission observed vide letter No. 15/S/HERC/98 that the ARR was incomplete for the following reasons:

- the licensee had not submitted full details of calculations of the aggregate revenue requirement ;

- although the licensee was required to give complete details and particulars to support filing of ARR, the filing of HVPNL did not fulfil its statutory obligations under the Act.

- HVPNL did not file separate ARRs for the separate Transmission and Bulk Supply, and Distribution and Retail Supply Licences that it holds.

The Commission directed the licensee to file, within 10 days of the issue of the letter mentioned above, separate ARRs for each of the licences, with all relevant information along with details as per the requirements of the Act and the Commission Guidelines for filing of ARR.

HVPNL was unable to compile and prepare the revised ARR filing within the stipulated time and requested on 27 January, 1999 for extension of the dead line. The Commission extended time up to March 15, 1999. HVPNL filed the revised ARR on March 19, 1999. HVPNL submitted that the delay was due to the following unavoidable reasons:

- there had been extensive discussions with the Government of Haryana concerning the filing;

- the World Bank required a detailed review and discussion of the completed ARR filing prior to submission to HERC as this was the first ARR filing;

- as a result of these meetings and subsequent improvements to the filing, there were several HVPNL board meetings reviewing and approving the changes.

HVPNL requested the Commission to condone the delay and accept the filing.

After initial review of the filing, the Commission observed vide letter no. 72/S/HERC/99 dated April 28, 1999 that the revised filing represented a substantial improvement on the consolidated filing made earlier by HVPNL on December 30, 1998. While appreciating the difficult circumstances in which HVPNL finds itself, having begun its  existence less than one year ago and having inherited sub-optimal information systems, the Commission granted a large number of waivers requested by HVPNL for the current filing (see Appendix 1 for the list of waivers granted by the Commission). However, it was pointed out that there were still deficiencies in the materials submitted, correction of which was imperative for the Commission to fulfil its obligations under the Act and HVPNL was directed  to submit the requested information within 30 days from the date of the letter of April 28, 1999.

HVPNL filed supplemental information on May 27, 1999 under cover letter no. Ch 71/SE/RAU/ARR-2. Upon reviewing the supplemental information and finding that the complete information was still wanting, the Staff of the Commission organised a meeting with the HVPNL staff on July 23, 1999 to seek certain clarification on the information furnished so far and to ascertain if any further information would be forthcoming. 

Information filed by the licensee is the essential source of information for the Commission and forms the general basis for its actions or decisions. The Commission observes that the licensee is unable to provide many pieces of vital information and even the quality of available information remains doubtful. While the Commission fully sympathises with the constraints of information generation, storage, retrieval and management faced by the licensee due to the lacunae in the inherited practices and systems, changing which would require time, it needs to be recognised that such handicaps on the part of the licensee make decision-making of the Commission more difficult because the present level of information does not permit it to determine, in most cases, an accurate base line with respect to which performances would be measured in the future.

Further, the entire issue of revenue requirement has become at best “a stop gap” because of the provisional nature of Transfer Schemes, provisional accounts data and the lack of segregated accounts by businesses of the licensee. Although the First Amendment Rules to the First Transfer Scheme have been notified on August 13, 1999 the Second Transfer Scheme would remain provisional for five months from its date of notification (i.e. July 1, 1999). Since the dates on which various accounts and Transfer Schemes were drawn are different, any disaggregation of assets and liabilities would remain provisional until the expiry of provisional period of the Transfer Schemes and the availability of segregated audited accounts. 

According to Section 26(5) of the Act, the Commission has the obligation to notify the licensee about its decision regarding the filing “within 90 days of the date on which the licensee has furnished all information”. Even though the present filing including the supplemental information did not fully comply with the requirements of the Guidelines issued by the Commission, keeping in view the objectives of the reform process and with an aim to move forward, the Commission decided  that in view of the limited possibility of any improvement in the present filing in the near future, for the limited purpose of the provisions 26(5) of the Act, the filing was deemed to be complete. It was also decided to proceed with organising a public hearing on the ARR.  

Accordingly public notices were issued in Hindi newspapers in the Punjab Kesri (9/9/99) and the Dainik Tribune (9/9/99) and in English in the Indian Express (8/9/99) and the Tribune on (9/9/99) separately for the ARR of Transmission and Bulk Supply business and Distribution and Retail Supply Business.  The notices outlined the essential features of the ARR filing made by the licensee and invited all interested persons to file their written comments/views on the ARR filing of the Transmission and Bulk Supply Licensee for the year 1999-2000 before the Secretary, HERC, at the office of the Commission by September 24, 1999. The notice indicated that all relevant documents pertaining to the ARR filing would be available for public consultation at all Offices of SE (Operation), at the Head Quarter of HVPNL at Panchkula and the Deputy Commissioner’s Offices in all districts in the State. Subsequently, the date of receiving the comments was extended by a week – up to October 2, 1999 on the request made by HVPNL - and the date for procedural hearing was fixed on October 4, 1999 to be held at the DC Court Room, Panchkula.

No comments or views were received by the Commission within the stipulated date. No party other than HVPNL appeared on the date of procedural hearing – 4^th October, 1999. The Secretary, HERC suggested that in view of poor response from the public, presumably due to technical nature of the issues involved, the Staff of the Commission may be allowed to be a party to the proceedings. The Commission allowed the Staff to be a party to the substantive hearing and ordered the Staff to file its views by 6^th October, 1999 and serve a copy to the licensee. HVPNL requested for two weeks of time for reviewing the views of the Staff and filing its reply. However, the Commission did not agree to this suggestion but agreed to hold the substantive hearing on October 12, to be continued on the next day, if required. 

The staff as intervenor filed on October 6, 1999 petitions containing the Staff Position analysing HVPNL’s ARR proposals. HVPNL has filed its reply to the petition with the Commission on October 11, 1999.  These have been brought on record as per the order of the Commission.

The Commission held substantive hearing on October 12, 1999 at the DC Court Room, Panchkula. The Commission agreed with the submission made by HVPNL that it may be allowed to raise those points on which it did not agree with those of the staff position on the ARR filed by them. Accordingly, the Commission allowed the HVPNL to make further oral submission on other issues/points during the hearing. The Commission indicated that since HVPNL in its response to the Staff Position Papers has identified certain areas where it does not agree with the Staff, those areas would be essentially dealt with in the hearing. In the morning session ARR relating to the Transmission and Bulk Supply business was taken up while the ARR of the Distribution and Retail Supply business was discussed in the afternoon session.

Throughout the Order the following convention is followed: for each element, HVPNL’s proposal, outlined in the principal filing and the supplement, is presented. Any observation/objection made by the HERC Staff in the HERC Staff Position Papers is furnished next. HVPNL’s response to the Staff Position – either given during the hearing or in the form of written submission - is introduced then. Finally, Commission’s views are presented.

2. Revenue Requirement the Transmission and Bulk Supply Business

In the following sub-sections, various elements of the ARR filing, namely the Capital Base, return, expenditure, non-tariff income, revenue requirement and the revenue gap, if any, are discussed. First various elements of expenditure are dealt with. It will be followed by discussion on Capital Base, reasonable return, non-tariff income, aggregate revenue requirement and revenue gap.

2.1  Expenditure

Items under this head are specified in paragraph XVII (2)(b) of the Sixth Schedule and include: (i) generation and purchase of energy, (ii) transmission or sale of energy;  (iii) rents, rates and taxes, other than all taxes on income and profits; (iv) interest on loans advanced by the Board; (iv-a) interest on loans borrowed from organisations or institutions approved by the State Government; (iv-b) interest on debentures; (v) interest on security deposits; (vi) legal charges; (vii) bad debts; (viii) auditors’ fees; (ix) management including managing agents’ remuneration ; (x) depreciation; (xi) other expenses; (xii) contributions to provident fund, staff pension and gratuity computed under any law for the time being in force or any such scheme as is approved by the State Government; and (xiii) bonus paid to the employees of the undertaking.

Paragraph XVII (2)(c) of the Sixth Schedule allows for special appropriations to cover: (i) previous losses; (ii) all taxes on income and profits; (iii) instalments of written down amounts in respect of intangible assets and new capital issue expenses; (iv) contributions to Contingency Reserve; (v) contributions towards arrears of depreciation; (va) Contribution to the Development Reserve; (vb) debt redemption obligation of private licensees; (vi) other special appropriations.

Form 1.3 of the Guidelines issued by the Commission broadly follows sections XVII(2)(b) and (c) of the Sixth Schedule. The licensee is required to provide full details of calculation of each expenditure item and enclose supporting financial and technical data for all relevant financial years. Additional data requirements in respect of employees are specified in Forms 1.3 and 1.3A. Each of these elements will be taken up in the following paragraphs.

2.1.1 Purchase of energy:

a) Volume of power purchased:

HVPNL proposal

HVPNL has the following major sources of power: National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC), Haryana Power Generation Corporation (HPGC), shared utilities (essentially Bhakra Beas Management Board (BBMB)) and captive power plants. Table 1 gives HVPNL’s share and capacity available to HVPNL.

Table 1 – HVPNL’s capacity share in various plants

b) Power Availability

Power supplied to HVPNL  is determined by its share in the capacity of the plants and the plant performance during the year. In the case of hydro power plants, another variable that significantly affects the power availability is the monsoon. 

In most cases power available for FY 2000 was estimated on the basis of average power available from the source in FY 1997, FY 1998, and FY 1999.

For the Faridabad Thermal Power Station, the estimated availability for FY 1999 has been assumed as the power to be available in FY 2000. 

The power expected to be available from Panipat Thermal Power Station is computed based on the expected operating plant load factor (PLF), taking into account planned refurbishment.

Magnum is expected to be the only IPP to be supplying power during FY 2000.  The power anticipated to be available from this plant has been based on an expected operating PLF of 80 per cent and an auxiliary consumption of 10 per cent. 

Power from new sources

Unit 1 of Faridabad Gas is expected to commence operations by May 1999 and Unit 2 by December 1999.  The power availability has been estimated based on assumptions on stabilisation period and the expected PLF.  The operating PLF has been assumed to be around 68.5 per cent while the stabilisation PLF has been assumed to be three-fourths of the operating PLF.  It has been assumed that the units would, on an average, take approximately 90 days for stabilisation.

A summary of power projected to be available from various sources during FY 2000 is given in table 2.

Table 2 – HVPNL’s proposal for power availability

Staff Position:

(i)         HVPNL has assumed that its power purchase is availability driven and whatever power is available would be absorbed by the system.

(ii)        HVPNL has estimated that the power availability during the financial year 1998‑99 (FY 1999) will be 13,746.79 million units (MU) and will increase to 14,541.28 MU during the financial year 1999-2000 (FY 2000).  The volume of power to be purchased during FY 2000 has been estimated to be equal to the average of the preceding three years purchases except for new plants and units under renovation. For new plants, projection has been made based on the expected date of commencement and expected plant load factor (PLF). For the units in renovation, projection has been made based on the refurbishment schedule.

(iii)       Essentially there are two issues involved: estimation of the total volume of power to be procured and the distribution of power procurement from various sources. Normally, the volume of power to be procured should be derived from the sales forecast of the distribution licensees after taking into consideration transmission and distribution losses. The supply-driven approach followed by HVPNL may be appropriate under the prevailing shortage situation but this should not be considered as the normal practice. The Staff believe that a demand-driven approach would be better for the future filings once shortages have been eliminated.

In the near-term, HVPNL is locked into the current power purchase agreements, plus whatever additions can be arranged. An appropriate method for projecting the availability of power from these sources would be to (1) rely on the projections made by the generators themselves in this regard while finalising unit-wise generation programme with CEA, or, (2) forecast availability on the basis of expected performance of each unit by analysing past performance record and other available information (such as renovation work), or (3) a combination of the two.

The method of estimation of total volume of power availability used by HVPNL and the distribution of availability by source do not appear to be based on strong scientific methods. However, this being the first such exercise by the licensee and given the constraints of data availability, the Staff would suggest that HVPNL’s forecast may be accepted for this filing, subject to the condition that the next filing should contain the following:

- a demand-driven approach is followed for determining the power purchase requirement;

- availability of power from various sources is determined from the information furnished by the generators and the unit-wise generation programme prepared in CEA; in case generators do not provide such information, the second-best alternative method for determining power availability should be used (e.g. estimation based on projected plant availability, station-wise generation target decided by the CEA or the regional grid, etc.);

-  power purchase from various sources should be such that the cost of power purchase is minimised subject to the condition that purchase from a source does not exceed availability of power from that source and that the total requirement of power is met.

HVPNL response:

HVPNL agrees that a demand-based projection is preferable in a situation of capacity surpluses, and expects that the present system of projection from available capacity would continue for the next 1-2 years.

HVPNL recognises that the methodology suggested by the HERC staff is indeed superior to simply using the trends of the previous three years provided that the planned production from units bears a reasonable relationship to actual production.  When the FY 1999 ARR was compiled, the annual projections were not available from all generators.  HVPNL also acknowledges that using prior trends does not capture several critical issues such as expectations of rainfall in case of hydroelectric plants, the level of over and under–drawals by other states in case of central units, etc.

Nonetheless, HVPNL believes that it may have to continue to rely on the past trends.  The finalised annual projections have not consistently been available from the generators in time for compilation of the ARR.  Even if available, the actual generation available in a year does not necessarily correlate well with projected levels.  In order to overcome the imperfections of dispatch of thermal plants and the fact that hydroelectric generation is dependent on rainfall levels, HVPNL relies on trends for three years rather than one year.  HVPNL will examine the relationship between forecasted and actual generation by source and submit an analysis with the next ARR to be filed by 31 December 1999.

Commission view:

The Commission believes that projections based on those by generators are the best because they are expected to take into account the so-called imperfections of dispatch of thermal plants and dependence of hydro plants on rainfall levels. A method of average of three years advocated by HVPNL is, in our opinion, not appropriate.

Although supply would be limited by availability only, yet, for planning purposes demand-driven projections should be made. The Commission also does not accept the view that the licensee has to continue with the past practices regarding forecasts. Wherever projections from generators or central authorities such as CEA or NREB are available, HVPNL should provide and use those data. If for any reason whatsoever, HVPNL cannot find the data in some rare cases, HVPNL should use base data of the previous year, as there is a steady trend of increase in power generation in the  country.

As regards power purchase from shared utilities, only net purchases and net cost should be shown and the old practice of purchase and sales should be discontinued. Similarly, inter-state sales should be done on net purchase and net cost basis. The Commission presumes that inter-state purchase is based on bilateral agreements. If this is not so, a different treatment may have to be thought of.

Accordingly, the volume of power to be purchased becomes 14,238.72 MU. As explained  in table 6, this volume has been arrived at by deducting the quantity shown under “common pool sales” viz. 302.56 MU from the volume of power projected by HVPNL. 

2.1.2  Transmission loss and power available for distribution

HVPNL proposal:

HVPNL indicated a transmission loss of 10.98% for FY 1999 and a loss of 10.31% for FY 2000. This would imply a 0.67% reduction in transmission losses. The details of power available for distribution are presented in table 3 below.

Table 3  – HVPNL’s proposal for sale of power to distribution companies

Staff position:

The transmission loss appears to be significantly higher than the acceptable level of transmission losses and the proposed loss reduction of 0.67% is small. In view of the investments already made and planned to be made in the system, the Staff suggested that, for the purposes of this ARR, transmission loss may be fixed at 9%. The Staff also raised the issue of appropriate rate for direct sale of power and suggested that the licensee should not subsidise other states at the cost of consumers of the state.

HVPNL response

HVPNL in its oral presentation stressed on the uncertainty regarding he estimate of losses because of lack of interface metering at some points at 33 kV level. The losses are back computed for such points from 11 kV side to 33 kV side based on assumed figures. HVPNL maintained that it was not possible to reduce the level of losses by more than that had been projected until the projects have been completed. It also questioned the rationale on which HERC staff have proposed the reduction of transmission losses from 10.31% to 9%. HVPNL therefore submitted that there should be no attempt to restate its losses.

Regarding inter-state purchase and sale of power, HVPNL agrees to provide the information in the next filing of the ARR if it can be located in the records retained by the Company.  In addition, HVPNL will endeavor to seek agreement with other State Electricity Boards (SEBs) to determine whether the sales price can be increased. It also pointed out that the "common pool" charges are based on agreements among the partner states in BBMB projects.  Amendment of those agreements can only occur if there is consent among all partner States.

 Commission view:

It is the view of the Commission that there is no alternative to metering and only when all meters are installed, the transmission loss can be determined accurately. The Commission is concerned about the lack of inter-face metering at all bulk supply points and would expect that these meters are installed latest by 31 March, 2000.

As regards all new substations being set up, metering should invariably be provided. The Commission expects that all metering would be completed by 31 March, 2000 for all purposes including transmission and bulk supply tariff application by the licensee. The Commission would not like to be presented again with the plea of non-metering for any purposes whatsoever after 31 March 2000.

The Commission considers the existing transmission loss to be significantly higher than the loss that should occur in a well performing transmission system. However, given the constraints faced by the licensee, the Commission decided to take the following view: for the period up to November 1999, the loss figure projected by HVPNL is accepted. However, the Commission would expect that an effort would be made to reduce the losses so that 0.5% loss can be reduced in December 99, 1% in January 2000, 1.5% in February 2000 and 2% by the end of March 2000. The annualised loss figure for FY 2000 would be 9.89%. This is calculated as follows: the average of 10.31% of loss for 8 months, 9.81% for one month, 9.31% for one month, 8.81% for one month and 8.31% for one month. The Commission would expect that the licensee would maintain at least 2% reduction from the current reported 10.31% level with effect from April 2000.

As regards inter-state sale of power, only net sales should be accounted for. The “common pool sales” being a sale of power directly from BBMB and not by HVPNL, the volume has not been considered as direct sales. The sales made by BBMB are outside the purview of this Commission. HVPNL should provide full details of inter-state sales in the next ARR filing. The Commission presumes that 91.48 MU allowed for inter-state sales is through bilateral agreements only.

The present filing does not indicate any supply by the transmission and bulk supply licensee other than to the distribution licensee and the inter-state sales. The Commission therefore maintains that the licensee is not supplying bulk power to any other party and accordingly the sale to the distribution business has been determined by subtracting inter-state sales and transmission losses from the volume of projected power purchase by the licensee. However, as and when the licensee sells power to any  party or parties (including those having licence exemption from this Commission), the licensee should keep proper accounts of such transactions and should provide details in the ARR filing. 

Subject to the above observations, the Commission approves 12,738.56 MU for sale to distribution business as per the details given  in table 4:

Table 4 – Commission approved sale of power to distribution business

2.1.3 Cost of Power Purchase

HVPNL proposal:

HVPNL’s proposal for units to be purchased and power purchase costs for FY 2000, as provided in Schedule 3.8 of the filing, is presented in table 5.

 Table 5 – HVPNL’s estimate of cost of power purchase

The tariffs for the power purchased from NTPC units comprise two components, an annual fixed charge and a variable charge per unit.  HVPNL made separate estimates for the fixed charges and the variable charges. The fixed charge for power purchased from NTPC units during FY 2000 had been assumed to remain constant at FY1999 levels.  The variable charges had been projected to grow over FY 1999 charges at inflation (8 per cent). A significant part of the NHPC and NPC tariffs are fixed charges and accordingly, a single cost had been projected for them. The power purchase tariffs from NHPC units were estimated to grow at inflation.  

Power purchase tariffs from HPGCL had not been confirmed and HVPNL is currently in the process of negotiating the tariffs with HPGCL.  For purposes of estimation of power tariffs in FY 1999, a single average tariff had been assumed. The cost of power for FY 2000 was computed based on projections of the operating expenses of HPGCL.

HVPNL has an expense sharing arrangement with the shared utilities under which HVPNL contributes its share of the total operating expenses of the shared utilities. This, effectively, constitutes the cost of power purchase from the shared utilities.

Cost of power purchased from other sources such as IPPs and captive power plants had been taken as per any agreements available or their latest invoices.

Staff position:

(a)  The various elements of power purchase costs should be separately identified in order to enable a better review of the power purchase costs.
(b)  Since variable charge caters essentially to fuel costs and any change in fuel and purchased power costs will be recoverable through fuel adjustment clause, the adjustment for inflation is not admissible.
(c)   As regards cost of power from shared generation, it is not clear how the costs were estimated and whether the licensee maintains separate accounts for this purpose. The Staff has reduced the terminal benefits included in the employees cost from actuarial estimate of 20% to historical level of 8.5% of basic salary and DA of employees.
(d)      The Staff proposed an alternative forecast of cost of power from various sources. The method followed is as follows:

For NTPC plants: the actual total costs and volume of power purchased from various NTPC sources up to August 14, 1998 were taken from the Audited Accounts of erstwhile Haryana State Electricity Board (HSEB). The average rate was determined and the same is considered for the purposes of power purchase cost for FY 2000.

For NHPC power, the Staff considered January 1999 invoice figures, representing the most recent cost data, as representative for the purposes of average tariffs of power from NHPC for FY 2000 ARR calculations.

 HPGCL power – Details contained in the invoices for November 1998 submitted in the Supplement to ARR filing were considered.

Nuclear power – The average cost according to audited accounts up to August 14, 1998 was taken.

Inter state supply of power - The average proposed by HVPNL is accepted in absence of any better alternative.

HVPNL response:

HVPNL will attempt to provide additional detail for the next ARR filing.  As regards disallowing inflation adjustment, HVPNL agrees to the proposal but would expect that the approval for FSA adjustment would be given promptly.

Commission view:

The Commission decides that no adjustment for inflation would be permitted in the projected power purchase costs since they are recoverable through Fuel Surcharge Adjustment (FSA). The Commission has accepted the Staff position regarding the alternative estimate of the cost of power essentially because the Commission considers that no inflationary adjustment in power purchase cost is required because the Fuel Surcharge Adjustment specified in the Tariff Regulations notified by the Commission amply takes care of this issue. The revised estimate of cost of power purchase is given in table 6 below.

As regards shared generation, the accounting on net purchase basis has been considered because HVPNL should not account for any power that does not flow through its system. Accordingly, the quantity of power shown under “common pool sales” has been deducted from the volume of power available from shared utilities and the cost of power is adjusted by the revenue amount shown in the accounts of erstwhile HSEB as on  31^st March, 1998. For any future ARR filing, the cost of power from shared utilities should be projected on the basis of net payment made by the licensee in accordance with the invoices raised by the generator.

The Commission expects that HVPNL will soon enter into a power purchase agreement (PPA) with HPGCL and in the next ARR filing, the rate as per PPA would be made available.

The total cost of power allowed is Rs. 20,453 million for FY 2000 as per details shown in table 6 below.

Table 6 : Cost of power purchase as approved by the Commission

2.1.4  Operation and Maintenance Cost

2.1.4.1  Employees cost

HVPNL proposal: 

HVPNL has claimed Rs. 896.91 million towards employees cost. This has been calculated by taking the 1998 cost as the base and adjusting the same for revisions as per the 5^th Pay Commission and increasing it for inflation etc. and subtracting the capitalised employees cost.  The specific assumptions include:

a) The base salary (including dearness allowance (DA)) for 1998 has been arrived at after adjusting the salary cost for the arrears as per the 5^th Pay Commission.  An annual increase of 10 percent has then been assumed on the base salary based on an inflation rate of 8 percent and 2 percent for scale changes.

b) Based on an historic analysis, 15% of the sum of basic salary and dearness allowance has been charged towards other allowances.

c) In the absence of any precise mechanism relating to provision of these allowances on an accrual basis (the practice in the past has been to discharge these benefits on a cash basis), a working assumption has been made wherein the amount of contribution required for this purpose has been assumed to be 20 percent of the sum of basic salary and dearness allowance.

Staff position:

The Staff opined that terminal benefits may be discharged for present on cash basis and accordingly changed this element to 8.38% of basic salary and DA during the same year based on 1997-98 accounts figures. The Staff also objected to capitalisation of employees cost on the ground that  employees cost is a revenue expense and nothing is gained by capitalising the cost of employees.

HVPNL response:

Historically, erstwhile HSEB had two practices in relation to pension liabilities and other terminal benefits.  One, it did not recognise these liabilities in its books of accounts on an accrual basis.  Two, it did not deposit the moneys in respect of these benefits into the funds required for this purpose.  With the creation of HVPNL as a company incorporated under the Companies Act, HVPNL cannot continue either of these practices.

In particular, a failure to deposit provident fund moneys is  a violation of the law and will attract serious liabilities on the directors of the company.  HVPNL wishes to point out that the accrual for the year of 20% of basic salary and DA represents the contribution that HVPNL statutorily has to make to retirement funds.  Therefore, these amount represent a cash outflow to HVPNL, and it is incorrect to compare this with past trends, when HSEB did not make these statutory deposits into the respective funds.

The expenses capitalised by HVPNL represent the value of its employees' time spent supervising and working on new construction projects.  HVPNL does not oppose the HERC Staff position, but it would point out to the Commission that acceptance of the HERC Staff position is not consistent with generally–accepted regulatory practices; and will in effect charge current customers for benefits that will be received in the future.

Commission view:

The Commission accepts provisionally HVPNL proposal regarding capitalisation. The Commission is however not convinced that 20% of basic salary and DA represents the actual cash out flow of HVPNL in respect of terminal benefits. For the current ARR, the Commission would allow the pay out on the historical basis subject to the condition if HVPNL accounts demonstrate that the actual statutory payments were higher, the Commission would allow such additional expenses in the future. The Commission feels that terminal benefits on actual basis should be excluded from the employee cost for the purpose of calculating cost of employees to be capitalised.

The employees cost allowed by the Commission is Rs. 825.27 million. The details are given in table 7 below:

Table 7 – Commission approved employees cost (Rs. Million)

* HVPNL has charged capitalised employees cost at 8.11% of total employees costs.

** The Commission has excluded terminal benefits from total costs and applied 8.11% on that amount.

2.1.4.2 Administration & General Expenses : 

HVPNL proposal:

HVPNL has proposed Rs. 108.16 million as the A&G expenses related to the T&BS business. Administration and General expenses for FY 1998 have been assumed to grow at annual inflation rate of 8 percent to arrive at the cost for FY 1999 and FY 2000.

Staff Position:

The Staff considered that the proposed figure had been entered erroneously because the A&G expenses for FY 1998 were shown to be Rs. 306.87 million and the licensee assumed an annual growth of 8% over the FY 1998 figure.

HVPNL response:

Item 2.10 in SNR 1.11 in the ARR filing shows A&G costs in respect of HVPNL of Rs. 336.68 million.  This amount includes plant lease rentals of Rs. 214 million. As has been noted in Schedule 6 of SNR 1.11, which carries this amount.  On excluding this amount (which has been transferred to HPGCL), the A&G costs as projected in the ARR are a reasonable estimate of A&G expenses.

Commission view:

The Commission accepts HVPNL’s proposal in this regard and allows Rs. 108.16 million towards A&G expenses.

2.1.4.3 Repair and Maintenance Cost :

HVPNL proposal:

HVPNL has claimed Rs. 140.59 million towards repair and maintenance costs. This has been assumed at 1.30% of Gross Fixed Assets (opening balance + average additions during the year) based on a technical estimate.  The R&M expenses considered are as follows (refer table 8) :

Table 8 – HVPNL proposal for R&M expenses (Rs. Million)

* refers to transmission assets and excludes shared utility assets.

The actual R&M expenses for HVPNL transmission business as a percentage of gross fixed assets were 1.01% in the financial year 1996-97 and 0.86% in the financial year 1997-98. This percentage has been considered  to be 1.30% for the purpose of projections.

HVPNL informed that the actual R&M expenses in the past had been far less than the required levels. In order to ensure reliability of power supply, adequate investment needs to be made towards maintenance of the system. In the past, due to limited financial resources, HVPNL was not able to invest / earmark adequate funds for this activity. In the revised scenario, HVPNL would intend to give higher importance to the preventive maintenance and renovation of the transmission system. Accordingly, a higher provision of 1.30% has been proposed in the coming years.

Staff position:

The proposed rate is in line with the general norm of 1.5% retained for R&M expenses for transmission line and the Staff has no objection in accepting the per cent figure. However, the Staff points out that the actual rate applied by HVPNL is 1.24% and not 1.30%.

HVPNL response:

No response

Commission view:

The Commission provisionally allows Rs. 140.59 million towards R&M costs for this ARR.

2.1.4.4 Rents, rates and taxes:

This element has not been projected separately and has been included in A&G expenses.

2.1.4.5 Interest on loan:

HVPNL proposal:

HVPNL has claimed Rs. 929.09 million towards interest expenses and other financial charges. This is made of interest : 985.32 million, Other finance changes : 13.79 million; less interest capitalised: Rs. 70.02 million, less interest on shared utility loans : Rs. 11.46 million. The interest amount consists of interest on all loans – long term loans, PF liability, current maturity of debt and other loans (including working capital loans).  All loans had been assumed to have been approved by the State Government. The amount of interest expenditure on loans from various sources is indicated in Schedule 2.

Staff Position:

The Staff accepted HVPNL’s proposal but suggested that Provident Fund liability, which represented the contribution of the employees and which had been appropriated for running the business and on which interest had been charged at the prevailing rate of 12%, should be considered as a loan subject to the condition that the fund is managed by a separate trust.

HVPNL response:

No response here but as mentioned under the head “Loan” in the “Capital Base” section above HVPNL has argued for removal of PF liability as well as Pension Fund liability from the Capital Base.

Commission view:

The Commission does not consider the PF liability and Pension liability as  loans as defined in the Sixth Schedule for the purpose of working out Capital Base and interest charges. Accordingly, HVPNL’s proposal to consider PF liability as loan is rejected and no interest has been allowed on PF liability.

As regards finance charges, the Commission finds from HSEB accounts for FY 1997-98 that the Board incurred a cost of about Rs. 57 million towards cost of raising finance and bank charges. This comes to about 1% of funds received during the year. The Commission therefore accepts the estimate for finance charge proposed by the licensee. However, in future the licensee should project the finance charges based on the actual charges incurred in the previous year allowing for any known and measurable changes.

Accordingly, the Commission allows interest expense to be charged to the expenditure to be Rs. 858.44 million. The details are as follows:

Interest on approved loans : Rs. 926.13 million (Rs. 996.78 million claimed by HVPNL less Rs. 70.65 million charged to PF liability);  

Less interest capitalised : Rs. 70.02 million.

Less interest on shared utility loans: Rs. 11.46 million.

Add Finance charges: Rs. 13.79 million.

Total                            : Rs. 858.44 million.

2.1.4.6 Interest on security deposits:

Given that there is no deposit held by the licensee, this element is not relevant.

2.1.4.7 Legal charges:

This has not been separately projected and is included in A&G expenses.

2.1.4.8 Bad debts:

HVPNL has not proposed any amount under this head and therefore no bad debts have been allowed by the Commission.

2.1.4.9 Auditors’ fees:

This has not been separately projected and is included in A&G expenses.

2.1.4.10 Depreciation:

HVPNL proposal

HVPNL has claimed Rs. 654.94 million towards depreciation for the financial year 2000. Based on the overall depreciation provision claimed in earlier years as compared to the value of the Gross Fixed Assets, an average depreciation rate of 6.38 percent on a straight line basis has been applied to the amount of Gross Fixed Assets at the beginning of the year. Accordingly, the annual provision for depreciation is expected to be Rs. 654.94 million (table 9 below):

Table 9 – HVPNL proposal for depreciation 
                                                           (Rs. Million)

* only transmission assets are included and excludes shared utility assets.
** values are rounded here.

Staff position:

As per principles contained in Ministry of Power (Dept. of Power) Notification No.265 (E) dt.29.03.94, depreciation charge has to be calculated by applying depreciation rates applicable to various asset classes. HVPNL could not furnish the disaggregated class-wise assets essentially due to revaluation of assets and applied an average depreciation rate. Although this amounts to departure from the GOI notification, the Staff agree to this method for the present ARR filing, provided that the licensee is asked to furnish disaggregated asset data in the next ARR filing.

HVPNL response:

HVPNL agrees to provide the depreciation data as soon as its accounting system will permit it to do so.  HVPNL anticipates that it can make the changes in its accounting system no later than the ARR to be filed on 31 December 2000.  However, if that situation changes, HVPNL will notify the Commission in advance of the anticipated filing date.

Commission view:

Commission accepts the average rate applied by HVPNL for this ARR. However, as the Commission is allowing terminal benefits on cash basis, the  employee cost would be different, which will slightly modify the capitalised employees cost and hence the gross fixed asset value at the beginning of the year. The depreciation expense allowed would be Rs. 654.25 million (see table 10).

The depreciation rates have been allowed provisionally and the Commission would specify the rates for depreciation separately.

Table 10: Commission approved depreciation charges.

2.1.4.11 Other expenses

A&G expenses, which are placed under this head by HVPNL, have already been discussed above.

2.1.4.12 Contribution to provident fund, staff pension and gratuity:

These elements have been covered under employees cost.

2.1.4.13  Expenses on apprentice and other training schemes:

These expenses have been covered under employees costs.

2.1.5  Special Appropriations

Sixth Schedule allows special appropriation of certain items: previous losses, taxes on income and profits, written down amounts in respect of intangible assets, contributions to the Contingency reserve, contributions towards arrears of depreciation, contribution to the Development Reserve, debt redemption obligation of the private licensee, and any other special appropriation permitted by the State Government.

HVPNL proposal:

HVPNL has proposed to include Rs. 336.75 million under two elements : tax on income and a special appropriation in respect of Pension Fund liabilities. HVPNL has estimated Rs. 88.57 million as tax on profit and Rs. 248.17 million as Pension Fund liabilities.

HVPNL calculated income tax liability as per the applicable provisions of Income Tax Act by applying the prevailing statutory rate of 35 percent and also by taking into account the specific provisions on Minimum Alternate Tax (MAT). For 1999, HVPNL (Transmission business) has neither income tax profit nor any book profits.  Accordingly, there is no income tax liability in 1999.  For the year 2000, the Company has losses as per tax provisions and therefore a Nil regular tax liability.  However, in view of the book profits, it is liable to pay tax at the rate of 10.5 percent of book profits as per the provisions of MAT. 

The liability on account of pension and other terminal benefits is based on a recently conducted actuarial valuation.  The amount of liability as of March 31, 1998 is estimated to be Rs. 2,655 million for HVPNL. The annual pay out of this liability has been taken based on an analysis provided by the Actuary of the amounts likely to fall due for pension and related liabilities (on a pro-rata basis) in 1999 and 2000.  The same has been deducted from the balance in this account. 

Staff position:

The Staff argued that the book profit, if any, would not be significant and no provision is required for this purpose.

Regarding Special Appropriation of Pension Fund liabilities, the Staff argued that the filing shows a sudden jump in pension fund liability, which has not been explained by HVPNL and the Staff considers this amount unjustifiable. Further, as the Staff do not consider it appropriate to change the accounting policy regarding terminal benefits at this point of time, this liability would not be considered for the purposes of this ARR.

HVPNL response:

HVPNL accepts the staff position given its existing anticipated revenue.  In the event that HVPNL files for and is granted an increase in tariffs, it would expect that income taxes will be restored in the calculation of its revenue requirement underlying the tariff increase granted by the Commission.  HVPNL will calculate its income tax liability in a manner consistent with regulatory practices which recognise the need to make the company whole for the effect of inclusion of income taxes in its revenue requirement.

Regarding Pension Fund liability, HVPNL is now statutorily required to maintain its accounts on accrual basis.  The amount of pension liability shown in FY 2000 reflects that actuarial estimate of HVPNL’s pension liability.  Similarly, the amount of Rs. 4 million for FY 1999 reflected the actuarial estimate for that year.  At the time HVPNL was asked for an explanation for this sudden increase, it was unable to explain the increase.  Since then, it has checked with the actuary, who has admitted that the amount of Rs. 4 million for FY 1999 was a mistake. 

The actuary has provided a revised calculation of the liability for FY 1999.  As per this calculation, the liability for FY 1999 was Rs. 163.6 million and not Rs. 4 million.  HVPNL therefore requests that this adjustment should not be made in its revenue requirement.

Commission view:

For this ARR, the Commission would not make any provision for income tax in view of the current performance of the licensee. The Commission is not convinced that the amount claimed for Pension Fund actually represents the cash pay out for the company. As the Commission is allowing terminal benefits on cash basis, this additional amount would not be admissible. Therefore, the Commission rejects HVPNL’s proposal.

Total expenses allowed by the Commission would be Rs. 23,039.71 million as detailed in table 11 below.

Table 11 – Commission approved expenses for the transmission and bulk supply business 

2.2 Capital base

Paragraph XVII of the Sixth Schedule of the Electricity (Supply) Act, 1948 defines Capital Base as the sum of

          i)        the original cost of fixed assets available for use and necessary for the purpose     licensee minus consumers’ contributions towards the cost of service lines.
ii)        the cost of intangible assets.
iii)       the original cost of works in progress.
iv)       the amount of compulsory investments.
v)       an amount on account of working capital

less

                vi)    the amounts of depreciation.
                vii)   oans and debentures.
                viii)  amounts pertaining to cash security deposits from consumers, and 
                       amounts standing to the credit of the Tariffs and Dividends Control 
                       Reserve.
                ix)    Development Reserve.
                x)    Any amount carried forward for distribution to the consumers.

The Commission has considered these elements while calculating the Capital Base of the licensee. Each element is discussed below in the subsequent paragraphs.

The Guideline of the Commission require that the item No. XVII(1)(ii) of the Sixth Schedule should also include the amount of subventions from the State Government. The purpose of this change is to prevent the licensees from earning a return on subventions from the State Government. This change will be appropriate, since the licensee is not entitled to earn a return on assets that it did not purchase.

Form 1.1 of the Guidelines specifies calculation of  the Capital Base, following XVII (1) of  the Sixth Schedule. The licensee shall provide full details of calculation of each Capital Base item and enclose supporting financial and technical data for all relevant financial years.

2.2.1  Original Cost of Fixed Assets :

HVPNL proposal:

HVPNL has projected the cost of fixed assets of the transmission and bulk supply business for FY 2000 to be Rs. 14,811.67 million.  This projection was worked out on the basis of the restructured balance sheet prepared for March 31, 1998 and forecasts for the next two years.

HVPNL prepared a statement of assets and liabilities that provides a reconciliation between the audited balance sheet of erstwhile HSEB as at March 31, 1998, and the balances considered for the preparation of opening balance sheets of the successor companies i.e., Haryana Power Generation Company Limited (‘HPGCL’), Haryana Vidyut Prasaran Nigam Limited (‘HVPNL’) and the Distribution Companies (‘DISCOMs’) together with the restructuring adjustments. Gross Fixed Assets as at April 1, 1998 have been considered as equal to the Net Fixed Assets as at March 31, 1998 in the restructured balance sheet of the Transmission and Bulk Supply Licensee.  This is the same as the value of the assets notified by the State Government of Haryana in the First Transfer Scheme of August 14, 1998.

The value of Gross Fixed Assets in the balance sheet as at March 31, 1999 and March 31, 2000 reflects this balance as at April 1, 1998 duly adjusted for the additions / disposals made and projected to be made in 1999 and 2000 respectively, the details of which were provided in section 3 of Serial Number (SNR) 1.11 of the filing.  The retirement of assets has been assumed to occur at the rate of 1 percent per annum of the value of the Gross Fixed Assets at the beginning of the year. Table 12 below summarises HVPNL’s proposal. 

Table 12 : HVPNL’s proposal regarding fixed assets (Rs. Million).

Staff Position:

The accounting statements filed in the ARR were prepared from the audited accounts of HSEB as on 31 March, 1998 after incorporating restructuring adjustments. However, the notification of amended First Transfer Scheme and the Second Transfer Scheme render the above accounts provisional. Since the dates on which various accounts and Transfer Schemes were drawn are different and given that the audited accounts for FY 1999 and the first quarter of FY 2000 are not available at present, any disaggregation of assets and liabilities would remain provisional. 

In order to avoid any further delay in the finalisation of ARR, the Staff suggested that that the current ARR may be completed based on the accounting statements filed by HVPNL provided that the next ARR filing would be based on finalised accounts as per the Transfer Schemes and audited accounts.

As regards the cost of fixed assets, the Staff raised question regarding inclusion of shared generation assets worth of Rs. 2,865.2 millions in the cost of fixed assets of the T&BS licensee. These shared generation assets raise two issues.  First, can the licensee lawfully hold an interest in them?  Condition 5.1 of its license generally prohibits it from holding a beneficial interest in a generating company or generating set.  However, an interest in these particular generating assets was vested in the licensee by Government of Haryana prior to creation of this Commission.  Staff therefore believes that licensee’s interest in the assets is not subject to the prohibition of Condition 5.1.

Second, even if licensee can lawfully hold an interest in the generating assets, there is the further question of whether those assets should be included in its Capital Base.  In general, its Capital Base should not include assets that are not used in providing transmission and bulk supply service or distribution and retail supply service under the license.  The reason is that licensee’s customers should not be burdened with the cost of assets that are not used in providing those services.  That general reason is not applicable in this case, however.  Including the assets in licensee’s Capital Base increases its revenue requirement.  That increase is, however, offset by the fact that the price that licensee pays for power generated by the shared generation assets does not include any return on the assets.  There is, therefore, no net burden on licensee’s customers.

The Staff also pointed out that the Sixth Schedule requires the Capital Base to be calculated for various vintages. HVPNL has submitted that its Capital Base relates to investments made after the commencement of the Electricity Laws (Amended) Act, 1991 because the assets have been transferred to HVPNL only on 14^th August, 1998. The Staff suggested that the licensee should keep appropriate records so that in the future filings, vintaged Capital Base can be calculated.

Commission view: 

In view of the importance of the ARR exercise for the licensee, the Commission has taken the following view on the cost of fixed assets:

¨    the cost of assets considered in this ARR is for the limited purpose of this ARR only and the Commission would not be bound by these numbers in the future, once the final asset values are available.

¨   Given that the shared generation assets were vested with the licensee through the first Transfer Scheme, the  Commission would be willing to consider the application of licensee for exemption from the relevant provision of the licence (condition 5.1b of licence No. 1 of 1999) regarding prohibition to undertake the business of generation of power. Generation is not under regulation of the Commission. Even otherwise, the Sixth Schedule only pertains to transmission and distribution of power. The Commission thinks that these assets are neither relevant nor necessary for the purpose of the transmission and bulk supply business of the licensee and should not form part of the Capital Base. Separate accounts should be maintained for a) shared generation,  b) transmission and c) bulk supply businesses of the licensee as per Condition 8 of licence 1 of 1999.

¨    Retirement of assets at 1% is accepted for this ARR. However, HVPNL should support in future retirement of asset based on historical figure.

¨    The licensee should keep accounts so that assets of different vintages are shown separately.

The cost of fixed assets approved for the financial year 2000 would be Rs. 11,923.76 million compared with HVPNL’s estimate of Rs. 14,811.67 million (refer table 13). The difference is due to the fact that the Commission has excluded shared generation assets and has taken the terminal benefits on actual cash pay out basis while HVPNL has taken it on actuarial basis at 20% of the basic salary + DA. This latter has resulted in a reduced capitalised cost of employees.

Table 13: Commission position on fixed assets vis-à-vis HVPNL proposal.
                                                                                   (Rs. Million)

2.2.2 Cost of intangible assets

HVPNL has not included any cost for this item and therefore, it is not included.

2.2.3  Cost of work in progress (CWIP)

HVPNL proposal

HVPNL has estimated that the cost work in progress (CWIP) for the financial year 2000 would be Rs. 1,448.02 million.

Capital Outlay for the year

HVPNL indicated that the outlay on capital account (base cost) for transmission business as approved in the annual plan document is Rs. 670 million for financial year 1999 and Rs. 1,899 million for financial year 2000.

Capitalisation of investments

HVPNL estimated that the capital work in progress as on April 1, 1998 would be completed and capitalised over two years. A 16% interest rate per year was used by HVPNL for computing the interest during construction (IDC) on this capital work in progress. 

Table 14 presents HVPNL’s  estimated  schedule of the capitalisation of the capital work in progress as on April 1, 1998.

Table 14 – HVPNL’s proposal for capitalisation of 1998 capital expenditure
                                                                                     (Rs. Million)

As regards capitalisation of new investments starting in 1999, HVPNL proposed the following asset capitalisation schedule:

Year 1 (Year of investment) – 30%; Year 2 – 60% and Year 3 – 10%.

Accordingly, the capitalisation of fresh investments in transmission was estimated and the work in progress for FY 2000 works out as Rs. 1,448.02 million (as detailed in table 15 below).

Table 15 – HVPNL’s proposal for CWIP (Rs. Million)

Commission View

Investments included in this ARR filing relate essentially to the previously approved projects, ongoing projects and works under the World Bank loan. Information furnished by the licensee could not be related to establish the need of each project and their cost-benefits. Given that any new investment plans of the licensee would be approved by the Commission separately and since the projects under consideration are of grand-fathered type, the Commission accepts the HVPNL proposal for this ARR subject to the condition that the licensee has to furnish details of the amount actually invested to the Commission in the next ARR, along with the terms and conditions of the loans of the said outlay. The Commission has accepted 16% rate of interest for calculating IDC for this ARR. This rate will be adjusted to the actual figure in the next ARR. The licensee should furnish separately interest on loans already finalised. Moreover, in future, only those new investments should be included in the ARR which are approved by the Commission.

All investments in new capital works should be made in a well planned manner with proper techno-economic justification. For all non-turn-key capital works, supply of equipment required to complete a scheme should be arranged in a sequential and co-ordinated manner to match with erection/utilisation of the equipment and to avoid any delays/ consequential time and cost overruns or any undue storage at site/ stores.

2.2.4. Investment made Compulsorily : 

HVPNL did not propose any provision for such investments and hence it is not included.

2.2.5. Average Cost of Stores :

As per Paragraph XVII1(e)(i) of the Sixth Schedule to Electricity (Supply) Act 1948, an amount on account of working capital equal to sum of one‑twelfth of the sum of book cost of stores material and supplies including fuel on hand at the end of each month of the year of account should be included in calculating Capital Base.

HVPNL proposal:

HVPNL has proposed Rs. 401.51 million on this account. The year-end balance of stock is assumed equal to 6 months of repairs and maintenance expenses for the year.  For 1999 and 2000, it consists of stocks for repairs and maintenance only. HVPNL believes that since the Sixth Schedule is directed at calculating the permitted reasonable return, etc based on actual financial data, it does not provide any guidance on how these working capital balances should be projected. This methodology appears to be directed at averaging variations in monthly balances, assuming that actual data on monthly balances is available. In the context of an ARR filing, balances for the ensuing year have to be derived though projections in the financial model.  In the ARR filing, HVPNL has calculated the amount based on 6 months historical cost of repairs. It also informs that since the financial model used by HVPNL does not calculate balances on a monthly basis, it is not possible to calculate an average of monthly balances, as required by the Sixth Schedule.  It is the best estimate that HVPNL could make from available data.

Staff position:

The working capital requirement for maintaining stores is normally determined by properly studying the inventory requirement. Stocks should be properly managed so that no stock is unnecessarily maintained. Also there should be appropriate plans for dealing with non-moving stocks. Pending such information, the Staff believes that it would not be reasonable to reject HVPNL’s claim. Therefore, for the present ARR, HVPNL’s computation of working capital allowance for stores is accepted.

Commission view:

The arguments put forward by HVPNL for departing from the provisions of the Sixth Schedule are not acceptable. The Sixth Schedule clearly provides that “the licensee shall so adjust his charges for the sale of electricity whether by enhancing or reducing them that his clear profit in any year of account shall not, as far as possible, exceed the amount of reasonable return”. Further, “the licensee shall not be deemed to have failed so to adjust his charges if the clear profit in any year of account has not exceeded the amount of reasonable return by twenty per centum of the amount of reasonable return”. This goes to show that the Sixth Schedule provides for the ARR amount to be based on historical costs adjusted for known and measurable changes.

Further, if HVPNL’s model cannot handle monthly data, the model should be changed and not the Schedule. HVPNL has confirmed during the hearing that it maintains monthly accounts and therefore twelve-monthly average of the stocks can be easily found out. While it is correct that in the context of the ARR filing, the amount of stock has to be projected, the difficulty faced by the licensee in using past year’s monthly data for the purpose of such projections is not clear. It is one thing that HVPNL does not have the data for this ARR because in the erstwhile HSEB regime disaggregated accounts perhaps were not maintained, but to contend that the Sixth Schedule does not give any direction for such projections is quite another and the Commission does not accept this logic.  

For the purpose of this ARR, the Commission would allow an amount equivalent to one-sixth of the amount proposed by HVPNL. The Commission does not think it appropriate that the licensee maintains a stock equal to six month’s expense. In absence of data to the contrary, this has been assumed as the monthly average of the stock required by HVPNL. The amount allowed would be Rs. 66.92 million.

2.2.6. Average Cash and Bank Balance :

Paragraph XVII(1)(e)(ii) of Schedule VI of the Act, 1948 allows an amount equal to one-twelfth of the sum of cash and bank balances and call and short term deposits at the end of each month of the year of account, not exceeding in aggregate an amount equal to one quarter of expenditure under sub paragraph 2(b) of this paragraph excluding sub clauses (i), (iv), (iv-a), (iv-b) and (x) is to be considered on account of working capital. Here sub-clause (i) refers to generation and purchase of energy, (iv) refers to interest on loan advanced by Board, (iv-a) refers to interest on loan borrowed from organisation or institution approved by Govt. of Haryana, (iv-b) refers to interest on debenture issued by licensee and (x) refers to depreciation.

HVPNL proposal

HVPNL has proposed Rs. 93.74 million as the cash and bank balance for FY 2000. This amount, representing the amount of working cash on hand, was estimated assuming that the amount to be maintained is equal to one month of operating expenses (repairs and maintenance + employee cost + administrative and general expenses for the year). HVPNL has made the same arguments noted above for “average cost of stores” for departing from the Sixth Schedule.

Staff position :

HVPNL’s position may be accepted for the purposes of this ARR filing on the ground that there is no historical data for the transmission business as such and the opening balance of the restructured accounts is showing a negative figure. However, from the next filing, the provision should be based on actual monthly cash and balance data for the past year with any appropriate adjustment for known and measurable changes.

Commission view

As mentioned above, the Commission is not convinced that there is any valid argument for departing from the Sixth Schedule. The licensee should follow the method prescribed in the Schedule for the next ARR filing. However,  the Commission accepts HVPNL’s estimate for this ARR and the amount allowed would be Rs. 93.74 million. The proxy estimation has been accepted for this ARR because no monthly cash and bank balance data disaggregated by businesses is available for the past year.

2.2.7. Accumulated Depreciation:

HVPNL proposal

HVPNL has proposed that Rs. 1,161.72 million would be accumulated by way of depreciation up to 31 March, 2000. Accumulated depreciation as at April 1, 1998 has been considered to be Nil (subsequent to the netting of March 31, 1998 accumulated depreciation against Gross Fixed Assets and the shift of Net to Gross Fixed Assets described above).  The balances for March 31, 1999 and March 31, 2000 are derived based on the provision for depreciation taken in 1999 and 2000 respectively net of the deduction of the value of the retiring assets each year.

Staff position: No comments.

Commission view:

The Commission has accepted this method for the purpose of this ARR. However, since the opening balance of gross fixed asset includes cost of assets capitalised during the previous year and given that this is a projected amount based on anticipated investment and not the actual investment, the licensee should furnish the actual investment data and accordingly, the accumulated depreciation should be updated in the next ARR filing.

The Commission allows Rs. 1,056.65 million as the accumulated depreciation for this ARR. The amount is  lower than that suggested by HVPNL because the Commission has not taken accumulated depreciation arising out of shared generation utilities into consideration. Moreover,  the revised estimate of the employees cost  affects the capitalised amount of employees cost and hence the cost of gross fixed assets, which, in turn, has modified the depreciation charge to a certain extent.

2.2.8. Loans :

Paragraph XVII(1)(ii) of the Sixth Schedule deals with loans and requires that “the amount of any loans advanced by the Board”,  “the amount of any loans borrowed from organisations or institutions approved by the State Government” (Paragraph XVII(1)(ii-a)) and “the amount of any debentures issued by the licensee” (paragraph XVII(1)(ii-b)) should also be deducted from the Capital Base.

HVPNL proposal

HVPNL has proposed Rs. 10,952.73 million as the amount of loans to be deducted from the Capital Base. According to SNR 1.12, the above amount is arrived at by summing up unfunded pension liablity, long-term loans, Provident Fund (PF) liability, current maturity of debt and other loans (including working capital loans).

HVPNL informed that according to the First Transfer Scheme the State Government loan had been extinguished and the licensee did not anticipate any  State Government loans for the Current Year and the Ensuing Year. Further, HVPNL assumed that for the year ended March 31, 1998, all loans were approved by the State Government, since such loans are as reflected in the Transfer Scheme.  All new loans in the current year and the ensuing year, are expected to be against a charge created on the assets of the licensee and therefore, would qualify as 'debentures', as defined in the Sixth Schedule.  Since the closing balances of all the loans for the year ended March 31, 1998 are disclosed in this item, the closing balances of the total loans for the current year and the ensuing year, are also being disclosed in this item for the respective years.  Details of new loans obtained during the current year and the ensuing year are available in SNR 1.11.

Staff position:

HVPNL has included both Pension Fund liabilities and PF liabilities as loans. The Staff do not consider the Pension Fund liabilities as a loan and would not recommend its inclusion in the approved loans.  Accordingly, the amount of loan for the purpose of calculating the Capital Base would be Rs. 8,549.46 million.

HVPNL response:

HVPNL concurs with Staff's Position on pension liability.  In addition, HVPNL is now recommending an alternative treatment of the Provident Fund liability.  HVPNL supports the exclusion of Provident Fund liability from the loans portion of Capital Base deduction.  The Company believes that, even when interest on this liability is charged to the revenue requirement, it is still consistent with the intent of Sixth Schedule.  The concept of the deduction of loans from the Capital Base is to insure that compensation for the carrying cost of assets is not occurring in more than one stream of the revenue requirement.  Thus, the interest on loans used to fund assets, such as mortgage bonds and other debentures, is included in the revenue requirement and the outstanding balance is included as negative elements of the Capital Base that  reduce the net Capital Base.  In contrast, as HERC Staff has noted, Provident Fund liability by statute must receive interest at the rate of 12% per annum.  In effect, these funds are not used in funding assets that provide service to customers.

Because Provident Fund liability does not finance any assets, there are no assets which would receive two streams of income if Provident Fund liability were not included in the negative elements of the Capital Base.  If Provident Fund liability is included in the negative elements of the Capital Base, then a portion of the assets will receive neither a return nor interest.

Therefore, HVPNL requests that the Capital Base be increased by the amount of the Provident Fund liability through exclusion of the liability from the negative elements of the Capital Base.  Acceptance of this and the HERC Staff position will cause an increase in the Capital Base of 4,009.5 million Rupees over the level as filed by HVPNL in its FY 2000 ARR.

Commission view:

It is the view of the Commission that PF liability and Unfunded Pension Liability do not form part of the loans as defined in the Sixth Schedule. The Commission does not agree with HVPNL that charging interest on PF liability is in line with the content of the Sixth Schedule. The Commission holds that the licensee acts as a trustee of the PF money of the employees and it is out of the prudent investment of that money that 12% interest should be provided. It will not be fair to pass on the burden of PF money to the consumers through the revenue requirement. Accordingly, the loans allowed to be deducted from the Capital Base for FY 2000 for the purpose of this ARR is Rs. 7,960.67 million.

HVPNL did not propose any amount towards the following elements: Security deposits from the consumers, Tariffs and Dividend Control reserve, Development reserve, carry forward of any amount for distribution to the consumers. These elements are not included in the ARR.

On the basis of the above discussion, the Capital Base allowed by the Commission for FY 2000 is Rs. 4,515.12 million (see table 16 below).

Table 16  - Commission approval of Capital Base (Rs. Million)

2.3  Reasonable return:

Paragraph XVII(9) of the Sixth Schedule defines reasonable return as follows:

“In respect of any year of account, the sum of the following: -

(a) the amount found by applying the standard rate to the Capital Base at the end of the year;
(b) the income derived from investments other than those included in the Capital Base under the provisions of clause (d) of sub-paragraph (1);
(c) an amount equal to one-half of one per centum on any loans advanced by the Board;

(c-1) an amount equal to one-half of one per centum on the amounts borrowed from organisations or institutions approved by the State Government;
(c-2) an amount equal to one-half of one per centum on the amounts realised by the issue of debentures;

(d) an amount equal to one-half of one per centum on the accumulations in the Development Reserve created under paragraph VA of this Schedule.” 

Paragraph XVII(10) of the Sixth Schedule defines the “standard rate” in respect of any year of account as follows:

(a) in relation to that part of the Capital Base for that year of account which is equivalent to the Capital Base as on the 31^st day of March, 1955, seven per centum per annum;

(b)  in relation to the remaining Capital Base for that year, the Reserve Bank rate ruling at the beginning of that year plus – 

(i) two per centum for investments made up to the 15^th day of October 1991;

(ii) five percentum for investments made on and from the 16^th day of October 1991 till the 31^st day of March 1999 ; and

(iii)      differential between sixteen percentum and Reserve Bank rate ruling at the beginning of that year for investments made thereafter.

HVPNL proposal:

HVPNL has claimed a return of Rs. 506.8 million for FY 2000. This is composed of Rs. 464.05 million as return at the rate of 10% on the Capital Base and Rs. 42.75 million as the amount equal to 0.5% on loans. HVPNL stated that the rate of return adopted by HVPNL represents a voluntary cap on the level of revenue requirements that HVPNL elected to adopt as a means to minimise the impact of tariff increases. This has been done as a temporary measure, in order to maintain power tariffs at affordable levels.

Staff position:

The RBI rate at the beginning of FY 2000 is 8%. The admissible rate of return would be 13%. A 3% reduction in return would not materially change the revenue requirement of the licensee and therefore, the stated concern for keeping power tariffs at affordable levels does not appear to be sufficiently strong. The Staff believes that allowing for a return in the long term as per the provisions of the Schedule would result in an incentive for investment in the business of the licensee, which would lead to reduction of losses and system improvement. Such investments in the longer run would help bringing down the cost of supply. In this case, however, licensee has chosen to use a lower return in its ARR.  This is a choice that generally should be left to the judgment of the company.  Staff therefore believes that the 10 percent return on Capital Base requested by licensee should be accepted.

Commission view:

HVPNL has elected to adopt 10% rate of return as a means to minimise the impact of tariff increases. The Commission has no reason to disagree and therefore, the rate of return asked for by the licensee is allowed for this ARR. The amount allowed is Rs. 491.32 million. The break up is given in the table 17 below.

Table 17 – Reasonable return approved by the Commission (Rs. Million)

2.4 Non-Tariff Income

HVPNL proposal

HVPNL has estimated an income of Rs. 787.66 million from Transfer fees and other ancillary income for FY 2000. Out of this, transfer fee contributes Rs. 592.8 million. HVPNL has assumed that the same number of units as in FY 1998 would be sold during FY 2000 but the price would grow at about 12% per year over FY 1998 average price. Other income has been assumed to grow at the rate of 10% over FY 1998 values.

Staff position:

Account statements of HVPNL show that transfer fee has two elements: revenue from inter-state sales and revenue from supplies in bulk to consumer (common pool sales). As mentioned above under Direct Sales, the Staff would suggest that in the next year’s ARR the licensee should provide the details of inter-state sales (quantity to sold to each party and rate at which sold, calculation supporting the rate charged, etc.). Also, in that filing it should provide information if the licensee receives any transmission charges for allowing others to use its system.

It is not clear what supply in bulk to consumer (Common pool sales) means. If this means supplying power to a consumer, this transaction should not appear in the accounts of a T&BS licensee because a T&BS licensee can sell energy to a D&RS licensee or anyone who is exempted from a license. If this means inter-state sale, however, this can be included in the transmission and bulk supply business. HVPNL has assumed that the supply is for inter-state sales. In absence of any further information on common pool sales, for the purpose of this ARR, the Staff would accept the volume projected for sales in this category, subject to the condition that this aspect should be clarified at the earliest. The income from direct sales should be calculated considering the average rate of supply of power to Distribution licensees developed by Staff. 

As regards other income, HVPNL has assumed an increase of 10%  in income. No basis has been mentioned for this. The audited accounts statements of HSEB show that the other income for the year 1996-97 was about Rs. 960 million but grew to Rs. 1408 million during 1997-98. After taking delayed payment surcharge out of the two figures, the amount of remaining other income becomes Rs. 223 million for 1996-97 and Rs. 278 million for 1997-98. The growth then becomes 25%. The Staff would believe that an arbitrary increase of 10% may not be acceptable. However, given the low volume of other income involved, the Staff would retain an increase of 10% for the present filing subject to the condition that the next filing be made based on historical growth in other income.

HVPNL response:

HVPNL agrees to provide the information in the next filing of the ARR if it can be located in the records retained by the Company.  In addition, HVPNL will endeavour to seek agreement with other State Electricity Boards (SEBs) to determine whether the sales price can be increased.

Commission view:

The Commission is of the view that the “common pool sale” is not a sale by HVPNL. The Commission therefore has removed this item from Non-Tariff Income.  Instead, the Commission has treated the amount stated by HVPNL for this item as a reduction in the cost of power purchased from shared generating facilities. Revenue from inter-state sales has been calculated by multiplying the volume of those sales by the average rate charged for power supplied  to the distribution companies. The Commission accepts HVPNL’s proposal regarding ancillary and incidental income. Therefore, the non-tariff income approved by the Commission is Rs. 361.25 million.

2.5 Subsidy

HVPNL proposal:

HVPNL has considered Rs. 5,311.5 million in subsidy would flow to the transmission business.

Staff position:

The Staff believe that it would not be justifiable to include subsidies in the accounts of T&BS licensee for the following reasons:

-   under the provisions of the HER Act, subsidy can only be allowed to any class or classes of persons provided that the State Government shall compensate the amount. HVPNL transmission business is not engaged in supplying electricity to any particular group of consumers and therefore the subsidy cannot be given to the transmission business.

-    Inclusion of subsidy to the transmission business would imply a reduction in the revenue requirement. If subsequently tariffs are based on this revenue requirement, the benefit would pass on to all consumers and not to the target group of consumers. Such a subsidy would be against any sound economic principle.

The Staff would not support inclusion of subsidies in the transmission business and would place the entire amount in the distribution business.

HVPNL response:

For this year, it has been decided that the subsidy will flow through HVPNL until such time as the Distribution Companies can demonstrate a claim for the amount of subsidy to which it is entitled.  This will require proper interface metering.

Furthermore, HVPNL and the Distribution Companies contemplate an approach to billing that is consistent with the requirements of the Act.  For example, in one approach being considered, when issuing bills to the Distribution Companies, HVPNL will explicitly credit an amount of subsidy to each Distribution Company in proportion to the number of kilowatt–hours (kWh) consumed by subsidy target groups in the most recent month in which billing data are available for both Companies.  Then, on the bills of the customers in the target groups, the Distribution Companies will issue a credit in proportion to the kWh consumed by the customer in the target group.  Thus, HVPNL and the Distribution Companies can comply with the Act.

Commission view:

Commission considers that subsidy meant for a particular consumer group should be reflected in the accounts of the distribution business as allowing subsidy from the accounts of the transmission licensee will lead to dispersion of subsidy to non-targeted segments.

2.6 Aggregate Revenue requirement

HVPNL proposal:

HVPNL has estimated the aggregate revenue requirement as Rs. 24,884.06 million without subsidy and Rs. 19,572.56 million after taking into account of subsidy of Rs. 5,311.5 million.

Commission view:

The Commission approves Rs. 23,169.78 million as the aggregate revenue requirement of the HVPNL for its transmission and bulk supply business.

Table 18 – Commission approved revenue requirement for the transmission business (Rs. Million)

2.7 Revenue Gap

At present there is no bulk supply tariff approved by the Commission. The Commission had asked HVPNL to indicate the transmission component of the present composite tariff which includes the distribution component also. HVPNL has submitted to the Commission, vide memo No. CE/CS/Ch-9/T-1/loose dated 29.9.99, the computation statement of transmission and bulk supply tariff component which is included in its existing retail supply tariff. HVPNL has estimated the Bulk Supply tariff based on the ARR filing as well as on the basis of latest financial projections for the financial year 1999-2000. The reply furnished by HVPNL is irrelevant for the purpose of the Commission.

Pending a Transmission and Bulk Supply tariff application by the licensee, the Commission has no other option but to consider that the licensee’s revenue for the Transmission & Bulk Supply business would be equal to the Revenue Requirements as approved by the Commission. Accordingly, there is no revenue gap for this business.

3.0 Conclusion

The Commission hereby determines the Revenue Requirement of HVPNL for Transmission and Bulk Supply business as Rs. 23,169.78 million for the financial year 2000.

Dated: 26/11/1999 at Panchkula

Sd/-
(V.S. AILAWADI) CHAIRMAN

Sd/-
(R. CHANDRA)
MEMBER

Sd/-
(K.S. CHAUBE)
MEMBER

Appendix 1

List of waivers granted by the Commission for this ARR filing

Requests For Waivers And Commission Response Transmission & Bulk Supply

1.  SNR 1.8 – HVPNL requests that the Commission kindly waive the requirement to provide audited financial information for the individual businesses for FY 1998. HVPNL states that it will be able to provide such information in filings for the year 2000-2001 onwards, since financial year 1999-2000 is likely to be the first full year for which the licensee would exist as a separate legal entity.

Commission Response: Waiver granted.

2.  SNR 1.8 - The Guidelines require that for the current financial year, estimates should be based on actual figures for the first six months of the current financial year and estimated figures for the second six months of the current year. The estimated figures for the second half of the year of the current financial year should be based on actual audited figures of the second half of the previous financial year. HVPNL requests a waiver from this requirement because it does not have the necessary audited figures for the individual businesses and because its financial model cannot combine actual and estimated figures.

Commission Response: Waiver granted. HVPNL should indicate when it expects to make the necessary modification to its financial model.

3.  SNR 1.8 - HVPNL is currently unable to provide information on the level of the Capital Base at different periods in time and requests a waiver from this requirement (Form 1.1).

Commission Response: Waiver granted.

4.  SNR 2.1 – HVPNL requests a waiver from the requirement to calculate expected revenues for the ensuing financial year by applying current tariffs to projected quantities supplied, on the grounds that there is no approved bulk supply tariff. 

Commission Response: Waiver granted. Commission expects HVPNL to file bulk supply and transmission tariff within 3 months.

5.  SNR 3.1 - HVPNL seeks a waiver from the requirement to compute the difference between the aggregate revenue requirement and the expected revenues for the ensuing financial year because there is no approved bulk supply tariff.

Commission Response: Waiver granted. Commission expects HVPNL to file bulk supply and transmission tariff within 3 months.

6. Form 3.2 – HVPNL requests a waiver from the requirement to file information on input into each DISCOM at the grid substations because of insufficient metering.

Commission Response: Waiver granted. HVPNL should ensure that the interface metering is installed and commissioned before the licenses are granted to Distribution companies.

7.  Form 3.3 – HVPNL requests a waiver from the requirement to provide transmission losses (as opposed to transmission plus subtransmission losses) because the necessary metering is not in place.

Commission Response: Same response as in the case of Form 3.2.

8.  Statement of distribution losses (Guidelines – Section 6) - HVPNL requests a waiver from the requirement to provide a statement of distribution losses because this information does not apply to the Transmission and Bulk Supply Licensee. 

Commission Response: Waiver not required as it is not applicable.

9.  Plans for Undertaking Load Research – HVPNL states that the requirement to provide plans for undertaking load research does not apply to the Transmission and Bulk Supply Licensee and requests a waiver from doing so. 

Commission Response: Waiver granted.

10.  Plans for Improving the System Power Factor – HVPNL states that at this time the requirement to provide plans for improving the system power factor does not apply to the Transmission and Bulk Supply Licensee and requests a waiver from this requirement.

Commission Response: Waiver granted.

11.  Plans for Determining the Relationship between kWh Consumed and Connected Loads – HVPNL states that at this time the requirement to provide plans for determining the relationship between kWh consumed and connected loads does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver from this requirement. 

Commission Response: No waiver is required as it is not applicable .

12.  Program for Converting Unmetered Connections to Metered Supply – HVPNL states that at this time the requirement to provide plans for converting unmetered connections to metered supply does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver.

Commission Response: No waiver is required as it is not applicable.

13.  Method of Assessing Consumption when Meters are not Installed/ Defective – HVPNL states that at this time the requirement to provide details of the method of assessing consumption when meters are not installed or are defective does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver. 

Commission Response: No waiver is required as it is not applicable .

14. The Number and Duration of Supply Interruptions on the Networks – HVPNL states that it does not have available the information for substations, but provides instead data for two circles and requests a waiver.

Commission Response: Waiver granted. HVPNL should indicate what steps are being taken to meet this requirement  by December 31, 1999.

15.  Periods when Voltage and/or Frequency was beyond the Prescribed Limits – HVPNL requests a waiver because the information requested is not readily available, and states that HVPNL has no plans to improve frequency, since this is outside their control.

Commission Response: Waiver granted. HVPNL should take steps to meet this requirement by December 31, 1999.

16.  Connection Applications Pending – HVPNL states that the requirement to provide data on connection applications pending does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver.

Commission Response: No waiver is required as it is not applicable .

17.  Accidents – HVPNL requests a waiver on the requirement to provide data by business unit. Aggregate data have been supplied.

Commission Response: Waiver granted.

18.  Unauthorised Connections - HVPNL states that at this time the requirement to provide data on unauthorised connections does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver.

Commission Response: No waiver is required as it is not applicable .

19.  Revenue in Arrears - HVPNL states that the requirement to provide data on revenue in arrears does not apply to the Transmission and Bulk Supply Licensee, and therefore requests a waiver. 

Commission Response: Waiver granted.