I. Preamble

II. Issues under Review

1. Power Purchase Cost

2. Treatment of Employees’ Cost

3. Treatment of Administrative & General Expenses

4. Treatment of Interest on Loans

5. Treatment of Other Finance Charges

6. Revenue Gap

7. Directives of the Commission

HARYANA ELECTRICITY REGULATORY COMMISSION
 SCO - 180, SECTOR – 5, PANCHKULA  - 134109, HARYANA

Case No. HERC / RA – 3 of 2003

Date of Hearing : 11-12-2003

Date of Order :  29-01-2004

In the matter of Review Petition seeking review and/or modification and/or clarification of the Order dated 20^th August 2003 passed by the Haryana Electricity Regulatory Commission in Case No. HERC / PRO – 7 of 2002 in respect to the Annual Revenue Requirement of Haryana Vidyut Prasaran Nigam Limited for Distribution & Retail Supply business for the financial year 2003-04.  

 ORDER

This order relates to the review petition filed by Haryana Vidyut Prasaran Nigam Limited, having its registered office at Shakti Bhawan, Sector – 6, Panchkula seeking review of the Order dated 20^th August 2003 passed by the Haryana Electricity Regulatory Commission in Case No. HERC / PRO – 7 of 2002 in respect of Annual Revenue Requirement filed by HVPNL for its Distribution and Retail Supply business for the financial year 2003-04.

 I. Preamble

(1)   The Haryana Electricity Regulatory Commission (herein referred to as the Commission) passed its Order on August 20, 2003 in respect of Case No. HERC / PRO – 7 of 2002 regarding the Annual Revenue Requirement (ARR) for FY 2003-04 filing by Haryana Vidyut Prasaran Nigam Limited (HVPNL, the Licensee) for its Distribution and Retail Supply (D&RS) business. HVPNL filed a review petition on 3.10.2003 seeking review, reconsideration and reversal of certain findings and observations of the said order. The filing was made under Section 10 (1) (h) of the Haryana Electricity Reform Act, 1997 read with Regulations 109, 114 to 120 of the Haryana Electricity Regulatory Commission (Conduct of Business) Regulations, 1999. The whole time Directors and Chairman of HVPNL approved the review petition and authorized Shri A.K. Nandwani, Superintending Engineer / RAU & Tariff of the Company to sign, execute, certify, file and pursue the review petition.           

(2)    The Regulation 109 of the Haryana Electricity Regulatory Commission (Conduct of Business) Regulations requires that the Commission may on its own motion or on the application of any party or person concerned review any order or decision within 30 days after making any decision, direction or order (other than an award by the Commission in any arbitration).  Accordingly, the Registrar of the Commission put up the Review Petition filed by HVPNL to the Commission that the review petition was barred by time and, hence, the Commission may first decide the ‘delay condonation’ part of the petition. The Commission condoned the delay and the petition was accepted. However, the Commission would like to emphasise that in future all filings and applications should be filed by the Licensee with in the prescribed time period. The Commission may not condone delay and summarily reject such petitions.  

(3)    The public notices were issued in Hindi in the “Dainik Jagaran” and in English in “The Hindustan Times” and “The Times of India” for holding a hearing on the review petition on 11-12-2003 at 11.00 A.M. in the Red Bishop Tourist Complex, Sector – 1, Panchkula. The interested persons / organizations were invited to file their comments / objections on the review petition under consideration by 28^th November 2003.

(4)    In paragraphs 7,8,9,10,11,12 and 13 of the review petition, the petitioner has sought review / modification of some of the issues referred to in HERC / PRO – 7 of 2002 approving the Annual Revenue Requirement for FY 2003-04 for its Distribution and Retail Supply business. The Commission would like to deal with the issues raised in the review petition on merits.

(5)    The Review Petition and the submissions made during the hearing and clarifications and evidences submitted by HVPNL are dealt with here under.

II. Issues under Review

The following issues were raised by HVPNL in its review petition of the impugned order relating to ARR of Distribution & Retail Supply Business :  

1. Power Purchase Cost

2. Treatment of Employees’ Cost

3. Treatment of Administrative & General Expenses

4. Treatment of Interest on Loans

5. Treatment of Other Finance Charges

6. Revenue Gap

7. Directives of the Commission

Each issue is discussed in detail hereunder.

1.   Power Purchase Cost

As the Distribution & Retail Supply Licensee purchases all its power from the Transmission & Bulk Supply Licensee, the power purchase cost of Distribution & Retail Supply Licensee has been considered equal to the total ARR amount of the Transmission & Bulk Supply Licensee. The Licensee has sought review of the power purchase cost of Distribution & Retail Supply Licensee.

Petitioner’s View Point

HVPNL has filed a separate review petition against the order of the Commission on the ARR for Transmission & Bulk supply business for FY 2003-04. Accordingly the Licensee has asked for higher expenditure on account of power purchase cost based on the Transmission & Bulk Supply Review Petition filed by HVPNL. 

Commission’s Observations and Decision

HVPNL has not quantified the required change in power purchase cost in its review petition. The Commission has considered in detail the review petition filed by the Transmission & Bulk Supply Licensee for which order has already been pronounced on 13.1.2004. The Commission has approved no change in the amount of ARR for the Transmission & Bulk Supply Business of HVPNL for financial year 2003-04 and thus it follows that there will not be any change in power purchase cost for Distribution & Retail Supply Business.  Therefore, the Commission finds no grounds for reviewing its order on this issue. The power purchase cost for Distribution & Retail Supply business would remain unchanged i.e. Rs. 35,783.58 million for financial year 2003-04 as mentioned in the Commission’s order dated 20.8.2003.

However, if the Transmission & Bulk Supply Licensee claims any FSA due to change in their power purchase cost for FY 2003-04, the Distribution & Retail Supply Licensee may also file a separate FSA application with the Commission for its consideration and approval.

2.   Treatment of Employees’ Cost

The amount of employees’ cost approved by the Commission in its ARR order dated 20^th August 2003 was as following:

 Employees’ cost approved for FY 2003-04  (Rs. in million)

The Licensee has sought review of employees’ cost for Distribution and Retail Supply Business in respect of terminal benefits and rate of dearness allowance (DA). 

Petitioner’s View Point

The Licensee has mentioned in the Review Petition that the Commission has allowed terminal benefits to the Licensee on actual cash basis amounting to Rs. 327.30 million against an amount of Rs. 615.90 million proposed by the Licensee on actuarial valuation basis. 

The Licensee submitted that the pension and PF trusts formed by it were separate legal entities and the terminal benefit liabilities in respect of its employees have to be discharged.  For the purpose the Licensee has to statutorily transfer the funds to the trust so that the trust can invest the same and discharge its liability out of the proceeds.  In case the funding of the trust is not allowed from the revenues of the Licensee, the Licensee will not be able to fund the trust.  It is obligatory on the part of Licensee to fund the pension and PF trusts to the extent of their liability in respect of terminal benefits of its employees.  As per the accounting standards also, the Licensee has to provide for the terminal benefits on accrual basis in their accounts. 

Further, in the case of the DHBVNL a sum of Rs. 310 million has been projected in the ARR on account of terminal benefits.  As per the actuarial valuation for FY 2001-2002 this amount works out to Rs. 395 million and as such the valuation for FY 2003-04 may be about Rs. 410 million instead of Rs. 310 million projected in the ARR by the DHBVNL.  The Licensee has requested in its review petition to allow the terminal benefits to the extent of Rs. 910 million (Rs. 500 million for UHBVNL and Rs. 410 million for DHBVNL) as expenditure in the ARR for FY 2003-04.

The Licensee in its review petition has also sought DA at 59% instead of 55% for FY 2003-04, as the Central Government has already released one instalment of 4% with effect from 1.7.2003 and the State Government is expected to follow the same.  Another instalment of DA shall be due from January 2004.  The Licensee has asked in its review petition an additional amount of Rs. 74.86 million towards DA in the ARR for FY 2003-04.

Commission’s Observations & Decision

The employees’ cost is an important component of the ARR, which includes the cost incurred on working employees as well as retirees.  The Licensee has sought review of the amount of terminal benefits allowed in the ARR towards the retiring and the retired employees for the financial year 2003-04. The Licensee in its review petition has requested for terminal benefit expenses to be allowed on actuarial valuation basis as against actual pay out basis allowed by the Commission in the ARR order dated 20^th August 2003.

The issue relating to terminal benefits need to be considered jointly for Transmission & Bulk supply and Distribution & Retail supply Licensees. This is based on the method laid down by the Commission in its earlier order dated 29^th May 2000 i.e. “(a) One time payment for retiring employees will be made by the respective Licensee separately, (b) Recurring payments will be made by HVPNL for all retired and retiring employees. The manner of sharing the payments between HVPNL and its Distribution companies is a matter that has to be decided between them.” It has also been clearly mentioned in the said order that any under / over recovery can be adjusted in the next ARR.

Total liability of terminal benefits on accrual basis was projected as Rs. 1740.02 million in the ARR filing for FY 2003-04 for T&BS as well as D&RS Licensee. A part of this was projected as interest cost on the bonds issued by the Licensee to the trusts. HVPNL also projected the liability on actual cash pay out basis for T&BS and D&RS business (HVPNL and its subsidiary companies – UHBVNL and DHBVNL) at Rs.1100.83 million for FY 2003-04. The difference between accrual and actual cost of terminal benefits for FY 2003-04 amounting to Rs. 639.19 million related to creation of provision for the future liability. After considering the variations in different filings, the commission approved Rs.753.19 million towards cost of terminal benefits for Transmission and Bulk Supply business and Rs.327.30 million for Distribution and Retail Supply business adding to a total of Rs.1080.49 million for terminal benefits of employees for T&BS and D&RS Licensee. The D&RS Licensee in its review petition has projected the terminal benefits equal to Rs. 910 million (Rs. 500 million for UHBVNL and Rs. 410 million for DHBVNL) for FY 2003-04 on accrual basis based on valuation of actuary for FY 2001-02.

It is reiterated that the Commission is committed to adequately provide for retirement benefits to the employees of the Licensee through ARR. The Commission, in all its ARR orders for previous years as well as the order under review, has allowed the entire amount of actual pay out cost of terminal benefits so that the Licensee do not find any difficulty in paying its dues to the retiring and retired employees in time. Thus any question of not being able to make payments because of non-provision of such amount on actuarial valuation basis in the ARR should not arise.

The Commission has at no point denied that the terminal benefits would not be allowed on accrual basis. However, keeping in view the interest of electricity consumers at large and the deficit position of the Licensee, the Commission has deferred the issue of allowing higher employees’ cost by way of difference in actuarial valuation amount and the amount as per actual payout of terminal benefits. The Commission has clearly mentioned in its ARR order dated 20^th August 2003 that as and when the Licensee is able to generate a cash surplus from its operations, a part of such surplus may be appropriated for creation of corpus for discharge of future liability of terminal benefits. The decision of the Commission was based on the following facts and reasoning.

The Licensee is presently in a cash deficit position and hence is without any internal accrual. Thus, the additional amount required would have to be either collected through tariff or by additional borrowings, for which additional interest cost will have to be incurred. It can be observed from the financial records of the Licensee that they are borrowing at an interest rate higher than the rate of return earned on investment by the trusts. In other words, the trusts managed by the Licensee are not able to generate adequate return from the investments of funds to service the additional financial liability arising due to additional borrowings. As per the records of the Licensee, the average rate of borrowings and the annualised return on investments are as under: -

If the terminal benefits are allowed to the Licensee on actuarial valuation basis, they will have to resort to additional borrowing and the difference in interest expenses mentioned above would have to be included in the ARR. The Pension and PF trusts formed by the Licensee are separate legal entities and have to discharge the terminal benefits liability in respect of employees of the Licensee. This does not mean that the electricity consumers of the state can be burdened with the additional interest cost that would arise due to higher borrowing requirement by allowing terminal benefits on actuarial valuation basis.

It is also relevant to mention here that the amount of terminal benefits on accrual basis, as per actuarial valuation for FY 2003-04 is still not certain. As per the review petition, the terminal benefits amount as per actuarial valuation for DHBVNL has been calculated now as Rs.395 millions for FY 2001-02 and based on this calculation the licensee has estimated DHBVNL liability for FY 2003-04 as Rs.410 million as against Rs.310 million projected in the ARR filing. It means actuarial valuation amount for FY 2003-04 is still uncertain. Besides this, no calculation or supporting valuation certificate has been submitted in the case of UHBVNL, whose liability based on actuarial valuation has been estimated as Rs.500 million in the review petition. In other words, terminal benefits amounting to Rs.910 million mentioned in the review petition for FY 2003-04 based on actuarial valuation is without any basis or supporting document.

In the ARR filing, the Licensee has supported its claim with a letter from the PF Commissioner stating that the Licensee is exempt under Section 16(I) (b) of the EPF & MP Act, 1952 by virtue of it being a Government Owned Company and because it is following the rules of HSEB for providing terminal benefits to its employees. The PF authorities, however, have not prescribed any specific methodology for discharge of liabilities by the Licensee. It is relevant to mention here that the HSEB was also discharging its pension liabilities by way of actual payment basis only and, thus, was not making any provision on accrual basis. During the hearing on ARR for FY 2003-04, the Commission specifically asked the Licensee to describe any difficulty arising due to allowing terminal benefits on cash payout basis instead of accrual basis. To this specific query, the Licensee was unable to provide any convincing reply.

Keeping in view the interest of all stakeholders, the Commission does not think justifiable to change the basis for allowing the amount of terminal benefits for FY 2003-04 at this stage. Had the Licensee been in operational surplus, it would have been viable to create a corpus to discharge the future liability accruing for the current period because this payment is not required to be made during next year or even in near future. Therefore, in the present conditions, the Commission thinks it reasonable to provide terminal benefits on actual pay out basis instead of accrual basis. Thus, the Commission finds no ground for accepting the submission of the Licensee. Hence, terminal benefits will remain same as allowed in the ARR order dated 20^th August 2003.

The licensee has sought review on the ground of change in DA rate. The Commission has already directed in its ARR order dated 29^th May 2000 (the excerpts of which were also included in the ARR order dated 20^th August 2003), that on account of estimation of DA there could be some marginal over-recovery / under-recovery. The under- recovery / over-recovery can be taken care of by providing for these in the subsequent year with interest at 10% per year or so. As there may be further change in the DA rate w.e.f. January 2004, the full amount of under / over recovery of employees’ cost for FY 2003-04 cannot be calculated now. Therefore, the Commission directs that the licensee may provide the calculation of under / over recovery arising due to change of DA rate, which will be allowed in the ARR of FY 2004-05.    

3.   Treatment of Administrative & General Expenses

The Commission approved the following Administrative and General expenses for the D&RS Licensee.

A&G Expenses approved for FY 2003-04 (Rs. in million)

For the purpose of ARR, the Commission accepted the projection of A&G expenses made by the Licensee with the exception of miscellaneous debits, which include regulatory assets written off. 

Petitioner’s View Point

The Licensee has sought the review of the order to include the amount of regulatory assets written off in the expenses for the purpose of calculating the ARR. The Commission in its order dated December 22, 2000 on the ARR of Distribution and Retail Supply Business had mentioned that the regulatory asset should be amortised by way of adjustments against the efficiency gains to be achieved by the Licensee in future or by inclusion in the subsequent ARRs of the Licensee. Since the Licensee was not generating any surplus through the operations, it formulated an accounting policy to amortise 1/5^th of the regulatory assets in its books of accounts every year beginning FY 2001-02. As such the Licensee in FY 2001-02 wrote off the 1/5th of the regulatory assets. The statutory auditors as well as the C&AG of India audited the same. A copy of the audited accounts was also submitted to the Commission and the Commission also never objected to the said write off.

The Licensee has submitted that the Commission has arrived at a surplus for FY 2003-04 by decreasing the expenditure of the Licensee. The Licensee has requested for a higher allowance in expenditure under the head of employees’ cost and interest on loans. Further, HVPNL is also filing a review petition against the order of the Commission on the ARR for Transmission and Bulk supply business and Transmission tariff for FY 2003-04 wherein the Licensee is also requesting for review of the bulk supply tariff. Any increase in the bulk supply tariff shall lead to an increase in the power purchase cost of the Licensee for its distribution and retail supply business. Thus the distribution and retail supply business will not be left with any surplus. The approach of the Commission in respect of amortisation of regulatory assets is to adjust the same against the surplus, if any, whereas the Licensee has formulated an accounting policy to write off the 1/5^th of regulatory assets every year irrespective of any surplus in line with the directions given by the Commission in its earlier order as already mentioned above. In view of the position explained above, the Licensee should be allowed to include the write off amount of regulatory assets amounting to Rs.531 million in the expenditure for the purpose of calculating the ARR.

Commission’s Observation and Decision

The regulatory assets were created as per the Commission’s order on ARR for the Distribution & Retail supply business for FY 2000-01 and FY 2001-02. The rationale for allowing regulatory assets is to mitigate the effect of rate shock in the initial years of reforms by pushing a portion of the tariff increase into the future. The Commission permitted the Licensee to carry forward the revenue gap as regulatory assets and to allow the amount of revenue gap to be funded by way of borrowings from approved sources. The Commission allowed interest on such borrowings to the Licensee. It was clearly mentioned in the ARR order dated 22^nd December 2000 that when the Licensee returns to efficiency and profitability, the borrowings resorted to for funding the permitted revenue gap can be recovered over a period of time through special amortisation expenses included in the ARR to set tariffs in future years or through efficiency gains as decided by the Commission. In the Commission order dated 11^th August 2001 it was also mentioned that the regulatory assets shall be liquidated either by amortisation and inclusion in the Annual Revenue Requirement or adjusted by way of efficiency gains once the Licensee attains efficiency and profitability level. The Licensee should not view amortisation of regulatory assets in isolation without attaining efficiency level. If the regulatory assets are amortised and included in ARR as long as the Licensee is in a deficit position, it will simply increase the revenue gap or in turn may require creation of more regulatory assets. 

In the ARR for FY 2003-04, the Commission allowed A&G expenses as proposed by the Licensee, except miscellaneous debits, which includes regulatory assets written off. The Commission is of the opinion that actual amount is not payable against the regulatory assets written off and it is an accounting adjustment entry in the books of accounts of the Licensee. In the ARR, all prudent expenditures have been allowed for which the Licensee needs to make actual payments.

The Licensee in FY 2001-02 started amortisation of regulatory assets in its books of accounts by one-fifth as per its accounting policy. However, as the Licensee is not earning any surplus as per its audited Profit & Loss Accounts, amortisation of regulatory assets had resulted in an increase in expenditure and in turn increases in financial losses. Therefore, the Commission considers it justifiable to adjust the regulatory assets only when the Licensee reports an operational surplus. The Commission is allowing borrowings equivalent to regulatory assets allowed by it and also allowing interest thereon in the approved ARR. Thus there is no adverse effect on the financial position of the Licensee by not including the amount of written off regulatory assets in the A&G expenditure for the purpose of calculating ARR.

Had the Commission allowed inclusion of the amount of written off regulatory assets (Rs.531 million) in the expenses for the purpose of calculating the ARR of the Licensee for D&RS Business, it would have resulted in increasing the ARR amount which in turn would have led to reduction in revenue surplus calculated in the approved ARR and equivalent reduction in the ‘carry forward’ amount of regulatory assets. In other words, the closing balance of regulatory assets as on 31^st March 2004 would not change from the amount allowed in the ARR order dated 20^th August 2003. Therefore, the Licensee is not incurring any financial loss by not being allowed amortisation of regulatory assets.

In the light of the above, the Commission finds no ground to include the amount of written off of Regulatory Assets in the expenditure for the purpose of calculating ARR. The amount of regulatory assets would remain unchanged as Rs.490.87 million as on 31^st March 2004 and the Licensee will be allowed to borrow against this amount, as mentioned in the approved ARR. 

 4.    Treatment of Interest on Loans

The Commission has allowed interest on loans in its ARR order dated 20^th August 2003 as following:

 Interest Expenses approved for FY 2003-04 (Rs. in million)

* The total interest as per ARR Financial Form 1.3 is Rs. 985 Millions. However, this does not match the details of interest cost provided by the licensee. The Licensee has shown Rs. 947.40 million as interest on working capital for FY 2003-04 in the Supplementary information.

 Petitioner’s View Point

The petitioner has requested for higher amount of interest on loans. It is mentioned in the review petition that in the ARR order for the Distribution and Retail supply business for FY 2002-03 the Commission allowed working capital borrowing equivalent to average monthly balance of stores for the year plus the average monthly cash and bank balance during the year. The Licensee considers the calculation of the Commission un-reasonable and hence the Licensee filed a review petition against the order of the commission in which the position of the Licensee in respect of borrowings for working capital was explained in detail. The Licensee had contended that the Commission had taken a very narrow and unrealistic view regarding the permissible working capital borrowing. The Licensee had also submitted normative computation of its working capital borrowings for FY 2002-03, which depicted that the borrowings projected by the Licensee in its ARR was almost as per the norms and should have been allowed to the Licensee.

In the ARR filing for FY 2003-04, the Licensee claimed the working capital borrowings, which were justifiable as per the projected balance sheet of the Licensee for the year. However, in the ARR order for FY 2003-04 also, the Commission reduced the allowable working capital borrowings of the Licensee substantially. This year the Commission has taken a different view on the computation of the permissible working capital borrowings by allowing them at a level equivalent to one month’s ARR plus the regulatory Asset allowed to the Licensee till date. In this computation, the Licensee’s projected balance sheet has not been taken into consideration while computing the borrowings. Since the Licensee does not consider the borrowings allowed by the Commission as justified, the normative working capital computation for projected FY 2003-04 have been submitted which shows that the level of borrowings proposed by the Licensee in its ARR and in supplementary information are not even sufficient in the present financial condition of the Licensee. The Licensee has an additional borrowing requirement of Rs.1464 million as per the normative working over and above the level asked for in the ARR filing. The borrowings as per the normative working may be allowed to the Licensee. The interest cost on the total borrowings for FY 2003-2004 works out to Rs.1545 million against Rs.1130 million allowed by the Commission. In view of the position explained above, the Licensee has requested that interest expenses of Rs.1545 million may kindly be allowed to the Licensee in the ARR for the year FY 2003-2004.

Commission Observations and decision

The Commission observes that the working capital borrowings of the Licensee have increased manifold during the last few years. The details are as under : 

Borrowing for D&RS Business (Rs. in million)

* Loan amounts are excluding interest accrued & due but not paid.

** The figures for DHBVNL are audited for FY 2002-03.

*** The projected figures of Licensee are based on ARR filing for FY 2004-05.

During the corresponding period the increase in revenue from sales of power is also as follows:

Sale of Power for D&RS Business (Rs. in million)

* The figures for DHBVNL are audited for FY 2002-03.

** The projected figures of Licensee are based on ARR filing for FY 2004-05.

From the above it is clear that the Licensee has borrowed excessively for working capital purpose and the increase in such borrowings bears no correlation with increase in its operations. The borrowings of the Licensee are ever increasing because of its poor financial management, lack of cost controls and operational inefficiencies especially low collection efficiency resulting in mounting receivables and very high levels of distribution losses. The Commission is of the view that the Licensee has not been able to manage its financial affairs in an efficient and professional manner.

In the review petition the Licensee has not mentioned the actual / contracted working capital borrowings for FY 2003-04. Instead of that, an additional borrowing requirement of Rs. 1464 million has been asked over and above the level mentioned in ARR filing as shortfall in funds after considering normative working capital requirement. The normative working capital borrowing mentioned by the Licensee in its review petition is without any justifiable basis and is not commensurate with the working capital requirements of the business level of the Licensee. The Commission feels that all the loans should be for specific purpose, properly contracted and tied up with the banks or financial institutions, the details of which should be provided to the Commission for claiming any interest expenses.

The Licensee has mentioned that the interest cost on total borrowings for FY 2003-04 works out to Rs.1545 million against Rs.1130 million allowed by the Commission. However, any calculation of interest cost of Rs.1545 million has not been provided in the review petition. The Licensee requested for interest expenses of Rs. 1297.09 million in its ARR filings for FY 2003-04. Therefore, an additional interest cost of Rs. 247.91 million has been projected against additional borrowings of Rs. 1464 million as per the review petition, which seems exceptionally high and cannot be justified by the Licensee.

There is a need to differentiate between the loans taken for capital expenditure and working capital purpose. Before considering the working capital loans, there is a need to justify the present level of working capital. Cash and bank balances, stores and spares and receivables are the main elements of working capital. The Licensee is maintaining a high level of cash and bank balances contrary to its business requirement and the balance of stores and spares is also at a high level. The position on the above two counts for last few years is as under: 

(Rs. in million)

Normative working capital asked for by the Licensee in the review petition caters to the receivables for sale of electricity equal to 3 months’ gross sale of power and other income and one month of subsidy, which by all means is on a very high side and can not be considered reasonable. Even the receivable amount of the Licensee as shown in their books of accounts is not accurate. The amount of receivable includes delayed payment surcharge and the accounting system regarding waiver of delayed payment surcharge is different in two distribution companies namely UHBVNL and DHBVNL. There is a need to have an accurate and detailed record of receivable and surcharge separately as mentioned in the Commission Order dated 20^th August 2003. The Commission also directed the Licensee to undertake detailed receivable audit, computerization of all receivable accounts, modification in accounting system of delayed payment surcharge and its policy about waiver. The Licensee has, however, failed to submit any such scheme in respect of these issues within the two months as directed by the Commission in its order on ARR dated 20^th August 2003.

From the above it is clear that the normative calculation of working capital as submitted in the review filing is not correct and cannot be considered justifiable for allowing interest on working capital loans. The Commission has allowed working capital borrowings limited to one month’s ARR, amounting to Rs. 2600 million in uniformity with ARR Order for Transmission & Bulk Supply business. The approved levels of working capital borrowings are more in tune with the requirement for day-to-day operations of the licensee. In addition to this, the Commission has also provided interest on borrowings to fund the regulatory asset amounting to Rs. 2649.10 million. The total of these two amounts work out to Rs. 5249.10 million, which is the allowed borrowing for FY 2003-04.The Commission has provided interest on borrowings of Rs. 5249.10 million for FY 2003-04. The interest cost on these borrowings at the Licensee’s projected average rate of interest has been calculated as Rs.580.11 million.

The Commission is of the view that the electricity consumers cannot be burdened with interest cost of excessive borrowings made by the Licensee and has attempted to project a reasonable interest cost, which could be justifiably passed on to the consumers. The Commission would like to emphasize that there is a need for better financial management of the affairs by the Licensee. The existing loans with high rate of interest should be re-negotiated and converted into loans with low interest rates. The Licensee is carrying high cash and bank balance (particularly DHBVNL) and also resorting to higher amount of working capital borrowings, both of which calls for rationalisation. For funds transfer, the company should adopt better and improved banking techniques. The inventory of stores and spares should be reduced to a reasonable level. Inspite of repeated directions by the Commission to finalise the optimum level of inventory for various items of stores to carry out repair and maintenance activities, the Licensee has not made much progress. The receivables should be reduced after attaining higher collection efficiency levels.  By adopting all these measures, the working capital requirement of the Licensee can be substantially reduced. Therefore, the Commission finds no ground to allow the interest on excessive borrowings on the plea of normative working capital submitted by the Licensee in its review petition.

(5)    Treatment of Other Finance Charges

The Licensee projected Rs. 34 million as finance charges in its review petition. The Commission did not allow that amount in the absence of proper details.  

Petitioner’s View Point

The Government of Haryana has started charging guarantee fee from the Companies / Nigam, which give Government guarantee to various banks and financial institutions against the loans taken by them. This guarantee fee is charged at the rate of 2% of the loan amount.

The Govt. of Haryana has charged a sum of Rs.100.34 million as guarantee fee from the UHBVNL and DHBVNL up to 31^st March 2003. The amount has been adjusted out of the RE subsidy payable by the Government to Licensee and the same has been conveyed vide order-dated 15.07.2003. The Licensee also mentioned that the matter could not be taken up in the public hearing as it was held on 9^th July 2003 and the order was passed later on. Therefore, the Commission may review the matter and the guarantee fees already paid by the utility amounting to Rs.100.34 million may be allowed in the ARR for FY 2003-04.

Commission’s Observation and Decision

The Commission did not allow finance charges of Rs.34 million as proposed in the ARR filing by the Licensee for the reason that the Licensee did not provide any detail or basis. It was clearly mentioned in the ARR order dated 20^th August 2003 that in case the Licensee is able to provide details of the expenses, the same may be allowed in the future ARR.

As per the review petition, the Government of Haryana has charged a sum of Rs.100.34 million as guarantee fees from UHBVNL and DHBVNL up to 31^st March 2003. The amount has been adjusted out of the RE subsidy payable by the Government to the Licensee and the same has been conveyed vide order-dated 15.7.2003. Even after receipt of the letter and before issue of the order, the Licensee did not inform the Commission on this issue. 

However, as the Commission has already mentioned in the order that actual finance charges can be claimed in the future ARR. The finance charges paid by the Licensee will be allowed accordingly.

(6)    Revenue Gap

Petitioner’s View Point

The Commission has worked out a surplus of Rs.845.51 million in its order. However, after consideration of the various points contained in the review petition, the Licensee may be left with a deficit. The resultant deficit may kindly be converted in to Regulatory Asset.  

Commission’s Observation and Decision

As there is no change in the ARR amount allowed by the Commission based on the reason given by the Commission on different issues raised by the Licensee in their review petition, there will not be any resultant deficit, which needs to be addressed. The regulatory assets will be considered at the same level i.e. Rs. 490.87 million as on 31.3.2004, as allowed in the Commission order dated 20^th August 2003.

(7)    Directives of the Commission

Petitioner’s View Point

The petitioner has sought review and reconsideration of the directives given by the Commission in view of the following grounds:

Towards implementation of the objective of 100% metering the Utility had purchased 1,00,000, 3 phase electro mechanical meters during the year 2000-01 to be installed on un-metered agricultural pump-set consumers governed by flat rate agricultural tariff. The firm supplying the meters was also required to install the meters at the consumers’ tube wells. However, the implementation of the programme met with severe resistance by the farmers who had to be desensitized to allow installation of meters and only about 71,000 meters could be installed in a period of about 1½ year.

The compliance of directive would mean that the Utilities would be required to purchase another 2.75 lakh, 3 phase meters at a cost of around Rs.30.00 crores. The cost of meters with MDI would be 2 to 3 times the cost of ordinary meters. Moreover as per section 55 of Electricity Act 2003 the 100% metering is imperative only after the expiry of two years from the appointed date and there is a further provision in the Act, that the State Commission, by notification, extend the said period of two years for a class or classes of persons or for such area as may be specified in that notification. The Commission has directed that these meters should be installed by December 2003.

Keeping in view the past experience in installation of these meters and the resistance from the farmers, Commission is requested to review their directives in the light of Electricity Act 2003 and allow 100% metering in a period of two years from the date of new Act becomes applicable.

Commission’s Observation and Decision

There cannot be two views to provide meters at the premises of all the electricity consumers at the earliest. However, the Licensee has delayed in installation of meters. The objectives of proper metering of flat rate agricultural consumers have been deliberated at length in the earlier orders of the Commission. It is essential to measure both the reading i.e. the energy and the demand of consumers as indicated earlier. An (LT) electronic energy meter with MDI is learnt to be costlier by about 25-30% when compared to a plain (LT) electronic energy meter. (The Licensee’s contention that the LT electronic meter with MDI would be 2-3 times costlier appears to be based upon its comparison with LT plain electro-mechanical / hybrid energy meter.) The Licensee should continue its efforts for finding out ways and means to address this issue rather than finding escape route for non-implementation of the Commission’s directives.

In view of the difficulties explained in the review petition for achieving cent-per-cent metering at the flat-rate agriculture consumer premises, the Commission agrees to the extension sought for in the light of The Electricity Act, 2003 and directs the Licensee to complete the 100% metering by 9^th June 2005. A quarterly progress report to achieve the goal should be regularly submitted to the Commission by 20^th of April / July / October / January respectively.

This order is signed, dated and issued by the Haryana Electricity Regulatory Commission on the 29^th day of January 2004.

Dated: 29^th January 2004
Place:  Panchkula