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7Financial Statements of Electricity

Companies

Unit 1: Relevant Legal and Admini strative Provisions

Learning Objectives

After studying this unit, you will be able to:

Know the legal framework applicable for electricity companies. Understand the composition and purposes of various statutory authorities. Know the Regulations applicable for electricity companies. Understand the policies applicable to the Power Sector. Understand how accounting is done in electricity companies

1.1 Introduction

The electricity industry in India was guided by the Indian Electricity Act, 1910 and the

Electricity (Supply) Act, 1948. The Indian Electricity Act, 1910 introduced a licensing systemfor the electricity industry and the Electricity (Supply) Act, 1948 introduced greater state

involvement in the industry, facilitating regional coordination through state-owned, verticallyintegrated units called State Electricity Boards (SEBs) to develop a Grid System. The SEBswere responsible for generation, transmission and distribution of electricity within each state of

the Indian Union.

In the early 1990s, the power sector was liberalised by permitting private participation in the

generation and transmission sectors and establishing regional load dispatch centres (RLDCs).

In 1998, the Electricity Regulatory Commissions Act, 1998 (the ERC Act) establishedindependent electricity regulatory commissions (ERC) at the central and state levels, with the

objective of rationalising the electricity tariff regime and promoting and regulating theelectricity industry. The ERC Act, which has been replaced by the Electricity Act, 2003provided for the formation of state electricity regulatory commissions (SERCs) in the

respective states for the rationalisation of energy tariffs.

The Institute of Chartered Accountants of India

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Financial Statements of Electricit y Companies 7.2

1.1.1 Historical Background of Legislative Initiatives

The Indian Electricity Act, 1910 provided basic framework for electric supply industry inIndia. It made provisions for growth of the sector through licensees. The Act covered the

provisions for licence by State Government, provision for licence for supply of electricity in aspecified area, legal framework for lying down of wires and other works, provisions laying

down relationship between licensee and consumer.

The Electric ity (Supply) Act, 1948 mandated creation of State Electricity Boards (SEBs) andneed for the State to step in (through SEBs) to extend electrification (so far limited to cities)

across the country. Later on this Act was amended to enable generation in Central sector andto bring in commercial viability in the functioning of SEBs -- especially section 59 was

amended to make the earning of a minimum return of 3% on fixed assets a statutoryrequirement (w.e.f. 1.4.1985). Further amendment was made in 1991 to open generation toprivate sector and establishment of RLDCs and another amendment in 1998 was made to

provide for private sector participation in transmission, and also provision relating to

Transmission Utilities.

The Electricity Regulatory Commission Act, 1998 lays down the provision for setting up ofCentral / State Electricity Regulatory Commission with powers to determine tariffs. Further, itemphasized on the constitution of SERC optional for States and distancing of Government

from tariff determination.

1.2 Electri cit y Act , 2003

The Electricity Act, 2003 (the Electricity Act) is a central legislation relating to generation,transmission, distribution, trading and use of electricity, that seeks to replace the multiple

legislations that governs the Indian power sector. The most significant reform initiative underthe Electricity Act was the move towards a multi-buyer, multi-seller system as opposed to the

existing structure which permitted only a single buyer to purchase power from power

generators. In addition, the Electricity Act grants the ERCs freedom in determining tariffs,without being constrained by rate-of-return regulations. Under the Electricity Act, no licenceis required for generation of electricity if the generating station complies with the technical

standards relating to connectivity with the grid. The Electricity Act was amended in 2007 toexempt captive power generation plants from licensing requirements for supply to any licensee

or consumer. The Electricity Act was amended in 2010 by notification dated 3 March 2010 to

provide that any developer of a special economic zone notified under the Special EconomicZones Act, 2005 shall be deemed to be a licensee under the Electricity Act.

1.2.1 Objectives

The objectives of the Act are "to consolidate the laws relating to generation, transmission,

distribution, trading and use of electricity and generally for taking measures conducive todevelopment of electricity industry, promoting competition therein, protecting interest of

consumers and supply of electricity to all areas, rationalization of electricity tariff, ensuring

transparent policies regarding subsidies, promotion of efficient and environmentally benign


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7.3 Advanced Accou nting

policies, constitution of Central Electricity Authority, Regulatory Commissions andestablishment of Appellate Tribunal and for matters connected therewith or incidental thereto.

The Electricity Act 2003 provides electricity market for private investments for increasing

generation capacity and efficient network use in India. It encourages captive generation, non-discriminatory open access to transmission and distribution system and de-licensing

generation

Under the Electricity Act 2003, activities like generation, transmission and distributionhave been separately identified. Now, no person shall (a) transmit electricity; or (b)

distribute electricity; or (c) undertake trading in electricity, unless he is authorised to do so by

a license issued under section 14, or is exempt under section 13.

1.2.2 LicensingThe Electricity Act stipulates that no person can transmit, distribute or undertake trading in

electricity, unless he is authorised to do so by a licence issued under, or is exempt under, theElectricity Act. The Electricity Act provides for transmission licensees, distribution licensees

and licensees for electricity trading. There can be a private distribution licensee as well.

1.2.3 Generation

As per sec 2(29), "generate" means to produce electricity from a generating station for the

purpose of giving supply to any premises or enabling a supply to be so given.

Currently, any electricity generating company can establish, operate and maintain a

generating station if it complies with the technical standards relating to connectivity with grid.

Approvals from the Government, the state government and the techno-economic clearancefrom the Central Electricity Authority (CEA) are no longer required, except for hydroelectricprojects. Generating companies are now permitted to sell electricity to any licensees and

where permitted by State Electricity Regulatory Commissions (SERCs), to consumers. Inaddition, no restriction is placed on the setting up of captive power plants by any consumer or

group of consumers for their own consumption. Under the Electricity Act, no surcharge isrequired to be paid on wheeling of power from the captive plant to the destination of the use

by its owner. This provides financial incentive to large consumers to set up their own captiveplants. Through an amendment in 2007, Section 9 was amended to state that no separate

licence is required for the supply of electricity generated from the captive power plant to anylicensee or the consumer. The ERCs determine the tariff for the supply of electricity from a

generating company to any distribution licensee, transmission of electricity, wheeling ofelectricity and retail of electricity. The Central Electricity Regulatory Commission (CERC) has

jurisdiction over generating companies owned or controlled by the Government and those

generating companies who have entered into or otherwise have a composite scheme forgeneration and sale in more than one state. SERCs have jurisdiction over generating stations

within the state boundaries, except those under the CERCs jurisdiction.


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1.2.4 Transmission

Transmission being a regulated activity involves the intervention of various players. TheGovernment is responsible for facilitating the transmission and supply of electricity, particularly

inter-state, regional and inter-regional transmission. The Electricity Act vests the responsibilityof efficient, economical and integrated transmission and supply of electricity with theGovernment and empowers it to make regional demarcations of the country for the same. In

addition, the Government will facilitate voluntary inter-connections and coordination of facilities

for the inter-state, regional and inter-regional generation and transmission of electricity. TheCEA is required to prescribe certain grid standards under the Electricity Act and every

transmission licensee must comply with such technical standards of operation andmaintenance of transmission lines. In addition, every transmission licensee is required to

obtain a licence from the CERC and the SERCs, as the case may be.

The Electricity Act requires the Government to designate one government company as the

central transmission utility (CTU), which would be deemed as a transmission licensee.Similarly, each state government is required to designate one government company as statetransmission utility (STU), which would also be deemed as a transmission licensee. The CTU

and STUs are responsible for transmission of electricity, planning and co-ordination of the

transmission system, providing non-discriminatory open access to any users and developing acoordinated, efficient and integrated inter-state and intra-state transmission system

respectively. The Electricity Act prohibits the CTU and STUs from engaging in the business ofgeneration or trading in electricity. Under the Electricity Act, a transmission licensee may withprior intimation to the appropriate ERC engage in any business for the optimum utilisation of

its assets.

Under the Electricity Act, the Government was empowered to establish the national load

despatch centre (NLDC) and regional load despatch centre RLDCs for optimum scheduling

and despatch of electricity among the RLDCs. The RLDCs are responsible for

(a) optimum scheduling and despatch of electricity within the region, in accordance withthe contracts entered into with the licensees or the generating companies operating in the

region;

(b) monitoring grid operations;

(c) keeping accounts of the quantity of electricity transmitted through the regional grid;

(d) exercising supervision and control over the inter-state transmission system; and(e) carrying out real time operations for grid control and despatch of electricity within the

region through secure and economic operation of the regional grid in accordance with the grid

standards and grid code.

The transmission licensee is required to comply with the technical standards of operation andmaintenance of transmission lines specified by the CEA. The Electricity Act allows IPPs open

access to transmission lines. The provision of open access is subject to the availability ofadequate transmission capacity as determined by the CTU or STU. The Electricity Act also


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lays down provisions for intra-state transmission, where the state commission facilitates andpromotes transmission, wheeling and inter-connection arrangements within its territorialjurisdiction for the transmission and supply of electricity by economical and efficient utilisation

of the electricity.

1.2.5 Trading

The Electricity Act specifies trading in electricity as a licensed activity. Trading has beendefined as the purchase of electricity for resale. This may involve wholesale supply (i.e.purchasing power from the generators and selling to the distribution licensees) or retail supply

(i.e. purchasing from generators or distribution licensees for sale to end consumers). Thelicence to engage in electricity trading is required to be obtained from the appropriate ERC.

The CERC, by notification dated 16 February 2009, issued the CERC (Procedure, Terms andConditions for Grant of Trading License and Other Related Matters) Regulations, 2009 (theTrading Licence Regulations) to regulate the inter-state trading of electricity. The TradingLicence Regulations define inter-state trading as transfer of electricity from the territory of one

state for resale to the territory of another state and includes electricity imported from any othercountry for resale in any state of India. Under the Trading Licence Regulations, any person

desirous of undertaking inter-state trading in electricity shall apply to the CERC for the grant of

a licence. The Trading Licence Regulations set out various qualifications for the grant of alicence for undertaking electricity trading, including certain technical and professionalqualifications, and net worth requirements. An applicant is required to publish notice of his

application in daily newspapers to receive objections, if any, to be filed before the CERC.Further, a licensee is subject to certain conditions including the extent of trading margin,

maintenance of records and submission of auditors report. The existing licensees are requiredto meet the net worth, current ratio and liquidity ratio criteria and are required to pay thelicence fee as specified by the CERC, from time to time. The eligibility criteria include norms

relating to capital adequacy and technical parameters. However, the NLDC and RLDCs,CTUs, STUs and other transmission licensees are not allowed to trade in power, to preventunfair competition. The relevant ERCs also have the right to fix a ceiling on trading margins in

intra-state trading.

The CERC has issued a draft amendment to the Trading Licence Regulations dated 7 May

2012 and entitled CERC (procedure, terms and conditions for grant of trading licence andother related matters) (First Amendment) Regulations, 2012 (the Draft TL Amendment

Regulations) under which the number categories of trading licenses have been increased from

three to four categories and the traders are additionally required to furnish information relatingto the volume of electricity proposed to be traded during fiscal 2013 supported by specialbalance sheets so that the trader s risk may be viewed by the CERC in a more holistic

manner. The Draft TL Amendment Regulations will also introduce a code of conduct for the

trading licensees to encourage fair and transparent trading practices.


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1.2.6 Distribut ion and Retail Supply

The Electricity Act does not make any distinction between distribution and retail supply ofelectricity. Distribution is a licensed activity and distribution licensees are allowed to

undertake trading without any separate licence. Under the Electricity Act, no licence isrequired for the purposes of the supply of electricity. Thus, a distribution licensee canundertake three activities: trading, distribution and supply, through one licence. The

distribution licensee with prior permission of the appropriate commission may engage itself in

any other activities for optimal utilisation of its assets.

1.2.7 Unregulated Rural Markets

The licensing requirement does not apply in cases where a person intends to generate and

distribute electricity in rural areas as notified by a state government. However, the supplier isrequired to comply with the requirements specified by the CEA such as protecting the public

from dangers involved, eliminating or reducing the risks of injury and providing notifications ofaccidents and failures of transmission and supplies of electricity. It shall also be required to

comply with system specifications for supply and transmission of electricity. The Electricity Actmandates formulation of national policies governing rural electrification and local distribution

and rural off-grid supply including those based on renewable and other non-conventionalenergy sources. This policy initiative is expected to give impetus to rural electrification and

also conceptualise rural power as a business opportunity.

1.3 Tariff Princ iples

The Electricity Act, 2003 has introduced significant changes in terms of tariff principlesapplicable to the electricity industry. Under the Electricity Act, the appropriate ERCs are

empowered to determine the tariff for:

Supply of electricity by a generating company to a distribution licensee, provided that theappropriate commission may, in case of a shortage of supply of electricity, fix theminimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance ofan agreement, entered into between a generating company and a licensee or between

licensees, for a period not exceeding one year to ensure reasonable prices of electricity;

Transmission of electricity; Wheeling of electricity; and Retail of electricity, provided that in case of distribution of electricity in the same area by

two or more distribution licensees, the appropriate commission may, for promotingcompetition among distribution licensees, fix only the maximum ceiling of tariff for retail of

electricity.

The appropriate ERC is required to be guided by the following while determining tariff:

The principles and methodologies specified by the CERC for the determination of the tariffapplicable to generating companies and licensees;


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That the generation, transmission, distribution and supply of electricity are conducted oncommercial principles;

The factors which would encourage competition, efficiency, economical use of theresources, good performance and optimum investments;

Safeguarding consumers interest and also ensure recovery of the cost of electricity in areasonable manner;

The principles rewarding efficiency in performance; Multi-year tariff principles; That the tariff progressively reflects the cost of supply of electricity, at an adequate and

improving level of efficiency; That the tariff progressively reduces and eliminates cross-subsidies in the manner to be

specified by the CERC;

The promotion of co-generation and generation of electricity from renewable sources ofenergy; and

The NEP and the Tariff Policy.The Electricity Act provides that the ERC shall adopt such tariff that has been determined

through a transparent process of bidding in accordance with the guidelines issued by theGovernment. The MoP has issued detailed guidelines for competitive bidding as well as

standard bidding documents for competitive bid projects. The determination of tariff for a

particular power project would depend on the mode of participation in the project. Broadly, thetariffs can be determined in two ways: (i) based on the tariff principles prescribed by the CERC(cost plus basis consisting of a capacity charge, an energy charge, an unscheduled

interchange charge and incentive payments); or (ii) competitive bidding route where the tariff

is purely market based.

1.4 CERC (Terms and Condit ions of Tarif f) Regulations, 2009

The CERC (Terms and Conditions of Tariff) Regulations, 2009 (the CERC Tariff Regulations)

apply where the tariff for a generating station or a unit (other than those based on non-conventional energy sources) and the transmission system is yet to be determined by the

CERC.

Tariff for the supply of electricity from a thermal generating station shall comprise two parts,

namely, capacity charge (for recovery of annual fixed cost) and energy charge (for recovery of

primary fuel cost and limestone cost (where applicable).

Tariff for the supply of electricity from a hydro generating station shall comprise capacity

charge and energy charge, for recovery of annual fixed cost through the two charges.

Tariff for transmission of electricity on the inter-state transmission system shall comprise

transmission charge for recovery of annual fixed cost.


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Tariff in respect of a generating station may be determined for the whole generating station ora stage, unit or block of the generating station, and tariff for the transmission system may be

determined for the whole of the transmission system or the transmission line or sub-station.

For determination of tariff, the capital cost of the project may be broken into stages anddistinct units or blocks, transmission lines and sub-systems forming part of the project, if

required, provided that where break-up of the capital cost of the project for different stages,units or blocks and transmission lines or sub-stations is not available and in case of on-going

projects, the common facilities shall be apportioned on the basis of the installed capacity of

the units, line length and number of bays and that in relation to multi-purpose hydro schemeswith irrigation, flood control and power components, the capital cost chargeable to the power

component of the scheme only shall be considered for determination of tariff.

The generating company or the transmission licensee, as the case may be, may apply fordetermination of tariff in respect of units of the generating station or the transmission lines or

sub-stations of the transmission system, completed or projected to be completed within sixmonths from the date of the application. In the case of existing projects, the generating

company or the transmission licensee, as the case may be, shall continue to provisionally billthe beneficiaries or the long-term customers with the tariff approved by the CERC and

applicable as on 31 March 2009 for the period starting from 1 April, 2009 until approval of tariff

by the CERC in accordance with the CERC Tariff Regulations.

The CERC (Terms and Conditions of Tariff) (Second Amendment) Regulations, 2011 specifythat, where the tariff provisionally billed exceeds or falls short of the final tariff approved by the

CERC under the CERC Tariff Regulations, the generating company, or the transmissionlicensee, shall refund to (or recover from) the beneficiaries or the transmission customerswithin six months, together with simple interest, at the State Bank of India base rate during the

previous year plus 350 basis points (for the years 2012 to 2013 and 2013 to 2014) for the

period from the date of provisional billing to the date of issue of the final tariff order of theCERC monthly average.

Where an application for the determination of the tariff of an existing or a new project has

been filed before the CERC in accordance with clauses (1) and (2) of the CERC Tariff

Regulations, the CERC may consider in its discretion to grant a provisional tariff of up to 95.0per cent. of the annual fixed cost of the project claimed in the application, subject to

adjustment as per the proviso to clause (3) of the CERC Tariff Regulations after the final tarifforder has been issued, provided that the recovery of capacity charge and energy charge ortransmission charge, as the case may be, in respect of the existing or new project for which

provisional tariff has been granted, shall be made in accordance with the relevant provisions

of the CERC Tariff Regulations.


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Unit 2 : Preparation of Financial Statements

Learning Objectives

After studying this unit, you will be able to:

Understand relevant transaction of an electricity company such as security deposit,capital service line contribution, Accelerated Power Development and Reforms Program

loan and grant and depreciation.

Understand Reporting of financial statements of Electricity Company as per Schedule VI. Understand method of depreciation for replacement of asset i.e. the optimised

depreciated replacement cost [ODRC] method.

2.1 Formats of Financial Statements

Section 616 of the Companies Act, 1956 provides that the provisions of the Companies Act,

1956 shall not apply to companies engaged tn generation or supply of electricity except in sofar as the said provisions are inconsistent with the provisions of the Indian Electricity Act 1910or the Electricity (Supply) Act, 1948. The Indian Electricity Act 1910 or the Electricity (Supply)

Act, 1948 have been repealed and Electricity Act, 2003 has been enacted in their place.Accordingly in section 616 of the Companies Act instead of the Indian Electricity Act 1910 or

the Electricity (Supply) Act, 1948, the Electricity Act, 2003 can be read.

Therefore it is clear that for the companies in the business of generation or supply ofelectricity, provisions of Companies Act, 1956 shall apply except in so far as the said

provisions are inconsistent with the provisions of the Electricity Act, 2003.

Electricity Act, 2003 does not prescribe any formats of financial statements to be followed bythe electricity companies. Whereas, the Companies Act, 1956 provides that every company

shall prepare its financial statements as per the Schedule VI to the Companies Act, 1956.

Therefore, the electricity companies shall be required to prepare their accounts as per the

Schedule VI to the Companies Act, 1956.

2.2 Specifi c Transactions of Electri city Supply Company

2.2.1 Security DepositAs provided in section 47 of the Act, the Distribution Licensee may require from any person,who requires a supply of electricity to his premises in pursuance of section 43 of the Act, to

deposit sufficient security against the estimated payment which may become due to him -

(1) In respect of electricity supplied to such person (including Energy Charges, Fixed /

Demand Charges, Fuel Price and Power Purchase Adjustment (FPPPA) charges, ElectricityDuty and any other charges as may be levied from time to time), or


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(2) Where any electric line or electric plant or electric meter is to be provided for supplyingelectricity to such person, in respect of the provision of such line or plant or meter.

(3) The distribution licensee shall pay interest equivalent to the bank rate or more, as may

be specified by the concerned State Commission, on the security referred to in sub-section

(1) and refund such security on the request of the person who gave such security.

(4) A distribution licensee shall not be entitled to require security in pursuance of clause (a)of sub-section (1) if the person requiring the supply is prepared to take the supply through a

pre-payment meter.

Interest on Securi ty Deposit

The Licensee shall pay interest to the consumer at the Reserve Bank of India bank rate

prevailing on the Is1 of April for the year, payable annually on the consumer's security depositwith effect from date of such deposit in case of new connections energized after the date of

this notification, or in other cases, from the date of notification of this Code. The interestaccrued during the year shall be adjusted in the consumer's bill for the first quarter of the

ensuing financial year.

Acco unt ing and Repor ti ng of Securi ty Depos it

Journal Entry Am ou nt to be debit ed / c redit ed

When security deposit is received

1. For amount receivedBank A/c Dr.

To Security Deposit A/cActual amount received

Note: Balance of Security Deposit A/c at the end of the accounting period should bedisclosed as Non-current liability in the Balance Sheet since the same is, in substance,not repayable within a period of 12 months from the reporting date and hence does not

satisfy any of the conditions for classifying a liability as current

Journ al Entry Amoun t to be debited / credited

(a) Interest accrued on security deposit at the end of the accounting period2. Interest on security deposit at bank rate or more, as may be specified by theconcerned State Commission

Interest Expense A/c Dr.

To Interest Accrued on Security Deposit A/c

Note: Balance of Interest Accrued on Security Deposit A/c at the end of the accounting

period should be disclosed as Non-current liability in the Balance Sheet since the same is,in substance, not repayable within a period of 12 months from the reporting date and

hence does not satisfy any of the conditions for classifying a liability as current


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(b) Ad ju st ment of accr ued Interest on secur ity depo sit in th e consum er's bi ll 3. The interest accrued during the year shall be adjusted in the consumer's bill for thefirst quarter of the ensuing financial year

Interest Accrued on Security Deposit A/c Dr.

To Sales Turnover

2.2.2 Advance against Depreci ation (AAD)

Advance against depreciation (AAD) was an element of tariff provided under the TariffRegulations for 2001-04 and 2004-09 to facilitate debt servicing by the generators since it was

considered that depreciation recovered in the tariff considering a useful life of 25 years is notadequate for debt servicing. Though this amount is not repayable to the customers by the

electricity companies, keeping in view the matching principle, and in line with the opinion ofthe Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI),

this is to be treated as deferred revenue to the extent depreciation chargeable in the accounts

is considered to be higher than the depreciation recoverable in tariff in future years.

2.2.3 Accoun ting for Exchange Rate Variations on the Foreign CurrencyBorrowings

Foreign exchange rate variation (FERV) on foreign currency loans and interest thereon is

recoverable from/payable to the customers on actual payment in line with the TariffRegulations. Keeping in view the opinion of the EAC of ICAI, the deferred foreign currency

fluctuation asset is to be recognised by corresponding credit to deferred income from foreigncurrency fluctuation in respect of the FERV on foreign currency loans or interest thereon

adjusted in the cost of fixed assets, which is recoverable from the customers in future years onactual repayment. This amount will be recognized as revenue corresponding to the

depreciation charge in future years.

2.2.4 Assets under 5 KM scheme of the Government of India

Ministry of Power has launched a scheme for electrification of villages within 5 km periphery of

generation plants of Central Public Sector Undertakings (CPSUs) for providing reliable andquality power to the project affected people. The scheme provides free electricity connections

to below poverty line (BPL) households. The scheme will cover all existing and upcoming

power plants of CPSUs. The cost of the scheme will be borne by the CPSU to which the plantbelongs. This cost will be bookedby the CPSU under the project cost and will be considered

by the CERC for determination of tariff.

2.2.5 Capital Service Line Contributions

Different State Commissions prescribes such Service line cum Development (SLD) Chargesnorms as per section 47 of the Act. Norms of Delhi Electricity Supply Code Regulations, 2012

Chapter IV are given below for reference:


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Service line cum Development (SLD) Charges: ln case the area/colony is electrified by theLicensee, the SLD charges shall be payable by all consumers irrespective of whether it is

electrified or un-electrified area. SLD charges, as given in Table-4, shall be leviable.

Service Line cum Development Charge

S.No. Sancti oned Load (kW) Amoun t (`)1 Upto 5 3,000

2 More than 5 upto 10 7,000




6 More than 100 kW (at 11 kV) 50% of the cost of HTcables/line/switchgear

Accounting for this source of funds of Electricity Company requires special attention as the

following different accounting and reporting practices are noticed in published FinancialStatements of some companies.

1. Amount received from consumer towards capital/service line contributions is accounted

as liability and subsequently recognized as income over the life of the asset;

2. Amount received from consumer towards capital / service line contributions is accounted

as reserves as the amount is not refundable and reported under the head reserves andsurplus without transferring any proportionate amount to the income statement over the

life of asset;3. Amount received from consumer towards capital / service line contributions is accounted

as capital reserve as the amount is not refundable and subsequently proportionateamount is transferred to income statement during the expected life of the asset to match

against depreciation on total cost of such asset;

4. Amount received from consumer towards capital/service line contributions is accounted

as reduction in the cost of non-current asset and depreciation may be provided on suchreduced cost.

Acco un ti ng entr y fo r th e 3 rd option is as follows


(c) When amount received from consumers towards capital / service line contributions

4. For amount receivedBank A/c Dr.

To Capital / service line contributionsA/c

Actual amount received


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Note: Balance of capital / service line contributionsA/c at the end of the accountingperiod should be disclosed under Capital Reserve under Reserves and Surplus as in

substance it is not redeemable to consumers.


(d) When propo rtion ate amount is transferred to inco me statement durin g the

expected life of the asset from capital / service line contributions A/c

5. For amount receivedCapital / service line contributionsA/c Dr.

To Profit and Loss A/c

Note: Balance of capital / service line contributionsA/c at the end of the accounting

period should be disclosed as Capital Reserve under Reserves and Surplus wherein thistransfer is shown as deduction. The amount transferred matches proportionately against

depreciation charged on total cost of such asset in the Statement of Profit and Loss.

Return on equity shall be computed in rupee terms, on the equity base determined in

accordance with regulation 12. Equity Base should not include the amount contributed by the

consumers towards such capital investment. Consumer contribution for such capitalinvestment is not brought out in the ARR .

2.3 Implementation of Accelerated Power Development and ReformsProgram (APDRP)

Government identified need for electricity distribution reforms in light of existing poor

distribution network, huge transmission and distribution losses due to un-metered supply andtheft, high LT/HT line ratio, overloaded DT/lines etc. For this Government introduced

Accelerated Power Development Program (APDP) in February, 2000.

The main objective of this program was to initiate a financial turnaround in the performance of

the state owned power sector.

Two years of working experience of APDP showed that it had several limitations. Therefore, in theUnion Budget 2002-03 APDP was re-christened as Accelerated Power Development and Reforms

Program (APDRP) with the stipulation that access of the States to the fund will be on the basis of

agreed reform programmes the center piece of which would be narrowing and ultimate eliminationof the gap between unit cost of supply and revenue realization within a specific time frame.

2.3.1 Object ives of APDRP

APDRP has now been given much wider scope than APDP. It aims at strengthening and up-gradation of the Sub-Transmission, and Distribution system in the country with the following

objectives:


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i. Reducing Aggregate Technical and Commercial (AT&C) losses;

ii. Improving quality of supply of power;

iii. Increasing revenue collection; and

iv. Improving consumer satisfaction.

Union Government provide funds under the programme as additional central assistance over

and above the normal Central Plan Allocation to those States who commit to a time boundprogramme of reforms as elaborated in the Memorandum of Understanding (MoU) and

Memorandum of Agreement (MoA). The funds under the programme are provided under two

components:

i Investment component-Assistance for strengthening and upgradation of sub-transmission

and distribution system. Focus is on high density urban areas to achieve quick result aslosses in absolute term are very high in such areas.

ii. Incentive component It is a grant for States/Utilities to encourage them to reduce their

cash losses on yearly basis.

Investment component Funds are provided through a combination of grant and loan. For thispurpose States have been categorized as Special Category States and Non-Special Category

States. 100% of the project cost in special category States (all North Eastern States, Sikkim,Uttaranchal, Himachal Pradesh and Jammu & Kashmir) in the ratio of 90% grant and 10% soft loan

is financed. In respect of other States (Non-special category) Union Government finance 50% ofthe project cost and the ratio of grant and loan is 1:1. SEBs and Utilities have to arrange remaining

50% of the fund from Power Finance Corporation (PFC) and Rural Electrification Corporation(REC) or other financial institutions or from their own resources as counter-part funds.

Incentive component: - This component has been introduced to motivate SEBs/Utilities to reducetheir cash losses. State Governments are incentivised upto 50% of the actual cash loss reduction

by SEBs/ Utilities as grant. The year 2000-01 is the base year for the calculation of loss reduction,in subsequent years. The losses are calculated net of subsidy and receivable. Funds under

incentive components are provided as 100% grant to all the States (special category and non-

special category) as Additional Plan Assistance.

The following table will make the funding modalities more clear:

S.No. Category of States

% of Projects /Scheme Cost

from APDRP as

% of Projects SchemeCost from PFC/REC/

Own/ Other Sources

Grant Loan

1 Special Category States 90 10 -

2 Non-special category States 25 25 50


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2.3.2 Funding Pattern

Funds under the Accelerated Power Development Reforms Programme (APDRP) are releasedto the State Government as below:

i. Non-special category States:

a. 25 percent of the APDRP amount after approval of project under APDRP and ontie up of counterpart funds from financial institutions and release of matching fundby financial institutions (FIs)

b. On utilization of the 25 percent of sanctioned project cost, 50 percent of the APDRPamount is released.

c. On utilization of 75 percent of the sanctioned project cost, balance 25 percent isreleased

ii. Special Category States: (namely all North-Eastern States, Sikkim, Uttaranchal,

Himachal Pradesh and Jammu & Kashmir):

a. 25 percent of the APDRP amount after approval of projectb. On utilization of 25 percent of the project cost, 50 percent of the APDRP amount is

released

c. On utilization of 75 percent of the project cost, balance 25 percent of the APDRPamount is released

2.3.3 Accounti ng of Grant received under APDRP

Grant received under the Accelerated Power Development and Reforms Programme (APDRP) ofthe Ministry of Power, Government of India towards capital expenditure, is treated as capital receiptand accounted as Capital Reserve and subsequently adjusted as income (by transfer to theStatement of Profit and Loss) in the same proportion as the depreciation written off on the assetsacquired out of the grant. The depreciation for the year debited to the statement of Profit and Losson asset acquired out of grant match against portion of grant transferred from Capital Reserve. Theunadjusted balance of capital reserve is disclosed under Reserves and Surplus in balance sheet.In the Cash Flow Statement grant received under APDRP is reported under Financing Activity.

At any time if the ownership of the assets acquired, out of the grants, vest with theGovernment, the grants (capital reserve) are adjusted in the carrying cost of such assets.

The grant-in-aid assistance received by the utility under APDRP and its utilisation shown

under the head capital expenditure made during the year is not considered for calculation ofAnnual Revenue Requirement (ARR) of the utility for the year.

2.4 Depreciation

Depreciation requires special consideration for an electricity company for following reasons:

1. As already discussed, for the companies in the business of generation or supply ofelectricity, provisions of Companies Act, 1956 shall apply except in so far as the said

provisions are inconsistent with the provisions of the Electricity Act, 2003.


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2. The rates of depreciation has been prescribed by the Central Electricity RegulatoryCommission (CERC) under the tariff regulations, 2009 which has been notified under the

powers given under the Electricity Act, 2003.

3. The rates of depreciation as prescribed by CERC for the purpose of tariff are different

from those prescribed under Schedule XIV to the Companies Act, 1956;

4. As per 2004 Regulations, the Central Electricity Regulatory Commission has observedthat different rates of depreciation are already being allowed for the purpose of accounts and

income-tax. This being so, following different depreciation rates for the purpose of tariff was

considered fully justified.

5. As per 2009 Regulations, it has been stated in the Tariff Policy that the depreciation

rates for the assets shall be specified by the Central Electricity Regulatory Commission andthis rate of depreciation shall be applicable for the purpose of tariff as well as accounting.

6. The Office of the Comptroller & Auditor General of India has expressed an opinion that

power sector companies shall be governed by the rates of depreciation notified by the CERCfor providing depreciation in respect of generating assets in the accounts instead of the ratesas per the Companies Act, 1956. Accordingly, a Company should revise its accounting

policies relating to charging of depreciation w.e.f. 1st April 2009 considering the rates and

methodology notified by the CERC for determination of tariff through Regulations, 2009 (Ref.35th Annual Report for FY 2010-11 of NTPC Ltd page 59).

2.4.1 Purpose of Depreciation

For the treatment of depreciation, three views are generally expressed The first is that it represents a cash flow for repayment of loan; The second is that it represents a return of capital subscribed; and The third is that it represents a replacement of capital or a charge for the replacement of

the assets consumed.

As per 2004 Regulations, depreciation represents a cash flow for repayment of loan and

allowed Advance Against Depreciation. (Explained in following paragraphs).

As per 2009 Regulations, depreciation represents a cash flow for repayment of loan not by

allowing Advance against Depreciation but by prescribing higher rates of depreciation for initial

years of loan redemption explained in following paragraphs.

2.4.2 Philosophy of depreciation

The philosophy of depreciation as adopted by the Commission in the existing norms as result

of detailed study, prescribes following two methods of depreciation.

(a) The Straight Line method by application of a fixed rate over the fair life of the asset;(b) Optimized Depreciated Replacement Cost (ODRC) based method under which the

depreciation could be a method for replacement of the asset.


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2.5 CERC (Terms and Conditions of Tariff) Regulations, 2009Statement of Objects and Reasons

CERC has issued CERC (Terms and Conditions of Tariff) Regulations, 2009 Statement of

Objects and Reasons. The following are relevant observations:

1. As per the 2004 regulations. Value Base for the purpose of depreciation is historical costof the asset which includes additional capitalization and FERV up to 31.03.2004. Depreciationis calculated by applying the depreciation rates notified by the Commission using Straight Line

Method over the useful life of the asset and considering salvage value of 10%. On repaymentof entire loan, the remaining depreciable value is spread over the balance useful life of the

asset. Depreciation is chargeable from the first year of operation. In case of operation of the

asset for part of the year, depreciation is charged on pro rata basis. To provide cash flow tothe utilities to make them repay their debt, Advance against Depreciation (AAD) is allowed

subject to certain conditions.

2. While determining the tariff, the Regulators have to ensure that: (i) capital is refunded tothe investors over estimated life of assets, i.e. refund of capital: (ii) capital invested in the

regulated business is allowed sufficient return so that the investors find the business attractiveenough to invest, i.e. return on investment; and (iii) reasonable amount of operation and

maintenance expenses is allowed, i.e. reimbursement of O&M expenses. And one of the majorcomponents of capital deployed is loan. As such it is important for the Commission to ensure

availability of sufficient cash flow in the hands of the utilities to take care of the loanrepayment obligation. For the control period 2004-09, the Commission took care of this cash

flow requirement by allowing AAD, in case normative depreciation amount is not sufficient tomeet the loan repayment obligations.

3. The Commission has proposed gearing of 70% investment with 30% equity in future sothat the burden on the consumers on account of cost of capital would be reduced. From the

experience it is found that long tern loans are available for the power sector for the period 10-15 years. In the absence of AAD, the amount of depreciation calculated as per the existing

methodology will not be enough to meet the loan repayment obligations.

4. The Commission has proposed gearing of 70% investment with 30% equity in future sothat the burden on the consumers on account of cost of capital would be reduced. From the

experience it is found that long tern loans are available for the power sector for the period 10-

15 years. In the absence of AAD, the amount of depreciation calculated as per the existingmethodology will not be enough to meet the loan repayment obligations.

5. The Tariff policy stipulates that the Commission may notify the rates of depreciation in

respect of generation and transmission assets. The depreciation rates so notified would also

be applicable for distribution with appropriate modification as may be evolved by the Forum ofRegulators. The rates of depreciation so notified would be applicable for the purpose of tariffs

as well as accounting. There should be no need for any advance against depreciation. Benefitof reduced tariff after the assets have been fully depreciated should remain available to the


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consumers. It is also the responsibility of the Commission to see that sufficient cash flow isavailable to the generators and transmission licenses to meet their loan obligations arising due

to high gearing.

6. As per the Accounting Standard 6 Depreciation (AS 6) issued by Institute of CharteredAccountants of India, 'Useful life is the period over which a depreciable asset is expected to

be used by the enterprise'. As per section 205 and 350 of Companies Act, companies arerequired to provide depreciation in the books of accounts based on the useful life of asset.

These rates are specified in Schedule XIV to the Act. However, in power sector the practice of

considering depreciation towards the repayment of loan has been in vogue for quite sometimeand has come to stay. The fact is that AAD is allowed over and above the rate arrived at onthe basis of useful life to take care of repayment of loan has not given enough incentive for

generating companies to look forward to long term loans. While on one hand it is argued thatthe Indian debt market is not having depth and the availability of long term loan is limited, it is

imperative that the infrastructure companies, particularly power sector investors, who contract

a sizeable amount of funding through loan should be able to facilitate long term funding withtenure of at least 12 years, if not more to be made available by the banks and financialinstitutions. The entities should use their propensity to avail large amounts of loans with the

FIs/banks, and negotiate for long term low cost funding.

7. In a regulatory environment, the Commission has to protect the interest of the consumers

while determining tariff and at the same time it is to be seen that the investors are havingsufficient liquidity and revenue to meet then commercial commitment. Apart from paying

regular dividend to the shareholders the utilities should have sufficient liquidity to cater to the

loan repayment obligation. The Commission is aware of the burden of repayment of loan thatwill accrue over the initial years of the project life. Linking depreciation to the useful life of theassets may not provide sufficient cash flow to the utilities to meet their loan repayment

obligation. Normally, the projects are having a debt component of 50% to 70% and arerepayable over a period of 12 years. If higher depreciation is allowed over a period of initial 12

years, the debt repayment obligation can easily be met by the utilities. Once the loans are

repaid, the benefit of reduced tariff should go to the consumers.

8. Accordingly, the Commission felt that the loan repayment period be treated as 12 yearsfor all normative loans and accordingly this repayment period of 12 years be linked to

depreciation. For 12 years during which the loan capital would be refunded to the investors inthe form of depreciation, the rate of depreciation shall be as specified in appendix-III of the

regulation and thereafter the remaining depreciable value shall be spread over the balanceuseful life of the assets.


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2.6 Comparison between depreciation as per provis ion of ScheduleXIV to the Companies Act, 1956 and as per tariff policy underElectri city Supply Act, 2003.

Depreciation to be provided as perSchedule XIV to the Companies Act, 1956

Depreciation to be provided as per tariffpolicy under Electricity Supply Act 2003.

1 Schedule XIV does not have specific rateof depreciation that can be applied directlyfor generation, transmission anddistribution assets used in electricity

business. Therefore, it may not bepossible to maintain uniformity incalculation of depreciation amongst thevarious utilities in electricity business. Thiscan also affect comparability.

Since 1948, rates of depreciation havebeen specified for various assets used inelectricity business separately either byGovernment of India or the Commission.

This ensures uniformity in calculation ofdepreciation amongst the various utilitiesin electricity business and also allowscomparability.

2 The Companies Act, 1956 also allowscalculation of depreciation when the assetis ready for use i.e. when asset is readyfor commercial production.

Under regulatory system, depreciation isprovided only when the asset is put touse.

3 As per the Companies Act, 1956 in case ofrevaluation of assets, the revalued cost isto be used for calculation of depreciation

Under regulatory system, fordetermination of tariff, depreciation iscalculated on the capital cost admitted bythe Commission and does not considerrevalued cost of the asset.

4 As per Companies Act, 1956 and thenotified accounting standards, spares arenot capitalized (except in case ofinsurance spares or those acquiredalongwith the asset). Such spares aredepreciated alongwith the main asset.Other spares acquired are normallycharged to statement of Profit and Loss asand when consumed.

Under regulatory system all spares areincluded in the value base for calculationof depreciation

5 Depreciation rates are prescribed inSchedule XIV of the Companies Act, 1956and are based on estimated useful life.

The depreciation rates for different assetshave been so assigned as to arrive at theweighted average rate approximating5.28%. The depreciation rates as given inAppendix-III of the regulation have nobearing on the useful life of the projectsas defined in regulation 3(42).


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Note: Some companies engaged in generation of electricity are using the rates specified forPlant and Machinery under Continuous Process given in schedule XIV for their thermalgenerating assets for the purpose of accounting whereas hydro generating companies and

transmission licensees are applying the depreciation rates specified by the Commission for the

purpose of accounting as well as tariff.

2.7 2009 Regulations

These regulations may be called the Central Electricity Regulatory Commission (Terms andConditions of Tariff) Regulations, 2009 has also maintained the first view that Depreciation

represents cash flow for the repayment of loan in a modified form as compared to 2004

regulation.

2.7.1 Depreciation provisions as per CERC Regulations, 2009

Regulation 17 of the CERC Regulations, 2009 provides the provisions related to the

depreciation. It states the following:

1. The value base for the purpose of depreciation shall be the capital cost of the asset

admitted by the Commission.

2. The salvage value of the asset shall be considered as 10% and depreciation shall beallowed up to maximum of 90% of the capital cost of the asset. (This is at variance from

Companies Act, 1956 where the salvage value is considered as 5% and the

depreciation is allowed up to maximum of 95% of the capital cost of the asset)

Provided that in case of hydro generating stations, the salvage value shall be asprovided in the agreement signed by the developers with the State Government for

creation of the site:

Provided further that the capital cost of the assets of the hydro generating station for

the purpose of computation of depreciable value shall correspond to the percentage of

sale of electricity under long-term power purchase agreement at regulated tariff.

3. Land other than the land held under lease and the land for reservoir in case of hydrogenerating station shall not be a depreciable asset and its cost shall be excluded from

the capital cost while computing depreciable value of the asset.

4. Depreciation shall be calculated annually based on Straight Line Method and at rates

specified in Appendix-III to these regulations for the assets of the generating stationand transmission system:

Provided that, the remaining depreciable value as on 31st March of the year closing

after a period of 12 years from date of commercial operation shall be spread over the

balance useful life of the assets.

5. In case of the existing projects, the balance depreciable value as on 1.4.2009 shall beworked out by deducting the cumulative depreciation as admitted by the Commission

upto 31.3.2009 from the gross depreciable value of the assets.


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6. Depreciation shall be chargeable from the first year of commercial operation. In case ofcommercial operation of the asset for part of the year, depreciation shall be charged on

pro rata basis.

2.7.2 Appendix -III of the Regulati ons , 2009

The rates of depreciation are provided under Appendix-III of the Regulations, 2009 and are as

under:

Sr.

No.

Asset Particulars DepreciationRate (Salvage

Value=10%)

SLM

A Land under full ownership 0.00%

B Land under lease

(a) for investment in the land 3.34%

(b) For cost of clearing the site 3.34%

(c ) Land for reservoir in case of hydro generating station 3.34%

C Assets purchased new

(a) Pl & Machinery in generating stations

(i) Hydro electric 5.28%

(ii) Steam electric NHRB & waste heat recovery boilers 5.28%

(iii) Diesel electric and gas plant 5.28%

(b) Cooling towers & circulating water systems 5.28%

(c) Hydraulic works forming part of the Hydro

(i) Dams, Spillways, Weirs, Canals, Reinforced concreteflumes and syphons

5.28%

(ii) Reinforced concrete pipelines and surge tanks, steelpipelines, sluice gates, steel surge tanks, hydraulic control

valves and hydraulic works

5.28%

(d) Building & Civil Engineering works of a

(i) Offices and showrooms 3.34%

(ii) Containing thermo-electric generating plant 3.34%

(iii) Containing hydro-electric generating plant 3.34%

(iv) Temporary erections such as wooden structures 100.00%

(v) Roads other than Kutcha roads 3.34%


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(vi) Others 3.34%

(e) Transformers, Kiosk, sub-station equipment & other fixedapparatus (including plant

(i) Transformers including foundations having rating of 100

KVA and over

5.28%

(ii) Others 5.28%

f Switchgear including cable connections 5.28%

g Lightning arrestor

(i) Station type 5.28%

(ii) Pole type 5.28%

(iii) Synchronous condensor 5.28%

h Batteries 5.28%

(i) Underground cable including joint boxes and disconnectedboxes

5.28%

(ii) Cable duct system 5.28%

i Overhead lines including cable support

(i) Lines on fabricated steel operating at terminal voltages

higher than 66 KV

5.28%

(ii) Lines on steel supports operating at terminal voltages

higher than 13.2 KV but not exceeding 66 KV

5.28%

(iii) Lines on steel on reinforced concrete support 5.28%

(iv) Lines on treated wood support 5.28%

j Meters 5.28%

k Self propelled vehicles 9.50%

l Air Conditioning Plants

(i) Static 5.28%

(ii) Portable 9.50%m (i) Office furniture and furnishing 6.33%

(ii) Office equipment 6.33%

(iii) Internal wiring including fittings and apparatus 6.33%

(iv) Street Light fittings 5.28%

n Apparatus let on hire


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(i) Other than motors 9.50%

(ii) Motors 6.33%

o Communication equipment

(i) Radio and high frequency carrier system 6.33%

(ii) Telephone lines and telephones 6.33%

p I. T equipments 15.00%

q Any other assets not covered above 5.28%

It is to be noted that these rates are applicable for the first 12 years and the remaining depreciable

value as on 31st March of the year closing after a period of 12 years from date of commercialoperation shall be spread over the balance useful life of the assets.

Illustration 1

From the following details of assets calculate weighted average rate of depreciation

considering the rates as per Appendix-III

Particulars Closing balance at cost

Land

(a) Freehold 6,69,800

(b) Leasehold 2,15,450

Buildings 36,85,350

Railway Sidings 11,700

Plant and Machinery

(a) Steam Station 1,41,64,950

(b) Others Including "Switchgears and Transformers" 1,02,89,450

Transmission and Distributing Systems

(a) Overhead 21,21,450

(b) Underground 84,48,050

Electrical Fittings 2,50,650

and ApparatusFurniture, Fixture and Office Equipments 3,51,800

Vehicles 1,07,400

Total 4,03,16,050


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Solution

Particulars Closing balance

at cost

Rate of

depreciation

Depreciation

Land

(a) Freehold 6,69,800 0 0

(b) Leasehold 2,15,450 3.34% 7,196.03

Buildings 36,85,350 3.34% 1,23,090.69

Railway Skiing 11,700 3.34% 390.78

Plant and Machinery

(a) Steam Station 1,41,64,950 5.28% 7,47,909.36

(b) Others including "Switchgearsand Transformers" 10,289,450 5.28% 5,43,282.96

Transmission and

Distributing Systems

(a) Overhead 2,121,450 5.28% 1,12,012.56

(b) Underground 8,448,050 5.28% 4,46,057.04

Electrical Fittings and Apparatus 2,50,650 6.33% 15,866.145

Furniture, Fixture and Office

Equipments 3,51,800 6.33% 22,268.94

Vehicles 1,07,400 5.28% 5,670.72

Total (other than freehold land ) 3,96,46,250 20,23,745.535

Weighted average rate of depreciation =20,23,745.535

x 1003,96,46,250.00

= 5.104506 %

Illustration 2

Calculate depreciation as per 2009 regulations from the following information of BarhGeneration project

(1) Date of commercial operation, i.e. 1.9.2010.(2) The details of actual expenditure incurred up to the date of commercial operation, i.e.

1.9.2010 and projected expenditure to be incurred from the date of commercial operationto 31.3.2014 for the assets under Barh Transmission System. The details of apportioned


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approved cost as on the date of commercial operation and projected expenditure to beincurred for the above mentioned assets is summarized below:-

Apportioned

approved

cost

Actual cost

incurred as

on the date

of

commercial

operation

Proposed

expenditure

from the date

of commercial

operation to

31.3.2011

Proposed

expenditure

for 2011-12

Total

estimated

completion

cost

205054.00 195054.65 30754.00 9716.00 235524.65

(3)

Average Rate of Depreciation

calculated as per rates

specified in Appendix-III

5.1749% 5.1650% 5.1650% 5.1650%

Solution

As per 2009 regulations, ''cut-off date means 31 March of the year closing after 2 years of the

year of commercial operation of the project, and in-case of the project is declared undercommercial operation in the last quarter of the year, the cut-off date shall be 31s March of the

year closing after 3 years of the year of commercial operation".

Therefore, cut-off date for the above mentioned assets is 31.3.2013.

Illustration 3From the following information calculate:

(a) Average capital cost

(b) Return on equity

(c) Interest on loan

(d) Depreciation

as per Regulation 14 of the Central Electricity Regulatory Commission (Terms and Conditions

of Tariff) Regulations, 2009.

1. Date of commercial operation or COD = 1, April,2010

2. Approved opening Capital cost as on 1-4-2010 = `1,42,165.37

3. Consider weighted average rate of depreciat ion of 5.28%

4. Details of allowed additional capital expenditure, Weighted average rate of interest on

loan is as follows:


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2010-11 2011-12 2012-13 2013-14

` ` ` `

Additional capital expenditure (allowedabove) (B) 9,922.29 2,786.65 1,933.54 1,507.84

Weighted Average Rate of Interest onLoan

7.3765% 7.4788% 7.4690% 7.5011%

Solution

a) Average capital cost

Capital Cost

2010-11 2011-12 2012-13 2013-14

` ` ` `

Opening capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.85

Additional capitalexpenditure (allowedabove) (B) 9,922.29 2,786.65 1,933.54 1,507.85

Closing Capital cost(A)+(B) 1,52,087.66 1,54,874.31 1,56,807.85 1,58,315.70

Average Cap ital co st 1,47,126.52 1,53,480.99 1,55,841.08 1,57,561.78

b) Return on equity

Debt-Equity r atio

Debt-Equity ratiofor the purpose of return on equity for the period 2010-14 is 70:30

2010-11 2011-12 2012-13 2013-14

Opening Capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86

Equity-Openingconsidered now((A)*0.30) = (B) 42,649.61 45,626.30 46,462.29 47,042.36

Additional allowablecapital expenditure (C) 9,922.29 2,786.65 1,933.54 1,507.84

Ad di ti on of Equi ty du eto admitted additionalcapital expenditure((C)*0.30)=(D) 2,976.69 836.00 580.06 452.35

Equity-Closing((B)+(D))=(E) 45,626.30 46,462.29 47,042.36 47,494.71


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Average equity[(B)+(E)]/2 = (F) 44,137.95 46,044.30 46,752.33 47,268.53

Return on Equity @23.481% of (F) 10364.03 10811.66 10977.91 11099.12

c) Interest on loan

2010-11 2011-12 2012-13 2013-14

Opening Capital cost (A) 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86

Gross Opening loan -considered at 70% of

(A)=(B) 99,515.76 1,06,461.36 1,08,412.02 1,09,765.50Cumulative Repayment ofLoan upto previous year

(C) 0.00 7,768.28 15,872.08 24,100.49

Net Loan Opening (B)-

(C)=(D) 99,515.76 98,693.08 92,539.94 85,665.01

Additional capitalexpenditure (allowedabove) (E) 9,922.29 2,786.65 1,933.54 1,507.84

Addition of loan due to

approved additionalcapital expenditure-

considered at 70% of(E)=(F) 6,945.61 1,950.66 1,353.48 1,055.49

Repayment of loan during

the year (net)(G) 7,768.28 8,103.80 8,228.41 8,319.26

Net Loan Closing(D)+(F)-

(G)=(H) 98,693.08 92,539.94 85,665.01 78401.24

Average

Loan{(D)+(H)}/2=I 99,104.42 95,616.51 89,102.48 82,033.12

Weighted Average Rate ofInterest on Loan (J) 7.3765% 7.4788% 7.4690% 7.5011%

Interest on Loan(I) x (J) 7310.44 7150.97 6655.06 6153.39

d) Depreciation

Weighted average rate of depreciation is considered as 5.28% and retained for the

purpose of tariff. The necessary calculations are as under.


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2005-06 2006-07 2007-08 2008-09

Opening capital cost 1,42,165.37 1,52,087.66 1,54,874.31 1,56,807.86

Closing capital cost 1,52,087.66 1,54,874.31 1,56,807.86 1,58,315.7

Average capital cost(A) 1,47,126.52 1,53,480.99 1,55,841.08 1,57,561.78

Weighted Average Rateof depreciation % 0.0528 0.0528 0.0528 0.0528

Depreciation

(annualized) 7,768.28 8,103.80 8,228.41 8,319.26

Depreciable value @

90% of (A) 1,32,413.86 1,38,132.89 1,40,256.98 1,41,805.60Cumulative depreciationat the beginning

0.00 7,768.28 15,872.08 24,100.49

Balance depreciable 1,32,413.86 1,30,364.61 1,24,384.90 1,17,705.11

value (at the beginning)

Depreciation to be

Recovered

7,768.28 8,103.80 8,228.41 8,319.26

2.8 Addit ional Capital Expenditu re

As per Regulation 9(1) of 2009 regulations-

"Additional Capitalization: (1) The capital expenditure incurred or projected to be incurred, on

the following counts within the original scope of work, after the date of commercial operation

and up to the cut-off date may be admitted by the Commission, subject to prudence check:

(i) Undischarged liabilities:

(ii) XXX

(iii) XXX

(iv) XXX

(v) XXX"

Additional capital expenditure of` 9999.35 lakh has been considered out of ` 30754.00 lakh for

the year 2010-11 and no further additional capital expenditure has been considered as capitalcost has been restricted to apportioned approved cost in the absence of revised capital

expenditure.

The date of commercial operation of the transmission system was 1.9.2010. Accordingly, it will

complete 12 years beyond 2013-14 and thus depreciation has been calculated annually based

on Straight Line Method and at rates specified in Appendix-Ill to the 2009 regulations.


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Details of the depreciation worked out are as under-

(` in lakh)2010-11 2011-12 2012-13 2013-14

Opening Gross Block 1,95,054.65 2,05,054.00 2,05,054.00 2,05,054.00

Addition during 2009-14 dueto Projected AdditionalCapitalization

9,999.35

0.00 0.00

0.00

Closing Gross Block 2,05,054.00 2,05,054.00 2,05,054.00 2,05,054.00

Average Gross Block 2,00,054.33 2,05,054.00 2,05,054.00 2,05,054.00

Rate of Depreciation 5.1749% 5.1650% 5.1650% 5.1650%

Period 7 months 1 year 1 year 1 yearDepreciation 6,038.97 10,591.00 10,591.00 10,591.00

Illustration 4

Calculate depreciation as per 2009 regulations from the following information of H.B.H. Hydro

Power Generation Project

Date of commercial operation /Work Completed Date 11-Jan-95

Beginning of Current year 1-Apr-2010

Useful life 35 Years

S.N. (Figures in crores)

1 Capital Cost at beqinning of the Year 2010-11 110.8462 Additional Capltiisation during the year 0.000

2011-12 0.478

2012-13 4.070

3 Value of Land 0.000

4 Depreciation recovered up to 2008-09 48.046

5 Depreciation recovered in 2009-10 3.183

Note: Capital cost at the beginning of the year accumulated depreciation are as per tarifforder FY 2010-11.

Solution

Name of the Hydro Power Station H.B.H. Hydro Power Generation

Project

Date of commercial operation /Work Completed Date 11-Jan-95

Beginning of Current year 1-Apr-10

Useful life 35 Years

Remaining Useful Life 20 Years


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(Figures in` crores)

S.N. 2010-11 2011-12 2012-13

Capital cost at beqinning of the year 110.846 110.85 111.32

Additional capitalisation during the year 0.000 0.478 4.070

Closing capital cost 110.846 111.328 115.398

1 Average capital cost 110.846 111.089 113.355

Less : Value of Land 0.000 0.000 0.000

3 Capital cost for depreciation (1-2) 110.846 111.089 113.355

4 Depreciable value (90% of 3) 99.761 99.980 102.020

5 Depreciation recovered up to 2008-09 48.046

6 Depreciation recovered in 2009-10 3.183

7 Depreciation recovered upto previous year (5+6) 51.229 53.656 56.094

8 Balance depreciation to be recovered (4-7) 48.532 46.324 45.926

9 Balance useful life of 35 years 20 19 18

10 Yearly depreciation from 2010-11 (8/9) 2.427 2.438 2.551

11 Depreciation recovered upto the year (7+10) 53.656 56.094 58.645

Note : Capital cost at the beginning of the year accumulated depreciation are as per tariff

order FY 2010-11.

2.9 ODRC Method (Optimised Depreciated Replacement Cost )

Third view is that depreciation represents a replacement of capital or a charge for the

replacement of the assets consumed. This view has been evaluated by the Commission and is

as per Discussion Paper on Depreciation norms of ICRA Advisory Services(a division of ICRA

Ltd) April, 2000 mentioned in following paragraphs:

The optimised depreciated replacement cost [ODRC] method involves

(i) assessment of the gross current replacement cost of modern equivalent assets(ii)

making an adjustment for over design, over capacity and redundant assets and then,

(iii) depreciating this optimum gross current replacement cost to reflect the anticipatedeffective working life of the asset from new, the age of the asset and the estimated

residual value at the end of the asset's working life.

The effective working life of an asset is the estimated life of the asset, assuming continueduse in its present function, as a part of a continuing business. The ODRC method comprises

the following steps:


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1. Preparing a detailed asset register. Asset registers should contain data on quantity,location physical condition, age and maintenance of the assets.

2. Calculation of the replacement cost. This refers to the cost of replacing the assets with

modern equivalent assets.

3. Assessment of depreciation. The new assets at replacement costs identified earlier need

to be depreciated in case the life of the existing asset is lower than the life of the new

asset.

4. System Optimisation: This is done to measure the most cost effective way of deliveringservice, in terms of capacity and quality to meet the requirements. This involves three

levels;

Capacity Optimisation both in size and number Optimisation of spares Optimisation of unit costs

Under an ODRC valuation methodology, depreciation would be greater than the capitalexpenditure likely to be incurred during the proposed regulatory period when the assets that

exist in the system are old. For instance- generating machinery set up in the 70s would be duefor replacement in the present decade and a switch to the ODRC valuation basis would result

in higher depreciation charges due to higher current replacement costs.

The implementation of the ODRC would impart a significant shock to the system but this wouldbe more gradual than under the HC system. The shocks can be further minimised if the period

between adoption of the ODRC method and replacement of assets is spaced out. This would

therefore require an immediate implementation of the ODRC valuation method.

2.10 Recommendation

To minimise the price shocks arising as a result of the lumpiness in capital expenditure and

resultant fluctuations in depreciation, the asset valuation method adopted should to thegreatest extent reflect current economic replacement cost. This approach will also enhance

price signalling which is best done by using the ODRC valuation.

We however recommend that the historical cost be used as the basis for the short term (the

exact time frame to be arrived based on discussion between CERC and the utilities) and

thereafter shift to the ODRC method. We do not recommend an immediate shift to the ODRCmethod due to

1. Problems in producing a detailed asset register2. The absence of norms for standard lives of assets3. The absence of construction cost estimates4. Lack of data on future load growth


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The transition period should help utilities reorganise their management information systems toprovide data for the implementation of the new valuation method.

The ODRC method would be better because

1. Little attention has been paid to replacing assets in India and many of these will be duefor replacement in the coming decade. An adoption of the ODRC method will ensure that

the price shocks are gradually administered to the customers.

2. This will ensure greater acceptability to users (State Electricity Boards and theirsuccessors) since over capacity issues will be addressed and cost reductions possiblefrom new technologies will be incorporated in the valuation

3. Since the valuation will reflect the cost of replacement utilities will be able to assess thetiming and financing requirements with a greater degree of certainty.

2.11 Application of Accounting Standards in Electricit y Companies

The objective of financial statements is to provide information about the financial position,performance and cash flows of an enterprise that is useful to a wide range of users in making

economic decisions. Financial statements prepared for this purpose meet the common needs

of most users.

However, financial statements do not provide all the information that users may need to make

economic decisions since

(a) these largely portray the financial effects of past events, and

(b) do not necessarily provide non-financial information.

Financial statements also show the results of the stewardship of management, or the

accountability of management for the resources entrusted to it. The users may wish to assessthe stewardship or accountability of management in order to make economic decisions; these

decisions may include, for example, whether to hold or sell their investment in the enterprise

or whether to reappoint or replace the management.

Considering the various uses and to achieve a standardised comparability of the financialstatements over a period of time or across organizations, the accounting standards have been

promulgated. The management of any company is mandated as per the Companies Act, 1956to declare that the company has followed the Accounting Standards prescribed under section

211 of the companies Act, 1956.Considering these issues it is important that the requirements of these Standards are complied

with in the accounting functions to the extent applicable. Although all the accounting standardsare applicable to the electricity companies, some of the specific applications have been

discussed below:


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2.11.1 (AS) 2 Valuation of Inventor ies

The revised standard came into effect in respect of accounting periods commencing on orafter 1.4.1999 and is mandatory in nature.

The Standard mandates the following:

1. Inventories should be valued at the lower of cost and net realisable value.

2. The cost of inventories should comprise all costs of purchase, costs of conversion and

other costs incurred in bringing the inventories to their present location and condition.

Specific issues relating to electrici ty companies:

i) The unique feature of Power sector is that electricity cannot be stored and hence there

are no finished goods or work in progress in stock. The inventories would generallycomprise materials, stores and supplies and fuels. As per AS 2 these are required to be

valued at lesser of cost or Net Realisable Value (NRV). Generally, the materials, stores

and supplies and fuels are valued at cost.

ii) The cost of purchase of materials especially coal and fuel which forms major part of

inventory should include:

- All duties and taxes (except those that are subsequently recoverable from the taxing

authorities)

- Freight inwards on an actual basis.

- All expenditure attributable to bring the inventories to the current location and

condition which includes freight cost, handling cost and other direct costs (like coalhandling costs, cost of employees involved in transportation of fuel and converting it

to the consumable stage).

2.11.2 Accounting Standard (AS) 6 Depreciation Ac counti ng

This Standard deals with depreciation accounting and applies to all depreciable assets, except

the following items to which special considerations apply:

1. Forests, plantations and similar regenerative natural resources

2. Wasting assets including expenditure on the exploration for and extraction of minerals,oils, natural gas and similar non-regenerative resources

3. Expenditure on research and development4. Goodwill

5. Livestock

This statement also does not apply to land unless it has a limited useful life for the enterprise.

The depreciable amount of a depreciable asset should be allocated on a systematic basis to

each accounting period during the useful life of the asset.


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Specific issue relating to electrici ty companies:

Under the provisions of the Electricity Act, depreciation has to be provided at the ratesprescribed by the Government of India / Regulatory Commission so as to ensure that 90% of

the cost of each asset is provided for during its useful life. In respect of assets for which nospecific rates have been prescribed by the regulatory authorities depreciation shall be

provided for as per the minimum rates prescribed under Schedule XIV to the Companies Act,

1956.

The provisions regarding depreciation have already been discussed in detail.

2.11.3 Accounting Standard (AS) 9 Revenue Recognition

This Accounting Standard is mandatory for all companies. In case of electricity companies,

significant revenues are from the sale of power. It should be ensured that the revenue from

units generated is recognised commencing 00.00 hours as on 1st April.

Power generation utility business is highly capital intensive. Adequate care should be taken toensure that the capital and revenue expenses are differentiated and accounted for. The

capitalisation principles should be applied as a test to ensure that the capital expenses are

accounted properly in accordance with the standard.

2.12 Miscellaneous Illustrations

Illustration 5

The trial balance of Noida Electric Supply Ltd. for the year ended 31st March, 2012 is as

below:

(`000)

Particulars Dr. Cr.

Share Capital :

Equity Shares of`10 each 250,00

14% Preference Shares of`100 each 75,00

Patents and trade mark 12,52

15% Debentures 123,50

16% Term Loan 76,50

Land (additions during the year 10,25) 62,25

Building (additions during the year 25,40) 175,67

Plant & Machinery 285,29

Mains 22,62

Meters 15,75

Electrical Instrument 7,65


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Office furniture 12,25

Capital reserve 25,10

Contingency reserves 60,15

Transformers 82,20

Net revenue account 26,75

Stock in hand 60,25

Sundry debtors 31,23

Contingency reserve investment 60,05

Cash & Bank 16,27

Public lamps 15,20

Depreciation fund 129,08

Sundry Creditors 32,62

Proposed dividend 60,50

859,20 859,20

During 2011-12, ` (000) 50,00 of 14% preference shares were redeemed at a premium of

10% out of proceeds of fresh issue of equity shares of necessary amounts at a premium of

10%.

Prepare Balance Sheet as on 31st March, 2012 as per the revised Schedule VI.

Solution

Balance Sheet of Noid a Electric Suppl y Ltd . for t he year ended March 31, 2012

Particulars Note No ` ('000)Equity and Liabilities

1 Shareholders' funds

a Share capital 1 32,500

b Reserves and Surplus 2 11,200

2 Non-current liabilities

a Long-term borrowings 3 20,0003 Current liabilities

a Trade Payables 3,262

b Short-term provisions 4 6,050

Total 73,012


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Assets

1 Non-current assets

a Fixed assets

i Tangible assets 5 54,980

ii Intangible assets 1,252

b Other non-current assets 6 6005

2 Current assets

a Inventories 6,025

b Trade receivables 3,123

c Cash and cash equivalents 1,627

Total 73,012

Notes to financial statements

` ('000)1. Share Capital

Equity share capital

Authorised

2,500,000 Equity shares of` 10 each 25,000

Issued & subscribed

2,000,000 Equity shares of` 10 each 20,000500,000 Equity shares of` 10 each issued during the year (A) 5,000 25,000

Preference share capital

Authorised

125,000 14% Preference shares of` 100 each 12,50

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