Analysis of ARR & Tariff Proposal of SOUTHCO for FY 2011-12

February 10, 2011

By

World Institute of Sustainable Energy

(Consumer Counsel)

ARR submission and Proposal of SOUTHCO

ARR submission of SOUTHCO

ARR 2011-12 ProjectedPower purchase cost 325.03Employee Cost 283.49A&G Cost 39.43R&M Cost 50.13Depreciation 20.25Bad Debts 10.35Interest & Finance charges 62.01Reasonable return 8.11Amortization of Regulatory Asset 144.54Truing up of Revenue Gap for FY 2009-10 123.11Contingency Reserve 2.1Total ARR 1068.55Sale of Power at existing tariff 517.44Other Revenue 6.5Total Revenue Relisation 523.94Revenue Gap with existing Tariff 544.51

In Rs. Cr.

Tariff Proposal of SOUTHCO

The licensee requests the Hon’ble Commission to accept the proposal of ARR and bridge the revenue gap through combination of – grant/subsidy from the state govt., – reduction in BST and/or – increase in RST in appropriate manner.

Proposed Tariff Rationalisation Measures

– Computation of Over drawl penalty

– Delayed payment surcharge

– KVAH billing for three phase LT & HT industrial consumers

– Demand charges for consumers having contract demand more than 70KVA through HT supply

– Payment of demand charges for CPPs

– Discontinuance of load factor incentive in Energy Charges

– Fixed charges for LT industrial (S & M), specified public purpose and public water works

– Tariff for Medium Industries Consumers

– Monthly Minimum Fixed Charges for consumers with contract demand < 110 kVA

– Security deposit for providing meter and metering installations

– Demand charges and monthly minimum fixed charges

– Inspection fees of lines and substations

– Billing of lift irrigation points

– Over Drawl Penalty for Drawl over and above OERC approved Quantum (MU) & (MVA)

– Back to back DPS adjustment between GRIDCO, GOO and Licensee

– Initiatives to increase collection efficiency through Jan Seva Kendra in DISCOMS

– Power factor penalty

– Fuel price adjustment

– Rebate on prompt payment

Analysis of ARR by Consumer

Counsel

Observation:44.33% is the distribution cost of proposed ARR

Revenue GAP of SOUTHCO for FY 2011-12(in Rs Cr)

Annual Revenue Requirement SOUTHCO

ARR 2010-11 Approved

2011-12 Projected

% Change

Power purchase cost269.19 325.03

20.74371

Employee Cost133.96 283.49

111.6229

A&G Cost17.96 39.43

119.5434

R&M Cost 26.11 50.13 91.9954Depreciation 14.12 20.25 43.4136Bad Debts 6.98 10.35 48.2808Interest & Finance charges 15.41 62.01 302.401Reasonable return 6.03 8.11 34.4942Amortization of Regulatory Asset 0 144.54  Truing up of Revenue Gap for FY 2009-10 0 123.11  Contingency Reserve 0 2.1  Total ARR

489.76 1068.55118.178

3

Observation: -SOUTHCO has proposed 118% hike in ARR for 2011-12

ARR cost component-Power Purchase Cost

Issues:

1.Utilization of proposed power

2.Higher demand forecasts

3.Higher Distribution Loss

4.Lower Collection Efficiency

5.Higher AT & C Loss

6.Higher loss in LT and HT network

Utilization of Proposed Purchased Power

Observation:- 43% power purchased is loss and actual sale is 57%

Demand Forecasting (In MU)

Sale/ Purchase

FY 2010-11 FY 2011-12

Projection in ARR

% Change over

2010-11 Revised

Estimates

Number of ConsumersProjection in ARR

Revised Estimates (Based on actual

data of Six months)

% Change in (Rev Est.

over Projection)

As on 1/4/2010

As on 1/4/2011

% Change

LT 923.99 849.39 -8.07 1028.89 21.13 622,824 856,597 38%HT 234.13 225.79 -3.5 219.79 -2.65 539 569 6%EHT 290.15 283.61 -2.25 390.89 37.82 12 12 0%Total Sale

1448.29 1358.80 -6.17 1639.59 20.66

Total Purchase 2530 2545.00 0.59 2860.00 12.38

Observation: Utilities demand forecast is on higher side and also have some discrepancies in terms of % rise in Consumption Vs % rise in number consumers in EHT category. This will result in higher power purchase cost in ARR and corresponding impact on consumers Submission: Excess power purchase cost is mainly due to excess loss at LT level. Utilities should be directed to drastically reduce the LT loss level.

Distribution Loss (%)

Approved in ARR

Approved in BP

Actual Audited Performance

2007-08 30.4 30 45.5 +15.5

2008-09 30.4 30.42 47.8 + 17.38

2009-10 27.9 27.92 48.02 + 20.15

2010-11 27.82 27.82 ?

2011-12 26.5 ?

Observation: -There is huge gap in projected (42.62%) and approved (26.5%) distribution loss. -Trend of actual distribution loss is increasing. -There is no financial provision for SI in ARR and in BP.

Submission:-Loss of revenue realization / higher energy purchase due to (16.17 %, 462.5 MU, 53.62Cr ) higher distribution loss should not be allowed to passed on to consumer.

Collection Efficiency (%)

Approved in ARR

Approved in BP

Actual Audited Performance

2007-08 94 9494.1 + 0.1

2008-09 94 9494.2 + 0.2

2009-10 95 9895.98 - 2.2

2010-11 97 98 ?

2011-12 99 ?

Observation: -Collection efficiency proposed is lower by 1 % than that of approved in BP. -LT collection efficiency up to Sept 09 (Actual) is 83.96%. Which clearly shows the reason for lower overall collection efficiency. -Further the gap between the approved and actual collection efficiency is increasing from 2009-10 which indicates that measures taken by the utility are not effective to that extend.

Submission:-Loss of revenue realization due to 1% lesser collection efficiency (than that of approved in BP)should not be passed on to consumer-Nominal DPS to LT consumers if allowed could help to improve the collection efficiency.

AT & C Loss (%)

Approved in ARR

Approved in BP

Actual Audited Performance

2007-0834.6 34.2 48.7 +14.5

2008-0934.6 34.59 50.8 + 16.21

2009-1029.4 29.36 50.16 + 20.8

2010-1129.27 29.26

?

2011-1227.24

?

Observation: -Licensee has proposed 43.82% AT&C Loss.-93% Metering covered till Sept 2009. -Low Agriculture Consumption. -This implies that the reason for higher AT&C loses could be 1)Lower HT to LT ratio.2)Poor Power factor3)Aged transmission lines and poor jointing 4)Less energy Audits 5)Faulty meters and metering6)Higher thefts

- Six energy police stations are functioning out of proposed Nine.

Distribution Loss excluding EHT Consumption

FY 2009-10 Actual

FY2010-11 Proposed

FY 2010-11 Revised Estimates

FY 2011-12 Proposed

Overall Distribution Loss 48.02% 42.76% 46.61% 42.67%Distribution Loss Excluding EHT consumption 53.56% 48.29% 52.45% 49.43%Distribution Loss Approved in BP 27.83% 26.50%

Observation: Distribution loss in HT and LT level is much higher than the overall distribution loss (taking together LT, HT and EHT consumption) and approved distribution loss in BP.

Submission: Utility needs to find out reasons for high losses in HT and LT level. Faulty metering , meter tampering , power theft needs to be drastically reduced with the help of regular inspection, dedicated flying squad and energy police stations. Such energy police stations should be directly controlled by senior police officer attached to energy department.

ARR cost component – Employee Cost

• Observation:The utility has proposed the Employee cost of Rs 283.49 Cr in ARR with 111.62% hike from the earlier FY 2010-11

Employee Cost per unit of Energy Purchase (Paise/Unit) % Rise in

FY 11-12 over FY 08-09FY 08-09 (App) FY 09-10 (App) FY 10-11 (App) FY 11-12 (Prop)

CESU 30.79 32.23 34.83 41.34 34.27

SOUTHCO 47.04 45.62 56.57 99.12 110.72

NESCO 21.96 26.67 28.81 59.88 172.72

WESCO 19.36 21.60 26.70 55.80 188.21

ARR cost component – A&G Cost

Observation:• Utility has proposed A&G expenses of Rs. 39.43 Cr for FY 2011-12 which are

119.54% higher than that of approved expenses for FY 2010-11.

Submission:Most of the A&G expenses projected by the utility are based on 7% hike from the current year in line with LTTS order. Further, utility has proposed higher expenses under the heads Franchise expenses, Training Expenses, Special police stations, organizational development expenses, additional expenses etc without any detailed supporting plan and breakup of cost components. These expenses shall not be allowed to pass through in the ARR.

A&G Cost (Paise/Unit)% Rise in

FY 11-12 over FY 08-09FY 08-09 (App)FY 09-10 (App) FY 10-11 (App) FY 11-12 (Prop)

CESU 4.96 4.77 5.59 7.69 55.04SOUTHCO 6.51 6.84 7.58 13.79 111.94NESCO 3.12 3.68 3.34 7.11 128.08WESCO 3.68 3.55 3.97 5.91 60.48

ARR cost component – R&M

Observation:Utility has proposed Rs. 50.13 Cr as R&M expenses. These expenses were projected as 5.4% of the opening GFA. (Rs. 928.36 Cr. at the beginning of FY-2011-12)

Submission: Utilities GFA approved by commission as on 31.03.2010 were 390.96 Cr. Utility has projected the GFA as Rs. 928.36 Cr. at the beginning of ensuring year. Which seems to be on higher side. Therefore Hon. Commission should consider the new additional GFA (during FY 10-11) over and above approved GFA of Rs. 390.96 and equivalent R&M be allowed to pass through in the ARR.

ARR cost component–Interest & financial charges

Observation: Utility has proposed Rs 62.01 Cr as net interest charges in the ARR. This includes the major component of Rs. 30.68 Cr towards differential interest payment of power bond.

Submission:

Rs. 30.68 Cr towards differential interest payment of power bond should not be allowed to pass through in ARR.

ARR cost component – Provision for Bad Debt

Observation: Utility has proposed Rs 10.35 Cr as provision for Bad Debt by considering 98% collection efficiency as against 99% approved in BP.

Submission:Provision of bad dept 1% (due to the 1% lower collection efficiency) should not be allowed to be passed on to consumer through ARR which accounts to Rs. 5.175 Cr.

ARR cost component-RoE

Observation: As proposed equity capital is constant for the current and ensuring year. There is no new equity capital infusion from DISCOM. Hence the Return on Equity should remain same as that of approved for FY 2010-11.

Submission:Proposed higher RoE (Rs. 8.11 – Rs 6.03 Cr)should not be allowed to pass through in ARR

Per Unit Distribution Cost

Per Unit Distribution Cost (Paise /Unit)% Rise in

FY 10-11 over FY 09-10

% Rise in FY 11-12 over

FY10-11FY 09-10 (App) FY 10-11 (App) FY 11-12 (Prop)

CESU 61.99 66.07 83.95 6.58 27.06

SOUTHCO 80.11 93.11 165.65 16.23 77.92

NESCO 53.25 53.31 108.74 0.11 103.98

WESCO 41.77 48.99 92.59 17.30 89.01

Tariff proposal – Other Issues

Growth in LT consumers

Consumer category

Number of Consumers FY

2010-11

FY 2011-

12Difference

% Increase in

ConsumersTotal LT consumers

622,824

856,597 233,773 38%

Total HT consumers 539 569 30 6%Total EHT consumers 12 12 0 0%

Grand Total 623,37

5857,17

8 233,803 38%

Observation: -About 63 % of energy is proposed to be sold to LT consumers. - Year on Year growth in LT consumers is 38% -Minor change in LT tariff has considerable impact on ARR. -As the LT consumer base is increasing there is likely possibility of further reduction of collection efficiency -This will increase pressure of cross subsidy on HT and EHT consumers.

Consumer category

Number of Consumers Position

as on01.04.20

10

Position as on

01.04.2011

Addition in FY

2010-11

% Increase (1/4/10 to

1/4/11)

Proposed Addition during FY 2011-12

% Increase (1/4/11 to

1/4/12)LT Domestic 537,541 587,541 50,000 9% 50,000 8.51%

Kutir Jyoti <=30 kWh 22,823 202,897

180,074

789% 4,00,000 197.14%Total LT domestic 560,364 790,438 230,074 41% 4,50,000 56.93%

Observation: The growth of BPL consumers is increasing due to GoI / GoO rural electrification schemes : growth in FY 2010-11 ( 789%) & anticipated in FY 2011-12 ( 197% ) as per submission in ARR. It is predicted that the cumulative BPL consumer in Orissa will raise to 40 lakh by end of 2011-12 , accordingly the BPL consumers in SOUTCO area will further increase . Submission:In above situation , it will be difficult to maintain the EHT , HT & LT tariff so as to keep the cross subsidy within (+ / - ) 20% of average cost of supply. The subsidized BPL tariff should be strictly made applicable to the consumer having monthly energy consumption of 30 units . The OERC may recommend GoO to give upfront subsidy to DISCOM to cater the BPL consumer in the state.

Growth in Kutir Jyoti / BPL consumers

27

Submission of Consumer Counsel• SOUTHCO’s projection of purchase forecasts are on higher side due to higher losses at HT and LT

level. Cost of power of Rs 53.62 Cr due to higher distribution loss should not be allowed to pass through in ARR.

• Loss of revenue realization due to 1% lesser collection efficiency should not be allowed to pass through in ARR. Nominal DPS to LT consumers if allowed could help to improve the collection efficiency.

• The Utility has not taken any step to reduce distribution loss in the line of recommendations of the Kanungo Committee and OERC.. Utility needs to explore various measures to reduce LT and HT distribution loss. Faulty metering and power theft needs to be drastically reduced with the help of dedicated flying squad and energy police stations. Such energy police stations if directly controlled by senior police officer attached to energy department could improve the efficiency.

• Higher A&G expenses should not be allowed to pass through in the ARR.

• Higher R&M should not be allowed to pass through in the ARR.

• Rs. 30.68 Cr towards differential interest payment of power bond should not be allowed to pass through in ARR.

• Rs. 5.175 Cr higher provision for bad debt should not be allowed to pass through in the ARR..

• Rs 2.08 Cr of Proposed higher RoE of Rs (Rs. 8.11 – Rs 6.03 Cr)should not be allowed to pass through in ARR

• Licensee should make effort to collect arrears in order to reduce deficit.

• ARR can be reduced by increasing collection efficiency, reducing losses and measures suggested by consumer counsel in the submission..

• Hon. Commission may kindly consider all above facts and decide the retail tariff in the best interest of all category of consumers.