Chapter-9

9.1       ANNUAL REVENUE REQUIREMENT

            The Board has filed tariff application for revision of tariff rates to meet its Annual Revenue Requirement for the year 2005-06. ARR filings of the Board also include truing up for the year 2003-04 and revised ARR for the year 2004-05.  The Board has projected revenue deficit of Rs.1878 crores for the current year and additional deficit of Rs.1476 crores for the years 2003-04 and 2004-05.  It has, however, proposed to recover only Rs.1002 crores through increase in tariffs during the current year. The balance deficit of Rs.876 crores for the current year is proposed to be converted  to Regulatory Asset while no proposal has been made by the Board for recovery of  deficit of Rs.1476 crores projected by it for earlier years. The Board has, however, stated that suitable recovery mechanism needs to be evolved separately. The Commission has determined the ARR for the current year at Rs.7863.54 crores.  After making adjustments on account of non-tariff income and revenue from tariff at existing level, the Revenue Gap assessed by the Commission for the current year is a deficit of Rs.500.07 crores, against deficit of Rs.1878 crores for the current year only projected by the Board in its ARR.

            The Commission has simultaneously undertaken the final exercise of Truing Up for the year 2003-04. This is consequent to the availability of audited balance-sheet of the Board for that year as well as the specific proposal  made by the Board in the current ARR requesting for Truing Up Exercise for the year 2003-04.  Similar exercise for the year 2002-03 was suo-moto undertaken by the Commission first time in its last Tariff Order for the year 2004-05. The basic logic behind such exercise is very clear. The Commission initially fixes tariff for a particular year based on estimates which, in turn, are based on certain assumptions which may or may not come out to be true during the year. Even at the time of review of the tariff order in the next Tariff Order, the orders of the Commission are generally based on latest estimates or pre-actuals for that year which are  a better indication of the final picture, but not the actual.  As a result, after the finalisation of the balance-sheet, a final exercise of Truing Up is necessiated. For the year 2003-04 the Commission first passed the Tariff Order and thereafter undertook review exercise in the Tariff Order for 2004-05.  After availability of audited figures for the year 2003-04, the final exercise of Truing Up for the year became essential.  As a result of this Truing Up Exercise, net revenue surplus of the Board has been finally worked out at Rs.36.66 crores against the surplus of Rs.262.43 crores earlier determined by the Commission in its Tariff Order dated November 30, 2004.  This surplus has been carried forward to the next year for adjustment. The detailed discussion in this regard is contained in Chapter-2 of this order.

The Commission had simultaneously taken up the review of its Tariff Order for the year 2004-05. The logic for undertaking Truing Up Exercise for 2003-04 is already explained above.  As a result of this exercise, the ARR for the year 2004-05 is revised to Rs.7567.47 crores as against the original approval at Rs.7424.60 crores. After adjustment of non-tariff income and revenue from the tariff at the existing rates as well as special concessions granted to various categories of consumers under that tariff order, the gap for the year 2004-05  is revised to deficit of Rs.305.24 crores against surplus of Rs.175.86 crores originally approved by the Commission.  After including the impact of Truing Up Exercise for the year 2003-04, total gap for the year 2004-05 is now determined at a deficit of Rs.268.58 crores against the surplus of Rs.438.29 crores originally approved by the Commission.  The detailed discussion in this regard is contained in Chapter 3 of this order.

Combining the result of all the three exercises, the Commission has come to the conclusion that there is overall total revenue deficit of Rs.768.65 crores.  In other words, the combined impact of the three exercises i.e. Truing Up for the year      2003-04, review for the year 2004-05 and assessment for the year 2005-06,  is that at the prevalent level of tariffs, the Board is short of revenue by Rs.768.65 crores as compared to its total revenue requirement.

9.2       COST OF SUPPLY & REVENUE GAP

As per the basic mandate of the Electricity Act, 2003, the issue of ?cost of supply? is  fundamental to the determination of tariff. Section 61 of the Act lays down different guiding factors to be kept in view by the Commission for determination of tariff. Sub section (d) provides that the consumers? interests are to be safeguarded while at the same time recovery of the cost of electricity in a reasonable manner is to be ensured. Further sub section (g) provides that tariffs should progressively reflect the cost of supply of electricity and also reduce and eliminate cross subsidies. Thus, from the Board?s point of view, cost of supply of electricity is to be recovered and from consumers? point of view, tariffs are to progressively reflect cost of supply of electricity. It is clear that cost of supply is the ultimate goal towards which tariffs of different categories of consumers have to move over a period of time. The Commission for all purposes has taken cost of supply to mean average cost of supply.        

The average unit cost of supply is derived by dividing the Total Revenue Requirement for the year (Sr.No.9 in Table 7.44) by the total units of energy sold (Sr.No.19).  Clearly, for a given level of units of energy sold, changes in the average unit cost will depend upon factors like changes in operational efficiencies, fuel costs, other major expenses like employees costs and interest charges, cost of power purchase (which varies mostly as a result of fluctuations in hydro generation and overall demand), inflation and T&D losses.  In general, one could say that where operational efficiencies are improving, costs are being contained and T&D losses are being reduced, unit average cost would be declining.  After regulatory regime took over, the average unit cost of supply for different years has been 315 p. (trued up) for 2002-03; 300 p. (trued up) for 2003-04; 321p.(revised) for 2004-05 and 319 p.(estimated) for 2005-06. This figure is relatively steady.  However, this need not provide any great comfort because this is as per the Regulatory Accounts.  The true picture of the performance of the Board is given by the actual figures of the yearly average unit cost as per the Balance Sheets of the Board.  In the case of the PSEB, such figures would be found to be higher and rising.  Difference, in these figures as compared to the Regulatory Accounts figures would indicate that the Board is suffering losses continuously (reasons for which could be easily guessed).

It may be stated that tariff modification requirements are not directly and exclusively related to the yearly average unit cost of supply.  Tariffs are required to be adjusted to meet the Revenue Gap. Revenue Gap in turn depends on the sum of the surplus/deficit carried forward from last year and the difference between ARR and Income (i.e. tariff income and non-tariff income) for the current year.  Thus, in theory, it is possible that even when yearly average unit cost has not increased (or may even decline) in a particular year, a Revenue Gap may emerge which will have to be made good normally through tariff increases only.  Further, the percentage average increase in tariff will be determined by the Revenue Gap expressed as a ratio of the total tariff income of the year at existing rates of tariff. 

      When yearly average unit cost of supply does not change as compared to the previous year, it means that ARR has increased in the same ratio as the energy units sold.  If the total income were also to increase in the same ratio, there would be no Revenue Gap.  Tariff income would automatically increase to the same extent as energy units sold if all consumer classes were paying one common tariff, which was roughly equal to the average unit cost of supply.  Alternately, tariff income would still increase to the required extent if in case when different consumer classes were paying differential tariffs, the consumption growth in each consumer class is the same.  Since in real situation, this is not happening, the Revenue Gap may emerge, without showing any clear relationship with the changes in the yearly average cost of supply.  It is possible to generalize a little more and say that where overall, weighted increase in the consumption of subsidizing consumer classes is more than the corresponding increase for the subsidized categories, the Revenue Gap would be surplus and in the reverse situation, it would be deficit.  Furthermore, if the consumption of the subsidized consumer classes is rising more than the consumption of the subsidizing consumer classes, and if levels of cross subsidy for the subsidizing classes are not to be increased (as is the mandate of the Electricity Act, 2003), it follows that tariffs of the subsidized classes will have to be raised by a margin which is higher than the required average increase in tariff in a given situation.  A policy conclusion which emerges is that if a subsidized class is raising its consumption too much from year to year, it must be ready to accept a tariff hike which is larger than the hike for other classes.  This has particular relevance for AP consumption in our set up.  Not only are the AP tariffs lowest as compared to the average unit cost, but the annual growth in AP consumption is high and sustained. Inevitably, either the growth will have to be curbed or AP tariffs, in the years to come, will have to be raised by a higher proportion compared to other classes.

      The changes in consumer mix in the last few years are demonstrated in the table ahead:

Table - 9.1

Growth in Category-wise Energy Sales

A second, though relatively insignificant reason for the emergence of the Revenue Gap is the relative inelasticity of the non-tariff income.  If the percentage increase in non-tariff income is less than the percentage increase in the ARR (or the units of energy sold), it would lead to the creation of Revenue Gap.

The third contributory cost for the existence of the Revenue Gap which is required to be made good through tariff changes is the Revenue Gap carried forward from the previous year.  This may be positive or negative and may be often quite significant.

9.3       CROSS SUBSIDY

Cross subsidy is another important factor in determination of tariff. As already stated above, Section 61 of the Electricity Act, 2003 mandates the Commission to reduce and eliminate cross subsidies. The Act further goes on to say that the cross subsidies should be eliminated within a period to be specified by the Commission.

            As the mandate of the Act is clear and specific and cross subsidy is one of the critical factors in determination of tariffs, it is important to understand its meaning. The common understanding of the term ?cross subsidy? is the excess contributions made by a class of consumers over and above the justified contributions to be made on their part. These excess contributions are utilized for cross subsidizing other categories of consumers who may be contributing below their justified share. Hence, the term ?cross subsidy? i.e.  cross subsidizing of one section / category of consumers by another section/ category of consumers. In its Tariff Order for the year 2004-05, the Commission had gone beyond the general understanding of the term ?cross-subsidy? and had made serious effort to define the same. In this context, the Commission had also deliberated at length and decided to go by the ?average cost of supply? principle for determining the cross subsidies prevalent in the system.  Carrying on the discussion further, the Commission had deliberated at length about various alternative definitions of the term cross subsidy and had finally defined the same to mean as difference between revenue actually realized from a particular category and the cost of supply, expressed as a percentage of average cost of supply.

From the discussion in para 9.2 above, it is clear that the Revenue Gap of the previous year has to be added to the current year?s gap to arrive at the aggregate Revenue Gap to be covered through tariff changes. It is, therefore, necessary to consider a change in the definition of cross subsidy adopted by the Commission last year.

            The Commission feels that for the purpose of measuring cross subsidy levels, the current year?s ARR should be increased/decreased by the Revenue Gap of the previous year and so the yearly average unit cost should be replaced by the combined average unit cost for the purpose of calculation of cross subsidies. Hence cross subsidy is redefined as:

The combined average cost of supply now works out to 329.42 paise per unit against        299.17 paise per unit worked out last year. 

9.4       TARIFF PROPOSAL OF THE BOARD

The tariff proposal of the Board is contained in Chapter 5 of this Order. The detailed tariff schedule proposed by the Board is contained in Annexure-I of that Chapter. Salient features of the proposal are also narrated in that Chapter. One of the basic changes proposed by the Board in the tariff structure this year is the shift from Single Part Tariff to Two Part Tariff for all categories of consumers (except Agricultural Pumpset  and Temporary Supply consumers). This structure involves charging of tariff in two parts - one for the energy consumption made by a consumer which is in proportion to the energy consumed by him at the rates determined for the purpose and second, fixed charges to be borne by the consumers which are with reference to the sanctioned load/ contract demand but irrespective of the actual energy consumed by the consumer. The proposal for imposition of fixed charges goes hand in hand with the proposal for abolishing of Monthly Minimum Charges.  Due to the change in the basic structure of tariff in the proposal of the Board, it is not possible to work out the increases in tariff in each category as per proposal of the Board.  The Board has also proposed to restructure the slabs of domestic consumers by dividing the present lowest slab into two different slabs that is one slab from 0 to 30 Units and another from 31 to 100 units and merging the remaining present two slabs of above 100 units.

The Board has also proposed higher flat rate tariff for AP tubewells with Submersible  pumps. The tariff for Submersible  pumpsets is proposed to be 24% higher than tariff for Mono-block pumpsets, as energy consumption of Submersible  pumpsets is higher by 24%. The Board has also proposed restructuring of the penalty for exceeding the contract demand. Rebate for high voltage has also been proposed to be linked with norms on the basis of connected load. This year, the Board has not proposed recovery of charges for transmission and system operation activities of the Board separately from distribution business. Apparently, the Board is not foreseeing unbundling of the Board into separate Generation, Transmission, Distribution and System Operation Utilities during the current year.  The detailed discussion on consumer issues related to tariff is contained in Chapter 8 of this Order.

9.5       DETERMINATION OF TARIFF

            For determination of tariff, the Commission is guided by the principles enshrined in the Electricity Act, 2003. Section 61 of the Act lays down the various guiding    principles in this regard. These are reproduced below for quick reference :-

(a)               the principles and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees;

(b)               the generation, transmission, distribution and supply of electricity are conducted on commercial principles;

(c)               the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments;

(d)               safeguarding of consumers? interest and at the same time, recovery of the cost of electricity in a reasonable manner;

(e)               the principles rewarding efficiency in performance;

(f)                 multi-year tariff principles;

(g)               that the tariff progressively reflects the cost of supply of electricity, and also, reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission;

(h)               the promotion of co-generation and generation of electricity from renewable sources of energy;

(i)                  the National Electricity Policy and tariff policy.

For working out the ARRs, the Commission has kept these principles in view. For  tariff determination, the main principles are contained in sub section (d), (f), (g) and (i) above. While National Electricity Policy has been notified, the Tariff Policy is yet to be finalized by the Government of India. Only Draft Tariff Policy has been received by the Commission recently but is yet to be finalized.  Also, the Multi Year Tariff principles are still being developed by the Commission. The Commission has also been guided by the philosophies and principles adopted by it in the earlier three Tariff Orders. Besides, the Commission has taken a considerate view of the consumers? genuine grievances and made efforts to address the same to the extent possible.

Regarding the methodology for determination of tariffs for various categories of consumers, the Commission has firstly worked out the ARR for the current year. After adjustment of ?Other Income? and ?Revenue from Tariff? at the existing rates, the Commission has arrived at the Revenue Gap for the current year as already worked out in Table 7.44 of this order.  After adding the adjustments made for the earlier years, the total  deficit of the Board works out to Rs.768.65 crores as given in Table 7.44. While working out this deficit, the Regulatory Reserve of Rs.291 crores created with excess revenues of the last year, also stands liquidated.

The Commission in its last Tariff Order had decided to give concession of 10% in tariff on consumption of electricity to the domestic category of consumers located in rural areas. This concession was allowed to them in view of the substantially poor quality of supply. The total impact of this concession was adjudged at Rs.65 crores on ad hoc basis.  Inspite of the substantial revenue impact, the Commission notes that this step has not been particularly welcomed by the rural community.  In fact, the demand from the rural community has been for improving the quality of supply and  not for lower tariff rates.  The Commission also notes that in cases of common feeders for rural and urban areas, such a concession has led to disparity as some times the consumers getting supply from the same feeder and getting the same quality of supply, are charged  differential tariff rates depending on the area of their residence ? rural or urban.  Though the Commission is following average cost of supply principle for determination of tariff, it needs to be stated that the actual cost of supply to rural areas is substantially more than the average cost of supply and as such, charging of still lower tariff from them is unreasonable and unviable.  Further, the Board has committed to cover all the rural areas in Punjab under the urban pattern supply within the next few months.  Accordingly, the Commission does not see much justification in continuing this concession, especially in view of substantial revenue deficit now determined by the Commission.  The gap shall be met by withdrawal of this concession by Rs.65 crores and balance to be covered through tariff increase of Rs.703.65 crores.

The Commission notes that in its last three Tariff Orders, it has already reduced the cross subsidy levels prevalent in the system substantially.  This has been achieved by the Commission in two ways, (1) by levy of tariff of about Rs.2 per unit on agricultural consumers as against free supply of power to this sector earlier.  In fact, the recovery from agricultural sector is now about two third as against 0% recovery earlier, and, (2) by bringing the tariffs of other categories of consumers nearer to average cost of supply. To achieve this objective, in case of increase, the Commission has affected higher increase in tariff of subsidized category of consumers than the subsidizing ones.  Similarly, in case of decrease, the decrease in respect of subsidized category has been kept at a lower level than the decrease in subsidizing category of consumers. In fact, in the State of Punjab, the current subsidy levels are substantially lower than the ones prevailing in other States. Accordingly, the Commission does not consider need of differential increase in tariffs in the current year.  This is especially so in view of the substantial Revenue Gap of Rs.703.65 crores which is now required to be recovered through increase in tariffs and represents average increase of more than 10%. The Commission, therefore, decides to uniformly increase the tariffs in respect of all categories of consumers in the current year so as to fully recover the revenue deficit now determined.

As discussed in detail in Chapter 8 of this order, the Commission has already decided to continue the present system of Single Part Tariff instead of Two Part Tariff structure proposed by the Board. Accordingly, Monthly Minimum Charges have to continue. Further, to maintain parity with the quantum of units of electricity ensured through the MMC, the Commission also decides that the MMC may also be increased in equal proportion to the tariff increase to be effected during the year. The percentage increase in tariff is worked out by dividing gap to be covered with the income from tariff at existing rates. The income from tariff at existing rates will however need to be adjusted for income from MMC and revenues from Common Pool and Outside State sale. Based on the above principle, the required increase in tariff works out to 10.27% for all categories of consumers. The increase in MMC has accordingly been taken as 10.27%. The exact impact on tariff and MMC with this increase is as given in Table 9.2. The growth in Annual Revenue Requirement approved by the Commission and the revenues of the Board over the last 4-5 years is given in the graphs on the opposite.

Table - 9.2

TARIFF STRUCTURE

EXISTING TARIFF, TARIFF AS PROPOSED BY PSEB

AND TARIFF AS APPROVED BY THE COMMISSION

FOR 2005-06 APPLICABLE W.E.F. APRIL 01, 2005