PERFORMANCE OF POWER SECTOR IN PUNJAB

Transcription

1 PERFORMANCE OF POWER SECTOR IN PUNJAB The Punjab State Electricity Board was constituted as an integrated power utility under the Electricity (Supply) Act It continued discharging the generation, transmission and distribution functions up to April The government of Punjab was required to unbundle the Punjab State Electricity Board (PSEB) under the provisions of the Electricity Act Box 2: Milestone in Power Sector Reforms in Punjab State Sr. No Key Development Date 1 The Punjab State Electricity Board (PSEB) was a statutory body formed Feb 01, 1959 Re-organization of the erstwhile State of Punjab under the Punjab Reorganization May 01, Act 1966 PSERC was constituted under the provisions of Electricity Regulatory March 3, Commissions Act,1998 MoU on power sector reforms signed between Ministry of Power, Govt of March 30, 2001 India and Govt of Punjab 4 The Commission passed its first (tetail) tariff order on the proposal of PSEB Sept 6, 2002 Submission of the Report of the Expert Group on Power Sector Reforms in March 06, Punjab (Gajendra Haldea Report) These Regulations may be called the Punjab State Electricity Regulatory March 07, Commission (Conduct of Business) Regulations, 2005 Punjab State Electricity Regulatory Commission (Forum and Ombudsman) August 17, Regulations, Unbundling of Punjab State Electricity Board (PSEB) April 16, PSPCL has filed its first ARR Petition for FY Nov 30, 2010 However, under the pressure from certain political interests and employees unions, it deferred the restructuring process of PSEB for many years. Ultimately, the state government had to unbundle the PSEB into separate generation, transmission and distribution companies. The Govt. of Punjab vide its notification dated issued the Punjab Power Sector

2 Reforms and Transfer Scheme, 2010 and has notified two successor entities of the erstwhile PSEB. The Punjab State Power Corporation Limited (PSPCL) is one of the successor entities and is entrusted with the functions of generation, distribution, wheeling and retail supply of electricity in the state. The other successor entity, the Punjab State Transmission Corporation Limited (PSTCL) is assigned with the functions of transmission of electricity in the State, including functions of State Load Dispatch Centre (SLDC). The Punjab State Electricity Regulatory Commission (PSERC) was established on under the Electricity Regulatory Commissions Act, 1998, a Central Act which was superseded by the Electricity Act, The Commission is assigned various functions, such as determination of tariff for generation, transmission and wheeling of electricity, supply to wholesale, bulk or retail consumers etc. under Section 86 of the Act. Other major functions of the Commission include regulating electricity purchase and procurement process of Distribution Licensees; issue Licenses for Transmission, Distribution and Trading of electricity and promote generation /co-generation of electricity from renewable sources of energy. It has also advisory role to make suggestions to the State Government on key issues such as promotion of competition, efficiency and economy in activities of the electricity supply system; promotion of investment and restructuring of electricity supply industry in the state. Therefore, one of the major functions of the PSERC is to make a balance between the interests of consumers and utilities promoting economic efficiency in the sector. Like other Electricity Regulatory Commissions of

3 the country, PSERC has adopted Rate of Return (RoR) approach for the regulation of power sector business in the state. Under the RoR approach, the regulated utility is required to make exante proposals of the revenue requirement and get it approved from the regulator on periodical basis. Ideally, there should be no significant difference between the targets approved by the Commission and actual achievements by the utilities. However, this was not a reality in the case of Punjab. Many times, there were significant differences observed between the actual performance of PSEB and the targets fixed by the Commission. The Commission had to initiate true-up exercises to make adjustments between the approved amounts and actual performance for various expenses, at later dates when more reliable data was available. With this background, this chapter targets to analyse the physical and financial performance in the light of regulatory observations made by PSERC during the last ten years. It may be noted that reform process was initiated with formation of the regulatory commission in However, the generation, transmission and distribution functions continued to be vested in the Punjab State Electricity Board, a single entity. The PSEB was reorganized quite recently on in to two separate companies, one for generation and distribution functions and the other for transmission and load dispatch centre which was a statutory requirement. Therefore, Panjab study is an exercise in examining the changes in performance of the PSEB, if any under the direction of the regulatory commission (PSERC) during the last 10 years i.e. from to In Section I, we examine the physical and financial performance of the utility taking into consideration some performance parameters such as plant load factor, energy losses,

4 commercial losses etc. In section II, financial performance has been examined in relation to the pricing policy being adopted in the state. In Section III, some salient features emerging from the tariff order passed by the PSERC for the year has been highlighted. Section IV includes some of the regulatory concerns which emerge from the regulatory experience of the PSERC. Section V includes conclusions and policy recommendations. SECTION 3.I: TECHNICAL PERFORMANCE 3.I.1 Electricity Generation System: Generally, the Commission does not undertake any demand/supply forecasting exercise for making future energy projections in the state. However, as there is a shortage of power in the state, the demand projections were made on the basis of availability of power supply. It was assumed whatsoever power is available would be consumed by various categories of consumers. The demand supply scenario in the state is given in the Table 1 as projected by Central Electricity Authority (CEA). Table 3.1: Electricity Demand and Supply Scenario in Punjab Year Energy Peak Demand Available Demand Deficit Demand Demand Deficit (%) (MU) (MU) (%) Met (MW) (MW) Source: Central Electricity Authority, Monthly Reports (various issues)

5 It is shown in the Table 3.1 that over time since , the gap between demand and supply has widened over time. In , the energy and peak demand deficits were reported as 4.2% and 8.9 % which increased to 13.4% and 24.3% respectively in The widening of gap is due to failure in adding the planned generation capacity at the state as well central levels. Another important reason is the faster increasing demand for electricity across various sectors. In the FY , the reported energy as well as peak shortages were the highest, i. e. 13.8% and 24.3% respectively. Table 3.2: Thermal-Hydro Mix in Installed Capacity Owned by the State (Capacity (MW) Source (Fuel Type) Thermal 1280 (42) 2130 (54) 2620 (70) Hydro 1769 (58) 1799 (46) ) Total State Capacity 3049 (100) 3929 (100) 3762 (100) Source: Central Electricity Authority, Monthly Reports (various issues) Another important point is hydro-thermal mix in the generation capacity. Initially, the state had a reasonably high relative share of hydro capacity. Table 3.3: Generation Capacity as on S. No. Name of the Power Station Total Installed Capacity (MW) A Hydro: i)bhakra Nangal Complex ii) Dehar Power House iii) Pong Power House iv) Central Hydro Projects (NTPC) Punjab s Share (MW) Total (A) B i) Central Thermal Projects (NTPC) ii) Others C Total (B) PSEB Own Projects a) Hydro: i) RSDHEP 4x150MW ii) Mukerian 6x15 + 6x iii) Anandpur Sahib 4x iv) Shanan PHs 4x15 + 1x v) UBDC 3x15 +3x

6 vi) Daudhar Micro 3x0.5 vii) Nadampur Micro 2x viii) Rohti Micro 2x ix) Thuhi Micro 2x Sub Total (a) b) Thermal: i) GGSSTP, Ropar 6x210 ii) GNDTP, Bhantinda 4x110 iii) GHTP, Lehra Mohabat 2x210 iv) RSTP, Jalkhari 1x Sub Total (b) Total C: (a) +(b) Grand total (A) +(B) +(C) Source: (i) PSEB: Basic Statistics , Patiala (ii) PSERC- Tariff Orders for various years. However, over time, the relative share of thermal power has increased rapidly. The relative share of thermal power in the total owned capacity has increased from 42% in to 70% in (Table 3.2). The detailed break up of sources of power and the total installed capacity dedicated to the state as on is presented in the Table 3.3. The Commission has approved the estimates of available power in the state taking into consideration various performance parameters such as Plant Load Factor (PLF) and auxiliary consumption of thermal power stations etc. Table 3.4: Power Generation from Hydro and Thermal Sources (Million Units) Thermal Hydro Total Year Generation Moving* Average Generation Moving Average Generation Moving* Average

7 * Moving 5 year average Source: Centre for Monitoring of India Economy (CMIE) and Power Finance Corporation Report, 2010 In case of hydro power stations, the Commission has approved the availability projections on the basis of average energy generation in the last three years. The total energy available from the thermal and hydro sources is given in the Table 3.4 Thermal power generation has increased over time at a higher growth rate than the hydro power. This is because of relatively more capacity additions at the thermal power stations. It may be noted that hydro stations include power generation from the plants operated by Bhakra Beas Management Board (BBMB) also, which is utility shared by the states of Punjab, Haryana, Himachal Pradesh and Rajasthan. The average power purchase cost is determined by estimating the energy available and cost of power purchased from various internal as well external sources. The overall scenario of energy availability presenting the estimates of total power generation from own sources as well as external sources in and their relative shares as approved by the PSERC are presented in the Table Table 3.5: Estimated Power Availability in the State during FY (MU, )

8 Sr. No Station Energy Available Percentage Share of total 1. Thermal Station % 2. Hydel Stations % 3. BBMB % 4. =2+3 Total Hydro % 5. =1+4 Total own Availability % 6. Outside purchase Total Available in the state Source: Tariff Order issued by PSERC for the FY The Table 3.5 brings out that thermal power plants are the major source of electricity supply in the state. The share of hydropower including the energy received from BBMB sources will be 19% of the total power generated. The commission has also approved MU to be purchased from Central Power Undertakings such as NTPC, NHPC etc. Therefore, about 40% of the total power is outsourced from out of the state power stations. As per provisions of the Electricity Act 2003, the tariff rates of power supply from CPUs and BBMB are to be approved by the CERC. As the choice of source of supply is limited, the PSERC has effectively little control over the cost of power purchase from the outside sources. However, through efficient purchase and demand side management, the utility can reduce the power purchase bill from outside sources. This important issue is yet to receive due attention from the utility as well as the commission. It has been noted that the rates of power purchased from Central as well as shared utilities are determined by CERC while the state commission has discretion to fix the rates for the stations owned by PSEB. Since, the generation business in Punjab is still associated with distribution and retail supply business; it may not be possible to compare the internal power generation cost of PSEB with the other sources available to state. However, taking some performance parameters into account, one can examine the

9 physical performance improvements, if any, in the system over time. Plant Load Factor (PLF) and auxiliary consumption are two important parameters which can be used to evaluate the improvement in the generation system of PSEB. The PLF and auxiliary consumption of internal power stations is given in the Table 3.6. It may be noted that improvement in PLFs across various plants was not the same. Some of the power plants showed remarkable improvements in comparisons to rest of the plants in the state. Table 3.6: Plan Load Factor and Auxiliary Consumption in Punjab Year Plan Load Factor (%age) Aux. Consumption (%) NA NA NA NA NA NA

10 NA Source: Central Electricity Authority, and the Planning Commission Reports The plant wise PLF is given in the Table 3.7. It may be noted over time, except for GNDTP, Bhatinda, other thermal power stations have shown significant improvement in their performance. Table 3.7: Plan Load Factor Across Various Power Plants in the State (in %age) Years GNDTP, Bhatinda GGSSTP, Ropar GHTP, Lehra Mohabat Overall Source: Basic Statistics issued by PSERC 3.I.2: Transmission and Distribution System 3.I2.A: Transmission and Distribution Losses The high transmission and distribution losses was one of the main reasons responsible for poor performance of the SEBs in India. Transmission and distribution losses recorded in the Punjab power system are presented in Table 8. In , the T&D losses were estimated to be about 27% in Punjab. Then, under the pressure of PSERC and other stakeholders, PSEB showed some improved performance in the distribution sector. The T&D loss level as reported by PSPCL was 19% in Most important question is the reliability of the projected data. Since one-third of the power supply to agriculture sector is un-metered, there is no way to assess the actual technical and commercial losses in the system. The focus should be

11 on cent-percent metering of consumers so that the energy consumption and losses are estimated accurately. Table 3.8: Transmission and Distribution losses in the state Years T&D Losses in %age Source: Planning Commission Annual Report on Working of SEBs and EDs Power Finance Corporation Report to ARR of PSEB, SECTION 3.II: FINANCIAL PERFORMANCE National Electricity Policy 2005 as well as Electricity Tariff Policy 2006 focus on rationalization of tariff structure and elimination the crosssubsidisation in the sector. It requires the respective state government to pay the subsidy in advance on account of subsidized power supply to any class of consumers. It further provides that the tariff should reflect the cost of supply to ensure efficient use of power. However, in Punjab there is no progress towards tariff rationalization. Moreover, the state government has been providing free power to farm sector.

12 To examine the pricing policy of PSEB in relation to the cost of supplying power, separate analysis has been carried out for each consumer category with a view for determining the nature of relationship between the average revenue realised from various consumer categories within the state and the average cost of supplying power. It would help us to bring out the extent to which energy sale to each consumer class involves profit earning or subsidisation. It may be highlighted that existing tariff structure was not similar for all the categories of consumers. There was slab system for the domestic consumers, which consisted of three slabs on the basis of electricity consumption. The first slab consisted of the electricity consumption upto 100 units/ month; second slab covered the consumption from 101 to 300 units/ month, and the third slab was for the consumption above 300 units/ month. The industrial supply has been divided into three sub groups on the basis of connected load, i.e., Small Power supply (up to 20 KW), Medium Power supply (above 20 KW to 100 KW) and Large Power supply (above 100 KW). The agricultural supply has two options for tariff. Metered supply was charged according per unit tariff and unmetered supply according to per BHP/month (Tariff Order for FY , p.186). From analysis point of view we have clubbed subgroups into main category as the separate data was not available. The comparison between the average cost of supply and average revenue realised from various categories of consumers has been presented in Table 9. In this Table the figures in brackets are the average revenue as a proportion of the average cost of supply (AR/AC) in percentage terms. In the analysis average cost of supply was assumed to be same for all the consumer categories mainly due to non-availability of data regarding consumer category-wise (or voltage wise) cost of supply of electricity.

13 Table 3.9: Consumer Class-wise Average Revenue and Average Cost of Supply Per Unit) (Paise S. No. Description Annual Compound Growth Rates to to to Domestic (89.69) (68.37) (91.88) 2 Commercial (142.07) (127.22) (118.48) 3 Industrial (69.78) (111.30) (103.80) 4 Agricultural FS FS (55.95) 5 Others (42.51) (108.93) (109.48) 6 Average Revenue from sale with state (63.87) (68.04) (97.79) 7 Average cost of supply Note: (i) FS- Free Supply (ii) Figures in brackets are the average revenue as a percentage of average cost of electricity supply in a particular year. Sources: (i) Planning Commission, Annual Report on the working of State Electricity Boards and ED, 1994,1997, and 2002 (ii) Statistical Abstract of Punjab, (iii) PSERC: Tariff Orders for various financial years. In fact, PSEB as well as Punjab State Electricity Regulatory Commision (PSERC) have not estimated consumers category-wise cost of supply. The Table 3.9 clearly depicts that average revenue realised from the commercial consumers was higher than the cost of supply during the whole time period under consideration. Since 1991 the industrial consumers were also paying more than average cost of supply. The average revenue realised from domestic and agriculture consumers was consistently lower than the cost of supply, implying the subsidisation of domestic and agriculture supply. According to the tariff policy adopted by the PSEB various categories of the consumers were charged different rates even when electricity was supplied at the same voltage (Tariff Orders issued by PSERC). Such practice of the

14 PSEB shows that there was discrimination in price being charged from various categories of consumers regardless of cost of supply. The rationale provided for subsidised supply to agriculture as well as domestic sectors has been to promote social welfare of the peoples. But in actual practice, there has been significant intra- category variations regarding their capacity to bear the cost. In this regard, some independent studies (Ghose, 1998; Garg & Jain, 1998; GOI, 2000 and World Bank 2001) depicted that most of the benefits of the subsidies were being cornered by the big farmers, particularly in agricultural sector. This implies that tariff rates do not have any systematic relationship with the cost of supply. Mainly political considerations appear to have played a dominant role in tariff setting. Obviously, State Governments compelled the SEBs to follow certain pricing policy but abdicated from their responsibility to compensate the SEBs keeping them in a perpetual financial crisis (Surinder Kumar, 1999). This requires a reconsideration of the relationship between electricity undertakings and the state governments on the one side and the rationale for a pricing policy and subsidisation of certain consumers on the other. The analysis of financial loss or surplus from the sale of electricity to various categories has been presented in Table Table 3.10: Consumer Category wise Surplus /Subsidy (Rs. in Crore)

15 S. No. Description ACGR To ACGR to ACGR to Domestic Commercial Industrial Agricultural Others Total Source (i) Computed from the data collected from Annual Report on the Working of State Electricity Boards and EDs, 1994, (ii) Statistical Abstract of Punjab, (iii) PSERC: Tariff Orders for various financial years The Table 3.10 reveals that revenue loss due to subsidised power supply in was Rs crores and it increased to Rs crores in During the year it was reduced to Rs crores. The reduction in revenue loss is due to subvention paid by the state government on account of free power to agriculture sector. It needs to be noted that subsidy per unit of supply for domestic consumers increased from 3.76 paise per unit in to paise in It reduced to paise per unit in the year Hence, total quantum of subsidy to domestic consumers has increased from Rs crores in to Rs crores in and further to Rs crores in mainly due to significant increment in electricity consumption by the concerned category of consumers. Average revenue realised from commercial consumers was higher than the average cost of supply, so there was surplus. Per unit surplus increased from paise to paise during the period to It was recorded as paise per unit in Therefore, the total quantum of the surplus has increased from Rs crores to Rs crores and to Rs crores during the same period. It is pertinent to note that commercial consumers were

16 never subsidised and this category always contributed to the surplus to PSEB. As far as industrial consumers were concerned, the comparison between average revenue realised and average cost of supply shows that since after , this category was also being overcharged and consequently contributed surplus to the Board s revenue. Per unit revenue gap between cost of supply and revenue realised has been recorded as paise in and paise in During the year it turned out to be paise per unit. Subsequently, the total quantum of surplus has increased from Rs crores to Rs crores during the period to It was calculated to be Rs crores in The analysis of the financial performance of agricultural consumers presented a very interesting picture. The pricing policy for the agricultural sector in Punjab consists of two types of tariff and consumers could opt for any one of these. One system was a flat rate system, which was levied according to the horsepower rating of the sanctioned load of the motor used by the tube wells per month. The other was metered supply where tariff was charged per unit of electricity consumed. The average revenue did not keep pace with the increase in the cost of supply over the period under consideration. Thus, total quantum of subsidy to this category increased from Rs crores in to Rs.1314 crores in and further to Rs crores in Being very low recovery rate of the cost of supply through the revenue realised and significant amount of electricity sale to this category, the quantum of subsidy kept on increasing consistently during the period under consideration. Further, the Table 3.10 depicts that in case of the category of other consumers (bulk supply & public lighting etc.) it was noted that since after this category was also contributing to the surplus of the Board. The total quantum of surplus from this category has been

17 recorded as Rs crores in as against to Rs crores in and Rs.9.87 crores in It is clear from the above analysis that there were elements of subsidisation and cross subsidisation in the tariff structure without any rational justification. This implies that tariff rates do not have any systematic relationship with the cost of supply and mainly political considerations appear to have played a dominant role in tariff setting. On basis of the analysis of technical as well as financial performance of the Board it may be highlighted that the PSEB has played an important role in creating an extensive network of electricity supply in the state. However, lower level of operational efficiencies coupled with an irrational tariff structure has led to increasing losses taking it to the verge of bankruptcy. It is in this background that reform measures were initiated. Thus it may be concluded that the reforms in Power Sector of Punjab did not lead to any significant improvement in technical as well as financial performance of PSEB. 3. II. 1: Collection Efficiency The collection efficiency in Punjab has increased in the recent year (Table 3.11). It may be noted that 100% collection efficiency does not mean that no dues is pending towards consumers. It simply represents the collection in the relevant year. The collection may be the deferred amounts pending towards consumers in past. Table 3.11: Collection Efficiency in Punjab Year Collection efficiency

18 Source: PFC Report for the respective years As a result of increased collection efficiency, the reported AT& C losses have decreased in the State. It is also shown that in comparison to All India Average, the AT&C losses level was significantly lower in Punjab. However, the reported data should be used with cautions because most of the power supply to agriculture sector in still un-metered (Table 3.12). Table 3.12: Comparison of AT& C Losses in Punjab with All India Average (%age) Year Punjab All India Average Source: PFC Report for the respective years SECTION 3.III: SOME SALIENT FEATURES EMERGING FROM TARIFF ORDER OF PSERC FOR FY It may be interesting to undertake a comparative analysis of the average cost of supply from various sources outside the state. It is shown in the Table 13 that Overall cost of power purchase was approved as Rs per unit. At the same time the cost of power to be purchased from traders (short term purchase) was the highest. The average cost from NPHC plants is the lowest except BBMB which is the shared utility. The average cost from NHPC is even lower than the per unit fuel cost of the Punjab power utility. The Commission has estimated that per unit average fuel cost of generation from internal/own thermal plants is Rs for the financial year Table 3.13: The cost of power purchase from outside sources (FY )

19 Source Total Cost (Rs. Million) Power Purchased (MUs) Cost (Rs./Unit) NTPC NHPC NPC Short-term Purchase Overall Source: Tariff order issued by PSERC for FY Since the cost of power purchase accounts for approximately 70-80% of the total cost of power supply, therefore, it would be useful to compare the cost of power generation from internal sources with external sources available to Punjab. It will ensure more accountability in the system. However, since the utility is still an integrated unit for the generation as well as the distribution businesses, it is not possible to calculate the actual generation cost as separate data on employee cost, R&M cost etc. for the generation system & distribution system were not provided by the PSEB. So, the commission should make some reliable estimates of cost of power generation from internal sources by segregating the various cost items such as employee cost, capital cost, R&M expenses etc between the generation and distribution businesses. 3.III.1 Employee Cost Employee cost is the second major component of the total expenses. From time to time, the Commission has directed the utility to control the employee cost by taking various initiatives such as training and skill development programmes to enhance the productivity of the employees. The licensee has submitted that it has taken various measures to control this cost. Table 3.14: Employee Cost as approved by the Commission Million) (Rs. Sr. No Particular Projections Approval Percentage of total approval 1. Salary and other %

20 expenses 2. Terminal and Pension % Benefits 3. Arrears % 4. Total Expenses % Source: Tariff order issued by PSERC for FY However, the directions given by the Commission have not been implemented in order to enhance the productivity of the manpower. Consequently, the employee cost burden is increasing year after year. Moreover, the share of expenses on account of pension and terminal benefit is unacceptably very high. The employee expenses projected and approved are given in the Table It shows that the share of terminal benefits is very high. This is because of the deferred liability passed over by the erstwhile PSEB. As per standard practice, the terminal benefits should be paid out of the financial contribution made towards provident fund & pension fund etc. during inservice period of the employees. However, it seems that the Board has utilized the money in the fund for meeting other current expenses apparently on the direction of the government. The commission should propose to the state government that since these liabilities have been shifted from the PSEB, therefore, the government should make payment on this account so that the honest present consumers are not asked to bear this burden as it is not justified. The employee cost per unit of sale of energy is given in the Figure-3.1 (source: PFC reports).

21 The Graph 3.1 highlights that employee cost per unit of sale of energy was almost stable for the period from to The Employee cost was reported to be Rs. 0.5 per unit of sale in Afterwards, there was little decrease in the cost for the next two years and it was reported as 0.55 in the FY It implies that there was no significant change in the per unit employee cost. One important reason for little increase in the employee cost was the ban on new recruitments. PSERC had pointed out that the PSEB has enough manpower and it should improve the labor productivity before making any fresh appointment in the Board. 3. III.2: Repair and Maintenance cost The PSERC has been following its Tariff Regulations while approving the Repair and Maintenance Cost (R&M). The commission links the current year cost with the base year value though Wholesale Price Index (WPI). Then, if required, certain directions are issued to the utility so that the funds are utilized properly. For the FY , the licensee had proposed Rs crore for R&M. This amount also included Rs crore as expenses on the assets to be added during The commission observed that this claim as a part of R&M expenses was not justified.

22 Therefore, the Commission disallowed this item while approving the R&M expenses. Finally, it allowed Rs. 376 crore as R&M expenses. The commission followed the same approach for the approval of administration and general expenses. The actual expenditures on R&M are given in the Table Table 3.15: Repair and Maintenance Cost Year R&M Cost (Rs. Crore) Annual Growth Rate % % % % Source: PFC Report for the respective years It is indicated in the Table 3.15 that the growth rate for FY was reported highest. The main reason for this hike was approval of the deferred amount during this year. However, during the FY it grew at 2%. So, taking the average inflation rate into account, the increase in R&M expenses is reasonably acceptable except for the FY III. 3: Depreciation The depreciation amount is approved to compensate the utility for the wear and tear of capital employed in the business. According to the standard practices, a company should recover the capital cost of the assets during the useful life of the assets. The commission has approved the depreciation amount for the year on the basis of audited accounts for the FY As required by standard accounting practices, the Commission has applied different rates for the different type of assets. The rates and amounts of depreciation approved by the commission are given in the Table Table 3.16: Depreciation Charges for the FY Crore) (Rs.

23 Sr. No Item Assets (Approved as on April 1, 2011) Depreciation rate Depreciation Amount 1. Thermal % Hydro % Transmission assets % Distribution assets % Total So, applying the differential rates of depreciations, the total depreciation amount comes out to be Rs. 841 crore. The overall weighted average depreciation is 4.40% for the FY III.4: The Interest and Finance Charges The PSPCL had projected the interest and financial charges liability to be Rs crores for FY These projections are based on the approval made by the commission during the past years (for FY ). However, there are still some pending claims on which the commission is not in agreement with the licensee. Therefore, the Commission did not approve the entire loan amount taken by erstwhile PSEB from various sources. Further, the interest on the working capital seems to be unacceptably high. For example, the share of interest liability on working capital is about 43 percent of the total interest charges proposed by the licensee. The details of the interest charges proposed and approved are given in the Table Table 3.17: Details on Loan Interest Payments in FY Crore) (Rs. Sr. No Particular Proposal Approval 1. Loan Amount (on April 1, 2011) Borrowing for FY Repayment of loan during FY Loan on the closing of FY Interest payment Source: Tariff order FY for PSPCL The Commission has reduced the interest expenses by Rs. 329 crore from the amount proposed by licensee. Though the commission has not questioned the rate of interest applicable to the approved loans, however, the commission has reduced the loan amount proposed by licensee. It was

24 reduced because the commission observed that the loans were being utilized to meet out the current expenses. It may be noted from the Table 11, there are wide differences in the loan amounts proposed by licensee and approval given by the commission. Now, the question arises that what would happen to the loan amount over and above the commission s approval. Since, it stands on the balance sheet of the PSPCL and being a public sector unit, the public has to bear this burden in future unless the same is not paid by the state government. Therefore, under-approval of the interest expenses is not a desirable solution unless the commission is able to ensure financial viability of the utility. Responsibility of the erring officials may be fixed and suitable action initiated as per the Act. 3. III. 4 (a): Observations of the Commission on the fund management The Commission has observed that the utility has not utilized its funds properly. The money which was approved to strengthen the distribution system has been spent out to meet the current expenditure. This reflects poor financial management on behalf of the utility. The money should be used to create assets to reduce the AT& C losses in the system. The Commission has estimated that the liability on account of fund diversion is Rs crore and should not be passed on to the consumers. The present consumers should not be asked to pay for the mismanagement of funds by erstwhile PSEB. Therefore, the Commission has also required Govt of Punjab (GoP) to pay Rs. 454 core interest payment on the account of diversion of capital funds for current purposes by PSEB. 3. III. 5: Return of Equity

25 The utility had claimed the Return on Equity (ROE) at the rate of 15.5% for the FY Table 3.18: Annual Revenue Requirement for FY (Rs. Crore) = 3/2 Particular Proposal Approval Approval as a Percentage of proposal Cost of fuel % Cost of power purchase % Employee cost % R&M expenses % A&G expenses % Depreciation % Interest charges % Return on Equity % Transmission charges payable to PSTCL % Charges payable to GoP on Power RSD % Total Revenue Requirement % Less Non Tariff Income % Net Revenue Requirement % Less Revenue from Existing Tariff % Gap for FY % Add Consolidated Gap upto FY % Consolidated Gap up to FY % Add Carrying Cost of Revenue NA Total Gap for FY % Energy Sales(MU) % PSERC - Tariff Order FY However, the Commission did not approve the proposal. The Commission had observed that since the licensee has not shown any significant improvement in technical performance especially in improving manpower productivity, it would be unjustified in allowing such a high rate of return. Therefore, turning down the utility proposal, the commission allowed only 14% as return on equity. As shown in the Table 3.18, the licensee made proposal on the basis of past year performance and taking the other factors affecting into account. However, on certain items, there are significant differences between the

26 proposal made by licensee and final approval provided by the commission. For example, the cost of fuel is a major cost component, has been reduced by 12% while passing order on ARR. Similarly, huge differences have been reported on the issue of interest charges and revenue gaps. Now, the question arises that what would happen to these approvals if the licensee fails to control its costs. Initially, the commission had not accepted the licensee proposal on some issues such as interest cost etc. and the cost was cut accordingly. However, the commission approved the same amount while taking up the true up exercises conducted in the subsequent years. SECTION 3.IV: SOME REGULATORY CONCERNS 3. IV.1: Quality of Information The Punjab State Electricity Board has been filing its Annual Revenue Requirement (ARR) for the last twelve years since March It has been noted that the Board failed to provide the required data and information to the commission despite year after year reminders to this effect by the commission. This would mean, either the Board does not collect the relevant data or is reluctant to share the information which may add to its accountability. Commission may not let the generation, transmission and distribution companies from abdicating from the statutory responsibility. The Commission has stated that on scrutiny it was noticed that the ARR was deficient in some respects and in its communication of , the Commission sought further information (from the utility). So, there is a need to create a reliable database system so that the orders are passed on time with acceptable degree of accuracy 1. 1 PSERC - Tariff Order FY for PSPCL, Pg 3

27 3. IV.2: Budgetary Provision of Subsidy: Another important reason for the delay in processing tariff order is the communication gap between the regulatory commission and the state government. The commission has to consult the state government while fixing the amount of subsidy to be given on account of subsidized power supply to agricultural and household consumers. However, almost every time there was a long delay on behalf of the state government in responding to the commission on certain matters. For example, the ARR for FY , the commission asked the government to provide its views on the ARR in relation to the provision of subsidy and other related matter such as personnel issues on However, the government could reply only on The commission had to wait for the government response since its views were important on certain matters such as subsidy, investment, employee cost etc and needed to be considered as per statute. The state government must ensure that its reply to the PSERC is sent in time to enable the Commission to pass its orders on ARR before 31 st March of a year positively. However, the order for the FY got delayed in this process and the revised tariff could not be implemented for the full financial year IV. 3: Metering of Agricultural Supply: 2 PSERC - Tariff Order FY for PSPCL, Pg, 5

28 The poor metering in agriculture segment is a major concern in Punjab power sector. In the ARR for FY , the company submitted that the actual electricity consumption in the state was 21,430 MU for metered consumers in FY However, for the same year, MU was attributed to un-metered supply to agriculture sector. The un-metered consumption in agriculture comes out to be approximately one third of the total energy consumption. Due to lack of accurate and reliable metering in the agriculture sector, it was not possible to estimate the consumption as well as energy losses with any reliable degree of accuracy, especially when there was vested interest to underreport theft and inflate agricultural consumption. Therefore, it is recommended that the commission should force the utility to ensure 100% metering at consumers ends. In the absence of reliable and adequate data, the commission has to make intelligence guesses for various regulatory parameters such as revenue receipts, expenditures, investment, consumption etc. It also affects the overall quality of regulatory mechanism. It has also been observed that there was a big gap in the ex-ante estimates made by the commission and the actual performance achieved by the utilities. Consequently, the commission had to go for the true up excises to make the required corrections in key regulatory parameters, which undermines the reliability of the orders of the Commission on ARR and tariff applications. In the tariff order for the FY , the commission observed that the licensee has overestimated the power consumption in the agriculture sector. The commission rejected the estimates of electricity consumption in agricultural sector made by the utility. The licensee had estimated 12,253 MU as consumption by agricultural sector. However, the commission

29 accepted its own estimate of MU as consumption in agricultural sector for FY , which was lower by 12% from the estimate of the utility. The total consumption approved by the commission for various consumer categories is given in the Table Table 3.19: Relative share of various consumer categories ) (FY Sr. No Category Projections by Company Approval by Commission Relative shares (approval) 1 Domestic % 2 Commercial % 3 Industry % 4 Agriculture (Mainly Un-metered) % 5 Others* % 6 Total % Source: PSERC Tariff Order for FY for PSPCL Others includes common pool and outside states sales Table 3.19 brings out that share of agriculture in total electricity consumption will be 30%. Since the state government is providing free power to agriculture sector, it has serious financial implications for the utility as well as the state government. Firstly, it increases the financial dependence of the company on the state government. Secondly, if the state government is not able to provide adequate subsidy to the company, the company would have to bear the whole burden. Thirdly, increasing cost of power purchase from internal as well as external sources has further affected the financial viability of the company. SECTION 3.V: CONCLUSIONS AND POLICY RECOMMENDATIONS Poor technical and financial performance was the main problems faced by PSEB in the pre-reforms period. The Plant load factor of the plants operated by PSEB was very low. At the same time, the auxiliary consumptions and energy losses were reported unreasonably high. Further,

30 distorted tariff structure for various consumer categories compounded the problems. The tariff was kept too low to recover the cost of supplying power. Consequently, the revenue gap increased which further resulted into the financial crisis of the Board. Punjab was observed as one of the states initiating power sector reforms relatively late. Punjab State Electricity Regulatory Commission (PSERC) was constituted to regulate the power sector in the state. However, unbundling of PSEB which was due under the provisions of the Electricity Act 2003 was deferred for many years. It was only in 2010 when PSEB was unbundled. The transmission business is separated from the generation as well as distribution business. The overall objective of power sector reform is to restore financial viability of the electricity utilities improving the quality of service at the consumer ends. In this regard, the role of respective regulatory body is crucial. Apart from promoting economic efficiency, the interest of consumers needs to be protected. The analysis shows that the power sector in the state has shown some improvements on certain parameters such as plant load factor, loss level and recovery of dues. However, still the utility is suffering from the shortage of funds. The Punjab is among a very few states in the country proving free power supply to agriculture. Agriculture sector consumes about 30% of the total energy in the states. Consequently, the dependency of the utility on state government has been increasing. The state government is not providing adequate subsidy in the form of cash. The committed subsidy is adjusted by converting the past loan taken by PSEB into grants. This practice does not

31 provide any financial liquidity to the company. Another important issue is un-metered power supply to agriculture. The poor metering is a major barrier in the accurate estimation of energy consumption by agriculture sector and the overall T&D losses in the state. It is also clear from the analysis of tariff structure that there were elements of subsidisation and cross subsidisation in the tariff structure without any rational justification. This implies that tariff rates do not have any systematic relationship with the cost of supply and mainly political considerations appear to have played a dominant role in tariff setting. Therefore, it is suggested that sincere efforts should be made comply various provisions of the Electricity Act 2003 as well as National Electricity Policy. The power supply to all consumers should be fully metered so that the accountability is fixed in the system. The licensee should take measure to improve the manpower productivity. The government should pay full compensation in cash on account of free power supply provided to agricultural sector.