CASE No. 107 of Coram. Shri. Azeez M. Khan, Member Shri. Deepak Lad, Member. Maharashtra Veej Grahak Sanghatana

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1 Before the MAHARASHTRA ELECTRICITY REGULATORY COMMISSION World Trade Centre, Centre No.1, 13th Floor, Cuffe Parade, Mumbai Tel /65/69 Fax Website: CASE No. 107 of 2015 In the matter of Petition of Maharashtra Veej Grahak Sanghatana for review of Tariff Order dated 26 June, 2015 in Case No. 121 of 2014 with regard to O&M Expenses of Maharashtra State Electricity Distribution Co. Ltd. Coram Shri. Azeez M. Khan, Member Shri. Deepak Lad, Member Maharashtra Veej Grahak Sanghatana Petitioner V/s Maharashtra State Electricity Distribution Co. Ltd....Respondent Appearance For Petitioner : Shri. Pratap Hogade, MVGS For Respondent : Shri. S. V. Bapat, CE (TRC) Consumer Representative: Shri. Ashok Pendse, TBIA ORDER Dated: 8 December, Maharashtra Veej Grahak Sanghatana (MVGS), 16/581, Opp. Shahu High School, Shivajinagar, Ichalkaranji, Distt. Kolhapur, through its President, Shri Pratap Ganpatrao Hogade, has filed a Petition on 6 August, 2015 under Section 61 of the Electricity Act (EA), 2003 read with Regulations 85, 92, 94 and 95 of MERC (Conduct of Business) Order in Case No. 107 of 2015 Page 1 of 10

2 Regulations, 2004 and Regulations 78, 97, 99 & 100 of MERC (Multi Year Tariff) Regulations, 2011 ( the MYT Regulations ) for review, reconsideration and reduction of the Operation and Maintenance (O & M) expenses approved by the Commission in Tariff Order dated 26 June, 2015 in Case No.121 of 2014 in respect of Maharashtra State Electricity Distribution Co. Ltd. (MSEDCL). 2. The prayers of MVGS are as follows: 1. Honourable Commission, to improve services to the consumers, allowed reasonable O & M expenses in the Regulations. But MSEDCL has done more expenditure on Employees & A & G expenses, and has not spent the allowed amount of R & M expenses. Hence these amounts of Rs.1203 Crore Should be deducted and net O & M expenses total Rs Crore Should be allowed and approved for to MSEDCL. 2. For & the O & M expenses should be reconsidered on the basis of actual and estimated expenses upto the limit of normative basis as per regulations. Excess expenditure on Employees and A&G expenses should be rejected. Lower expenditure on R&M expenses should be reduced from the allowable costs and the total O&M expenses should be finalized and approved. 3. O&M expenses is the controllable parameter. Gain sharing of non expenditure and non performance cannot be allowed. Hence it is requested to the Honourable Commission that the Commission should reconsider and decide strict and distinct normative parameters on the basis of actual performance and the normative costs in various other States, in order to avoid unnecessary and unjust burden on the consumers. 4. For such further and other consequential reliefs, as in the nature and circumstances of the case may require and the Honourable Commission may think to consider and profit. 5. To condone any error / omission and to give opportunity to rectify the same. 6. To permit the petitioner to make further submissions, additions and alterations to this petition as may be necessary from time to time, in the interest of substantial justice to the consumers in the State. 3. In its Petition, MVGS has submitted that: 3.1. After going through the details of the Tariff Order in Case No.121 of 2014 dated 26 June, 2015, MVGS came to know that the O&M expenses approved by the Commission for to are huge and creating unnecessary burden on the consumers. As against the actual O&M expenses of Rs crore in , approved expenses for are Rs Crore, i.e. a 200 % increase of O&M expenses in only 5 years During the Public Hearings in that Case, many persons raised objections on the higher projection of O&M expenses by MSEDCL in its Petition. This higher Order in Case No. 107 of 2015 Page 2 of 10

3 projection was due to the relaxed norms approved in the MYT Regulations which were intended for better services to the consumers. However, the main component of excess expenditure is on employees only. The actual Administration and General (A&G) expenses are also higher than the prescribed norms. On the other hand, the actual Repairs and Maintenance (R&M expenses) are much less than the norms in the Regulations. Thus, an undue advantage being taken by MSEDCL of the norms and due to lack of clarity in those norms Actual O& M expenses up to are as below: Particulars (Rs in Crore) Employee Expenses A & G Expenses R & M Expenses Total O & M Expenses Source- MSEDCL s Business Plan Petition in Case No.134 of The Tariff Order in Case No.121 of 2014 approves the following O&M Expenses: (Rs in Crore) Particulars Total O & M Expenses It is evident from the above that the O&M expenses up to were limited and restricted within a certain range. However, they have steeply increased from This is due to the relaxed norms specified by the Commission in the MYT Regulations, The per unit O&M expenses of MSEDCL are higher than those of Distribution Licensees in Gujarat. Gujarat Licensees have been successful in reducing their O&M Expenses; MSEDCL may adopt the process followed by them. Moreover, MSEDCL has the following additional advantages for reducing O&M Expenses: (a) Only 0.55 % of HT Industrial consumers are contributing % of revenue of MSEDCL, and 1.25 % of LT Industrial consumers are contributing 7.93 %. Thus around 44% revenue is being collected from only 1.3 % consumers. O&M expenses for serving these consumers are negligible. Order in Case No. 107 of 2015 Page 3 of 10

4 (b) The O&M expenses should come down to the extent of the consumption in the areas of Distribution Franchisees. It is evident from the Tariff Order that the Commission has not considered sales and consumers pertaining to Franchisees while determining O & M expenses. Further the R&M expense on the basis of percentage of Gross Fixed Assets (GFA) has not been deducted due to nonavailability of data. This is unfair to the consumers and also undue enrichment of the Licensee. (c) MSEDCL has already rolled out capex schemes such as Automatic Meter Reading, IT Schemes, R-APDRP, MIS, SCADA/DMS implementation, Communication backbone, upgradation of IT Center Hardware and software, ERP, etc. for improving efficiency and cutting down costs. All these expenses are being paid by the consumers as part of the Aggregate Revenue Requirement (ARR). The consumer should be benefited due to these schemes by way of reduction in O & M expenses. On the contrary, consumers are having to bear the increased O&M expenses in addition to expenses on account of enormous capex. (d) The Commission has decided the norms for R&M expenses on the basis of percentage of GFA. However, the actual expenses on R&M are much lower than the norms. That means that MSEDCL is getting undue benefit of the MYT Regulation norms. Further, the Licensee is eligible for gain sharing. Hence approval for R&M should be as per actuals or up to the specified norms, whichever is less. (e) Actual figures for show that the maximum amount of O&M expenses goes towards employee cost only. In , employee cost was Rs 4028 crore out of total O&M expenses of Rs 5320 crore, i.e. 76 % of the total O&M expenses. Thus, the real purpose of allowing O&M costs is not being served. Hence it is necessary to restrict the employee cost as per the methodology described in the approach paper on the draft of the MYT Regulations before they were finalised. Further, A&G Expenses should be allowed up to the limit as per the methodology adopted for the MYT Norms O&M expenses consist of Employee Cost, Administrative Expenses and R& M expenses. In the MYT Regulations 2011, the Commission changed the method of allowing these heads of O&M expenses. The Commission decided to allow Employee Cost on the basis of sales/wheeled energy in paise per unit along with the number of consumers; Administrative Expenses on the basis of number of consumers; and R&M Expenses on the basis of percentage of GFA. The Commission has not made clear, distinct and separated allocations for Employee Cost and A&G Expenses. Also, projection as per norms is allowed for R&M expenses though actual expenditure was less. Order in Case No. 107 of 2015 Page 4 of 10

5 3.8. Taking advantage of the norms in the Regulations, MSEDCL made higher projections in its MYT Petition. MVGS has come out with its own calculation of O & M expenses by relying on the methodology stipulated in the Approach Paper of the Commission on the draft MYT Regulations. As per MVGS calculation, O & M expenses are as below: (Rs in Crore) Particulars Employee Costs Admin. Expenses R & M Expenses The difference between O & M Expenses actually incurred by MSEDCL and calculated as per MYT Regulations is tabulated below: (Rs.in crore) Particulars Difference (Actual) (As per Reg.) Employee Costs Admin. Expenses R & M Expenses (Necessary Deduction) The expenses incurred on Employee and A&G Expenses which are above the regulatory norms should be deducted. Further, expenditure not done on R&M expenses to the extent required should also be deducted. Hence, final allowable amount for should be Rs Crore On similar lines, eligible amounts for and should be calculated and necessary deduction made by the Commission As per the MYT Regulations, it is necessary to make separate application for determination of tariff for Wires Business and Supply Business. Segregation of Businesses has a clear and definite impact on Tariff. Proper segregation is necessary to determine correct Tariff. However, that has still not been decided by the Commission During the public consultation process for finalizing the MYT Regulation, there was a suggestion that there should be a reduction of 10 paise/unit of sales spread over 5 years in the O&M norms. This suggestion was not implemented. On the contrary, every year the norms for O&M expenses linked to paisa/unit on wheeled energy and Order in Case No. 107 of 2015 Page 5 of 10

6 sold energy are increased. That means that no efficiency improvement has been is envisaged by the Commission while finalizing the Regulations. 4. In its Reply dated 7 October, 2015, MSEDCL has submitted that: 4.1. Regulation 85 of the MERC (Conduct of Business) Regulations, 2005 provides for review of a decision or Order of the Commission upon discovery of new and important matter or evidence or on account of some mistake or error apparent from the face of the record, or for any other sufficient reasons. MVGS has not given any sufficient reason to review the Commission s Order dated 26 June, 2015 in Case No. 121 of In its Petition, MVGS has neither substantiated any mistake or error apparent in the Order, nor provided any new and important matter or evidence which was not within its knowledge or could not be produced by it at the time when the direction, decision or order was passed. Hence, this Review Petition is not maintainable and needs to be dismissed For approval of O&M Expenses for the Wires Supply Business, the Commission has considered the norms specified under Regulations and of the MYT Regulations The Commission has considered the revised sales, GFA and number of consumers as approved in the Tariff Order dated 26 June, 2015 for allowing the normative O&M Expenses for the Control Period. Further, the Commission has not considered sales and number of consumers pertaining to Distribution Franchisees while determining the normative O&M Expenses allowable to MSEDCL. Accordingly, the Commission has approved the O&M Expenses for MSEDCL as shown in the following Table. (Rs. in Crore) Particulars O&M Expenditure for Retail Supply Business 1,686 1,842 2,085 O&M Expenditure for Wires Business 3,718 4,114 4,627 Operation & Maintenance Expenses 5,404 5,957 6, There is no error apparent in the calculations of the O&M Expenses approved by the Commission, which are in line with the MYT Regulations, On this basis alone, this Review Petition needs to be rejected and treated as not maintainable, as the O&M expenses have been approved within the norms specified in the MYT Regulations Regulations 12, 13 and 14 of the MYT Regulations specifies the controllable and uncontrollable parameters, mechanism of pass-through of gains and losses on account of uncontrollable parameters, and the mechanism for sharing of gains and losses on account of controllable parameters. Variation in O&M expenses is one of Order in Case No. 107 of 2015 Page 6 of 10

7 the controllable factors. As per the MYT Regulations, the Commission has undertaken the sharing of gains or losses for There is no error apparent in the calculations of the sharing of gains and losses of O&M Expenses approved by the Commission The MYT Regulations 2011 have specifically provided for variation in O&M Expenses as a whole, and not separately on employee, A&G and R&M expenses as presumed by MVGS. Further, in the Regulations, no separate norms are provided for Employee and A&G expenses. In fact, in the entire MYT Regulations, there is no mention of Employee or A&G Expenses In its Order dated 26 August, 2013 approving MYT Business Plan for the second Control Period from to (Case No. 134 of 2012), the Commission had approved the percentage segregation of Wires and Supply Businesses. MVGS has not proved any error or provided any new and important matter or evidence MVGS itself has admitted that the suggestion of efficiency improvement has not been implemented in the MYT Regulations, That suggestion regarding efficiency improvement was in the Approach Paper. However, once the Regulations are notified, the suggestions in the Approach Paper have no significance. The consideration of efficiency improvement at this stage by way of review of the Tariff Order dated 26 June, 2015 is beyond the scope of the MYT Regulations. It amounts to challenging the MYT Regulations, for which this is not the proper forum. 5. In its Rejoinder filed on 18 November, 2015, MVGS stated as follows: 5.1. MVGS itself and many others had raised objections on O&M expenses at the time of Public Hearing, which were considered by the Commission in its impugned Tariff Order. In that Order, the Commission stated that it has considered O&M expenses as per MYT Regulations When MVGS went into details of the calculation, it observed that the Commission has given composite approval. Calculations are not done by considering each component of O&M expenses distinctly. The fact that O&M expenses are approved without considering sub-heads is the error apparent, and is not as per Regulations MVGS has presented comparison of O&M expense figures of the MYT Regulations, projections of MSEDCL and approved expenses. On that basis, MSEDCL has incurred excess expenditure of Rs. 332 crore on employee expenses and A&G expenses, and there is a shortfall in R&M expenditure to the extent of Rs. 415 crore. 6. At the hearing on 18 November, 2015, MVGS made a presentation reiterating its submissions, and setting out a comparative analysis of calculation of O&M expenses based on the methodology envisaged in the Approach Paper and in the MYT Regulations, MVGS contended that component-wise computation and treatment of O&M expenses should have been applied by the Commission instead of deriving figures by Order in Case No. 107 of 2015 Page 7 of 10

8 application of overall O&M Expense norms. The implication of not doing so is that, while essential R&M was not adequately carried out, excessive and sharply increasing expenditures on other O&M components was allowed. The position in Gujarat and other States may be compared. Segregation of Wires and Supply Businesses has also not been effected inspite of provisions of even the Tariff Regulations of That has an impact on tariff and wheeling charges. These points had been raised during the tariff determination proceedings, but not fully addressed. Hence, the Order deserves review. MSEDCL drew attention to its Reply, concluding that there is no error apparent on the face of the record in the O&M expenses allowed. The points made by MVGS might be considered, but not as a matter of review of the impugned Order. Commission s Analysis and Ruling 7. Regulation 85(a) of the Commission s Conduct of Business Regulations, 2004 specifies as follows: Review of decisions, directions, and orders: 85. (a) Any person aggrieved by a direction, decision or order of the Commission, from which (i) no appeal has been preferred or (ii) from which no appeal is allowed, may, upon the discovery of new and important matter or evidence which, after the exercise of due diligence, was not within his knowledge or could not be produced by him at the time when the direction, decision or order was passed or on account of some mistake or error apparent from the face of the record, or for any other sufficient reasons, may apply for a review of such order, within forty-five (45) days of the date of the direction, decision or order, as the case may be, to the Commission. Thus, the ambit of review is limited, and MVGS Petition has to be evaluated accordingly. 8. MVGS s main contention is that the Commission in its Order dated 26 June, 2015 has approved expenditure on O&M as a composite expense for application of normative parameters instead of considering its constituent expenses towards employee costs, A&G and R&M expenses separately as was envisaged in the Approach Paper provided by the Commission with the draft of the MYT Regulations. As a result, the shortfall in incurring expenditure on essential R&M has been condoned while allowing excessive expenditure on other components of O&M expenses. 9. The MYT Regulations, 2011 define the term O&M expenses as follows: 2.1 (45) Operation and Maintenance expenses or O&M expenses of a Licensee means the expenditure incurred on operation and maintenance by the Transmission Licensee or Distribution Licensee, or part thereof, and includes the expenditure on manpower, repairs, spares, consumables, insurance and overheads; Order in Case No. 107 of 2015 Page 8 of 10

9 Thus, O&M expenses include expenditure on manpower (i.e. employee expenses), repairs and spares (i.e. R&M expenses), and on consumables, insurance and overheads (i.e. A&G expenses). The norms for O&M expenses permitted to be recovered by MSEDCL for its Wires Business and Supply Business are specified in Regulations and , respectively, and are based on parameters such as sales / wheeled units, number of consumers and R&M Expenses as a certain percentage of GFA. However, the MYT Regulations do not provide any treatment for these or other expenses separate from the composite treatment of O&M expenses of which they are a part. In the Tariff Order dated 26 June, 2015, the Commission has derived the allowable O&M expenses by applying the norms specified under Regulations and accordingly. Thus, there is no error apparent in that Order. 10. MVGS has referred to the Approach Paper provided by the Commission during the public consultation process culminating the MYT Regulations, However, the Regulations attain finality once they are notified following the requirement of previous publication. Thus, the draft Regulations or Approach Paper cannot be relied upon for seeking deviation from the provisions of the Regulations as finally notified. Moreover, the relevant part of the Approach Paper reads as follows: Hence, after considering the merits and demerits of the above approaches, it is proposed that for distribution licensees, the norm for employee expenses, A&G expenses and R&M expenses be derived separately, and the three components are added to specify consolidated norm for O&M expenses. Thus, in the Approach Paper itself, the Commission had envisaged a consolidated norm for O&M expenses. 11. Regarding the segregation of Wires and Supply Business, the Commission has adopted the allocation matrix approved in its Order on MSEDCL s Business Plan dated 26 August, 2013, with the modification as explained in para of the impugned Tariff Order with reference to Regulation 73. With regard to MVGS submission, summarised at para. 3.6(b) above, para of the impugned Tariff Order states that the Commission has not considered sales and number of consumers pertaining to Distribution Franchisees while determining the normative O&M Expenses allowable to MSEDCL. However, since the data on GFA pertaining to Franchisee areas was not separately available, it has not been deducted. The Commission directs MSEDCL to submit the detailed break-up of GFA for each Franchisee separately for truing up at the end of the Control Period Order in Case No. 107 of 2015 Page 9 of 10

10 12. Considering the foregoing, the Commission is of the view that MVGS claim for review of the Order dated 26 June, 2015 has no merit, and does not satisfy the requirements for such review. The Petition of Maharashtra Veej Grahak Sanghatana in Case No.107 of 2015 stands disposed of accordingly. sd/- (Deepak Lad) Member sd/- (Azeez M. Khan) Member Order in Case No. 107 of 2015 Page 10 of 10