KARNATAKA ELECTRICITY REGULATORY COMMISSION TARIFF ORDER 2016 CESC ANNUAL PERFORMANCE REVIEW FOR FY15 ANNUAL REVENUE REQUIREMENT FOR FY17-19

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1 KARNATAKA ELECTRICITY REGULATORY COMMISSION TARIFF ORDER 2016 OF CESC ANNUAL PERFORMANCE REVIEW FOR FY15 & ANNUAL REVENUE REQUIREMENT FOR FY17-19 & REVISION OF RETAIL SUPPLY TARIFF FOR FY17 30 th March th and 7 th Floor, Mahalaxmi Chambers 9/2, M.G. Road, Bengaluru Phone: / Fax : Website: kerc-ka@nic.in

2 C O N T E N T S CHAPTER Page No. 1.0 Chamundeshwari Electricity Supply Corporation 3 Ltd., 1.1 The CESC at a glance Number of Consumers, Sales in MU to various 5 categories of consumers and details of Revenue for FY15 2 Summary of Filing and Tariff Determination 7 Process 2.0 Background for current filing Preliminary Observations of the Commission Public Hearing Process Consultation with the Advisory Committee of the 9 Commission 3.0 Public consultation Suggestions / Objections 10 and Replies 3.1 List of persons who filed written objections 10 4 Annual Performance Review for FY CESC s Application for APR for FY CESC s Submission CESC s Financial Performance as per Audited 14 Accounts for FY Sales for FY Distribution Losses for FY Power Purchase for FY RPO Compliance by CESC for FY Operation and Maintenance Expenses Depreciation Capital Expenditure for FY Prudence check of FY Interest and Finance Charges Interest on Working Capital Interest on Consumer Deposit Other Interest and Finance Charges Interest o belated payment of power purchase 39 cost Capitalisation of Interest Other Debits Net Prior Period Charges Return on Equity Income Tax Other Income Abstract of Approved revised ARR for FY Gap in Revenue for FY Annual Revenue Requirement for FY17-19 CESC s filing 45 ii

3 5.1 Annual Performance Review for FY15 & FY Annual Revenue Requirement for FY Capital Investments for FY Sales forecast for FY Distribution Losses for FY Power Purchase for FY Sources of Power CESC s Power Purchase Cost and Transmission 69 Charges RPO Target for FY O & M Expenses for FY Depreciation Interest on Capital Loan Interest on Working Capital Interest on Consumer Deposit Interest and other Expenses Capitalised Other Debits Net Prior Period Credit / Charges Return on Equity Other Income Fund towards Consumer Relations / Consumer 86 Education 5.3 Treatment of Regulatory Asset Abstract of ARR for FY Segregation of ARR into ARR for Distribution 88 Business and ARR for Retail Supply Business 5.6 Gap in Revenue for FY Application for Additional Revenue Requirement 91 for FY17 6 Determination of Tariff for FY CESC s Proposal and Commission s Analysis for 94 FY Tariff Application Statutory Provisions Guiding Determination of 94 Tariff 6.3 Consideration for Tariff Setting New Tariff Proposals by CESC Revenue at Existing Tariff and Deficit for FY Other Issues Tariff for Green Power Determination of Wheeling Charges Wheeling within CESC area Wheeling of Energy using Transmission Network 134 or network of more than one licensee Charges for Wheeling of Energy by RE sources 135 (non REC route) to consumer in the State Charges for Wheeling Energy by RE sources wheeling energy from the State to a consumer / others outside the State and for those opting for renewable energy 135 iii

4 6.7 Other Tariff related issues Cross Subsidy Levels for FY Effect of Revised Tariff Summary of Tariff Order Commission s Order 142 Appendix 143 Appendix - I 183 iv

5 LIST OF TABLES Table No. Content Page No. 4.1 Revised ARR for FY15 CESC s Submission CESC s Financial Performance as per Audited 14 Accounts for FY CESC s Accumulated Profits / Losses Approved Sales as per APR for FY Incentives for loss reduction in FY CESC s Power Purchase for FY RPO Compliance as submitted by CESC for FY Normative O & M Expenses CESC s Submission Approved O & M Expenses as per Tariff Order dated O & M Expenses of CESC as per Annual Audited 26 Accounts for FY Allowable O & M Expenses for FY Depreciation for FY15 CESC s Submission Actual Capital Expenditure incurred by CESC for FY Approved Vs Actual Capital Investment Gist of Prudence Check findings for FY Allowable Interest on Loans FY Allowable Interest on Working Capital for FY Allowable Interest and Finance Charges Other Debits CESC s Submission Allowable other Debits Net Prior Period Charges CESC s Submission Allowable Return on Equity Approved Revised ARR for as per APR Proposed ARR for FY Proposed Capital Investment by CESC for FY17 to 48 FY Category wise approved number of installations Category wise approved energy sales Projected Distribution Losses FY17-19 CESC s 63 Submission 5.6 Approved & Actual Distribution Losses FY11 to FY Approved Distribution Losses for FY Consolidated requirement of electricity as filed by 65 ESCOMs 5.9 Source wise Power Purchase of ESCOMs for the 68 Control Period FY17 to FY Power Purchase Cost of CESC for FY Power Purchase Cost of CESC for FY Power Purchase Cost of CESC for FY O & M Expenses CESC s Proposal 74 v

6 5.14 Computation of Inflation Index for FY Approved O & M Expenses for FY Depreciation FY17-19 CESC s proposal Approved Depreciation for FY Interest on Capital Loans CESC s Proposal Approved Interest on Capital Loans for FY Interest on Working Capital CESC s Submission Approved Interest on Working Capital for FY Interest on Consumer Security Deposits for FY CESC s Proposal 5.23 Approved Interest on Consumer Security Deposits for 82 FY Approved Interest and Finance Charges for FY Status of Debt Equity Ratio for FY Return on Equity for FY Other Income CESC s Proposal Approved Other Income for FY Approved ARR for FY Approved Segregation of ARR FY17-19 CESC s 89 Proposal 5.31 Approved Segregation of ARR FY Approved Revised ARR for Distribution Business FY Approved ARR for Retail Supply Business FY Revenue Gap for FY Revenue Deficit for FY Wheeling Charges 133 vi

7 LIST OF ANNEXURES SL.NO. DETAILS OF ANNEXURES Page No. I Total Approved Power Purchase Quantum and Cost 210 of all ESCOMs for FY17 II Approved Power Purchase quantum and cost of 216 CESC for FY17 III Proposed and approved Revenue for FY IV Electricity Tariff vii

8 ABBREVIATIONS AAD AEH ABT A & G ARR ATE BBMP BDA BESCOM BMP BST BWSSB CAPEX CCS CERC CEA CESC CPI CWIP DA DCB DPR EA EC ERC ESAAR ESCOMs FA FKCCI FR FoR FY GESCOM GFA GoI GoK GRIDCO HESCOM HP HRIS ICAI IFC IW Advance Against Depreciation All Electric Home Availability Based Tariff Administrative & General Expenses Annual Revenue Requirement Appellate Tribunal for Electricity Bruhut Bangalore Mahanagara Palike Bangalore Development Authority Bangalore Electricity Supply Company Bangalore Mahanagara Palike Bulk Supply Tariff Bangalore Water Supply & Sewerage Board Capital Expenditure Consumer Care Society Central Electricity Regulatory Commission Central Electricity Authority Chamundeshwari Electricity Supply Corporation Consumer Price Index Capital Work in Progress Dearness Allowance Demand Collection & Balance Detailed Project Report Electricity Act Energy Charges Expected Revenue From Charges Electricity Supply Annual Accounting Rules Electricity Supply Companies Financial Adviser Federation of Karnataka Chamber of Commerce & Industry Feasibility Report Forum of Regulators Financial Year Gulbarga Electricity Supply Company Gross Fixed Assets Government Of India Government Of Karnataka Grid Corporation Hubli Electricity Supply Company Horse Power Human Resource Information System Institute of Chartered Accountants of India Interest and Finance Charges Industrial Worker viii

9 IP SETS KASSIA KEB KER Act KERC KM/Km KPCL KPTCL KV KVA KW KWH LDC MAT MD MESCOM MFA MIS MoP MU MVA MW MYT NFA NLC NCP NTP O&M P & L PLR PPA PRDC REL R & M ROE ROR ROW RPO SBI SCADA SERCs SLDC SRLDC STU TAC TCC Irrigation Pump Sets Karnataka Small Scale Industries Association Karnataka Electricity Board Karnataka Electricity Reform Act Karnataka Electricity Regulatory Commission Kilometre Karnataka Power Corporation Limited Karnataka Power Transmission Corporation Limited Kilo Volts Kilo Volt Ampere Kilo Watt Kilo Watt Hour Load Despatch Centre Minimum Alternate Tax Managing Director Mangalore Electricity Supply Company Miscellaneous First Appeal Management Information System Ministry of Power Million Units Mega Volt Ampere Mega Watt Multi Year Tariff Net Fixed Assets Neyveli Lignite Corporation Non Coincident Peak National Tariff Policy Operation & Maintenance Profit & Loss Account Prime Lending Rate Power Purchase Agreement Power Research & Development Consultants Reliance Energy Limited Repairs and Maintenance Return on Equity Rate of Return Right of Way Renewable Purchase Obligation State Bank of India Supervisory Control and Data Acquisition System State Electricity Regulatory Commissions State Load Despatch Centre Southern Regional Load Dispatch Centre State Transmission Utility Technical Advisory Committee Total Contracted Capacity ix

10 T&D TCs TR VVNL WPI WC Transmission & Distribution Transformer Centres Transmission Rate Visvesvaraya Vidyuth Nigama Limited Wholesale Price Index Working Capital x

11 KARNATAKA ELECTRICITY REGULATORY COMMISSION, BANGALORE Dated this 30 th day of March, 2016 Order on CESC s Annual Performance Review for FY15 & Annual Revenue Requirement for FY17-19 & Revision of Retail Supply Tariff for FY17 In the matter of: Application of CESC in respect of the Annual Performance Review for FY15, Annual Revenue Requirement for FY17-19 and Revision of Retail Supply Tariff for FY17, under Multi Year Tariff framework. Present: Shri M.K.Shankaralinge Gowda Chairman Shri H.D.Arun Kumar Shri D.B.Manival Raju Member Member O R D E R The Chamundeshwari Electricity Supply Corporation Ltd., (hereinafter referred to as CESC) is a Distribution Licensee under the provisions of the Electricity Act, 2003, and has, on & , filed the following applications for consideration and orders: a) Review of Annual Performance for FY15 and approval of revised ARR thereon. b) Approval of ARR for FY17-19 xi

12 c) Approval for revision of Retail Supply Tariff, for the financial year (FY17) In exercise of the powers conferred under Sections 62, 64 and other provisions of the Electricity Act, 2003, read with KERC (Terms and conditions for Determination of Tariff for Distribution and Retail Sale of Electricity) Regulations 2006, and other enabling Regulations, the Commission has considered the applications and the views and objections submitted by the consumers and other stakeholders. The Commission s decisions are given in this order, Chapter wise. xii

13 CHAPTER 1 INTRODUCTION 1.0 Chamundeshwari Electricity Supply Corporation Ltd.: The Chamundeshwari Electricity Supply Corporation Ltd., (CESC) is a Distribution Licensee under Section 14 of the Electricity Act, 2003 (hereinafter referred to as the Act). The CESC is responsible for purchase of power, distribution and retail supply of electricity to its consumers and also providing infrastructure for open access, Wheeling and Banking in its area of operation which includes five Districts of the State as indicated below: 1. Mysuru 2. Hassan HASSAN KODAGU MYSORE MANDYA CE SC, 3. Mandya CH NAGAR 4. Chamarajnagara 5. Kodagu The CESC is a registered company under the Companies Act, 1956, incorporated on 19 th August, The CESC commenced its operations on 1 st April, 2005, with four districts in its area of operation. Further, the Madikeri Division (Kodagu District) which was earlier under the MESCOM, was transferred to the CESC with effect from 1 st April, At present the CESC s area of operations is structured as follows: xiii

14 O&M Zones O&M Circles O&M Divisions VV Mohalla Mysore Works Circle NR Mohalla Nanjangud Hunsur Chamarajnagar Mysore O&M Circle Kolegala Madikeri Mysore zone Hassan CR patna Hassan Circle Arasikere HN Pura Mandya Pandavapura Mandya Circle Nagamangala Maddur These O & M divisions of the CESC are further divided into sixty one O&M sub-divisions with accounting / non accounting sections. The section offices are the base level offices looking into operation and maintenance of the distribution system in order to provide reliable and quality power supply to the CESC s consumers. xiv

15 1.1 The CESC at a glance: The profile of the CESC is as indicated below: 1.2 Sl. No. Particulars (As on ) Statistics 1. Area Sq. km Districts Nos Taluks Nos Population lakhs Consumers Lakhs Energy Sales MU Zone Nos DTCs Nos Assets (including current assets) Rs. in Crores HT lines Ckt. kms LT lines Ckt. kms Total employees strength: A Sanctioned Nos B Working Nos Revenue Demand in FY15 Rs. in Crores Revenue Collection in FY15 Rs. in Crores Number of Consumers, Sales in MU to various categories of consumers and details of Revenue for FY15 are as follows: CESC CATEGORY No. of Installation Sales in MU Revenue in Rs.Crs. Domestic Commercial Industrial Agriculture Others Total The CESC has filed its application for Annual Performance Review for FY15, Annual Revenue Requirement (ARR) for FY17-19 and revision of Retail Supply Tariff for FY17. The CESC s application, the objections / views of stakeholders thereon and the Commission s decisions on the Annual Performance Review for FY15, ARR for xv

16 FY17-19 and Revision of Retail Supply Tariff for FY17 are discussed in detail in the subsequent Chapters of this Order. xvi

17 CHAPTER 2 SUMMARY OF FILING & TARIFF DETERMINATION PROCESS 2.0 Background for Current Filing: The Commission in its Tariff Order dated 6 th May, 2013 had approved the ERC for FY14 to FY16 and the Retail Supply Tariff of CESC for FY14 under MYT principles for the control period of FY14 to FY16. CESC in its present application filed on 15 th December, 2015 has sought for Annual Performance Review (APR) for FY15 based on the audited accounts, ARR for the fourth control period i.e. FY17-19 and revision of Retail Supply Tariff for FY Preliminary Observations of the Commission After a preliminary scrutiny of applications the Commission had communicated its observations to CESC on 1 st January, 2016 which were mainly on the following points: Capital Expenditure Sales Forecast Assessment of IP set consumption Power Purchase Issues pertaining to items of revenue and expenditure Other new proposals Compliance to Directives The CESC has furnished its replies on 11 th January, The replies furnished by CESC are considered in the respective Chapters of this Order. Further, the Commission also held a validation meeting to discuss the proposals of CESC on 10 th February, xvii

18 2.2 Public Hearing Process: As per the Karnataka Electricity Regulatory Commission (Terms and Conditions for Determination of Tariff for Distribution and Retail Sale of Electricity) Regulations, 2006, read with the KERC Tariff Regulations, 2000, and KERC (General and Conduct of Proceedings) Regulations, 2000, the Commission vide its letter dated 14 th January, 2016 treated the application of CESC as petition and directed CESC to publish the summary of ARR and Tariff proposals in the newspapers calling for objections, if any, from interested persons. Accordingly, CESC has published the same in the following newspapers: Name of the News Paper Language Date of Publication Deccan Herald English 18/1/2016 The Hindu & Udayavani Kannada 19/1/2016 Kannada Prabha The CESC s applications on APR of FY15, ARR for FY17-19 and revision of retail supply tariff for FY17 were also hosted on the web sites of CESC and the Commission for the ready reference and information of the general public. In response to the application of CESC, the Commission has received thirty seven statements / letters of objections. CESC has furnished its replies to all these objections. The Commission has held a Public Hearing on 27 th February, 2016 at Mysore. The details of the written / oral submissions made by various stake holders and the response from CESC thereon have been discussed in Chapter - 3 / Appendix to this Order. 2.3 Consultation with the Advisory Committee of the Commission: The Commission has also discussed the proposals of KPTCL and all ESCOMs in the State Advisory Committee meeting held on 10 th March, During the meeting the following important issues were also discussed: xviii

19 Performance of KPTCL / ESCOMs during FY15 Major items of expenditure of KPTCL / ESCOMs for FY17-19 Members of the Committee have offered valuable suggestions on the proposals. The Commission has taken note of these suggestions while passing the order. xix

20 CHAPTER 3 PUBLIC CONSULTATION SUGGESTIONS / OBJECTIONS & REPLIES 3.1 In pursuance of section 64 of the Electricity Act, 2003, the Commission undertook the process of public consultation, to obtain suggestions/views/objections from the interested stake-holders, on the application filed by CESC, for Annual Performance Review for FY15, approval of ERC, and ARR for FY17, FY18 and FY19 and approval of revised retail supply tariff for FY17, under the MYT Principle. In the written submissions as well as during the public hearing, the Stakeholders and the public have raised several objections/ made suggestions, on the Tariff Application. The names of the persons who have filed written objections and made oral submissions are given below: List of persons who filed written objections:- Sl. Application No No. Name & Address of Objectors 1 CB-01 Sri Yagnanarayana M.N, General Secretary, Laghu Udyog Bharati Karnataka, Bengaluru. 2 CB-02 Sri Chetan Jain, AM- Business Development, Indian Energy Exchange Limited, New Delhi. 3 CA-01 Sri N. Ravidranath & others, Madhuvanahalli, Kollegala. 4 CA-02 Sri R. Ramanna, Financial Advisor & Chief Accounts Officer, BWSSB, Bengaluru. 5 CA-03 Sri K.B. Arasappa, Hon. Gen. Secretary, KASSIA, Bengaluru. 6 CA-04 Sri Anil Savur D, Secretary, The Karnataka Planters Association, Chikmagaluru 7 CA-05 Sri M.M. Suryanarayana, General Secretary, Akhila Bharatiya Grahak Panchayat ( R). Mysuru. 8 Sri K. Ravindra Prabhu, Vice President, KIADB Industrial Area CA-06 Manufactures Association, Mysuru. 9 CA-07 Sri P.B. Chengappa, Chairman, Kodagu Planters Association, Kodagu. 10 CA-08 Sri C.A. Subbaiah, Vice President, Kodagu District Small Growers Association, Kodagu. 11 CA-09 Sri Lokaraj, Secretary, Federation of Karnataka Chambers of Commerce and Industry Bengaluru. 12 CA-10 Sri K. Ravindra Prabhu, Chairman, Energy Subcommittee, Hebbal Industrial Estate Manufacturers Association, Mysuru. 13 CA-11 to CA-35 Sri S.B. Kempegowda & others, Mandya, Maddur, Nagamangala, Pandavapura, T. Narasipura and Mysuru. 14 AE-01 Sri P.N. Karanth, Kundapura. 15 AE-02 Sri Praveen Sood, IPS, Additional Director General of Police, Administration, Bengaluru xx

21 3.2 List of the persons, who made oral submissions during the Public Hearing, held on SL.No. Names & Addresses of Objectors 1 Sri K. Ravindra Prabhu, Vice President, KIADB Industrial Area Manufacturers Association & Hebbal Industrial Estate Manufacturers Association. 2 Sri Suresh Kumar Jain, Mysuru Industries Association 3 Sri Mallappa Gowda & Manjunath, KASSIA. 4 Sri Savitha Ranganath, The Call, Secretary General, CVO. 5 Sri Rajesh Kadi, Anti-Corruption Committee, Mysuru. 6 Sri N. Nataraj, Chamarajanagar Kissan Sangha. 7 Sri Y.M. Raju, Hassan District Kissan Sangha. 8 Sri Anil Savur, Secretary, Karnataka Planters Association. 9 Sri Mohd. Arif Khan, Advocte, BWSSB. 10 Sri Vasanth. S. Karnataka State Electrical Contractors Association. 11 Sri Anselm Nazareth, Consumer, Mysuru. 12 Sri Rajendra, Bharatiya Kissan Sangha, Chamarajanagar. 13 Sri K.V. Siddappa, Hanuru Kissan Sangha. 14 Sri Chethan Jain, IEx. 15 Sri Capt. M.A. Hussain, Mysuru. 16 Sri Biddappa M.C, Orange County. 3.3 The gist of the objections, replies by CESC and the Commission s views in Appendix-1 of this order. xxi

22 CHAPTER 4 ANNUAL PERFORMANCE REVIEW FOR FY CESC s Application for APR for FY15: The CESC, in its application dated 30 th November, 2015, has sought for review of its Annual Performance (APR) for FY15 and approval of a revised ARR thereon, based on the Audited Accounts. The Commission in its letter dated 1 st January, 2016 had communicated its preliminary observations on the application of CESC. The CESC, in its letter dated 11 th January, 2016 has furnished its replies to the preliminary observations of the Commission. The Commission in its Multi Year Tariff (MYT) Order dated 6 th May, 2013 had approved the CESC s Annual Revenue Requirement (ARR) for FY14 FY16. Further, in its Tariff Order dated 12 th May, 2014, the Commission had approved the APR for FY13 and had revised the ARR for FY15 along with Retail Supply Tariff for FY15. The Annual Performance Review for FY15 based on the CESC s Audited Accounts is discussed in this Chapter. 4.1 CESC s Submission: The CESC has submitted its proposals for revision of ARR for FY15 based on the Audited Accounts as follows: xxii

23 Sl. No Particulars TABLE 4.1 Revised ARR for FY15 CESC s Submission Amount in Rs. Crores As Filed 1 Gen Bus in MU Interface in MU Distribution Losses in % Sales in MU 4 Sales to other than IP & BJ/KJ installations Sales to IP & BJ/KJ installations Total Sales Revenue in Rs Crs 6 Revenue from tariff and Misc. Charges RE Subsidy Total Revenue Expenditure in Rs Crs 8 Power Purchase Cost Transmission charges of KPTCL SLDC Charges 3.42 Power Purchase Cost including cost of transmission Employee Cost Repairs & Maintenance Admin & General Expenses Total O&M Expenses Depreciation Interest & Finance charges 15 Interest on Loans Interest on Working capital Interest on belated payment of power purchase Interest on consumer deposits Other Interest & Finance charges Less interest & other expenses capitalised Total Interest & Finance charges Other Debits Net Prior Period Debit/Credit (72.44) 23 Return on Equity Tax Other Income Net ARR Considering a revenue of Rs Crores against a net ARR of Rs Crores, the CESC has reported surplus in revenue of Rs Crores for FY15. xxiii

24 4.2 CESC s Financial Performance as per Audited Accounts for FY15: An overview of the financial performance of the CESC for FY15 as per their Audited Accounts is given below: Sl. No. TABLE 4.2 Financial Performance of CESC for FY15 Particulars Amount in Rs. Crores FY15 Receipts 1 Revenue from Tariff and misc. charges Tariff Subsidy Total Revenue Expenditure 3 Power Purchase Cost Transmission charges of KPTCL SLDC Charges 3.42 Power Purchase Cost including cost of transmission O&M Expenses Depreciation Interest & Finance charges 8 Interest on Loans Interest on Working capital Interest on consumer deposits Interest on belated payment of power purchase cost Other Interest & Finance charges Less interest and other expenses capitalized Total Interest & Finance charges Other Debits Net Prior Period Debit/Credit (72.44) 16 Other income Income tax Net ARR As per the Audited Accounts, the CESC has earned a profit of Rs Crores for FY15. The profits / losses reported by the CESC in its audited accounts in the previous years are as follows: xxiv

25 TABLE 4.3 CESC s Accumulated Profits / Losses Particulars Amount in Rs. Crs Accumulated losses as at the end of FY10 (285.15) Profit earned in FY Loss incurred in FY12 (123.45) Loss incurred in FY13 (269.63) Loss incurred in FY14 (15.61) Profits earned in FY Accumulated losses as at the end of FY15 (642.19) As seen from the above table, the accumulated losses are Rs Crores. Commission s analysis and decisions: The Annual Performance Review for FY15 has been taken up duly considering the actual expenditure as per the Audited Accounts against the expenditure approved by the Commission in its Tariff Order dated 12 th May, The item wise review of expenditure and the decisions of the Commission thereon are as discussed in the following paragraphs: Sales for FY15: a) Sales-Other than IP sets The Commission in its Tariff order dated had approved for FY15 total sales to various consumer categories at MU as against the CESC proposal of MU. The Actual sales of CESC as per the current APR filing [FORMAT D-2] is MU, indicating a short xxv

26 fall in sales to an extent of MU vis-à-vis the approved sales. The shortfall in sales is MU in LT-categories and MU in HTcategories. The Commission notes that, as against approved sales of MUs to categories other than BJ/KJ and IP sets, the actual sales achieved by CESC is MU, resulting in shortfall of sales to these categories by MU. Further, the CESC has sold MU to BJ/KJ and IP categories against approved sales of MU resulting in lower sales to these categories by MU. The actual share of sales to categories other than BJ/KJ and IP sets is 55.56% as against the estimated share of 55.02% resulting in marginal increase in share of sales to these categories, while the actual share of sales to BJ/KJ and IP sets has taken short by the same percentage point. The Commission notes that the major categories contributing to the lower sales are HT Industries ( MU), HT Commercial (27.23 MU) and IP sets ( MU). b) Sales to IP sets In its Tariff Order dated 6 th May, 2013, the Commission had approved specific consumption of IP sets at 8,195 units/installation/annum for the entire control period of FY14 to FY16, whereas, as per the IP set consumption reported by the CESC in its filing, the specific consumption works out to 7,843 units /installation/annum for the FY15, which indicates a decrease in the specific consumption of 352 units/installation/annum. The total IP set consumption reported by the CESC for the FY15 is 2, MU as against 2, MU sales quantum approved by the Commission. Thus, the specific consumption has decreased by 352 units /installation/annum with the corresponding decrease in sales by MU when compared to those approved by the Commission for the FY15. xxvi

27 Further, the Commission had approved 3,16,336 as number of installations likely to be serviced in the FY 15; whereas the actual number of installations serviced as reported by the CESC is 3,00,070. The difference in number of installations is 16,266. This indicates decrease of around 5 per cent in number of installations serviced, as compared to the approved number of installations by the Commission for the FY15. Further, it is noted that the shortfall in the sales can be attributed to lower number of installations serviced than the projected numbers. The Commission in its Tariff Order dated 12 th May, 2014 had directed the CESC to furnish feeder wise IP set consumption based on the feeder energy meter data, every month to the Commission, in respect of agricultural feeders segregated under NJY. The CESC in its tariff application has submitted the data of IP sets from April 14, to March 15, without indicating as to how much loss in 11 kv lines, distribution transformers and LT system has been deducted from the gross consumption obtained from the agricultural feeders, to arrive at the net IP set consumption. The Commission in its preliminary observations had directed the CESC to justify its claims of IP consumption of 2, MU declared for the FY15 with necessary data in support of the same and the methodology adopted to arrive at the energy loss figures in the 11 kv System. The CESC was also directed to explain whether the total IP set consumption for the FY15 has been worked out by considering the specific consumption of agricultural feeders segregated under NJY or on the basis of readings obtained from the meters fixed to sample DTCs feeding predominantly IP set loads, with the necessary data to justify its claims in support of IP sales declared for the FY15. The CESC, in its reply to the preliminary observations made by the Commission, has stated that it has submitted the IP set details based on the energy meters data in respect of the segregated agricultural xxvii

28 feeders as desired by the Commission and the distribution system loss figures at 15 per cent has been considered to arrive at the net IP set consumption from April, 2014 to March Further, the CESC during the validation meeting held on in the Commission has also submitted the necessary data in respect of IP set consumption for the FY15 on the basis of energy meter readings of 11 kv agricultural feeders which have been segregated under NJY. The Commission notes that the decrease in IP set sales for the FY15 can be attributed to the fact that the CESC has serviced less number of IP sets than it has projected. However, it is also noted that the specific consumption as well as the sales have significantly decreased vis-à-vis the approved quantities by the Commission for the FY15 perhaps due to restricted hours of power supply made to agricultural feeders which are segregated under NJY. The Commission also notes that the CESC has declared overall 11 kv distribution system losses at 15 per cent, whereas, the same could have been directly calculated for each feeder considering the 11 kv and LT sketches in respect of all the agricultural feeders to arrive at accurate IP set consumption. The CESC is directed to report henceforth the total IP set consumption on the basis of data from energy meters in respect of agricultural feeders segregated under NJY to the Commission every month regularly duly calculating the distribution system losses in 11 KV lines, distribution transformers and LT lines, as discussed above. For the present, the Commission decides to accept the sales to IP sets for the FY15 as 2, MU as submitted by the CESC. The category wise sales approved by Commission and the actuals for FY 15 are indicated in the table below: TABLE 4.4 Approved Sales as per APR for FY15 Figures in MU Category Approved Actuals Actuals - Approved xxviii

29 LT-2a* LT-2b LT LT-4b LT-4c LT LT LT LT HT HT-2a HT-2b HT-2c HT-3a & b HT HT Sub total BJ/KJ IP Sub total Grand total *Including BJ/KJ installations consuming more than 18 units/month Thus the Commission approves the energy sales for FY15 at MU Distribution Losses for FY15: CESC s Submission: The Commission had approved distribution losses for FY15 as shown in the table below: Range FY15 Upper limit 15.50% Average 15.00% Lower Limit 14.50% CESC has reported a loss level of 13.88% for FY15 as detailed below: xxix

30 1 Energy at Interface Points in MU Total sales in MU Distribution losses as a percentage of input energy at IF points 13.88% Commission s analysis and decisions: The distribution losses of 13.88% reported by CESC is based on the sales of MU as against the energy of MU at interface points. Considering the approved range of losses for FY15, CESC has achieved distribution loss reduction of 0.62% as compared to the lower limit of allowable losses. As per the provisions of the MYT Regulations, incentives for loss reduction is allowed to CESC as follows: TABLE 4.5 Incentives for loss reduction in FY15 Particulars Actual input at IF points as per audited accounts in MU FY Retail sales as per audited accounts in MU Percentage distribution losses 13.88% Target of lower limit of distribution loss 14.50% Reduction in loss in percentage point 0.62% Input at target loss for actual sales in MU Decrease in input due to reduction in distribution losses in MU Average cost of power IF points in Rs./unit 3.43 Reduction in power purchase cost due to lower distribution losses in Rs. Crores Incentives allowed in APR 15 (Sharing gains with consumers in the ratio of 50:50) in Rs.Crs Accordingly, the Commission decides to add an amount of Rs.7.53 Crores as incentive towards loss reduction in the revised ARR for FY Power Purchase for FY15: CESC s Submission: xxx

31 1. The Commission in its Tariff order dated 12th May, 2014 had approved source-wise quantum and cost of power purchase for FY15. The CESC, in its application has submitted the details of actual power purchase for FY15 for its Annual Performance Review. The details of power purchase are detailed as under: xxxi

32 Particulars KPCL Hydel Stations KPCL-Thermal Stations Energy in MUs Actuals for FY15 Cost in Rs Crs. Rate in Rs per Unit TABLE 4.6 CESC s POWER PURCHASE FOR FY15 Energy in MUs Approved for FY15 Cost in Rs Crs. Rate in Rs per Unit Difference of Actuals over the Approved-for FY15 Energy in MUs Cost in Rs Crs. Rate in Rs per Unit % increase /decrease over approved figures Energy Cost Rate Total CGS Major IPPs IPPs -Minor (NCE Projects) Other States Projects Short /Medium term including U I & Sce-11 Transmission Charges (KPTCL & PGCIL) LDC Charges (POSOO & SLDC) Energy Balancing Others Charges TOTAL Commission s analysis and decisions; 1. The actual power purchase for FY15 as filed by the CESC for approval of Annual Performance Review is MU at a cost of Rs Crores, as against the approved quantum of MU, amounting to Rs Crores. Thus there is reduction in quantum of power purchased to an extent of MU and in cost by Rs Crores. xxxii

33 2. On an analysis of the source-wise approved and actual power purchases, the following deviations in quantum of energy and its cost of purchase are found: i. As against the approved quantum of MU the actual power purchased by the CESC is MU for FY15, which is around 5.47% of the approved quantum. Such decrease during FY14 was 3.39%. purchase. This has reflected in reduction in power ii. On a verification of the source-wise power purchase, it is found that, there is lesser energy supply from KPCL thermal, CGS, NCE and outside the State projects to an extent of MU at a cost of Rs Crores. Consequently, CESC has purchased additional power from KPCL hydel, major IPPs and Short-term supplies, over and above the approved power purchase against these sources, to a tune of MU, incurring an expenditure of Rs Crores. However, there is an overall reduction in power purchase to a tune of Rs Crores. Consequent to reduced supply of energy from KPCL thermal, CGS, NCE etc., the power purchase cost per unit, has increased by 7 paise. iii. All these factors including the change in the source-wise mix of supply and reconciliation of energy and its cost among ESCOMs have resulted in higher average power purchase cost of CESC at Rs.3.43 per KWh as against the approved rate of Rs.3.37 per KWh leading to an overall increase by Rs.0.07 per unit. During FY 14 the increase in per unit cost was Rs.0.29 per unit which worked out to 9.66 %. Now, for FY15, the increase in per unit cost is 1.97 %. iv. D1 format of CESC indicates energy balancing among other ESCOMs to an extent of MU amounting to Rs Crores, which has been reconciled with Energy Balancing Statement of SLDC. 3. The Commission notes that, the SLDC is yet to implement the intrastate ABT scheme. The Commission therefore directs SLDC to take xxxiii

34 appropriate action immediately to expedite the implementation of intra-state ABT and to host such details on its website. 4. The Commission in its Tariff order dated 2nd March, 2015 had directed CESC to move the Government to effect necessary adjustments in the tariff subsidy payable to ESCOMs and ensure that there are no inter ESCOM payments outstanding in their accounts. Further, CESC was also directed to reconcile the inter ESCOM exchanges and its costs duly making necessary adjustments to ensure proper accounting of energy and its cost. 5. CESC is directed to reconcile the inter ESCOM energy exchanges and its costs every month and the difference amounts shall be collected/paid out of the tariff subsidy received from the Government of Karnataka, to ensure proper accounting of energy and its cost. 6. The Commission reiterates that, for the prior period receivables/payables, CESC should move the Government to effect necessary adjustments out of the tariff subsidy, to be received from the Government of Karnataka. In terms of the MYT Regulations, the Commission taking note of the above facts, decides to consider MU at a cost of Rs Crores (as per audited Accounts), towards power purchase for approving the Annual Performance Review of CESC for FY Renewable Purchase Obligation (RPO) compliance by CESC for FY15: CESC has submitted that its achievement of non-solar RPO and solar RPO are at 11.51% and 0.23% respectively as against target of 10% and 0.25% respectively, as indicated below: TABLE 4.7 RPO compliance as submitted by CESC for FY15 xxxiv

35 Company Name Total Input Energy (MU) Non-Solar RPO Solar RPO Target Achieved Target Achieved (MU) (%) (MU) (%) (MU) (%) (MU) (%) CESC The Commission has perused the source-wise renewable energy purchased, as submitted by CESC under D1 format of the Petition vis-àvis the RPO compliance data submitted by CESC in its reply to the Commission s preliminary observations. The Commission has observed that, CESC has accounted 7.49 MU of non-solar renewable energy purchased under APPC for the purpose of non-solar RPO compliance. Since, renewable energy purchased under APPC cannot be considered for the RPO calculation, the Commission has not considered the same. Thus, the non-solar RE reckoned by the Commission for non-solar RPO compliance is MU as against MU declared by CESC. The Commission has approved total power purchase quantum of MU for FY15 in its APR. Thus, CESC was required to purchase MU of Non-solar energy to meet its RPO target. Based on the information furnished, the Commission notes that CESC has purchased MU of non-solar RE power for FY15 complying with the non-solar target for FY15. Regarding solar RPO target, it is noted that CESC has been able to achieve solar RPO target of 0.23% as against a specified target of 0.25%, resulting in shortfall of 0.02% in meeting the solar RPO target. Further, in replies to the observations made by the Commission in the validation meeting, CESC has stated that the shortfall is due to inordinate delay in commissioning of 10MW capacity M/s Sai Sudhir Energy Pvt. Ltd. It is further, stated that if the project had been commissioned, CESC would have been able to meet the solar RPO from the anticipated generation of 15 MU. Further, CESC has requested the Commission to allow them to carry forward unfulfilled FY-15 solar xxxv

36 RPO to FY16 as two solar projects of M/s Madhav Solar of 5 MW capacity each have been commissioned during July, 2015 and in the event of non-fulfillment of solar RPO in FY-16, it would consider purchase of RECs to achieve the solar RPO. The Commission notes that when the State as a whole is taken for the purpose of assessment of achievement of solar RPO, in aggregate all the State owned ESCOMs have achieved the total solar RPO target set for the State. The Commission therefore decides not to recognize the individual achievement of CESC and to treat the matter as closed Operation and Maintenance Expenses: CESC s Submission: CESC has sought approval of O&M expenditure of Rs Crores for FY15. CESC has claimed this O&M expenses as follows: TABLE 4.8 Normative O & M Expenses CESC s submission Amount in Rs. Crores Particulars FY15 Repairs & Maintenance Employee Expenses A&G expenses O&M expenses Commission s analysis and decisions: The Commission had approved O&M expenses for FY15 as detailed below: TABLE 4.9 Approved O&M Expenses for FY15 Amount in Rs. Crores Particulars FY15 No. of installations as per actuals as per Audited Accts Weighted Inflation Index 6.89% CGI based on 3 Year CAGR 5.54% xxxvi

37 Actual O&M expenses for FY Approved O&M Expenses for FY As per the Annual Audited Accounts of the CESC for FY15, the actual O&M expenditure is as follows: xxxvii

38 TABLE 4.10 O&M Expenses of CESC for FY15 as per actuals Amount in Rs. Crores Repairs & Maintenance Employee Expenses A&G expenses O&M expenses The Commission in its preliminary observations made on the O & M expenses had sought the details of the items of expenditure incurred by the CESC during FY15 under A & G expenses. The CESC in its replies has stated that it has incurred expenses of Rs Crores towards professional charges, Rs.8.52 Crores towards conveyance, travel and vehicles expenses besides other A&G expenses. On detailed review of the expenses, it is observed that CESC is incurring substantial expenses on vehicle hire charges and professional charges. Also, the R&M expenses are increasing year on year without proper justification. One of the major items noticed under R & M is expenses incurred on repairs of distribution transformers. The CESC needs to institutionalize a mechanism for minimizing such expenses. These expenses are abnormally increasing as compared to the previous years. Since the O & M expenses are controllable expenses, the CESC has to initiate necessary measures to ensure prudence in incurring these expenses. The Commission is of the view that the CESC should continue control its O & M expenses as per the approved O & M expenses. However, for the present, based on the provisions of the MYT Regulations, the Commission has proceeded with determining the normative O & M expenses. Considering the Wholesale Price Index (WPI) as per the data available from the Ministry of Commerce & Industry, Government of India and Consumer Price Index (CPI) as per the data available from the Labour xxxviii

39 Bureau, Government of India and adopting the methodology followed by the CERC with CPI and WPI in a ratio of 80 : 20, the allowable inflation for FY15 is computed as follows: Year WPI CPI Composite Year Product [(t- Yt/Y1=Rt Ln Rt Series (t-1) 1)* (LnRt)] A= Sum of the product column B= 6 Times of A C= (n-1)*n*(2n-1) where n= No of years of data= D=B/C 0.07 g(exponential factor)= Exponential (D) e=annual Escalation Rate (%)=g* For the purpose of determining the normative O & M expenses for FY15, the Commission has considered the following: a) The actual O & M expenses allowed for FY13 excluding contribution to Pension and Gratuity Trust. b) The three year compounded annual growth rate (CAGR) of the number of installations considering the actual number of installations as per audited accounts up to FY15. c) The weighted inflation index (WII) at 7.24% as computed above. d) Efficiency factor at 2% as considered in the earlier two control periods. Thus, the normative O & M expenses for FY15 will be as follows: Particulars FY15 No. of Installations as per actuals as per Audited Accts Weighted Inflation Index 7.24% Consumer Growth Index (CGI) based on 3 Year CAGR 3.65% Normative O & M expenses for FY13 excluding P&G xxxix

40 contribution - Rs. Crs. O&M Index= 0&M (t-1)*(1+wii+cgi-x)- Rs. Crores The above normative O & M expenses have been computed without considering the contribution to Pension and Gratuity Trust. The Commission has treated certain employee costs on account of contribution to P&G Trust as uncontrollable O&M expenses. This component has been allowed beyond the normative O&M expenses to enable ESCOMs to meet their actual employee costs. The CESC in its audited accounts for FY15 has indicated an amount of Rs Crores towards contribution to Pension and Gratuity trust. Considering the request of the CESC to treat gratuity contribution as uncontrollable O & M expenses, the Commission has computed the allowable O & M expenses for FY15 as follows: TABLE 4.11 Allowable O & M Expenses for FY15 Amount in Rs. Crores Sl. No. Particulars FY15 1 Normative O & M expenses Additional employee cost (uncontrollable O & M expenses) 3 Allowable O & M expenses The Commission decides to allow an amount of Rs Crores as O&M expenses for FY Depreciation: CESC s Submission: CESC in its application has claimed an amount of Rs Crores as depreciation computed after deducting an amount of Rs Crores towards depreciation withdrawn on account of contributions / subsidies as per Accounting Standards (AS) 12. As per the audited accounts, the asset wise depreciation is as follows: xl

41 Particulars TABLE 4.12 Depreciation for FY15 CESC s Submission Opening Balance of Asset as on Closing Balance of Asset as on Amount in Rs. Crores Depreciation for FY15 Buildings Civil Other Civil Plant & M/c Line, Cable Network Vehicles Furniture Office Equipment Total Intangible assets Net Depreciation Commission s analysis and decisions: The depreciation is determined by the Commission in accordance with the provisions of the KERC (Terms and Conditions for Determination of Tariff) Regulations, 2006 as amended on 1 st February, Considering the opening and closing balance of gross blocks of fixed assets for FY15 and the depreciation as per annual accounts, the weighted average rate of depreciation works out to 4.46%. As per the audited accounts for FY15, an amount of Rs Crores on account of depreciation on assets created out of grants and contribution on actual basis, is considered for computation of allowable depreciation for FY15. Based on the above, the Commission decides to allow the actual depreciation of Rs Crores for FY15. xli

42 4.2.7 Capital Expenditure for FY15 CESC has reported a capital expenditure of Rs Crores against the approved capex of Rs.455 Crores (CESC had approached the Commission for approval of additional capex for FY15 duly furnishing the reasons for its increased capex requirement from Rs.378 Crores and the Commission had approved an additional capex of Rs.77 Crores for FY15 totalling to a capex of Rs.455 Crores for FY15). The actual expenditure incurred by CESC for different category of works is as shown in the table below: Crores Sl. No. TABLE The actual capital expenditure incurred by CESC for FY15 Schemes Approved Amount in Rs. Actual expenditure 1 Extension & Improvement a) HVDS+LTD Box + E&I works b) NJY R-APDRP RGGVY(Restructured )+DDG Replacement of failed Transformers Service Connections Rural Electrification(General) A Electrification of Hamlets/HB/JC/KJ under RGGVY B Providing infrastructure to Irrigation Pump sets & Energization of IPSETS C Kutir Jyothi(RGGVY) 7 Tribal plan A Electrification of HB/JC/AC(RGGVY) 3 4 B Energization of IP sets C Kutir Jyothi (RGGVY) 8 Special Component Plan A Electrification of HB/JC/AC(RGGVY) 8 11 B Energization of IP sets C Kutir Jyothi (RGGVY) 9 Tools & Plants (Other works) Civil Engineering Works xlii