National Electric Power Regulatory Authority

Transcription

1 National Electric Power Regulatory Authority Islamic Republic of Pakistan Registrar NEPRA Tower, Ataturk Avenue(East), G-5/1, Islamabad Ph: , Fax: Web: No. NEPRA/TRF-300/TESCO-2015/ May 19, 2015 Subject: Determination of the Authority in the matter of Petition filed by Tribal Areas Electric Supply Company Ltd. (TESCO) for the Determination of its Consumer end Tariff Pertaining to FY [Case # NEPRA/TRF-300/TESCO Dear Sir, Please find enclosed herewith the subject Determination of the Authority along with Annexure-I, II, III, IV, V, VI & VII (65 pages) in Case No. NEPRA/TRF- 300/TESCO The Determination is being intimated to the Federal Government for the purpose of notification of the approved tariff in the official gazette pursuant to Section 31(4) of the Regulation of Generation, Transmission and Distribution of Electric Power Act (XL of 1997) and Rule 16(11) of the National Electric Power Regulatory Authority (Tariff Standards and Procedure) Rules, The Order part along with Annex-I, III, IV, V & VII of the Determination is intimated for notification in the official Gazette. Enclosure: As above Secretary Ministry of Water & Power `A' Block, Pak Secretariat Islamabad ( Syed Safeer Hussain )" IS CC: 1. Secretary, Cabinet Division, Cabinet Secretariat, Islamabad. 2. Secretary, Ministry of Finance, 'Q' Block, Pak Secretariat, Islamabad.

2 Decision in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 National Electric Power Regulatory Authority (NEPRA) PETITION NO: NEPRA/TRF-300/TESCO-2015 TARIFF DETERMINATION FOR TRIBAL AREAS ELECTRIC SUPPLY COMPANY LTD. (TESCO) DETERMINED UNDER NEPRA TARIFF (STANDARDS AND PROCEDURE) RULES Islamabad May 19,

3 PRI Determination in the matter of Tribal Areas Electric Supply Company Liznited (TESCO) No. NEPRA/TRF-300/TESCO-2015 Abbreviations CpGenCap CPPA DISCO DM FY GOP GWh KV kw kwh MW NEPRA O&M PPP PYA RAB RORB SRO T&D TOU USCF The summation of the capacity cost in respect of all CpGencos for a billing period minus the amount of liquidated damages received during the months Central Power Purchasing Agency Distribution Company Distribution Margin Financial Year Government of Pakistan Giga Watt Hours Kilo Volt Kilo Watt Kilo Watt Hour Mega Watt National Electric Power Regulatory Authority Operation and Maintenance Power Purchase Price Prior Year Adjustment Regulatory Asset Base Return on Rate Base Statutory Regulatory Order Transmission and Distribution Time of Use The fixed charge part of the Use of System Charges in Rs./kW/Month 2

4 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 DECISION OF THE AUTHORITY IN THE MATTER OF PETMON FILED BY TRIBAL AREAS ELECTRIC SUPPLY COMPANY LTD, (TESCO) FOR THE DETERMINATION OF ITS CONSUMER END TARIFF. PETITIONER CASE NO. NEPRA/TRF-300/TESCO-2015 Tribal Areas Electric Supply Company Ltd., (TESCO) WAPDA House, Shami Road, Peshawar INTERVENER - Nil COMMENTATORS - Nil REPRESENTATION 1. Mr.Z alcaullah, Chief Executive Officer 2. Mr. JamaludinNasir, Manager H/Q 3. Mr. Bashir Khan, Manager (Operation) 4. Mr. Abdul Haq, Dy: Manager Corporate Accounts 5. Mr. Imran Iqbal, Dy: Manager (T&G) 6. Mr. Irshad Khan, Dy: Manager (T&G) 7. Mr. FazliWahab, Asstt: Manager Corporate Accounts 3

5 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/I'RF-300/TESCO-2015 The Authority, in exercise of the powers conferred on it under Section 7(3) (a) read with Section 31 of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, Tariff Standards and Procedure Rules, 1998 and all other powers enabling it in this behalf, and after taking into consideration all the submissions made by the parties, issues raised, evidence/record produced during hearings, and all other relevant material, hereby issues this determination. (Khawaja Muhammad Naeem) Member Member (Maj (Rtd) Haroon Rashid) Vice Chairman td) Tariq Soddozai Chairman 4

6 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/7'RF-300/TESCO BACKGROUND & BRIEF HISTORY 1.1 Tribal Areas Electric Supply Company Ltd., (TESCO) (hereinafter referred as "Petitioner") being distribution licensee of NEPRA (Distribution License No. (22/DL/2013) dated 12th August, 2013) filed a petition for the determination of its consumer-end tariff pertaining to the FY in terms of Rule 3(1) of Tariff Standards & Procedure Rules-1998 ("Rules"). 2. RELIEF SOUGHT 2.1 The Petitioner has sought the following relief: Ensuring the financial viability of the petitioner for the reliable supply of electricity to its Rs million consumers; Timely determination of tariff along with its monthly adjustments or annual adjustments as proposed, providing sufficient time to the petitioner for the recovery of the determined revenue requirement; Fixing of target of T&D losses by taking a realistic approach; Approving the investment plan of Rs. 613 million; Allowing Rs. 3,535 million as distribution margin; Any other relief. 3. PROCEEDINGS: 3.1 In terms of Rule 4, the Petition was admitted by the Authority on 10th March, In compliance with the provisions of sub-section (5) & (6) of Rule 4 & 5, notices of admission and hearing were sent to the parties which were considered to be affected or interested. An advertisement in this regard was also published in the leading national newspapers with the title and brief description of the petition on 28th March, FILING OF OBJECTIONS/ COMMENTS: 4.1 Comments/replies and filing of intervention request, if any, were desired from the interested person/ party within 7 days of the publication of the notice of admission in terms of Rule 6 & 8. In respohse thereof, no comments or intervention request was filed within the stipulated time. 5

7 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO FRAMING OF ISSUES 5.1 The pleadings so available on record were examined by the Authority in terms of Rule 9 of the Tariff Rules. In order to arrive at a just and informed decision, it was decided to conduct a hearing into the matter on 7th April, 2015 at NEPRA Main Office, Islamabad. Following issues were framed to be considered during the hearing to be presented as written as well as an oral evidence and arguments:- i. Whether the Petitioner has complied with the directions of the Authority prescribed in the tariff determination for the FY ii. Whether the Petitioner's projected purchases of 1,536GWhs and sales of 1,182GWhs units for the FY , are reasonable? iii. Whether the Petitioner's proposed transmission and distribution losses of % for the FY , are justified? iv. Whether the Petitioner's projected power purchase cost of Rs.16,233 million (Rs /kWh) for the FY , is justified? v. Whether the Petitioner's projected O&M cost of Rs.754 million (Rs.0.638/kWh) for the FY after accounting for inflation/increments, is justified? vi. Whether the Petitioner's request to allow wheeling charges payable to PESCO amounting to Rs. 1,182 (Rs.1/kWh)for the FY , is justified? vii. Whether the Petitioner's proposed depreciation charge of Rs.173 million (Rs0.146 /kwh) for the FY is justified? viii. Whether the Petitioner's projected Return on Regulatory Asset base ofrs.399 million (Rs /kwh) for FY is justified? ix. Whether the Petitioner's projected other income of Rs.1,239 million (Rs.1.05/kWh) for the FY , is reasonable? x. Whether the Petitioner's proposed Investment plan of Rs.613 million for the FY , is justified and keeping in view the prospective benefits? xi. Whether the Petitioner's claim for bad debts amounting to Rs. 2,267 million (Rs.1.918/kWh) for the FY , is justified? xii. Whether the Proposed revenue requirements of Rs. 19,811million at an average sale rate ofrs /kwh for the FY , is justified? xiii. Whether the Petitioner's request for financial charges for Rs. 43 million for the FY , are justified? xiv. Whether the Petitioner's projected receivables of Rs. 57,264 million for the FY are justified and what is the recovery plan for receivables? 6

8 Ow) yjs Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/7'ESCO-2015 xv. xvi. xvii. xviii. Whether the existing service delivering structure of circles, divisions and subdivisions etc can provide satisfactory services for supply of electric power to the consumer with the substantial expansion in the system? Whether the existing financial, administration and technical powers concentrated at different layers of hierarchy is required to be developed in order to provide better services from the door step of the consumer? What are the concerns of Petitioner on TOU metering of cellular company connections and similar connections? What are the concerns of Petitioner on changing terms and conditions of lifeline consumers and Residential consumers? 6. HEARING 6.1 Hearing into the matter was conducted on 7th April, 2015 at NEPRA Main Office, Islamabad. On the basis of pleadings, evidence/record produced and arguments raised during the hearing, issue-wise findings are given as under: 7. Issue # 1. Future tariff determination methodology with respect to the consumer end tariffs of XWDISCOs. Tariff Methodology for the FY As per the Petitioner's petition and existing Tariff Methodology, the Authority has decided to continue with the determining of revenue requirement on annual basis and continue with the practice of projecting monthly PPP references, for the FY as; - lesser revenue is generated in winter that is compensated by higher revenue generated in the summer; - changes in generation mix resulting in lower PPP in wet seasons (with greater hydel generation) compensating high PPP in winter (with greater generation reliance on RFO); - there is huge variation in T&D Losses due to seasonal fluctuation. 7.2 However, certain adjustments like impact of losses, variation in capacity transfer price and UoSC, impact of extra or lesser purchases of units would be made on quarterly basis for the FY , as per the existing practice. Thus, following components of tariff are subject to annual assessment for the FY ; Assessment of T&D losses target. Assessment of Sales target. 7

9 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRAITRF-300/TESCO Impact of Consumer mix variance. Month wise assessment of reference values with respect to PPP (including energy, capacity & transmission charges). Impact of extra and lesser units purchased. Assessment of Distribution Margin, and ; Assessment of prior period assessment, if any. 7.3 The Petitioner may file a review on the Authority's assessment as per Rules. Quarterly Adjustments 7.4 The quarterly adjustments would also be appraised for the FY as per the following scope, that would be limited to; 1.The adjustments pertaining to the capacity and transmission charges. 2.The impact of T&D losses on the components of PPP. 3. Adjustment of Variable O&M as per actual. Monthly Fuel Adjustments 7.5 The existing practice with respect to the adjustments on account of variation in fuel cost component of PPP on monthly basis would continue for the FY This adjustment reflects in the consumers' monthly bill as Fuel Adjustment Charge. 7.6 In view of any abnormal changes the Authority may review these references along with any quarterly adjustment. Here it is pertinent to mention that PPP is pass through for all the DISCOs (variable cost) and its monthly references would continue to exist irrespective of the financial year, unless the new Schedule of Tariff (SOT) is notified by the GOP. The recovery of fixed cost Distribution Margin & Prior Year Adjustment (DM & PYA) would also be determined on the currently notified regulated sales. Future Tariff Methodology for the FY and Onward 7.7 The Authority is in the process of notifying the future tariff methodology pertaining to the FY and onwards. The Authority, while devising the aforementioned, has used a participatory approach whereby the process was started in December, The first draft of the methodology was uploaded on the website for comments on 20th February, 2014 inviting all the stakeholders to submit their comments. After incorporating the relevant comments, the Authority again uploaded the revised version of the draft on 12th August, 2014 for any additional comments/concerns. An advertisement in this regard was also published on 12th August, 2014, intimating all the stakeholders about the uploading of the documelt on NEPRAs website. Furthermore, individual letters were also sent to all the stakeholders considered to be affected, seeking their views/comments on the document. 8

10 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/7'ESCO The Authority after going through all the available documents and record, has finalized the subject document and is in the process of notifying it. All the XWDISCOs are directed to submit their future tariff petition in accordance with the notified tariff methodology. 8. Issue #2. Whether the Petitioner has complied with the directions of the Authority passed in the last year's tariff petition? 8.1 The Authority issued several directions in the tariff determination for the FY The compliance of which are discussed under relevant heads. However, few of the directions are discussed as below; Comprehensive plan for separating Feeders from PESCO 8.2 The Petitioner was directed in tariff determination for the FY to prepare and submit a comprehensive plan with respect to separating its feeders from PESCO along with time lines by 30th June, 2014.The Petitioner vide its letter no 446/CEO/TESCO/Accts dated 24th June, 2014 communicated that PESCO's management has been contacted for the required separation of feeders. It was further stated that the process will be completed soon. 8.3 The Authority observed that the Petitioner's claim was not substantiated with any communication details with PESCO which would establish the level and quality of discussion at this point of time. During the tariff determination for the FY , the Authority highlighted the need for the separation of joint feeders between PESCO & TESCO which would ascertain the true cost of service of distribution network in the matter of Petitioner. Considering the importance of matter the Authority again directs the Petitioner to share the latest communication in this regard and in the light of concluding discussion prepare a comprehensive implementation plan regarding the separation of feeders not later than 30th June, TOU Meters 8.4 The Petitioner vide its letter no 446/CEO/TESCO/Accts dated 24th June, 2014 stated that TOU meters are being installed for agriculture, industrial and Govt. connections. It was further stated that for the rest of consumers categories TOU meters would be installed on the assurance of Political Administration that the installed meters would be secured. During the hearing, it was stated that due to worst law and order situation it is not possible for the Petitioner to install TOU meters on all connections. In view thereof, the Petitioner requested r an extension for the installation/replacement of TOU meters in its distribution area. 9

11 tr agral Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/7'ESCO The Authority after going through the available record is of the view that the provided information is not complete as how many TOU meters has been installed on Agriculture, industrial and Govt. connection, as claimed by the Petitioner. In view of aforementioned, the Petitioner is directed to provide the actual figure of both the installed and remaining TOU meters by 30th June, The Authority is cognizant of the fact that the operations of the Petitioner have been considerably affected by the ongoing law and order situation in its area and appreciates its efforts for the compliance of the Authority's decision in this regard. Thus, keeping in view the aforementioned arguments the Authority has decided to extends the date for the installation of TOU meters in the matter of Petitioner, in principle and directs the Petitioner to submit comprehensive plan for the installation of the same, after meeting with Political Administration, on priority basis and submit an updated report on the issue, not later than 30th June, Once the required plan is available with the Authority, it would set a realistic deadline in the matter of Petitioner with respect to the installation of TOU meters. 9. Issue # 3. Whether the Petitioner's projected purchase of 1,536GWhs and sales of 1,182GWhs units for the FY , is reasonable? 9.1 As per the Petitioner, the actual sales has shown the following trend in the last few years: Years Sale units in GWh Percentage Growth , , % ,735 (1.21)% ,466 (15.52)% ,295 (11.68)% , % 2015 (Projected) 1,182 (13.47) 9.2 The Petitioner submitted that the projected estimated sale units will decrease by approximately 13.47% as compared to the previous year after accounting for the impact of requested level of T&D losses. The Petitioner did not provide any basis for the estimated 13.47% decrease. 9.3 Although, there is an inbuilt mechanism for adjusting actual variation in sales against the estimated sales, yet in order to avoid unnecessary fluctuations in the consumer-end tariff 10

12 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 it is appropriate to make realistic assessment of the purchases and sales. Moreover, it is important for the realistic assessment of monthly reference fuel cost for estimating monthly fuel cost adjustment pursuant to Section 31(4) of Regulation of Generation, Transmission and Distribution Act (XL 1997). In view thereof, the Authority has carried out a detailed exercise for estimating station wise generation pertaining to the FY An increase of 0.78% has been assumed over the actual generation pertaining to the FY 13-14, as generation growth. Here it pertinent to mention that the actual generation for the FY was 9% more than the actual generation for the FY After incorporating all the upcoming additional generation, it is estimated that in the FY the overall system generation will be about 95,892GWh. After adjusting for the permissible transmission losses of 3.0% about 93,015GWh are expected to be delivered to the distribution companies; the estimated share for the Petitioner from the pool for the FY , is accordingly assessed at 1,761GWh against 1,536GWh projected by it. After incorporating the T&D losses target for the FY ( discussed below ) the sales target in the instant case for the same period worked out as 1,368 GWhs. 10. Issue #4.Whether the Petitioner's proposed transmission and distribution losses of 23.04% for the FY are justified? 10.1 The Petitioner has requested T&D losses target of 23.04% for the FY In order to justify its request the Petitioner submitted the following actual trend of T&D losses over the last few years : Years T&D Losses in % % % % 2015 (Projected) 23.04% 10.2 The Petitioner, in its petition argued that the Authority has been comparing its level of T&D losses with that the DISCOs of Punjab. It was further stated that the level of T&D losses of Punjab DISCOs are minimal since they enjoy a greater proportion of loss free big consumers whereas the Petitioner's main load comprises of small domestic consumers which are fed through scattered LT Distr'bution lines and lengthy 11KV feeders emanating from distantly located grids. The P titioner cited the following reasons for not reducing technical and administrative losses. 11

13 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 lengthy transmission lines under size conductor of transmission lines overloaded grid system high ratio of 11KV lines to 400 volts lines. ( 1:14) partially damaged distribution transformers outdated distribution and grid system The Petitioner stated that it has suffered 22.31% of T&D losses during the FY against the Authority's determined level of 18.50% for the same period The Authority after considering the arguments put forward by the Petitioner, is of the view that it while comparing different parameters across the DISCOs, the Authority do take into consideration the factor of zero loss and high loss consumers and only those parameters are compared which are common among all the DISCOs. The Authority assessed Petitioner's level of T&D losses, as during its first petition it did not submit any study of its T&D losses and the Authority has to rely on the findings of its in house study of T&D losses in the matter of Petitioner. The bifurcation of the assessed 18.50% level of T&D losses is given as below ; Calculated Technical Losses 12.63% Margin for Administrative Losses ( commercial loss ) 0.87% Margin for Law and Order 5.00% Target Losses 18.50% 10.5 The Authority's while assessing the aforementioned level of T&D losses, took cognizance of the fact that the Petitioner's major receivables, particularly pertaining to residential consumers, are being picked up by the GOP. In addition, the fact that the maximum areas under its jurisdiction are no go areas, which are not freely accessible and it is only with the support of army & local tribal heads such areas are accessed. Consequently, the consumers of these areas are billed as per the load factor and based on the hours that electricity is supplied by the respective grid. In view of aforementioned factors, the Authority during the last determination directed the Petitioner to conduct an independent study of T&D. The Petitioner vide its letter 446/CEO/TESCO/Accts dated 24th June, 2014, stated that the study of T&D losses is under process. No further details were provided to the Authority in this regard. Here it is pertinent to mention thai the 12

14 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 direction was to get the TORs for the study approved from the Authority. The Petitioner has given a unclear response on the status of the compliance. The Authority brings on record that the it has not received any TORs for the study from the Petitioner Since the required study is still not available, hence the Authority is constraint to rely on its own report. Nevertheless, keeping in view the particular distribution area in which the Petitioner operates, the Authority considers that the target of T&D losses must reflect the Petitioner's technical level of T&D losses, in addition to a margin for the law and order situation, for its distribution area In view of aforementioned, the Authority has decided to assess the level of technical level of losses as 13.50% (including 0.87% as commercial loss) for the FY However, keeping in view the ongoing Army operations in the FATA region, the Authority has decided to enhance the margin for law and order up to the level of 8.81% In order to ensure that the target given to the Petitioner is realistic and justified, the Petitioner is directed to submit the TORs for the study of its entire system including 11KV & below, to the Authority not later than 30th June, The study must be aimed to identify potential areas for improvement in the Petitioner's network Based on the aforementioned arguments, the Authority has assessed losses of 22.31% for the FY Issue #5.Whether the Petitioner's proposed Investment plan of Rs. 613 million for the FY , is justified and keeping in view the prospective benefits? The Petitioner has requested Rs. 613 million to execute its development/ investment plan for the FY The Petitioner intends to finance the requested investment primarily through capital contribution / deposit works. The Petitioner did not submit any break-up of proposed investment plan under the general heads of Distribution of Power (DOP), Energy Loss-Reduction (ELR), Secondary Transmission & Grid (STG), Rural Electrification (RE) etc. The Authority has observed with grave concern that the information provided by the Petitioner with respect to investments is not complete. It appears that either the Petitioner is ignoring a vital component of its operations or it is carrying out only those investments which are financed by the consumer contribution. In either case the Petitioner is directed to submit the details of its ongoing investments projects along with all the relevant details. If there isn't any investment project under the head of ELR, DOP or STG at this point of time, the Petitioner is directed to submit reasons thereof. The required reply must be submitted to the Authority not later than 30th Jun-, Here it is pertinent to mention that the financial statements of the Petitioner shot s some relent loans and loans from GOP. However, the purpose of loans is not provided. 13

15 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRAITRF-300/TESCO In future, the Petitioner is directed to segregate the requested plan under the heads of DOP, ELR, STG and also to quantify the benefits of aforementioned investments e.g. correlation between ELR and reduction/maintenance of losses, augmentation and maintenance of transmission lines with STG, DOP with better customer services etc. The Authority also hereby directs the Petitioner not to undertake any rural electrification which is not supported by technical evaluation and positive Net Present value (NPV) The financial statements for the FY depicts that the Petitioner has made investments worth around Rs. 462 million during the FY The Authority while allowing investments for any control period has to keep in view the past trend of investment made by the Petitioner along with its funding arrangements and its previous trend of closing CWIP along with the transferring of useful assets from CWIP to operating assets. Based thereon, it is expected that the Petitioner would be able to undertake the investment of Rs. 613 million during the FY (including the impact of consumer contributions of Rs. 439 million) based on actual expense undertaken last year. It is pertinent to mention here that the existing mechanism of determining RORB is selfadjusting with respect to the benefits of investments, thus any investments beyond Authority's assessment, carried out by the Petitioner during the FY (which is desirable), would be accounted for in next year's returns. The Petitioner is also directed to submit the details of actual investment undertaken in FY with the corresponding benefits along with the next year's tariff petition. 12. Issue # 6.Whether the Petitioner's projected Power Purchase cost of Rs 16,233 million (Rs /kwh) for the FY , is justified? 12.1 The Petitioner has requested for a Power Purchase Price (PPP) of Rs /kWh based on the actual PPP for the FY The matter is discussed below under relevant issue. 13. Issue # 7.Whether the Petitioner's projected O&M Cost of Rs 754 million for the FY is justified? 13.1 The Petitioner requested an amount of Rs.754 million on account of O&M cost. As per the Petitioner, its O&M cost include salaries and other benefits, repair and maintenance, traveling allowance, vehicle maintena ce allowance and other operating costs related to its distribution and supply of electri ity business. A history of O&M expenses of the Petitioner is provided as here under: 14

16 Determination in the matter of Tribal Areas Electric Supply Company limited (TESCO) No. NEPRA/7'RF-300/TESCO Description Audited Audited Audited Audited Audited Projected Rs. In million Salaries & Other Benefits Maintenance Exp Travelling Exp Vehicle Exp Other Exp (Admin exp, Management Fee, Misc Expense Total Salaries Wages & Other Benefits The Petitioner submitted that since it was incorporated as a company as part of Power Sector Reforms initiated by Government of Pakistan, hence WAPDA employees working in Area Electricity board of Tribal Area became its employees as per Man Power Transition Plan. Consequently, the Petitioner had to maintain the GOP pay scales and the terms of employment that were prevalent at unified WAPDA. The GOP in its annual budget for the FY has increased Pay and Pension of government 10%. Similarly 5% increase from December 2014 onward is assumed as an effect of annual increment Incorporating the aforementioned increase the Petitioner has requested an amount of Rs. 682 million for the FY on account of Salaries, wages & other benefits. In order to make fair assessment of the salaries & wages, the Petitioner's audited accounts for the FY and for the previous years were analyzed. As shown in table above, the actual expense under the same head has increased by Rs. 131 million (24%) in the FY A review of break-up of expense under salaries and other benefits reveals that of the tal expense of Rs. 551 million for the FY , Rs. 74 million is paid under the he d of post retirement benefits i.e. 16% of the total salary expenses are retirement benefits. 15

17 .z newe - Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/7'RF-300/7'ESCO Although the Petitioner has not requested any additional or replacement hiring, yet in order to mitigate regulatory risk for the Petitioner, the Petitioner can make replacement hiring whereby an employee is hired in lieu of a retiring employee, taking cognizance of the fact that the XWDISCOs work force is retiring each year and if they are not succeeded by skilled manpower, XWDISCOs would not be able to perform efficiently and effectively. In this particular scenario no additional / incremental cost could be incurred by the XWDISCOs. The Petitioner is directed that if it intends to carryout replacement hiring in future, it must obtain a certificate from the Auditor, certifying that the recruitment is undertaken as replacement hiring with no additional/incremental cost impact. Any other additional recruitment must be linked with the comprehensive recruitment plan that would link the additional work, quantified benefits based on best utility practices Considering the overall liquidity position in the power sector and in order to ensure that the Petitioner fulfils its legal liability with respect to the post retirement benefits, the Authority has directed all the XWDISCOs to create a separate retirement benefit fund that is allowed by IAS Creation of funds would ensure that the Petitioner records its liability more prudently as the funds would be transferred to a separate legal entity. In addition to that these independent funds would generate their own profits, if kept separate from the company's routine operations. Last year, the Authority observed that the Petitioner has not carried out any actuarial valuation of it post retirement benefits. Thus, directed the Petitioner to carry out the same. No compliance has been made in this regard. The Authority again directs the Petitioner to get the actuarial valuation of its post retirement benefits and on parallel basis create a separate independent post retirement fund not later than 30th June, 2015 as the Petitioner has neither created the required fund nor it has shown any credible efforts in this regard On the issue of retired WAPDA employees before 1998, the Authority in its determination dated Apri128, 2014, the Authority has directed the Petitioner to create a separate retirement benefit fund in this regard which is allowed by IAS Creation of funds would ensure that the Petitioner records its liability more prudently as the funds would be transferred to a separate legal entity. However the Petitioner failed to create separate fund in this regard the Authority decided to hold separate meeting on the subject whereby the arguments of the Petitioner and WAPDA could be heard in the light of available evidences. Pursuant a final meeting on the subject was held on 22nd January, The following concluding and executing points emerged out of a long brain storming session; The matte not only pertains to the Petitioner but also to all the XWDISCOs, and GENCOs. `QDNNER RFGIi 0 AEPRA 73 AUTHORITY ,

18 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/7'ESCO-2015 In the light of Business Transfer Agreement (BTA) and subsequent Supplementary Business Agreement ( SBTA ), Pension SOPs 2002 and subsequent changes thereafter, the issue solely pertains to WAPDA, XWDISCOs and GENCOS. The issue has two components, one is the accumulated effect till 30th June, 2012 and the other is the subsequent ownership of these retired employees as the SBTA is not clear on the subject. Since aforementioned agreements were signed mutually between WAPDA and Others hence the Authority directed the WAPDA and Other ( including Petitioner) to come up clearly on the settlement modality of accumulated costs in this regard till 30'h June 2012 and a way forward for the future payments of these retired employees not later than 30th June, During the last year's tariff determination the Petitioner along with other XDWDISCOs did not show any progress in this regard. In view thereof, the Authority decided to take the initiative on its own. In order to resolve the issue, the Authority reviewed the documents (Business Transfer Agreement, Supplemental Business Transfer Agreement, Pension SOPs, Actuarial valuations at the time of unbundling of WAPDA etc) and held a consultative meeting with the representatives of WAPDA, Executive Director Legal, PEPCO and representatives of Ex-WAPDA DISCOs on 26th June, During the meeting, WAPDA maintained the stance that this cost needs to be borne by XWDISCOs from whose jurisdiction the pensioner is claiming pension, whereas DISCOs pleaded otherwise. During the meeting, representative of WAPDA and PEPCO referred to an Operation & Development Agreement (ODA) which was submitted vide letter no. MF/56/259 on 1st July, After reviewing the submitted ODA and the documents mentioned above the Authority identified the following key facts; Key Facts of the Case The Key Facts of the case are as below; That as per the 'Restructuring Reforms and Privatization of WAPDA- Executive Order' 24th October, 1998, WAPDA would only be in charge of water wing and the shares in the companies being set up to control WAPDA's power assets would be in the name of the President of Pakistan. Thus, WAPDA won't be having any interest in the XWDISCOs in the form of investment, once they are privatized. That upon unbundling of WAPDA, all the assets were transferred to DISCOs along with all related liabilities with the exception of post retirement benefit liability. The Accounting standard relevant to this liability, i.e., IAS-19, was not being implemented by WAPDA at the time of unbundling and its financial statements did not reflect any related obligation. Nevertheless, at the time 1 of unbundling, an actuarial valuation was conducted to determine this post 17

19 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 retirement liability of employees. The obligation related to existing WAPDA employees was transferred to XWDISCOs, however, the obligation related to retired employees was missed out and not reflected in the financial statements of any XWDISCOs or WAPDA (Hydel) Based on the principles of natural justice and on the fact that had WAPDA adopted IAS- 19 at the time of unbundling, the liability of the retired employees would have been transferred to the XWDISCOs as the referred retired employees have served in the formations that are currently part of XWDISCOs. Further, in future WAPDA won't be having any interest in the form of investments, from where it would be generating any additional revenues. In view thereof, it can be fairly concluded that this cost needs to be borne by XWDISCOs Here it is pertinent to mention that since XWDISCOs has not booked the said cost in their financial statements. In view thereof, the Authority has principally decided that all cost of the WAPDA retired employees up to 30th June, 2014, would be borne by WAPDA. However, any cost after 30th June, 2014 would be borne by XWDISCOs. Thus, the Petitioner is directed to submit its next tariff petition accordingly While assessing the Salaries, wages & other benefits (including post retirement benefits as discussed above), the GOP's recent announcement of 10% increase as adhoc allowance, annual increment, increase in Medical Allowance by 20% for employees in BPS 1-15 and the increase in Conveyance Allowance by 5% for employees in BPS 1-15, along with its effect on other benefits like inflationary increase on free electricity supply to employees has been accounted for Based on the discussion made in the preceding paragraphs, after incorporating all the aforementioned increases, the Authority has assessed Rs. 576 million on account of salaries, wages and other benefits for the FY Maintenance Expenses The Petitioner requested Rs. 19million on account of repair and maintenance. The Petitioner has requested an increase of 12% over the actual audited figure of Rs.17 million for the FY As per the Petitioner, Repair & Maintenance expenses have been 0.005% of the net fixed assets. The Petitioner stated it has to maintain its old and over loaded system in order to ensure un-interrupted power supply to the consumers the requested amount is very important for the discharge of its smooth operations. In addition the Petitioner stated that the cost of material has also increased due to inflationary pressure An examination of the audited accounts for the FY revealed that the actual repair and maintenance expense has decreased to Rs. 17 million (17%) over the last year's expense of Rs. 21 million i.e. pertaining to the FY No further details has been 18

20 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 provided without which would establish the authenticity of the requested amount. Despite the aforesaid, the fact remains that the Petitioner has to incur some expenses on the repair & maintenance that are not only affected by the inflation only, as they are subject to the variation in gross assets of operation, due to addition of new consumers in the system and new investments The Petitioner's request has been examined on the basis of its past trend and in comparison with other DISCOs. Keeping in view, the aforementioned parameters the repair and maintenance cost of Rs. 19 million has been assessed for the FY in the instant case Traveling Expenses The Petitioner in its Petition requested an amount of Rs. 22million for the FY The requested amount is16% more than the actual expense for the FY The Petitioner argued that the GOP has initially increased the TA allowances through a notification dated 17th August, In addition, the regularization of its staff has also compounded the cost under this head Based on the comparison with other DISCOs and Petitioner's trend of actual results the Authority considers it's request to be slightly on a higher side. Accordingly, the Authority keeping in view the prudent utility practices considers that Rs. 21 million is a fair assessment for the FY in the instant head Vehicle Running Expenses The Petitioner requested Rs. 22 million under the head of Vehicle maintenance for the FY The requested amount is 10% more than the actual expense for the FY As per the Petitioner, most of the vehicles are old and have completed useful life of 10 years & need major overhauling. The Petitioner further stated that its financial position does not allow replacement of old vehicle with new. Consequently, it is left with no option but to maintain these vehicles. In addition to this, the Petitioner also attributed the increase requested to the increasing cost of POL & parts of vehicle due to inflation. Also, the Petitioner has stated that its distribution system is spread all over Tribal Area due to which the vehicle running expense is high While examining the audited accounts for the FY , the Authority again observed that the actual cost is not segregated between travelling and vehicle maintenance. The Petitioner was directed in its determination dated 28th April, 2014 to segregate the cost from the next year's financial statements. However, the Petitioner has not complied with the directions of the Authority in his regard. In view thereof, the Authority again directs 19

21 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO-2015 the Petitioner to carry out the same before its next year's tariff petition. Here it is pertinent to mention that the Petitioner has provided the required bifurcation in its petition forms. The same has also been used in the table above. Although the Petitioner has provided some calculation in order to substantiate its claim, however any concrete evidence such as list of vehicles along with their operational life has not been provided. However, while assessing the Petitioner's requested cost, the Authority would take into account the impact of inflation and impact of enhanced maintenance on its fleet of vehicles. In view of the above discussion, available evidence/information, past trend, increasing fuel prices and comparison with other DISCOs, the Authority considers Petitioner's request is reasonable and consequently allows cost under this head to the tune of Rs. 22 million for the FY Other Expenses The Petitioner requested Rs. 10 million for the FY under the head of other expenses. The requested amount is only indicated during the hearing and in the petition form. No rationale/justification for the requested cost has been provided. The overall requested other expense amount is 69% less than the audited expense for the FY No further basis has been provided by the Petitioner for the requested amount While evaluating the said cost, the Authority observed that the Petitioner's requested amount is unrealistically on the lower side as this cost covers rent, rates & taxes, power, light and water, bills collection charges, postage, telephone, office supplies, insurance expense, overhead expenses, Auditor's remuneration, NEPRA fee and charges, advertisement & publicity, provision of obsolete stores, miscellaneous expenses etc The Authority recalls that the same mistake was done by the Petitioner in its last petition. Considering the fact that the instant petition is the second tariff petition of the Petitioner, the Authority has decided to base its assessment on actual expenses of the prior years while keeping in view the same assessment at par with the other DISCOs. Consequently, the Authority has determined a cost of Rs. 36 million on account of other expenses for the FY Issue # 8.Whether the Petitioner's proposed depreciation charge of Rs 173 million (Rs /kwh) for the FY is justified? 14.1 The Petitioner in its petition requested a depreciation charge of Rs. 173 million for the FY The Petitioner based its request on applying value of existing assets plus addition in assets during the FY The Petitioner stated that the assets are depreciated on straight line method as per utility practices i.e 0%, building and civil 2%, Plant & achinery 3.5%, office equipment and mobile 10% and other 10%. 20

22 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO In order to make fair assessment, the Authority keeps in view the investments approved by it for the year. The Authority considers that after taking into account new investments, the Gross Fixed Assets in Operation for the FY will be Rs. 5,856 million. Accordingly the depreciation charge requested by the Petitioner for the FY appears to be reasonable After carefully examining the relevant details and information pertaining to the deferred credit and amortization as per the accounts for the FY & FY , the Authority has projected amortization of deferred credit to the tune of Rs. 128 million for the FY , thus passing on the benefit to this extent to the consumers. Accordingly, the consumers would bear net depreciation of Rs. 45 million. 15. Issue # 9. Whether the Petitioner's projected Return on Regulatory Asset base of Rs 399 million (Rs /kwh) for the FY is justified? 15.1 The return requested by the Petitioner for FY is Rs. 399 million using a Return on rate of 11.25%. The Petitioner submitted that it has worked out the return on rate base as per standard mechanism of the Authority's assessment in this regard. The Petitioner has used rate of return as it was assessed by the Authority for the FY The Petitioner has not submitted the basis for using the revised rate. However, the Authority has decided to revise the working of Rate of Return based on the request of multiple XWDISCOs. In view thereof, the Authority has decided to reassess the risk free rate of return based on rate of return of Market Treasury bills having a maturity of one year as published by State Bank of Pakistan. The revised rate is 9.45%. As regard the cost of debt, the Authority has accepted the request of XWDISCOs and re-worked the cost of debt based on the weighted average cost of debt of all the loans appearing in the financial statements of the Petitioner while calculating cost of debt. Consequently, the rate has been revised to 12.54%. Furthermore, the Authority had been taking post tax cost of debt based on the fact that any tax to be paid by Petitioner will be considered as pass through and would be adjusted as per actual payments made on this account. However, since the Petitioner is not taking any benefit of tax shield, the cost of debt to be taken in working shall be without any impact of tax shield i.e., 12.54% All the other factors remaining the same, the WACC has been re-worked as below; ke = RF + (RM RF) x 13 = % + k8% x 1.33) =20.09% 21

23 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/7RF-300/TESCO-2015 The cost of debt is taken as pre tax; kd= 12.54% WACC = [ke x (E / V)) + [kd x (D / V)) Where E / V and D / V are equity and debt ratios respectively taken as 20% and 80%; WACC = [20.09% x 20%) + [12.54% x 80%) = 14.05% 15.4 The Authority reiterates that in its opinion the Rate of Return should be reasonable enough to assure the confidence in the financial soundness of the utility company, should be adequate to maintain and support its credit and enable it to raise money necessary for the proper discharge of public service. From the investor's or the company's point of view it is important that there would be enough revenue not only for operating expenses but also for the capital cost of the business including the service of its debt. The Authority further considers that return to the equity should be commensurate with the return on investment of other enterprises having comparable risks. Thus, using the Plain vanilla WACC of 14.05%, the Authority has assessed Rs.374 million as return on rate base as per the following calculations: Description FY Audited Rupees in Million FY Projected Opening fixed assets in operation 4, , Assets Additions during the year Closing Fixed Assets in Operation 5, , Less: Accumulated Depreciation 2, , Net Fixed Assets in operation 3, , Capital Work in Progress (Closing) 2, , Total Fixed Assets 5, , Less: Deferred Credit ( including share 3, , for deposit works ) Total 2, , Average Regulatory Assets Base 2, Return on Rate 14.05% Issue #10. Whether the Petitioner's projected Other Income of Rs 1239 million (Rs 1.05 /kwh) for the FY , is reasonable? 16.1 The Petitioner has projected Rs. 1,239 million as other income for the FY The other income as per the audited accounts for the FY remained as Rs. 22

24 Determination in the matter of Tribal Areas Electric Supply Company Limited (TESCO) No. NEPRA/TRF-300/TESCO ,237million. According to the Petitioner, the requested figure of other income includes Interest Income, Sale of Scrap, Amortization of Deferred Credit, Rental & Service Income etc The XWDISCOs have been requesting to eliminate Late Payment charges from other income in the assessment. The request was based on the rationale that the Authority has been disallowing markup on delayed payments to IPPs, at CPPA level, yet on the other hand late payment charges were included in the DISCO's other income, passing on the benefit to the consumers, affecting the DISCOs liquidity adversely. XWDISCOs requested to offset the two markups against each other. The Authority declined the request on the grounds that each company is a separate legal entity and in the absence of any bilateral agreements which govern the issue, the request cannot be acceded to. Accordingly XWDISCOs were directed to enter into bilateral agreements with CPPA. The set deadline has passed and nothing concrete could be established. The Authority took an initiative whereby GEPCO was directed to draft and compile a proposed agreement that was sent to all the XWDISCOs for their comments. XWDISCOs rather than giving their comments on the draft, submitted the Electricity Supply Agreement signed between DISCOs and WAPDA on 29th June, As per XWDISCOs, a novation of the same agreement was also signed between individual DISCOs and NTDC. The Authority after going through the claimed agreement observed some clauses that need to be revisited In view of the above, the Authority decided to nominate a committee to be constituted from NEPRA professionals in order to conduct a brain storming session on draft PSA in the tariff determinations for FY Two brain storming sessions were conducted during the current year. The brain storming sessions were attended by nominees of XWDISCOs and CPPA and it was mutually agreed by CPPA and XWDISCOs in the final session that the existing Electricity supply agreement dated 29th June, 1998 is valid and the same shall be implemented in letter and spirit. As regard the improvements if any, the same would be incorporated at a later stage. As per the clause 9.3(d) of the agreement, the XWDISCOs shall be obliged to pay CPPA late payment charge on delay payments of invoice The clause 9.3 (d) of the agreement deals with Late Payment charge as below: "Late Payments by WAPDA or the Company, as the case may be, shall bear mark-up at a rate per annum equal to the Base Rate plus four percent (4%) per annum compounded semi-annually, and shall be computed for the actual number of Days on the basis of a three hundred sixty-five (365) Day Year." 16.5 In view of above, the Authority hereby decides that the late payment charge recovered from the consumers on utility bills shall offset the late payment invoices raised by CPPA against respective DISCO only i.e., CPPA cannot book late charge over and above what is calculated as per the relevant clause of the agreement to a respective DISCO only. The Petitioner is, therefore, directed to share the details of late payment charges recovered 23