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RN Parasher , Chairman, Haryana Electricity Regulatory Commission (HERC)

01 May 2014

Chairman of Haryana Electricity Regulatory Commission (HERC) RN Parasher talks to Shakeb Ayaz about the revenueexpenditure dynamics of distribution companies, pressures faced by them to raise tariffs, reasons behind losses and ways to tackle them. Excerpts

How much is the pressure on regulators to increase power tariff under the current regulatory regime?

The single largest cost component for a discom – to the extent of almost 85 per cent – is the cost of power purchased. The prices of cost, liquid fuel as well as gas have gone up steeply in the recent past and the upward trend continuous. Limited availability of concessional coal from Coal India Limited and its subsidiaries has forced power generating companies to use expensive imported coal. Then there are issues like the increasing cost of hiring people as well as the interest cost of short and long term funds. All these factors contribute towards widening the gap between revenue that the discoms get from sale of power at the current tariff and their estimated expenditure. Such revenue gaps do create upward pressure on the distribution and retail supply tariff. However, such upward pressure on tariff is cushioned, to a large extent, by reducing transmission and distribution losses, increasing collection efficiency, liquidating past arrears, plugging revenue leakages by promptly replacing dead or defective consumer meters as well as metering all the distribution transformers to narrow down pilferage in the areas contributing towards high losses.

What has prompted Haryana to increase power tariffs in an election year?

Is it due to losses incurred by the distribution companies – Uttar Haryana Bijli Vitran Nigam and Dakshin Haryana Bijli Vitran Nigam? The distribution licensees have not proposed any tariff hike in 2014-15 as their operating losses of the past three years as well as short term liabilities have been addressed by the financial restructuring proposal (FRP). In order to avoid accumulation of fuel surcharge adjustment (FSA), the Commission has allowed discoms to levy presumptive quarterly FSA not exceeding 10 per cent of the average power purchase cost. Any over recovery / under recovery account of such presumptive FSA is to be squared up. Such steps were taken to avoid any future rate shock to the consumers as well as infuse sufficient liquidity in the otherwise cash–strapped discoms in Haryana. The Commission will take a final view regarding re-alignment of distribution and retail supply tariff when ARRs of discoms for the MYT control period 2014-15 to 2016- 17 are firmed up as well as the various options available to the Commission for plugging revenue gap, if any, are explored .

Have the distribution companies asked HERC to allow them to pass FSA to recover the amount incurred on buying electricity via outsourcing?

FSA is primarily a mechanism to keep cost and price (tariff) aligned i.e. to address the difference in the cost of power from approved sources allowed by the Commission on a projected basis and the actual cost of such power. The cost arising out of inefficiency of the discoms is not passed on to the consumers. The entire computation and levy of FSA is a mechanical exercise based on the formula specified in the MYT Regulations, 2012 mnotified by the Commission.Power is purchased by discoms in Haryana under long-term power purchase agreements (PPA) or power sale agreements (PSA) approved by the Commission with the power generating / trading companies. A miniscule quantum of power may also be purchased through the power exchange or drawn under UI mechanism to meet the exigencies of intra–day demand and supply. In recent years, with the augmentation of power generation capacity in the state, as well as power contracted under competitive bidding, the discoms are not entering into short-term agreements for procurement of expensive power or continuously overdrawing from the grid in low grid frequency regime.

What will be the projected loss of distribution companies and how much of it can be offset if FSA is allowed?

As far as the Commission is concerned, the ARRs and tariffs approved are fully balanced except for some amount of unrecovered past regulatory assets and FSA for which the Commission has allowed funding through borrowings to the extent required and interest / carrying cost thereto. Hence there ought not to be any additional financial losses in the ensuing years provided the operating benchmarks prescribed by the Commission by way of regulations are adhered to or bettered as these benchmarks are minimum acceptable and not the industry best. The admissible FSA, as long as they remain un-collected, are considered as ‘book debt’ i.e. receivables on account of sale of power. It certainly adds to the working capital requirement and additional interest cost thereto for which the Commission allows ‘holding cost’. Thus, in the ultimate analysis, this is revenue neutral as far as profit and loss of the discoms are concerned.

What are the challenges in power procurement in Haryana? We saw issues between NTPC – the power producer and the distributor the BSES in Delhi. What is the situation in Haryana?

Haryana has witnessed a paradigm shift – from being a chronically power deficit state it has emerged into a power surplus state. However, this has come with another set of problems. The distribution companies are compelled to either underdraw their share of power from the grid or scale down their own power plants or dispose off such surplus power in the short-term market. Since all such power is tied up under long-term PPAs, the discoms have to pay ‘fixed charge’ to the generator and for the power underdrawn they get a meager amount as UI charge. The surplus power sold in the short-term market or banked in a bilateral exchange does not fetch more than about 60 per cent of the average cost of purchase of such power. The Commission, in order to address the problems of plenty, has allowed the dedicated intra-state power generating company i.e. HPGCL to sell power not requisitioned by discoms to any third party. Further proceedings have been initiated to facilitate real time-based load management by the state load dispatch centre (SLDC) in order to achieve cost optimization on account of drawl of power from the grid. But despite the financial crunch faced by discoms, they have never defaulted in making payments for the power purchased and no such dispute has ever been brought before the Commission.

Power shortage is a big election issue in Haryana as even villages in Rewari complain of only two to four hours of supply. How do you see the situation improving?

There is no shortage of power in Haryana as such. Even the peak load shortage, which a few years back used to be as high as 12 per cent, is minimal now. However, there could be isolated cases where due to local distribution system constraints the power supply could be inhibited. Agriculture load in the state has been segregated at 11 kv, hence it will also not be the case that rural domestic consumers or other consumers are getting supply as per agriculture power supply schedule.

How is the FRP working in Haryana?

FRP is a recent development and it is too early to assess its progress. Funding of operating losses and takeover of the short-term financial liabilities of discoms is expected to restore commercial viability of the distribution business which is the key link in the value chain of the power sector provided structural changes are introduced through multiple or parallel distribution licensees and deployment of franchisee in the retail supply segment especially in those area / circles where the feeder or DT losses continue to be on the higher side.

As a regulator what does HERC expect from the government, to smoothen the power situation in the state?

The government is an important stakeholder in the process of restructuring and reforming the power sector. All the power utilities in Haryana i.e. generation, transmission and distribution, are fully owned by the state government. These companies ought to be given complete functional autonomy including planning and purchase of material like consumer meter, cables / conductors, distribution transformers and other items that are essential for ensuring quality and reliability of electricity supply. Areas that are prone to theft and un-authorized extraction and use of electricity as well as non-payment of electricity bills and obstructing discoms’ employees in disconnecting defaulters or un-authorized users and inspecting premises for detecting theft etc, ought to be given proper support and security by the district administration. In the absence of such security and support the discoms’ employees will find it difficult to perform their duty in the villages / rural areas. The support of the state government is also required for introducing privatization as well as franchisee model in the retail supply business.

The Association of Power Producers feels that a uniform FRP for the recast of state discoms may not work and is pitching for unique FRP for each and every state. Do you agree with this view?

The issues before most of the discoms in India are more or less common i.e. high distribution losses, low collection efficiency, non-compensatory tariffs, electricity supplied but not billed because of large number of un-metered supply and equally large number of dead / defective meters. In the ultimate analysis, it can be held that these are the common issues responsible for huge accumulated losses and erosion of net worth of the discoms. Consequently, they find themselves in a vicious circle of ‘debt trap’ as they continue to fund their operating losses (before accounting for interest, depreciation and taxes) through more and more short-term expensive borrowings. Thus a stage was soon reached where the commercial banks and lending institutions, in order to protect their own interest, stopped accommodating the discoms leading to their defaults in making payments to the transmission and generating companies. FRP has taken care of the short term liabilities that also included payables to the transmission and generation companies and thereby has infused substantial liquidity into the discoms to carry on their business of purchasing power for onward distribution of the same. Thus FRP has provided a breathing space to discoms as well as comfort to banks / lending institutions, so that the discoms are able to chalk out a turnaround strategy. However, if they continue with ‘business as usual’ approach, the breathing space provided by FRP would soon vanish, paving the way for re-emergence of payment crisis. Thus FRP addresses the common issue of payment crisis. However, the turnaround strategy has to be state as well as discom-specific in order to have any chance of success.

The regulators in India tend to only consider short-term liabilities because load tariff and current tariff structures are different. How should this be tackled?

Electricity regulators mostly allow normative working capital loan and interest cost thereto. Thus anything in excess of the norms translates into financial losses as interest on such excess borrowings is not allowed to be recovered from consumers. Thus short-term liabilities are a matter of concern to the regulators but other liabilities such as interest on term loan, ability to service debt and re-payment obligations are of equal concern. Most regulators, for high tension and other large supply consumers, have followed two-part tariff design. The first part known as ‘fixed charge’ or ‘demand charge’ is correlated to connected load demand of the consumers and the supply voltage. The ARR and tariff approved by the Commission takes account all short-term as well as long-term liabilities after subjecting the same to prudence check in accordance with the tariff philosophy. Thus fixed charge or demand charge ought to be directly proportionate to the consumers’ load demand recorded by the meter. Time of use tariff / frequency linked tariff can also provide the desired price signal to the consumers to manage their intra-day demand. Thus through ‘peak trimming’ and ‘valley filling’ demand for additional generation as well as transmission capacities requiring huge financial outlays can be curtailed.