Section 5 in Orissa Electricity Regulatory Commission (Terms and Conditions for Determination of Tariff) Regulation, 2004
5. General principles.
(1)(a)The licensee shall make all filings for Annual Revenue Requirement (ARR) as per annual schedule, by November 30th of every year.(b)The licensee in the ARR filing for the ensuing financial year shall indicate the manner in which the gap, if any, between the charges which it is permitted to recover and the expected revenue calculated shall be filled up.(c)A Tariff Order shall continue to be in force for such period as may be indicated in the said order unless amended or revoked earlier.(d)The Commission may broadly classify costs incurred by licensee as controllable and non-controllable. For all controllable costs, the Commission may set the targets for each year under review. These targets shall be used for computing revenue requirement. If required, certain controllable costs can be indexed to appropriate indices/rates like Consumer Price Index (CPI), Wholesale Price Index (WPI), Prime Lending Rate (PLR) etc.(e)All non-controllable costs as checked [and certified by a registered Chartered Accountant] [Inserted vide O.G.E. No. 1267 Dated 22.9.04.] with due diligence and prudence [as accepted by the Commission] [Inserted vide O.G.E. No. 1267 Dated 22.9.04.] shall be treated as pass-through.(f)The Commission may require a long term business plan from each licensee for adopting the multi-year tariff regime, which the licensee shall scrupulously comply.(g)The Accounting Policy and Chart of Accounts shall be followed by the licensee, as determined by the Commission from time to time.(2)Sales forecast - (a) The licensee shall forecast energy sales, the number of consumers and load profile for each consumer category and for each slab for the period under consideration. The Commission shall examine the sales forecasts of the licensee for reasonableness, consistency of principles across all licensees, past trend, etc. before accepting and adopting it. The licensee shall develop a robust database of all consumer with desired particulars regarding their demand to facilitate the forecasting process in accordance with the direction given by the Commission.(b)This sales forecast shall be applied in estimating the revenue accruals.(3)Distribution Loss - (a) To set the baseline of distribution loss estimate, the Commission may either require the licensee to carry out proper loss estimation studies under its supervision or initiate a study itself.(b)The Commission shall approve a realistic and achievable loss target for the year under review based on the opening loss levels, licensee's filings, submissions and objections raised by the stake holders. This approved loss target will be used for computing sale of power to consumers for that year.(c)The licensee will have to share with the consumer part of the financial gains arising from achieving higher loss reduction vis-a-vis the target. Losses on account of under achievement of loss reduction target will be entirely borne by the licensee.(4)Power Purchase - (a) The quantum of power purchase for the ensuing financial years shall be estimated on the basis of actual purchase made during the previous financial year(s), actuals to the extent available for the current year and any projections for the balance period of the current year with appropriate adjustments for any abnormal variations during the period. The licensee through appropriate documentation shall justify all the abnormal deviations. This quantity will be evaluated at the price based on the power purchase agreements, bulk supply agreements, etc. consented by the Commission.(b)The Commission will not ordinarily consider the additional power purchases beyond the approved level of power purchase. However, if the variation in the actual purchase vis-a-vis the quantum of power as ordered by the Commission is on account of events beyond the reasonable control of the Licensee, as established to the satisfaction of the Commission, the resultant effect will be taken in to account in subsequent accounting years. To meet this additional requirement of power, the licensee shall follow the least cost combination of power procurement.(c)In the regime of Availability Based Tariff (ABT) the licensee shall be allowed to retain incentive of overdrawl of power under higher frequency and likewise absorb the loss for drawl of power under lower frequency as and when decided by the Commission.(d)In case of direct procurement of power by the distribution licensees from generators/other sources in order to optimise the cost of power procured by utilities, the Commission may lay down guidelines for power purchase mainly based on merit order dispatch. While devising the guidelines, the Commission may consider the following;(i)Load profiles during various seasons;(ii)Technical constraints;(iii)Avoidable costs (whether from own generation or power purchase) after giving due consideration to valid contractual obligations.(e)The power purchase expenses as determined through such optimal merit order dispatch after due consideration for contractual obligations and technical constraints, shall be considered for pass through in the Revenue requirement.(f)An automatic fuel cost revision provision may be provided, and the licensee shall be required to compute changes in the fuel costs, and appropriately claim or refund the same in tariffs, on quarterly basis according to an automatic fuel cost revision provision. The fuel cost revision shall include fuel related expenses including variations in mix of power purchases.(5)Capital Base and Cost of Capital -(A)Capital Investments -(a)Capital investments cover spending on capital equipment that augments fixed asset's, and capitalisation of corresponding interest and expenses determined as per the applicable accounting policies and guidelines, Capital investments may address a variety of needs such as, meeting load growth, refurnishment and replacement of equipment, reduction of losses, improvement of voltage profile, improvement of quality of supply and system reliability, metering, communication computerisation etc.,(b)The licensee shall propose in its filing a detailed capital investment plan. The plan must separately show ongoing projects that will spill into the year under review, and new projects that will commence but may be completed within or beyond the tariff period. For the new projects, the filing must provide the justification as stipulated under relevant investment guidelines of the Commission.(c)The Commission shall review the licensee's investment plan for approval, and for this purpose may require the licensee to provide relevant technical and commercial details.The costs corresponding to the approved investment plan of a licensee for a given year will, normally be considered for its revenue requirement.(d)In addition to the approved capital investment plan, the licensee can seek provision for additional capital expenditure anytime during the tariff year to meet natural calamities involving substantial investments. The Commission shall examine and if satisfied shall approve the corresponding costs for inclusion in revenue requirement in the next period.(e)In presenting the justification for new projects, the licensee shall detail the specific nature of the works, add outcome sought to be achieved. The detail must be shown in the form of physical parameters, e.g., new capacity added, to be added, meters replaced,customer service centres set up etc. so that it is amenable for physical verification. This is necessary to ensure that the approved investment plans are implemented and the licensee does not derive improper financial benefit by delaying or neglecting to make the proposed investment.In case of any significant shortfall in physical implementation, the Commission shall require the licensee to explain the reasons, and may proportionately reduce the provision, including the interest and the return component, made towards revenue requirement, in the next period.(B)Financing Costs -(a)The costs corresponding to the approved investment plan of a licensee for a given year will, normally, be considered for its revenue requirement. For the past investments, actual values will be considered. Depreciation reserve's to the extent available shall be utilised tor financing the investments. The licensee shall not earn return from the assets created through this depreciation reserve.(b)In case of all new projects, debt equity ratio shall be 70 : 30 for determination of tariff. Where equity employed is more than 30% the amount of equity for the purpose of tariff shall be limited to 30% and the balance amount shall be considered as the normative loan :Provided that in case of the projects where actual equity employed is less than 30% the actual debt and equity shall be considered for determination of tariff.(c)The licensee shall demonstrate that financing and investment requirements match. Thus, financing cost considered for revenue requirement is matched with what is needed for the approved level of capital expenditure and working capital.(d)For loans outstanding at the beginning of the year on the revenue account the licensee shall indicate in its filing the expected interest outgo for each year. This will be considered towards revenue requirement of the licensee for such years. The licensee shall make efforts to reduce the cost of the outstanding loans, in case of declining interest rates, by way of swapping. The licensee, till the next tariff review, may retain the benefit of such savings, when the actual cost of interest will be considered as the base for subsequent years.(e)For all loans, the permitted interest cost will be linked to the Prime Lending Rate of a Scheduled Bank plus a predetermined margin that realistically reflects the rate at which the licensed can raise debt fro/n the market.(f)In its filing, licensee may individually propose its choice of PLR reference (Indian Loans) and the margin, for the Commission's approval. In proposing this, the licensee must keep in view the suitability of PLR reference to its business prevailing market conditions, its financial position etc. To ensure consistency, the Commission will use one single benchmark PLR, which may be of a bank that is commonly acceptable.(C)Rate Base -(a)The Commission may determine appropriate rate base for computing returns either considering debt and equity separately for the present and may adopt the principle of return on capital employed at appropriate time.(b)The Commission shall provide a reasonable return to the investors to attract capital. In case of foreign currency brought as capital, the Commission may consider a separate rate of return if foreign exchange variation is allowed as a pass through.(c)The return on equity may be linked to the RBI Bank Rate plus a margin for the investment risk in the power sector. The Commission may allow a fixed rate of return on capital base to be decided by it. The Commission may provide post tax returns shall ensure that tax only to the extent of the tax on return is provided as pass through.(D)Working Capital - Working capital shall include -(a)Operation and maintenance expenses for one month; and(b)Amount equivalent to one sixth of approved Annual Revenue Requirement.(E)O&M Expenditure - This component of revenue requirement consists of employee costs, administration and general expenses, repair and maintenance expenses and other miscellaneous expenses. These costs shall be recognised at actual or as allowed by the Commission, whichever is lower, for the first period of review and shall be taken as base values. The Commission may endeavour to fix these costs on normative basis.These approved base values may be indexed to pre-determined indices viz. Consumer Price Index, Wholesale Price index or a combination of both the indices for the subsequent years. For example, the base value of O&M can be indexed to CPI and WPI.(F)Provision for bad debts - The Commission shall allow a provision for bad debts as a prudent commercial practice in the revenue requirement of the licensee. This provision for bad debts will be established as a percentage of sales revenue. Before establishing a provision for bad debts, the Commission may direct the licensee to audit the receivable so that there will be no financial burden on genuine consumers due to inappropriate provision.(G)Depreciation - For the purpose of tariff determination the rate of depreciation will be linked to the useful life of the asset, calculated on straight line method. However, a higher rate of depreciation may be permitted by the Commission, in case of inadequacy of cash for debt repayment. The Commission may also consider allowing advance against depreciation subject to the following constraints -(a)In any year, the Advance against depreciation and depreciation together do not exceed 1/12th of the original loan amount.(b)Total depreciation allowed during the life of the project shall not exceed 90% of the original project cost.(H)Profit Sharing -(a)The licensee will be provided with an approved return at the beginning of the period under review.(b)However, the licensee, if it makes more profit than the approved return on account of improved performance, the Commission shall treat the profit beyond the approved return in the following manner -(i)In case, one-third amount to be declared by the licensee as dividends to the shareholders, is not paid out as dividend, it shall be eligible to be treated as part of equity to that extent and earn returns on the same. Any future declaration of dividend from this shall lead to commensurate decrease in the equity base for the purpose of returns.(ii)One-third amount to be returned back to consumers by way of reduction in the consumer bills as rebate.(iii)One-third amount shall be kept as tariff balancing reserve, which shall be used to reduce sharp rise in ARR in future years. The Commission may allow a part of the total reserve to be returned back to the consumers every 3 years by way of reduction in ARR. The amount in tariff balancing reserve shall not be eligible to be treated as part of equity and would not earn any return for the shareholders. Any return earned on this reserve shall be added back to this reserve.(I)Regulatory Asset - Depending on the amount of Regulatory Asset submitted by the licensee and accepted by the Commission, the Commission shall stipulate the amortisation and financing rules of such assets. Creation of Regulatory Asset only for the purposes of avoiding tariff increase should not be allowed and it shall only be created to take care of force majeure or cost variations due to uncontrollable factors or major tariff shocks because of these reasons. The Commission shall have the discretion of providing regulatory assets.
