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NCT Delhi - Section

Section 5 in The Delhi Electricity Regulatory Commission (Terms and Conditions for Determination of Wheeling Tariff and Retail Supply Tariff) Regulations, 2011

5. Principles For Determination Of ARR.

-Arr For Wheeling Business
(1)The Aggregate Revenue Requirement for the Wheeling Business of the Distribution Licensees for each year of the Control Period, shall contain the following items;
(a)Operation and Maintenance expenses;
(b)Return on Capital Employed;
(c)Depreciation;
(d)Income Tax;
(e)Interest on Consumer Security Deposit;
(f)Less: Non-Tariff Income;
(g)Less: Income from Other Business; and
(h)Less: Income from wheeling of electricity.
ARR for Retail Supply Business
(2)The Aggregate Revenue Requirement for the Retail Supply Business of the Distribution Licensee, for each year of the Control Period, shall contain the following items;
(a)Cost of power procurement;
(i)Transmission & Load Dispatch charges;
(ii)Operation and Maintenance expenses;
(iii)Return on Capital Employed;
(iv)Depreciation;
(v)Income Tax;
(vi)Interest on Consumer Security Deposit;
(vii)Less: Non-Tariff Income;
(viii)Less: Income from Other Business; and
(ix)Less: Receipts on account of cross subsidy surcharge and additional surcharge from open access customers.
Operation and Maintenance Expenses
(3)Operation and Maintenance (O&M) expenses shall include:
(a)Salaries, wages, pension contribution and other employee costs;
(b)Administrative and General expenses;
(c)Repairs and Maintenance; and
(d)Other miscellaneous expenses, statutory levies and taxes (except corporate income tax).
(4)The Licensee shall submit the O&M expenses for the Control Period as prescribed in Multi Tear Tariff filing procedure. The O&M expenses for the Base Year shall be approved by the Commission taking into account the latest available audited accounts, business plan filed by the Licensees, estimates of the actuals for the Base Year, prudence check and any other factor considered appropriate by the Commission.
(5)O&M expenses permissible towards ARR for each year of the Control Period shall be determined using the formula detailed below:
(a)O&Mn = (R&Mn + EMPn + A&Gn) * (1 – Xn)
Where,
(i)R&Mn = K * GFAn-1;
(ii)EMPn + A&Gn = (EMPn-1 + A&Gn-1) * (INDX);
(iii)INDX = 0.55 * CPI + 0.45 * WPI;
(iv)Xn is an efficiency factor for nth year. Value of Xn shall be determined by the Commission in the MYT Tariff order based on Licensee?s filing, benchmarking, approved cost by the Commission in past and any other factor the Commission feels appropriate;
(v)EMPn – Employee Costs of the Licensee for the nth year;
(vi)A&Gn – Administrative and General Costs of the Licensee for the nth year; and
(vii)R&Mn – Repair and Maintenance Costs of the Licensee for the nth year.
Where,
(i)'K' is a constant (could be expressed in %). Value of K for each year of the Control Period shall be determined by the Commission in the MYT Tariff order based on Licensee?s filing, benchmarking, approved cost by the Commission in past and any other factor considered appropriate by the Commission;
(i)INDX - Inflation Factor to be used for indexing. Value of INDX shall be a combination of the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) for immediately preceding ten years before the base year.
Return on Capital Employed
(6)Return on Capital Employed (RoCE) shall be used to provide a return to the Distribution Licensee, and shall cover all financing costs, without providing separate allowances for interest on loans and interest on working capital.
(7)The Regulated Rate Base (RRB) shall be used to calculate the total capital employed which shall include the original cost of assets and working capital, less the accumulated depreciation. Capital work in progress (CWIP) shall not form part of the RRB. Consumer Contribution, capital subsidies / grants shall be deducted in arriving at the RRB.
(8)The RRB shall be determined for each year of the Control Period at the beginning of the Control Period based on the approved capital investment plan with corresponding capitalisation schedule and normative working capital.
(9)The Regulated Rate Base for the ith year of the Control Period shall be computed in the following manner:RRBi = RRB n-1 + ∆ABi /2 + ∆WCi;Where,'i' is the ith year of the Control Period, i = 1,2,3,4 for the first Control Period;RRBi: Regulated Rate Base for the ith year of the Control Period;∆ABi: Change in the Regulated Rate Base in the ith year of the Control Period. This component shall be the average of the value at the beginning and end of the year as the asset creation is spread across a year and is arrived at as follows:∆ABi = Invi – Di – CCi;Where,Invi: Investments projected to be capitalised during the ith year of the Control Period and approved;Di: Amount set aside or written off on account of Depreciation of fixed assets for the ith year of the Control Period;CCi: Consumer Contributions pertaining to the ∆RRBi and capital grants/subsidies received during ith year of the Control Period for construction of service lines or creation of fixed assets;RRBi-1: Regulated Rate Base for the Financial Year preceding the ith year of the Control period. For the first year of the Control Period, RRBi-1 shall be the Regulated Rate Base for the Base Year i.e. RRBo;RRBo = OCFAo – ADo – CCo;Where;OCFAo: Original Cost of Fixed Assets at the end of the Base Year available for use and necessary for the purpose of the Licensed business;ADo: Amounts written off or set aside on account of depreciation of fixed assets pertaining to the regulated business at the end of the Base Year;CCo: Total contributions pertaining to the OCFAo, made by the consumers towards the cost of construction of distribution/service lines by the Distribution Licensee and also includes the capital grants/subsidies received for this purpose;∆WCi: Change in normative working capital requirement in the ith year of the Control Period, from the (i-1)th year. For the first year of the Control Period (i=1), ∆WCi shall be taken as the normative working capital requirement of the first year.
(10)Return on Capital Employed (RoCE) for the year „i? shall be computed in the following manner:Where,WACCi is the Weighted Average Cost of Capital for each year of theControl Period;RoCE = WACCi*RRBiRRBi - Regulated Rate Base is the asset base for each year of theControl Period based on the capitalisation and working capital.
(11)The WACC for each year of the Control Period shall be computed at the start of the Control Period in the following manner:Where,
WACC= [ D/E ] * rd + [ 1 ] * re                
1+D/E 1+D/E                
D/E is the Debt to Equity Ratio and for the purpose of determination of tariff, debt-equity ratio for the asset capitalized shall be 70:30. Where equity employed is in excess of 30%, the amount of equity for the purpose of tariff shall be limited to 30% and the balance amount shall be considered as notional loan. The interest rate on the amount of equity in excess of 30% treated as notional loan shall be the weighted average rate of the loans of the Licensee for the respective years and shall be further limited to the prescribed rate of return on equity in the Regulations. Where actual equity employed is less than 30%, the actual equity and debt shall be considered:Provided that the Working capital shall be considered 100% debt financed for the calculation of WACC;Provided further that the Debt to Equity Ratio for the assets covered under Transfer Scheme, dated July 1, 2002 shall be considered as per the debt and equity in the transfer scheme;Provided further that Debt to Equity Ratio for the assets capitalised till 1.04.2012 (other than assets covered under Transfer Scheme) shall be considered as per the debt and equity approved by the Commission at the time of capitalization.rd is the Cost of Debt and shall be determined at the beginning of the Control Period after considering Licensee?s proposals, present cost of debt already contracted by the Licensee, credit rating, benchmarking and other relevant factors (risk free returns, risk premium, prime lending rate etc.);re is the Return on Equity and shall be considered at 16% post tax:Provided further that any additional investment made by the Licensee other than in the fixed asset of the distribution business, shall not qualify for the return on equity.
(12)The Distribution Licensee shall make every effort to refinance the loan as long as it results in net benefit to the consumers. The cost associated with such refinancing shall be borne by the consumers and any benefit on account of refinancing of loan and interest on loan shall be passed on to the consumers. Refinancing may also include restructuring of debt.
(13)In case any moratorium period is availed by the Licensee, depreciation provided for in the tariff during the years of moratorium shall be treated as notional repayment of loan during those years and interest on loan shall be calculated accordingly.Working Capital
(14)Working capital for wheeling business of electricity shall consist of
(a)Receivables for two months of Wheeling Charges.
(15)Working capital for retail supply of electricity shall consist of
(a)Receivables for two months of revenue from sale of electricity;
(b)Less: Power purchase costs for one month;
(c)Less: Transmission charges for one month; and
(d)Less: Wheeling charges for two month.
Depreciation
(16)Depreciation shall be calculated for each year of the Control Period, on the amount of Original Cost of the Fixed Assets considered for calculation of the Regulated Rate Base of the corresponding year:Provided that depreciation shall not be allowed on assets funded by consumer contribution (i.e., any receipts from consumers that are not treated as revenue) and capital subsidies/grants. Provision for replacement of such assets shall be made in the Capital Investment plan.
(17)Depreciation for each year of the Control Period shall be determined based on the methodology as specified in these Regulations along with the rates and other terms specified in Appendix 1 of these Regulations.
(18)Depreciation shall be calculated annually, based on the straight line method, over the useful life of the asset. The base value for the purpose of depreciation shall be original cost of the asset.
(19)The residual value of assets shall be considered as 10% and depreciation shall be allowed to a maximum of 90% of the original cost of the asset. Land is not a depreciable asset and its cost shall be excluded while computing 90% of the original cost of the asset:
(20)Provided that the Licensee shall submit yearwise details of the assets which have completed its useful life;
(21)Provided further that the Licensee shall submit yearwise details of assets retired and disposed off, which shall be removed from the Original Cost of Fixed Assets;
(22)Provided further that assets shall normally be not retired before completion of the useful life and the Licensee shall take prior approval of the Commission in case of retiring any asset before its useful life.
(23)Depreciation shall be charged from the first year of operation of the asset. In case, the operation of the asset is for a part of the year, depreciation shall be charged on a pro rata basis.
(24)In addition to allowable depreciation, the Distribution Licensee shall be entitled to Advance Against Depreciation, computed in the manner given hereunder:
(25)AAD = Loan (raised for capital expenditure) repayment amount based on loan repayment tenure, subject to a ceiling of 1/10th of loan amount minus depreciation as calculated on the basis of these Regulations;
(26)Provided that Advance Against Depreciation shall be permitted only if the cumulative repayment up to a particular year exceeds the cumulative depreciation up to that year;
(27)Provided further that Advance Against Depreciation in a year shall be restricted to the extent of difference between cumulative repayment and cumulative depreciation up to that year.
(28)On repayment of entire loan, the remaining depreciable value shall be spread over the balance useful life of the asset.Cost of Power Procurement
(29)Quantum of Power Purchase - The Commission approved category-wise sales forecast shall be applied along with Distribution loss trajectory for estimating the Licensees? power procurement requirement for each year of the Control Period.
(30)Distribution Licensee shall be allowed to recover the net cost of power it procures from sources approved by the Commission, viz. Intra-state and Inter-state Trading Licensees, Bilateral Purchases, Bulk Suppliers, State generators, Independent Power Producers, Central generating stations, non-conventional energy generators, generation business of the Distribution Licensee and others, assuming maximum normative rebate available from each source for payment of bills through letter of credit on presentation of bills for supply to consumers of Retail Supply Business;
(i)Provided that the Distribution Licensee shall propose the cost of power procurement taking into account the fuel adjustment formula specified for the generating stations and net revenues through bilateral exchanges and Unscheduled Interchange (UI) transactions;
(ii)Provided further that where the Licensee utilises a part of the power purchase approved or bulk supply allocated or contracted for the Retail Supply Business for its Trading Business, the Distribution Licensee shall provide an Allocation Statement clearly specifying the cost of power purchase that is attributable to such trading activity.
(31)While approving the cost of power purchase, the Commission shall determine the quantum of power to be purchased from various sources in accordance with the principles of merit order schedule and despatch based on a ranking of all approved sources of supply in the order of their variable cost of power purchase. All power purchase costs shall be considered legitimate unless it is established that the merit order principle has been violated or power has been purchased at unreasonable rates or the power procurement guidelines as laid down by the Commission from time to time has not been followed.
(32)To promote economical procurement of power as well as maximizing revenue from sale of surplus power, the Commission may evolve an appropriate mechanism to incentivise / penalise the Distribution Licensee.
(33)The Renewable Purchase Obligation of the Distribution Licensee shall be as per the order issued by the Commission from time to time.AT&C Losses
(34)The Licensee shall propose AT&C loss reduction trajectory for each year of the Control Period. For any year of the Control Period, loss reduction should be at least 30% of the total AT&C loss reduction target for the Control Period. The Commission shall examine the filings made by the Licensee for the AT&C loss trajectory for each year of the Control Period and approve the same with modification as considered necessary.
(35)The Distribution Licensee shall also propose voltage-wise losses for each year of the Control Period for the determination of voltage-wise cost of supply and determination of voltage-wise Wheeling Tariff.Transmission, Load Despatch & Wheeling Charges
(36)The Distribution Licensee shall be allowed to recover net transmission and load despatch charges payable to the Transmission Licensees (Central Transmission Utility, State Transmission Utility etc.) and System Operators (Regional Load Despatch Centre, State Load Despatch Centre etc.) for access to and use of the inter-state transmission system, intra-state transmission system and availing load despatch services assuming maximum normative rebate available from each source for payment of bills through letter of credit on presentation of bills in accordance with the tariffs approved from time to time by CERC and appropriate State Commissions, as the case may be.
(37)The Distribution Licensee shall also be allowed to recover the Wheeling Charges in case the distribution network of other Distribution Licensee is used for procurement of power for the Retail Supply Business.Corporate Income Tax
(38)Tax on income, if any, liable to be paid on the Licensed business of the Distribution Licensee shall be limited to tax on return on the equity component of capital employed. Any additional tax other than this shall not be a pass through, and it shall be payable by the Distribution Licensee itself.
(39)The actual assessment of income tax should take into account benefits of tax holiday, and the credit for carry forward losses applicable as per the provisions of the Income Tax Act 1961 shall be passed on to the consumers.Interest on Consumer Security Deposits
(40)Interest paid on consumer security deposits shall be based on the rate specified by the Commission in the "Delhi Electricity Supply Code and Performance Standards Regulations, 2007", and shall be a pass through in the ARR.Non-Tariff Income
(41)All incomes being incidental to electricity business and derived by the Licensee from sources, including but not limited to profit derived from disposal of assets, rents, late payment surcharge, meter rent (if any), income from investments, income on investment of consumer security deposit and miscellaneous receipts from the consumers shall constitute Non-Tariff Income of the Licensee:
(42)Provided that income arising from investment of shareholder?s funds, if any, shall not be included in Non Tariff Income subject to prudence check of requisite detailed information submitted by the Licensee to the Commission.
(43)The amount received by the Licensee on account of Non-Tariff Income shall be deducted from the aggregate revenue requirement in calculating the net revenue requirement of such Licensee.Other Income of Licensee
(44)Where the Licensee is engaged in any other business, the income from such business shall be calculated as per "DERC Treatment of Income from Other Business of Transmission Licensee and Distribution Licensee Regulation, 2005"and shall be deducted from the Aggregate Revenue Requirement in calculating the revenue requirement of the Licensee;
(45)Provided that the Licensee shall follow a reasonable basis for allocation of all joint and common costs between the Distribution Business and the Other Business and shall submit the Allocation Statement as approved by the Board of Directors to the Commission along with his application for determination of tariff;
(46)Provided further that where the sum total of the direct and indirect costs of such Other Business exceed the revenues from such Other Business or for any other reason, no amount shall be allowed to be added to the aggregate revenue requirement of the Licensee on account of such Other Business.Income from cross-subsidy surcharge and additional surcharge on charges of wheeling
(47)The amount received or to be received by the Licensee on account of cross-subsidy surcharge and additional surcharge, as approved by the Commission from time to time in accordance with the Delhi Electricity Regulatory Commission (Terms and Conditions of Open Access) Regulations 2005 shall be shown separately against the consumer category that is permitted open access as per the phasing plan.
(48)Cross-subsidy surcharge and additional surcharge shall be shown as revenue from tariff from the consumer categories permitted open access in accordance with the Delhi Electricity Regulatory Commission (Terms and Conditions of Open Access) Regulations 2005 and such amount shall be utilized to meet the cross-subsidy requirements of subsidised categories and fixed costs of the Licensee arising out of his obligation to supply. The Licensee shall provide such details in its annual filings.Truing Up Mechanism
(49)Truing-up shall be carried out in accordance with Regulation 4.21, for each year based on the actual/audited information and prudence check by the Commission;
(i)Provided that if such variations are large, and it is not feasible to recover in one year alone, the Commission may take a view to create a regulatory asset, as per the guidelines provided in clause 8.2.2 of the National Tariff Policy.
(ii)Provided further that under business as usual conditions, the Commission, to ensure tariff stability, may include the opening balances of uncovered gap / trued-up costs in the subsequent Control Period?s ARR instead of including in the year succeeding the relevant year of the control period after providing for transition financing arrangement or capital restructuring.