Section 5(5) in Orissa Electricity Regulatory Commission (Terms and Conditions for Determination of Tariff) Regulation, 2004
(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.
