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15. After considering the submissions made by the Appellant and the Respondents, we are of the opinion that the main issue is whether, to determine the quantum of A&G expenses eligible for recovery through tariff in the absence of any laid down norms, the Commission:

i) Should carry out the prudence check on the expenses projected for the year under consideration; or
ii) Should adopt the expenditure allowed in the Tariff Order for dated 10 March 2004 as base and increase by an escalation factor and if yes, then what should be the applicable escalation factor? The Commission has adopted the escalation factor to be 4.2% every year but does not explain the basis for arriving at it.

16. We feel that subjecting the admissibility of various heads under the A&G expenses to prudence check every year would require more efforts on the part of the Commission as well as the utility and would be time consuming but would be closer to the reality and the element of adhocism would be greatly reduced. In this process, extra-ordinary items of expenditure, which are incurred for the first time or are relevant only for a particular period, would get due consideration while firming up the quantum of admissible A&G expenses. This approach is somewhat more flexible in nature. On the other hand, the approach of adopting the base expenditure for a particular year and then applying an escalation factor works on the assumption that nature of expenditure is fairly identifiable and comparable on year-to-year basis. This approach enables the utility to reasonably forecast its cash flows over a period of time but the challenge remains in allowing time-specific expenditure or new items of expenditure and determining the escalation factor which provides adequate safeguard against inflationary factors. Time specific or new items of expenditure expenses could be, for example, in the nature of expenses incurred on study carried out to suggest efficiency improvement in the existing operations of the utility.

b) Where the Commission had approved interest on certain loans and such loans are partly used to be invested in FDs, other interest bearing securities, given to employees as advances,
c) Where the Commission allows expenditure on maintenance of staff quarters and other buildings, rental incomes from such quarters or buildings;
d) Income by way of sale of tender forms relating to expenditures allowed for execution certain contracts, studies, etc,

73. We feel that in cases where the Commission allows a cost to be recovered after prudent check, any deviation in the amount of such expenditure or recovery of income relating to such expenditure would be eligible to be taken up for truing up. In our view the objective of the Tariff Regulations is broadly to ensure a pre-determined return on the investments made by the utility on the one hand and to ensure availability of electricity with reasonable operational efficiency to the consumer. If in the process the utility is subjected to losses beyond its control or earns extra profits, the Commission has inherent powers to take necessary steps after prudence check. However, if the income can not be reasonably linked to any cost item allowed by the Commission as part of the ARR, the same should not be adjusted against the ARR of the Appellant, in the absence of specific Regulations. In the original order the Commission did not adjust any such other income.

83. The Commission has considered the estimates of the Appellant for the year 2006-07 and has also allowed escalation at the rate of 5.38%. We observe that the above dispensation results into deviation from the norms by the Commission in favour of the Appellant. The Commission in its submissions has also stated that 'since the actual audited O&M expenditure in FY 2006-07 was not available with the Commission at the time of the MYT order, and has not been submitted to the Commission till date for the Commission's prudence check, there was no question of considering the revised estimates of the O&M expenditure for the projection of O& M expenses over the Control Period, as these are only estimates and past experience has shown that there is significant variation between the estimated expenditure and the actual expenditure...the Commission is quite concerned about the Appellant's practice of booking expenditure of capital nature under Repair and Maintenance expenditure, and has sought a clear segregation of capital related expenditure and revenue expenditure.... Once the desired audited figures are submitted to the Commission under the truing up process, and the Commission has assessed the prudence of the same, the Commission will consider the same for projection of the O&M expenditure over the Control Period'.