CHAPTER III

Financial Performance and Pricing Policy:

Tamil Nadu and Uttar Pradesh State Electricity Boards

In this chapter, an attempt is made to examine the financial

performance of Tamil Nadu and Uttar Pradesh State Electricity

Boards, with a view to understanding its relationship with

pricing policy. Since the financial performance is very much

affected by their price policy an attempt is also made to

briefly analyse the evolution of their price policy over-

time.

Before independence, electricity undertakings were

governed by the Indian Electricity Act of 1910. The Act of

1910 related to the generation transmission, supply and use

of energy, it was primarily regulatory in character and was

not development oriented.

.
After independence the policy

makers recognised the crucial importance of electricity for

the development of the economy and gave a high priority to

its development. In order to develop this sector in a planned

manner a comprehensive Act, known as Electricity (Supply)

Act, 1948 was enacted soon after Independence. This Act

provided for the establishment of State Electricity Boards as

autonomous corporate bodies in the public sector to develop

power at the state level and the creation of the Central

Electricity Authority to formulate overall policy and

coordinate power development schemes at the national level.

This Act also provided broad guidelines for the determination

of electricity tariffs.
 In pursuance of the provisions of the Electricity

(Supply) Act, 1948, the State Electricity Boards were

constituted in the various states.

The revenue objectives of the State Electricity Boards

are stated in section 59 of the Electricity(Supply) Act,

1948. Initially the concept was that the Boards should manage

their operations in such a way as not to incur losses. The

Section has been amended twice to make its provisions more

specific and obligatory. The first amendment in 1978 made it

mandatory for a State Electricity Board to earn a positive

return. This was done because the Government of India was

not satisfied with the financial performance of the State

Electricity Boards as most of them were operating at a loss

and the losses had been on the increase from·year to year.

For example, the total commercial losses of the State

Electricity Boards which amounted to nearly Rs.103 crores in

1973-74 increased to about Rs.450 crores during 1979-80. 1 The

Central Government, therefore, wanted the State Electricity

Boards to achieve a reasonable rate of return which would

generate surplus after taking into account all operating

expenses, depreciation, interest and taxes to finance at

least a part of their investments. Despite this amendment in

the Electricity (Supply) Act in 1978, there was no sign of

any noticeable improvement in their performance. In view of

this, section 59 was further amended in August 1983. This

amendment enjoined upon the Boards to earn a minimum surplus

of 3.0 per cent after taking credit for any subventions from

1. Sixth Five Year Plan 1980-85, Planning Commission, GOI.

their respective State Governments. This amendment came into

force with effect from 1. 4.1985. It is now envisaged that

every State Electricity Board must earn a minimum of three

per cent return on the value of the fixed assets of the Board

in service less Consumers' contribution, as at the beginning

of the year. This statutory obligation is justified keeping

in view the imperative need to ensure that the Boards are

financially viable and generate resources for financing

partly future expansions. The State Government can specify a

rate of return higher than three per cent. To date, no State

Government has specified a higher than three per cent rate of

return to be earned by its Board.

The stipulation in Section 59 for the boards to earn 3.0

per cent net profit on their investment notwithstanding, even

guidelines for a rational tariff structure are absent. In

many cases states have tried to achieve 3 per cent rate of

return by providing subsidies from the government budget.

Accordingly, the financial performance of State Electricity

Boards has remained a matter of serious concern. A number of

expert committees have gone into this crucial economic area

and made recommendations for improving financial performance

of the Boards from time to time.

Financial Position of State Electricity Boards

The pricing policy and financial position of electricity

undertakings were examined by a Working Group constituted by

the Planning Commission in 1962. 2 The Working Group found

that the average rate of return on capital employed in all

the electricity boards in 1957-58 was 3. 9 per cent. The

comparison of cost of service to various consumer classes and

average revenue of the electricity boards showed that whereas

large industries and agriculture were being highly

subsidised, domestic consumption and public lighting were

being charged at par and the commercial and small industrial

consumers were being charged at more than the cost of

services leading to great deal of cross subsidisation. It

recommended 32 per cent increase in the price charged by the

Boards so that they could earn a return of 12 per cent on

. cap1ta
th e1r . 1 1nvestment.
. 2

The Energy Survey of India Committee set out the

essentials of an energy pricing policy. 3 The Committee

stipulated that the electricity undertakings should fix

tariffs at levels which would cover their costs and ensure a

minimum of 10 per cent return on capital. This level of

return was considered appropriate to a low-risk industry in

normal Indian conditions. The Committee further recommended

that the electricity tariff policy be devised in a such a way

as to provide incentives to minimize peak and maximize off-

peak consumption. It also stressed the need for tariffs to

reflect both the capacity cost and energy cost for bigger

consumers. The Committee felt that 'at least 35 to 40 per

cent of the following year's construction requirements should

be met from depreciation and retained earnings.'

-------------------------------------------------------------
2. Govt. of India, Planning Commission, The Pricing of
Electricity, Report of the Planning Unit of the Indian
Statistical Institute New Delhi, June, 1962.
3. Report of the Energy Survey of India Committee, GOI,1965
 Yet another committee was constituted in 1964, under the

chairmanship of R. Venkataraman to go into the financial

position of the State Electricity Boards. 4 The committee

candidly brought out the basic principles that should govern

the standards to judge the financial performance of State

Electricity Boards. The Committee urged that a phased

programme should be drawn up for attaining a minimum return

of 11 per cent on capital invested after meeting all working

expenses and depreciation. In this regard the main

recommendations of the Committee were as follows:

(a) The undertakings running at a loss should

immediately achieve self sufficiency. They should

supply power at a rate which meets at least

operation and maintenance cost, depreciation and

interest charges.

(b) Subsequently, the Boards should fix their tariff

in such a way that the gross revenue covers all

the operational costs plus depreciation and leaves

a return of 11 per cent on the investment made by

the Board. The rationality of 11 per cent rate of

return was that after deducting estimated average

interest rate of 6 per cent, electricity duty 1.5

per cent, general reserve 0.5 per cent, this will

leave 3 per cent pure profit for the Boards which

could be used for further investment.

(c) Interest on investment on works-in-progess should

4. Govt. of India, Report of the Committee on the Working

of the State Electricity Boards, New Delhi,l964.
 be capitalised.
(d) The energy intensive industries may be provided

power at subsidised rates after obtaining expert

advice.
The Committee estimated that for 1962-63, the rate of

return for various State Electricity Boards ranged between

0. 17 per cent and 6. 0 per cent. In view of the large

investments in the electricity supply industry and of the

need to maximize the returns from such investments, the rate

of return recommended by the committee was regarded as the

minimum to be achieved. 5
Both the Power Economy Committee6 set up in 1969 and the

Fuel Pol icy Commit tee 7 , 19 7 4 had pointed out that the

inadequate returns generally obtained by the State

Electricity Boards would adversely affect the power capacity

expansion programme. They strongly recommended that the

Boards must achieve the rate of return suggested by the

Venkataraman Committee. The Fuel Policy Committee further

recommended the introduction of time-differentiated tariff

structure, and was against any type of subsidy including

5. It has been stated by the Sixth Finance Commission, 1973

that the issue of prescribing a norm of 11 per cent
return on capital invested according to a phased
programme has come up for consideration in the course of
negotiations with the World Bank for loans for certain
transmission projects in the middle sixties. In this
connection, the State Electricity Boards also gave an
undertaking that they would achieve a return of 11 per
cent by certain stipulated dates. The deadlines passed
without achieving the financial targets.
6. Government of India, Ministry of Irrigation and Power,
Report of Power Economy Committee, March, 1971.
7. Government of India, Report of the Fuel Policy
Committee, New Delhi, 1974.
subsidy for agriculture sector.

The 1980 Rajadhyc:ksha Committee 8 on Power had also

examined the financial position as well as the pricing policy

of the State Electricity Boards in detail. It estimated that

the rate of return on the average capital base 9 for 17 State

Electricity Boards taken together for the year 1977-78 worked

out at 7.9 per cent. It was estimated to be 10.6 per cent and

and 0. 3 per c2nt only in the case of Tamil Nadu and Uttar

Pradesh respectively. It was thus found that most of the

State Electricity Boards could not achieve 9.5 per cent rate

of return as recommended by the Venkataraman Committee.

The Rajadhyaksha Committee also estimated the amount of

resources required for investment in power over the period of

1980 to 2000. The committee felt that electricity

undertakings must generate internal resources to the extent

of 50 per cent required for investment. The Commit tee

calculated that this magnitude of internal resources could

only be generated with a rate of return of about 15 per cent.

8. GOI, Ministry of Energy, Report of the Committee on

Power, New Delhi, 1980.
9. lbid., pp.103-104. The average capital base has been
defined (as is used in the negotiations with external
agencies 1 ike World Bank) as the average of "total
capital at the beginning and end of the financial year."
The total capital is computed as follows: (a) The gross
value of fixed assets in operation plus (b) the cost of
intangible assets plus (c) an amount on account of
working capital equal to one sixth of administration and
operating expenses {excluding provision of
depreciation) for the fiscal year ending on the date
under consideration reduced by: (a) the amount of
accumulated depreciation charged en account of fixed
assets in operation (b) the amount contributed by the
customers for fixed assets in operation; and (c) the
amount of security deposits of consumers.
Accordingly, the Committee recommended that the Boards should

achieve a rate of return of 15 per cent on their average

capital base. 1 0 This rate of return was substantially higher

than a return of 11 per cent recommended by the Venkataraman

Committee. The Rajadhyaksha Committee also highlighted the

need for rationalisation of electricity tariff structure.

The Committee report stated that:

(a) "Tariffs should be related to both costs and

consumers' capacity to pay;

(b) It should discourage waste, promote only justified

use of power and increase capacity utilisation by
flattening the load curve; and

(c) a distinction should be made between the role of a

utility and the policy of the state to grant
explicit subsidies to special categories of
consumers and levy duties on others as part of a
wider socio-economic objectives."

The Committee emphasised that the tariff structure was

to be such that besides fulfilling the above basic objectives

it should produce adequate net return to the State

Electricity Boards.

The finances of the State Electricity Boards have

invariably been examined by the various Finance Commissions.

Among the recent ones, are the reports of the Eighth and the

Ninth Finance Commissions. The Eighth Commission (1984) 11

-------------------------------------------------------------
10. "It is worth noting that the World Bank, when financing
rural electrification projects in this country, now
stipulates that the State Electricity Boards contribute
to investment not less than 20 per cent of the 3 years
annual average of capital expenditure of the Electricity
Board. The contribution is to be computed, inter alia,
after payment of the interest due to the State
Government, and taking credit for rural electrification
subsidy subject to certain ceilings." Report of the
Eighth Finance Commission, 1984.
11. GOI, Report of the Eighth Finance Commission, 1984, New
Delhi.

8~
estimated that in 1982-83 alone, net commercial losses of the

22 State Electricity Bo~rds and Departments were of the order

of Rs. 677.89 crores, out of these Tamil Nadu Electricity

Board's loss was Rs. 180.79 crores and that of Uttar Pradesh

State Electricity Board Rs.225.51 crores. 12 The Finance

Commission estimated that at the end of March 1984 State

Government's loans outstanding with the State Electricity

Boards were to the tune of Rs.13,639 crores. The average of

the stipulated rate of interest on these loans came to about

7 per cent per annum. The Commission expected and assumed

that during the period 1984-89, the 22 State Electricity

Boards/Departments would yield a return at the rate of 7 per

cent on the estimated outstanding loans to the State

Governments. Net interest receipts for a five year period at

this rate worked out at Rs. 3, 084 crores. Ninth Finance

Commission in its first report submitted in July 1988 has

estimated that during the first four years of the Seventh

Plan the commercial losses of the Boards were of the order of

Rs.7,519 crores. Analysing the reasons for the poor

performance of the Boards the Finance Commission has stressed

the urgent need for a rational pricing policy for improving

the financial results and for estimating the subsidisation of

unintended consumers.

Despite all-round awareness of the need to achieve

-------------------------------------------------------------
12. ibid., commercial los~is defined as gross operating
surplus minus (Depreciation plus interest payable to the
institutional creditors and State Governments). Finance
Commissions' estimates of commercial losses were
provisional. The figures therefore, do not tally with
the actua]S as given in Table 3. 3.
certain minimum rate of return on investment made on the

power projects, the working results of the State Electricity

Boards, far from registering any improvement, have rather

deteriorated over time. Majority of the State Electricity

Boards are incurring sizeable financial losses year after

year. This is seriously affecting their technical performance

as well as crippling their capability for undertaking

necessary developmental works that are essential for their

improved functioning.

The Planning Commission has also been making estimates

of total losses of State Electricity Boards during various

Plan periods. The commercial losses of the Boards during the

sixth plan were Rs.4,687 crores. The Planning Commission had

estimated that at 1984-85 prices the total losses of the

State Electricity Boards during the Seventh Plan period 1985-

90 would be of the order of Rs.11,757 crores. While framing

the Seventh Five Year Plan for the power sector it has been

assumed that the State Electricity Boards would be required

to mobilise additional resources to the tune of Rs. 7, 000

crores, which would imply that the commercial losses of the

State Electricity Boards during the Seventh Plan (i.e. 1985-

9 0) would not exceed Rs. 4, 7 57 crores. However, the losses

suffered by the State Electricity Boards during the years

1985-86 and 1988-89 have amounted to Rs.6,820 crores. It may,

therefore, be inferred that the financial losses could not be

contained within the contemplated figure of Rs.4,757 crores

during the entire Seventh Plan. The only option left with the

State Electricity Boards would be to make up their revenue

:1 I
91
losses by diversion of resources out of their capital budget.

This in turn is bound to have adverse effect on achievements

of the physical target set in the plan.

It is also obvious from a review of the various expert

committee reports that the State Electricity Boards should

generate surplus which is at least equal to the one

recommended by the Venkataraman Committee. It is pertinent to

mention that the stipulation of a minimum profit of 3 per

cent made vide an amendment in 1983 under section 59 to the

Electricity (Supply) Act of 1948 is in conformity with the

Venkatararnan Committee recommendations. However, Venkataraman

Committee recommendation of a rate of return of 11 per cent,

which inter alia included expenses on account of 6 per cent

interest, 0.5 per cent general reserve and 1.5 per cent

electricity duty, in the present conditions will not be

adequate to generate a net profit of 3 per cent as stipul~ted

in the Electricity (Supply) Act of 1948. This is mainly so

because the Venkataraman Committee had based their

recommendations on the assumption of the then prevailing rate

of interest of 6 per cent or less on which State Electricity

Boards were raising their loan capital. The rate of interest

has since shown a secularly rising trend and is much higher

compared to the mid-sixties. For example in the case of Uttar

Pradesh it stood at 6.9 per cent in 1974-75 and went upto 8.1

per cent in 1981-82 and exce.eded 10 per cent in 1985-86. In

order therefore, to achieve a net profit of 3 per cent the

overall rate of return shall have to be correspondingly

higher than 11 per cent.

 An attempt is made in this section to examine the

financial position of the State Electricity Boards of Uttar

Pradesh and Tamil Nadu, keeping in view the various

recommendations of these committees. In particular the rates

of return on capital employed are calculated for measuring

their performance. The rate of return is the amount of

earnings expressed as a percentage of the capital base. In

the technical sense, the rate of return and the rate of

profit are two different concepts. The former includes

profits as well as interest on debt capital, which is

generally considered to be the cost of doing business and is,

therefore, excluded from profits. To compute the rate of

return, one needs to define the capital base. Under the

Electricity (Supply) Act, the Capital base is defined as the

net fixed assets as at the beginning of the year, less

Consumers' contribution. On the other hand, the Venkataraman

Committee had defined capital base as the average net fixed

assets plus two months' expenses towards working capita1. 12 a

]tis proposed to keep the Venkataraman Committee recommendation

as a reference point to assess the performance of Tamil Nadu

and Uttar Pradesh State Electricity Boards.

Rates of return computed for Tamil Nadu and Uttar

12a. The standard commercial practice is to work out working

capital by taking the difference between current assets
and current liabilities. However, Rajadhyaksha Committee
had recommended as a norm that the working capital
expenses should normally not. exceed l/6th of the
operating expenses. This practice has since been
followed by the World Bank also for evaluating the
performance of electricity projects financed by the Bank.
Pradesh for the period 1971-72 to 1984-85 are given in Table

3.1.1 and 3.1.2 respectively. The actual calculations are

given in Appendices IIr.1 and III.2 for Tamil Nadu and Uttar

Pradesh respectively. The rate of return has been calculated

by taking the difference of gross revenue receipts and the

total operating cost, and dividing this difference (total net

revenue) by the capital base.

The capital base has been reckoned as the equivalent

of average net capital assets in use plus two months'
working expenses. In other words the total of gross
value of Fixed Assets in operation and cost of
intangible assets and working capital to the extent of
1/6th of the administrative and operative costs for tne
fiscal year reduced by the amount of accumulated
depreciation, Consumers' contributions to fixed assets
and security deposits from consumers at the beginning
and end of a financial year are averaged to arrive at
the capital base.

The gross revenue receipts consist of revenue from

electricity sales including meter rents, and miscellaneous

receipts such as license fees. The operating costs consist

of fuel cost, cost of power purchases, administration

establishment charges, operation and maintenance charges

besides a provision for depreciation of fixed assets in use.

It may be noted that the rates of return have been calculated

before and after duty payment and with and without state

subventions.

State Electricity duty in Tamil Nadu was imposed on

1.7.62 but was abolished in 1979. Union excise duty of 2

paise per kWh was levied on electricity generation with

effect from 1.3.1978. The objective of this levy was to

obtain better returns on the heavy investments made by the

nation on the development of power. The entire non-shareabale

 TABLE 3.1.1

RATE OF RETURN
TAMIL NADU ELECTRICITY BOARD
(Per cent)

Year Before Duty Payment* After Duty Payment

Excluding Including Excluding Including Duty as percentage

Subventions Subventions Subventions Subventions of Capita 1 base
--------------------------------------------------------------------------------------
1971-72
1972-73 4.3 8.7 3.6 8.0 0.7
1973-74 2.4 9.0 1.6 8.3 0.8
1974-75 SA 10.7 4.7 10.0 0.7
1975-76 9.7 11.1 9.0 10.4 0.7
1976-77 3.4 11.4 2.6 10.6 0.8
1977-78 6.1 11.6 5.1 10.6 1.0
1978-79 7.1 13.6 4.6 11.1 2.5
1979-80 7.3 13.8 4.8 11.3 2.5
1980-81 - 7.8 13.2 - 9.6 11.4 1.8
1981-82 -16.7 13.3 -18.3 11.7 1.6
1982-83 -18.5 14.5 -19.7 13.3 1.2
1983-84 -18.7 11.5 -19.7 10.5 1.0
1984-85 - 4.3 15.3 - 4.9 14.7 0.6

*Duty includes both Central and State duties

TABLE 3.1.2

RATE OF RETURN
UTTAR PRADESH STATE ELECTRICITY BOARD

(Percent)

Before Duty Payment* After Duty Payment

Out i es as per-
Year Excl. Incl. Excl. Incl. centage of capi-
Subventions Subventions Subventions Subventions ta 1 base

1970-71 3.4 3.4 2.1 2.1 1.3

1971-72 5.0 5.0 3.7 3.7 1.3
1972-73 5.6 5.6 4.5 4.5 1.1
1973-74 2.2 2.2 1.2 1.2 1.1
1974-75 1.8 1.8 1.3 1.3 0.5
1975-76 5.4 5.4 4.6 4.6 0.8
1976-77 6.7 6.7 5.9 5.9 0.8
1977-78 1.0 1.0 0.3 0.3 0.7
1978-79 3.6 3.6 1.7 1.7 1.9
1979-80 2.2 12.3 0.3 10.5 1.9
1980-81 0.4 12.1 -1.4 10.3 1.8
1981-82 -0.3 10.2 -1.7 8.8 1.4
1982-83 0.1 11.1 -1.3 9.7 1.4
1983-84 1.3 13.7 -0.03 12.3 1.3
1984--B) I ·6 t"2. ~ 0·6 11·7 J· 0
- - - - - - - - ..... -- - - -- - -- - ----------
- ---------------
't
])"1 ,.;,.,.,c.Q.... J~ boiL.. C2..Yih~£ o.,_._....~ s t:..t... c"'-' UJj
I ....

~s
95
portion of the net proceeds of central excise duty on power
generation was also tranferred to the states in proportion to

the revenues realized from each on this account. The central

duty, however, has since been abolished with effect from

1. 10. 1985. Rates of return have been separately worked out

after duty payment so that the rate of return for different

years will remain comparable. The Venkataraman Committee had

assumed that duty as per cent of capital will not exceed 1.5

per cent. The rates before and after duty payment are thus to

be compared with 11.0 and 9. 5 per cent respectively which

become the targetted rate of return according to the

Venkataraman Committee recommendation. It may be observed

from Tables 3 .1.1 and 3 .1. 2 that electricity duty did not

exceed 1.5 per cent of the capital base in the case of both

the Boards except for three years from 1978-79 to 1980-81.

However, the rates of return without revenue subvent~ons

(grants for rural electrification and agricultural supplies)

~

from the State Governments never reached their target of 9.5

per cent without duty and 11 per cent including duty.

The 9. 5 per cent return without duty and 11 per cent

with duty specified by the Venkataraman Committee, seems to

be quite low considering the increasing rate of interest both

on government loans and institutional borrowings. The

Rajadhyaksha Committee, therefore, was quite right when it

stated that the Electricity Boards are regarded more as

promotional agencies rather than commercial organisations and

are used to subsidise different classes of consumers with

little or no control over their tariff policy.

 Another useful way of judging financial performance is

to look at commercial profits or losses of the Boards defined

as the operating surplus minus the due amounts of

depreciation and interest. The operating surplus does not

take into account the subsidies or subventions. The important

feature that comes out of this analysis is that although the

two Boards achieved the target of 9. 5 per cent and 11 per

cent after getting the subventions, yet if one were to reckon

the commercial profits/losses, Uttar Pradesh State

Electricity Board did not generate any commercial surplus in

even a single year and the Tamil Nadu Electricity Board's

surplus was only nominal in different years. This becomes

amply clear in a subsequent analysis of commercial losses of

the two Boards. The reason for this is very high capital base

and very high interest burden thereon.

The Venkataraman Committee had recommended the 9.5 .per

cent return on the assumption that the average composite

lending rate (i.e. weighted average of the interest rates

being charged by the government and other lending

institutions) to a State Electricity Board was 6 per cent.

The average rate of interest charged on additional capital

raised by the two Boards is given in Table 3.2.

It is clear that the overall interest rate (i.e.

weighted average of the interest rates being charged by the

government and other lending institutions) had the tendency

to rise gradually since 1974-75 and it exceeded 8 per cent in

Tamil Nadu by 1979-80 and in Uttar Pradesh by 1981-82. State

governments have also been increasing the interest rate on

 TABLE 3.2

Average Interest.Rate on State Government and

Institutional Loans to State Electricity Boards

(Per cent)
-------------------------------------------------------------
Tamil Nadu Uttar Pradesh
Year
Overall State Govt. Overall State Govt.
-------------------------------------------------------------
1974-75 7.58 6.93 6.50

1975-76 7.99 6.79 6.50

1976-77 8.03 6.86 6.50

1977-78 8.10 8.50 6.88 6.50

1978-79 8.00 8.50 7.60 7.00

1979-80 8.30 8.50 7.60 7.00

1980=-81 7.47 7.25

1981-82 8.05 7.50

1982-83 7.50

1983-84 8.75
1984-85 8.75

1985-86 9.50*

-------------------------------------------------------------
*Revised to 10.25 per cent in Dec. 1985

9S
98
loans given to the State Electricity Boards. The average rate

of interest on institutional borrowings is higher than that

of State governments. I~ the overall interest rate is higher

than 6 per cent then the 9. 5 per cent return must be

increased accordingly. In the case of Uttar Pradesh, the

interest burden during the Sixth Plan from 1980-81 to 1984-85

amounted to 11.8, 11.3, 12.5, 14 and 14.5 per cent of the

capital base for each of the five years, compared to assumed

6 per cent in the Venkataraman Committee.

The financial performance of both the Boards has been

much below the expectation. Given the capital base, the

causative factors for the poor performance could be two fold

(a) unremunerative tariff structure flowing from the pricing

policies of the Boards which have adversely affected revenue

receipts, and (b) high operating costs due to cost

escalations and inherent deficiencies of operation. The

operational efficiency is reflected through technical

performance of the system in terms of (i)productivity levels

of power plants (Plant Load Factor); ( ii) losses in

transmission and distribution systems; (iii) fuel consumption

(coal & oil); (iv) energy consumption in generating

auxiliaries; (v) expenditure incurred in operation and main-

tenance; and (vi) employment and productivity of labour.

Besides these operational parameters, the financial viability

of the boards· is also affected by their capital structure

which in turn affects their debt-servicing capability, return

on capital employed and generation of internal resources so

essential for their future growth.

 The pricing policies of the two electricity undertakings

is the main concern of this study in second section of this

chapter. The role ~f above factors in affecting the

performance of the two Boards is discussed in this section in

detail.. Financial parameters are analysed first followed by

technical factors.

Capital Structure of State Electricity Boards:

The State Electricity Boards established under the

provisions of the Electricity (Supply) Act, 1948 have not

been provided with any equity and the value of assets

transferred to them by the State Governments at the time of

formation of the Boards was treated as loan to them under

Section 60(2) of the Electricity(Supply) Act, 1948. The

Boards thus are working on 100 per cent loan capital through

borrowings. Loans are advanced to the Boards by the

respective State Governments 13 to enable them to exp.and

their activities or for working capital. The Boards are also

authorised to raise loans from the financial

institutions/banks, by issuing bonds and debentures with or

without guarantee from the respective State Governments in

regard to payment of principal and interest thereon.

The amount of long term loans outstanding as on 31st

March, 1985 in respect of Tamil Nadu and Uttar Pradesh was

Rs.l748.1 and 3962 crores, respectively including loans from

-------------------------------------------------------------
13. Loans are advanced by the State Government under Section
64 of the Electricity(Supply) Act, 1948 which constitute
approximately eighty per cent in most of the cases. The
electricity boards are also empowered to raise market
loans under Section 65 of the Act by issuing debentures
and bonds against the guarantee of the State Governments
as covered by Section 66 of the Act.

roo
100
the State Governments which work out to 72 per cent and 79

per cent of total liability of the two Boards towards long

term loans. The remaining 28 and 21 per cent of the loans in

respect of two states come from various financial

institutions including banks. As per income statements of the

two Boards the interest payable on Government loans during

the year 1984-85 was Rs.54 crores in the case of Tamil Nadu

and Rs. 19 7 crores in the case of Uttar Pradesh State

Electricity Board. While Tamil Nadu Board showed a nominal

profit of Rs. 8. 7 crores, Uttar Pradesh Board incurred a

commercial loss of Rs. 42 crores after taking into account

rural electrification subsidy of Rs. 146.7 and 222.5 crores

respectively for the two States. If there were equity

participation with a debt equity ratio of 1:1, the interest

burden should have been less by about 50 per cent, resulting

in a much higher surplus for Tamil Nadu and an over.all

surplus for Uttar Pradesh. This feature of rigid financial

structure distinguishes the State Electricity Boards from

Central Electricity undertakings like National Thermal Power

Coprporation and National Hydel Power Corporation.

The capital of all the Boards so far has been raised

through borrowings only. In view of the non-flexibility in

the capital structure, the surplus or deficits in their case

are, therefore, derived after charging a 'cost' of the entire

capital which implies that a substantial portion of interest,

charged to revenues for arriving at surplus or deficits is

comparable to dividends in a commercial sense, if the capital

structure comprised of equity capital and debt as generally

to'f 1
is the case even in the public sector industrial/commercial

enterprises. 14 In view of the present capital structure of

State Electricity Boards, it would dot be justifiable to

compare the financial results as between State Electricity

Boards, in India and other industrial/commercial undertakings.

As stated above, loans constitute almost the entire

capital structure of the State Electricity Boards and in the

case of· Tamil Nadu Electricity Board about 70 per cent of the

borrowings are from State Governments and the remaining 30

per cent are raised from bonds, Life Insurance Corporation,

Rural Electrification Corporation and other State and central

Financial Institutions. The Uttar Pradesh State Electricity

Board's borrowings from the State Government are around 80

per cent. In actual practice State Government loans are

generally perpetual and are hardly redeemed. 1 5 Repayment of

14. Section 12(A) of the Electricity (Supply) Act 1948

stipulates that the State Government may direct that the
board shall be a body corporate from the date of
notification with capital not exceeding Rs. 10 crores.
This maximum limit of capital can be increased upto the
amount representing the aggregate of outstanding loans
of the board. However, no board has so far been
declared a corporate body having equity capital.
15. The liabilities of the State Electricity Boards are to
be redeemed in accordance with the priority fixed under
sect~on 67 which has undergone change from time to time.
At present, the state electricity boards are required to
distribute their revenue receipts (after meeting their
operating costs and taxes etc.) as far as they are
available in the following order ( i) repayment of
principal of any loan raised (including redemption of
debentures or bonds issued) under section 65 which
becomes due for payment in the year or in any previous
year and has remained unpaid; (ii) repayment of
principal of any loan advanced to the board by the State
Government under section 64; (iii) payment for the
purpose specified in sub-section ( 2) of section 59 in
such manner as the board may decide; and (iv) the
interest on Government loans advanced under sections 60
and 64, and charged to revenue in any year, may be paid
... (4t..i.

!02.
102
other loans are generally out ·of fresh borrowings. As

already explained earlier the marginal cost of capital

i.e.rate of interest on·additional gross borrowings is rising

faster than the average cost of capital as the State

Government loans borrowed earlier at fairly low interest

rates are not paid back and are charged interest only at the

contracted rate. In as much as the loans from Government are

perpetual, t~e interest burden will always be art the

increase, since both the total capital base and the interest

rates are increasing. Already, the Tamil Nadu Electricity

Board has reached a stage when it is no longer possible for

it to meet its interest liability from the revenues without

subsidy, unless the tariff rates are increased substantially.

It has been argued by some that this is mainly so because the

performance is bad and that interest burden is by no means

high.

Tariffs also have an important bearing on the ability to

raise funds for power development programmes. Much of the

expansion is usually financed by issue of long term loans.

But the low level of electricity rates and earnings, in a

period marked by increasing prices acts as a damper on the

attractiveness of the loan policy. Increasingly the

responsibility of electricity development has to be accepted

by the government and the Boards have to rely more and more

on state loans. In the ultimate analysis, the capacity of

the Board to raise its capital needs from borrowing depends

------------------------------------------------------------
only out of the balance, if any, of that year which is left
in sub-section (1) of the section 59 and under section 67A.
to a large extent on its capacity for self-financing which

comes from the use of depreciation reserves and other funds.

For this, power rates have to be adequate. The present

financial structure, thus places a very heavy interest burden

both on account of assets-in-use and work-in-progress of the

State Electricity Boards.

If the rate of return on capital employed is compared

in tabl~ 3.1.1 with the average rate of interest in table 3.2

one finds that the financial performance of both the boards

has been so highly unsatisfactory throughout that they failed

to meet their interest liabilities without receiving

subventions 16 from their State Governments. The Tamil Nadu

Electricity Board has been receiving subventions from its

State Government as a reimbursement of losses against rural

electrification operations since 1969 but the U.P. State

Government issued an undertaking to reimburse the loqses

suffered by the UPSEB on account of rural electrification

operations with effect from 1.4.79 only. Rates of return

have also been computed after including subventions in the

receipts of the two Boards given in Table 3.1.2. Only after

taking account for the subventions, the rates of return seem

reasonable and the Boards have become able to meet the

interest liabilities. The outstanding interest liability of

the Uttar Pradesh State Electricity Board to the State

-------------------------------------------------------------
16. Subventions from the State government under section 63
of the Electricity(Supply) Act, 1948 is a sort of
compensation for loss on those projects which are
undertaken by the boards on the directives of the
government even if such projects are economically or
financially non-viable.
Government upto the end of 1984-85 was Rs.1,137 crores.

Effectively, the two Boards operated at a loss as they could

not cover the cost of operations without subventions from the

State Governments.
The present rigid capital structure indicates a very

unsound financial position of the State Electricity Boards

from commercial angle as they are entirely dependent on

outside agencies for their existence. The

capital expenditure of State Electricity Boards is financed

predominantly by borrowings from outside agencies and the

internal resources contribute only about 5 per cent of the

total investment. On this basis debt-reserve ratio works out

to about 19:1. Rajadhyaksha Committee on Power (1980) had

observed that for restoring a measure of financial

independence to the State Electricity Boards, about 50 per

cent of the annual investments in power on an average should

be funded by internal resources. This would mean a debt-

reserve ratio of 1:1 which may be considered as ideal for

public utility undertakings like the State Electricity

Boards. In case of most of the public sector undertakings the

debt-equity ratio is usually 1:1. But the State Electricity

Boards which too are public sector undertakings have not been

encouraged to structure their capital base on widely accepted

norms of financial management.

On the question of capital structure of the Board,

Rajadhyaksha Committee was not in favour of any conversion of

the outstanding loans into equity I share capital or future

government participation although it had recommended that in

calculating the rate of return, works-in-progress which do

not contribute to income should be excluded from the capital

base. The committee also recommended that internal resources

of the boards should be enhanced through better performance

and that remunerative pricing policies which might ensure a

return of not less than 15 per cent be pursued. This

notwithstanding, the need for converting a part of Government

loans to equity continues to be debated.

National Council of Power Utili ties 17 feels that for

healthy functioning of the State Electricity Boards the

capital structure should be made up of not more than 75 to 80

per cent loan capital and balance 25 to 20 per cent of

internal resources through internal generation or through

partial conversion of government loans to equity. The latest

amendment to the Electricity (Supply) Act has already made

this provision. The expert committee 1 8 which recently looked

into the financial problems of State Electricity Boards has

come to the conclusion that State Electricity Boards are

over-burdened by debt-servicing which is crippling them

financially. It has, therefore, suggested that half of this

debt be converted into equity by the state governments on the

ground that this would enable the Boards to reduce their loan

interest burden and at the same time help them in augmenting

-------------------------------------------------------------
17. A study made by National Council of Power Utilities
indicates that the capital structure of State
Electricity Boards, on an all India basis (1984-85)
comprised 95 per cent loan capital of which 64 per cent
was government loan, 15 per cent institutional loan and
16 per cent market borrowings.
18. Working Group on Financial viability of SEBs, Department
of Power, Central Electricity Authority, 1988.

1 ()?8
their internal resources. For the time being at any rate,

this ought to reduce the strain on State Electricity Boards,

finances. It is, however, felt that this kind of financial

restructuring cannot be a permanent solution to the ills of

boards unless electricity undertakings generate internal

resources through improved financial performance. 19 Low

pricing of electricity under political pressure is at the

root of their problems. Another is perhaps inefficiency in

operations. If State Electricity Boards continue to be forced

to charge uneconomic prices, as indicated in Section II no

amount of tinkering with the financial structure will help.

Interest on Works Under Construction

In the power utilities, at any point of time, works in

progress constitute a sizeable proportion of the total block

capital. All power projects have long gestation period.

Works-in-progress are not capable of earning revenues. St~te

Electricity Boards are required to meet the interest

liability of loans invested in works-in-progress. The present

practice of most of the Electricity Boards including U.P. and

Tamil Nadu is to debit the interest on works-in-progress to

their revenue account. This afects the revenue earning

capability of the State Electricity Boards contributing to

their financial ill-health. This, therefore, is an important

factor that needs to be taken cognizance of as the aggregate

net cumulative deficits of the Boards are very high.

According to conventional commercial accounting

practice, the interest on works-in-progress is capitalised.

-------------------------------------------------------------
19. The Economic Times editorial, June 12, 1989.

107
107
Since State Electricity Boards are also expected to run as

viable commercial undertakings, there is a strong case for

them to follow this practice which is also being followed by

both National Thermal Power Corporation and National Hydel

Power .Corporation. Rajadhyaksha Committee 1980, however, did

not favour the suggestion that interest on works-in-progress

should be capitalised. On the contrary, it recommended that

the practice being followed by majority of the Boards of

debiting interest on works-in-progress to the revenue account

be continued. The question of capitalisation of interest on

works in progress was subsequently examined by the Eighth

Finance Commission and they had agreed in principle with the

view that this should be capitalised.

The government of India has also recently issued

instructions that henceforth interest on work-in-pr-ogress

should not be charged to revenue account but should be

capitalised. This will, of course, have the effect of

increasing the capacity cost of generation after a project is

commissioned, but at the same time, it will keep the State

Electricity Boards on the alert not to allow cost and time

overruns on projects due to internal deficiencies. However,

capacity cost increases on this account may ultimately force

increase in electricity tariff.

Commercial Losses

The poor financial performance of the two boards under

consideration is also reflected in their commercial losses

and have affected both their debt-servicing capacity and

self-financing ratios.

lOS
108
 The profits or losses of the Boards represent position

after providing for what may be deemed as liabilities of

commercial character like depreciation and interest due to

the financial institutions and the State Government. They do

not take into account the subsidy or subventions received by

the Boards from the State Governments for various purposes

including rural electrification losses. Table 3.3 gives the

year wise commercial losses for Tamil Nadu and Uttar Pradesh.

It would be seen that both the boards have been incurring

heavy losses and these have been increasing every year

particularly in the case of Uttar Pradesh. Both Tamil Nadu

and Uttar Pradesh accounted for 39.4 per cent of the total

commercial losses of all the Boards during the Sixth Plan.

The losses continued even during the Seventh Plan and the two

Boards are expected to account for about 30 per cent of the

total commercial losses by all Boards.

The Planning Commission has tried to identify some of

the causes for the heavy commercial losses by the various

boards. The main factor responsible for the financial losses

is the tariff structure adopted by the Boards. Average tariff

of the Boards is lower than their average operating cost. As

indicated subsequently, losses in revenue are mainly due to

low average rate of realisation from the agricultural sector

which averaged to 12.24 paise/kWh only in the case of Tamil

Nadu and 27.87 paise/kWh in the case of Uttar Pradesh during

1984-85. Apart from these there are revenue losses in both

the States due to low tariff for domestic and even high

tension industries in these states. Rationalisation of

Jo:
109
 TABLE 3.3

Commercial Losses of the Boards

(Rs. Crores)
-------------------------------------------------------------
Year Uttar Pradesh All Boards
Tamil Nadu
-------------------------------------------------------------
1971-72

1972-73

1973-74

1974-75 11.10 (6.3) 54.20 (30.7) 176.80

1975-76 45.90 (34.0) 135.10

1976-77 20.60 (12.8) 43.10 (26.9) 160.40

1977-78 15.60 (6.8) 92.00 (40.0) 229.80

1978-79 21.10 (8.4) 91.40 (36.2) 252.40

1979-80 21.10 (4.5) 171.50 (36.2) 473.90

1980-81 109.20 (14.4) 165.70 (21.9) 758.20

1981-82 176.70 (23.0) *

100.00(13.0) 768.10

1982-83 210.90 (23.8) 221.70 (25.0) 886 .10 .

1983-84 225.20 (21.4) 237.00 (22.5) 1052.60

1984-85 138.00 (11.3) 264.50 (21.6) 1222.90

1980-85 860.00 (18.3) 988.90 (21.1) 4687.90

1985-86 182.90 (11.3) 350.50 (21.7) 1611.70

1986-87 168.79 (13.7) 315.66 (25.6) 1233.79

1987-88 230.60 (13.0) 149.30 (8.4) 1776.70

1988-89 246.23 (11.2) 303.77 (13.8) 2197.51

1989-90 419.20 (16.4) 433.00 (17.0) 2551.10

1985-90 1247.7 (13.3) 1552.23 (16.6) 9370.80

-------------------------------------------------------------
Note: Figures in brackets are percentage to total. All
~oards Commercial losses are worked out on the basis
of data obtained from Central Electricity Authority.
*Interest dues amounting to Rs.100 crores were waived
by the State Government.
tariff and financial structure may, therefore, substantially

improve the financial health of the two Boards under

consideration. There is, however, no doubt that other

inherent aspects 20 like low capacity utilisation, high

transmission and distribution losses, over-staffing etc.,

which according to various studies 21 constitute a large per

cent of the Board's losses, need to be examined.

Operating Ratios

The operating ratios of the Boards refer to the ratio of

operating expenses to revenue receipts. Operating expenditure

comprises revenue expenditure and depreciation. It is an

index of the cost revenue relationship . The operating ratios

for both Tamil Nadu and Uttar Pradesh were quite high and

TABLE 3.4
Operating Ratios
Year Tamil Nadu Uttar Pradesh All Boards
1971-72 83.4 81.0
1972-73 86.0 78.0
1973-74 94.0 93.0
1974-75 86.6 94.5 85.9
1975-76 79.4 85.2 81.5
1976-77 94.6 79.7 81.5
1977-78 90.2 98.5 82.6
1978-79 92.0 93.0 83.6
1979-80 91.3 98.7 87.0
1980-81 119.4 105.9 97.3
1981-82 138.2 107.2 98.1
1982-83 139.3 104.6 94.0
1983-84 137.4 100.1 94.7
1984-85 106.6 98.5 94.6
1985-86 118.4 102.4 98.6
-------------------------------------------------------------
Operating ratio = operating expenqiture/Revenue r~ceipts.
Operating expenditure comprises revenue expenditure and
depreciation.
-------------------------------------------------------------
20. A.K. Sah Managing Electricity Boards: Compulsions and
Complexities The Economic Times December 30, 1988.
21. National Council of Power Utili ties: "SEBs - Why are
they sick?" Economic Times April, 1987.
much above the All Boards operating ratios put together as

shown in Table 3.4.

Debt-Servicing Capacity of the State Electricity Boards

One of the factors which determines the financial

soundness of an undertaking is its debt-servicing capability.

Since the capital structure of State Electricity Boards

consists of a predominantly high component of loan (about 95%

at present) and only 5 per cent internal resources,. the

interest liability on them is very heavy. To illustrate the

point, revenue accounts of Uttar Pradesh State Electricity

Board, 1984-85 show that in that year, as much as 32 per cent

of the revenue receipts of the Board were required for

meeting its liability towards payment of interest alone on

Government loans; another 11 per cent were needed for bonds

redemption, loan and interest payments due to LIC, REC &

others. About 87 per cent of revenue receipts were required

for meeting the revenue expenditure comprising fuel, power

purchase, operations and maintenance expenditure,

establishment charges etc. After making a provision of 10.7

per cent towards depreciation the Board is left with only 2.3

per cent of revenue receipts against the loan and interest

liability of 43 per cent. This amply demonstrates the poor

debt-servicing capacity of the Board. Under the

circumstances, question of making a commercial profit hardly

arises-actually there is a loss of . about 40 per cent. The

Board is unable to meet its debt service liabilities even if

Rural Electrification subvention from State Government, which

are nearly 24 per cent of revenue receipts comprising of sale

11 2.
112
 of power and Misc. revenues, are included in the revenue.

The usual method for testing the debt-servicing capacity

of an undertaking is to assess the annual "Debt Service

Ratio" which is the ratio of the annual Gross surplus (or

profit)· and the interest and loan repayment liability of the

.• organisation during the year.

·
A debt service ratio of less

than one indicates that debt-service liabilities are not

fully covered by the operating surplus excluding subsidies.

This implies inability of the Boards to service their debts.

Table 3.5 gives the debt-service ratio for 1980-81 and 1984-

85 for the TNEB, the UPSEB and All the Boards. Ratios have

been worked out by taking gross operating surplus (i.e.

revenue receipts less operating expenditure excluding

depreciation and interest divided by interest and repayment

liabilities to the institutions and the State Governments.

This procedure is similar to the one followed by the PlannLng

Commission for the estimate of internal resources of the

State Electricity Boards for their plans.

TABLE 3.5

DEBT - SERVICE RATIOS

(Per Cent)
-------------------------------------------------------------
Year Tamil Nadu Uttar Pradesh All Boards
-------------------------------------------------------------
1980-81 0.36 0.10 0.42
1984-85 0.28 0.18 0.40
-------------------------------------------------------------
Data Source: Planning Commission
-------------------------------------------------------------
The deterioration in the Debt-Service Ratio of Tamil

Nadu Electricity Board is due to the change in the proportion

of borrowings between Government and non-Government agencies.

The interest on Government loans has been rising but the

borrowings from non-Government carry higher rate of interest.

Therefore, the burden of· servicing debt has become heavier in

recent years for three main reasons. These are:

( i) The absolute volume of debt has substantially

I increased due mainly to the higher tempo of the
capacity expansion and other development
programmes;

(ii) the rate of interest is much higher; and

(iii) the amortisation of the debt, i.e. the need to

repay principal of the non-Government loans on the
dates of maturity involved a heavier burden.

As against this, the internal resources (accumulation in the

Depreciation reserves, general and other reserves, Staff

Provident Fund etc.) have grown more slowly during the

period.

The accumulated arrears of interest at the end of the

year 1988-89 were to the tune of Rs.573.68 crores for Tamil

Nadu Electricity Board and Rs. 2607.21 crores for Uttar

.
Pradesh State Electricity Board. The U.P. State Government

has since waived off interest amounting to Rs. 1915.81 crore

on Government loans till 31.3.1988 in consideration of losses

on rural electrification.22

The capacity of the Board to repay fully the interest

charges depends upon several factors which constrain the

performance of the system. The electricity undertakings

operate under several compusions and complexities.

A study by the National Council of Power Utili ties on

"Financial viability of State Electricity Boards" has stated

-------------------------------------------------------------
22. First Report of the Ninth Finance Commission, July 1988.
that a debt-service ratio of 1.25 may be considered to be a
healthy one.23 This according to their calculation would allow

the Boards to earn a c·ommercial profit of 9 per cent of

revenue receipts (equivalent to about 3 per cent of capital

at charge) after meeting their commitments for depreciation

and interest payments. The study indicates that to achieve

this, it would be necessary for the Boards to restrict

revenue expenditure to about 60 per cent of revenue receipts

(as against the present level of about 90 per cent by Uttar

Pradesh State Electricity Board) mainly by increasing the

revenue receipts. This will become possible only by adopting

remunerative tariff structure and to a certain extent by

reducing the revenue expenditure by improving the efficiency

of operation viz. improvement in plant load factor of thermal

power stations, reduction in auxiliary consumption and of

transmission and distribution, curtailing staff and reduction

in establishment charges. etc.

Self-Financing Ratio

Internal resources, defined as 'retained revenue

surplus/deficit plus depreciation and miscellaneous capital

receipts minus repayment of loans', are relevant in

connection with financing the development programmes of the

Boards. During the Sixth plan 1980-85, the internal resources

(inclusive of subsidies) of all State Electricity Boards

Constituted about 4 per cent of the total capital

expenditure. Tamil Nadu Electricity Board's proportion of

23. NCPU, "Power Outlook-Financial viability of SEBs"

Economic Times 9/87.
self-financing in their total plan investment was 8. 3 per

cent while Uttar Pradesh Board made only negative

contribution of 0.8 per cent. Some other Board's contribution

during this period was as under:

Andhra Pradesh 45.3 per cent, Karnataka 4.7 per cent,

Kerala 36.2 per cent, Madhya Pradesh 11.1 per cent,
Maharashtra 25.3 per cent and Orissa 9.4 per cent.

Uttar Pradesh State Electricity Board's self-financing

was expected to be about 9.5 per cent in 1985-86 and 4.3 per

cent in 1986-87. On the other hand, Tamil Nadu Board was

expected to contribute 19.8 per cent in 1985-86 and 9.2 per

cent in 1986-87 internal resources as proportion of expected

capital expenditure.

What should be the proportion of self-financing in the

total investment is a moot question. In developed countries

it has varied from 20 to 50 per cent for electricity

undertakings. During the fifties it was 9. 5 per cent ·in

Austria, 19.1 per cent in France, 18.1 per cent in Ireland,

16.4 per cent in Spain, 42.3 per cent in Switzerland and 42.5

per cent in U.K. Much depends on how adequate the power

rates are to meet not only all operating, maintenance and

administrative expenses, taxes, interest and depreciation but

also to provide a surplus out of which loans can be repaid

and future expansion can be financed in particular. Due to

lesser generation/sale of energy and increase in expenditure,

the Boards have not been able to get the full benefit of the

efforts for additional resource mobilisation and thus

improving the self-financing ratio through greater

contribution of internal resources for their capital

expenditure. Interest charges which include a margin for

borrowing throw a heavy burden on the finances of the Board.

About 20 to 25 per cent'of the revenues from sale of energy

and other miscellaneous receipts of the Tamil Nadu

Electrfcity Board are absorbed by interest payments. Of this,

about 60 per cent go towards state loans alone.

Lack of generation of internal resources particularly in

terms of reserves and allocable surplus are also reported to

have arisen from lack of proper investments and insufficient

recovery of arrears. Hence greater dependence on State

governments for long term loans and working capital

requirements which, however, have been both inadequate and

irregular adding to the cash flow problems of the two Boards.

Operating Efficiency and Financial Performance

The performance of State Electricity Boards depends not

only upon the financial parameters discussed above but also

upon several technical parameters. Important among these are

as under:

i) Plant Load Factor/Capacity Utilisation;

ii) Fuel Consumption (Coal & Oil);

iii) Energy Consumption in generating auxiliaries;

iv) Losses in Transmission and Distribution systems;

v) Operation and Maintenance Expenditure; and

vi) Employment and Productivity of Labour.

A critical analysis of the role of these factors vis-a-

vis the performance of the State Electricity Boards is

undertaken to measure the impact made by these individually

and collectively, on the performance of the Boards.

1~7
Plant Load Factor:

Low plant load factor means low generation which results

in revenue loss. The Raj adhyaksha Cornrni ttee on Power had

assessed a plant load factor (PLF) of 58 per cent to reflect

good thermal performance. The plant load factor of the

thermal plants of the two Boards is given in table 3.6.

TABLE 3. 6

Plant Load Factor of Thermal Power Stations

(1980-81 to 1987-88)

(Percentage)

Tamil Nadu Uttar Pradesh All Boards

1980-81 34.5 36.5 43.0

1981-82 37.8 37.6 44.0
1982-83 44.0 39.6 47.1
1983-84 39.4 35.1 44.3
1984-85 49.0 31.6 45.0
1985-86 56.5 37.3 49.2
1986-87 64.7 40.8 49.8
1987-88 68.7 47.1 53.5

Plant load factor has consistently improved in Tamil

Nadu against the below average performance of thermal plants

in Uttar Pradesh compared to all boards. There is, therefore,

considerable scope for improvement in the level of generation

in Uttar Pradesh. Thermal power development in the seventies

and eighties mainly comprised of units of 200/210 MW and

100/110/120 MW. While units of 200/210 MW have now stablised

to give a high average PLF, the 110 MW units still suffer

from generic and specific defects. In Tamil Nadu while

Tuticorin power station achieved PLF of 77.3 per cent, Ennore

station did not go beyond 57.4 per cent in 1987-88.

Improvements in PLF would result in availability of

additional units due to which would accrue additional

revenue. To precisely analyse the impact of low PLF on

financial performance, revenue loss due to low plant load

factor can be determined.

To illustrate, in Uttar Pradesh electricity generation

by thermal stations in 1986-87 was 9516 MU with plant load

factor of 40.8 per cent. One per cent improvement in PLF will

result in 233.24 million extra units. Even if auxiliary

consumption of 10 per cent and transmission and distribution

losses of 2 0 per cent are deducted, with one per cent

improvement in PLF 163.26 million net additional units will

become available which will earn Rs .13. 6 crores at the

average realisation rate of 83.19 paise per unit in 1986-87.

Fuel Consumption (Coal and Oil):

Unit fuel consumption of thermal power stations in Tamil

Nadu is given in table 5.16. In 1987-88 coal consumption per

kWh was 0.6876 kg and oil consumption 10.43 ml. On the

contrary in Uttar Pradesh coal and fuel oil consumption was

0. 81 kg and 13. 82 ml per kWh. Coal and Oil consumption in

thermal power plants both in Tamil Nadu and Uttar Pradesh is

rather high compared to the average norm of 0.65 kg coal and

10 ml oil per kWh. The higher consumption of coal is mainly

due to the coal supplied being of much inferior quality. Fuel

oil consumption is also high on account of the bad quality of

coal. The higher consumption particularly occurs during the

rainy season when the moisture content of coal is high and

often it is muddy and mixed with clay. Comparatively higher

consumption is also due to frequent start-ups of units

because of unduly high occurences of forced outages. Central

Electricity Authority has stated that there is scope to

reduce the fuel consump~ion to the level of 0.65 kg/kWh of

average quality of coal for thermal stations and 10 ml fuel

oil/kWh which can be reasonably achieved without incurring

any extra cost for the steps to be taken. This would result

in substantial savings in revenue expenditure and also

favourably affect the marginal energy cost.

Auxiliary Consumption

Auxiliary consumption refers to the power consumed by

various station auxiliaries which are supplied power from the

station itself. Auxiliayv pe:>wer consumption in the thermal

and hydro stations of Tamil Nadu and Uttar Pradesh is given

in tables 5. 13 and 6. 11 in subsequent chapters. Central

Electricity Authority has recommended a norm of 10 per cent

auxiliary consumption in thermal plants. Auxili~ry

consumption in thermal stations was more than 10 per cent in

both the states till the end of Sixth Plan. The higher

auxiliary consumption is mainly in the coal and ash handling

plants and milling system due to the problems of sub-standard

coal supplies. The coal handling plants have to work almost

for three shifts although these are generally planned for two

shift operation. Higher auxiliary consumption is also

reflected by its low plant load factor. However, the

reduction of auxiliary consumption from its level at the

commencement of Seventh Plan to less than 10 per cent in

Tamil Nadu has resulted in availability of additional units

which in turn would have earned an additional revenue. To

 illustrate, revenue gain/loss due to variations in the levels

of auxiliary consumption in thermal units of the two boards

in 1986-87 was as under:.

(MU)

Tamil Nadu Uttar Pradesh

Units generated by thermal stns. 6113 9516.4

Auxiliary consumption in 1986-87 569(9.3%) 1084.0(11.39)
Auxiliary consumption as per norm 611.3(10%) 951.64
Units gained/lost by lower 42.3 (132.36)
auxiliary consumption
T&D losses at the. 7.614 23.82
rate of 18 per cent
Net Units gained/lost 34.67 (108.54)
Net revenue gain/loss Rs.2.68 (Rs.9.029
as per average realisation crores crores)
rate/kWh in 1986-87 (@77.17/kWh) (@83.19/kWh)

The performance of the boards is thus affected by

improvements/deteriorations in the auxiliary consumption

levels.

Losses in Transmission and Distribution Systems:

The actual transmission and distribution losses have

been around 19 per cent in Tamil Nadu and have ranged from 16

to 28 per cent in Uttar Pradesh during the last about 15

years against an international standard of 10 per cent and a

I'
recommended norm of 15 per cent by Central Electricity

Authority. Transmission and distribution losses as per

centage of supply at busbar in some leading developed

countries are given below:

Country T&D Loss
(Percent)
J,
.J '• I
j /
USA 7.8
USSR 7.5
Japan 7.8
w. Germany 5.9
U.K. 8.1
France 7.1
Italy 8.5

I
Ic ~'

121
Losses in some important electric utilities· in India like

Maharashtra, Tamil Nadu, Gujarat & Uttar Pradesh producing

more than 8000 MU and having large transmission and

distribution networks varied from 14.46 per cent in

Maharashtra to 24.33 per cent in Gujarat in 1986-87. Several

factors play the role in determining these losses. These are

(i) the quantum of extra high and high voltage sales compared

to low ·and medium voltage sales of electricity; ( ii) the

length of lower voltage transmission and.distribution lines;

(iii) the efficiency of the me~ering system; and (iv) the

extent of pilferage of electricity. The line losses are

generally proportional to the length of L. T. lines and the

number of agricultural consumers (private tubewells and pump

sets). Intensity of the load, type of load, voltage and mode

of distribution are important considerations in judging the

reasonableness of line losses. An increased emphasis on rural

electrification inevitably means more line losses because

line losses increase progressively with lower voltage

transmission.

TABLE 3. 7

Transmission and Distribution Losses

as percentage of availability of power.
-------------------------------------------------------------
Tamil Nadu Uttar Pradesh All Boards
-------------------------------------------------------------
1980-81 18.89 15.8 18.57
1981-82 18.65 18.9 18.93
1982-83 18.81 18.8 19.50
1983-84 18.75 18.2 19.22
1984-85 18.36 20.8 19.79
1985-86 18.70 20.6 20.11
1986-87 18.65 20.8 20.02
1987-88 18.69 26.8
1988-89 26.5
-------------------------------------------------------------

1,.,'

1'2"2
 In the case of Uttar Pradesh, the increases in

transmission and distribution losses during the last five

years are steep, with spurts exceeding 2 per cent in a year.

If the transmission and distribution losses were

contained to 15 per cent, the additional revenue in 1986-87

of the order of Rs.40.65 crores in the case of Tamil Nadu and

Rs. 83.19 crores in the case of U.P. would have been

generated. The financial performance of the boards is

affected in a big way by the transmission and distribution

losses.

To illustrate
(MU)

Revenue Loss due to Higher Tamil Uttar

T&D Losses Nadu Pradesh
(1986-87)
Total units sold 11740 13655
Actual T&D Loss (%) 18.65 20.8
Actual Availability 81.35 79.2
Desirable Availability (%) 85.00 85.0
(at 15% losses)
Units gained on 85% 11740x85 13655x85
availability - 11740 -13655
81.35 79.2

= 526.742 = 999.987

526.747x77.17 999.987x83.19
Revenue loss = ------------- = -------------
(Rs. crores) lOOxlO lOOxlO
40.65 = 83.19

The main reasons for the high transmission and

distribution losses have been identified by the Central

Electricity Authority as long sub-transmission and

distribution lines in many areas of Uttar Pradesh and Tamil

Nadu, low power factor loads/comprising irrigation tubewell

motors, multiplicity of stages of transformation, inadequate

n-:
123
distribution system in some urban areas, lack of proper
administrative measures to prevent theft of electricity
especially in the industrial sector and improper load

management. In Uttar Pradesh, during the last five years

transmission and distribution losses have rather increased.

The Board has attributed this increase to ( i) the grossly

inadequate funds made available to the Board for

'Distribution and System Improvement Works' on the one hand

and (ii) the emphasis placed by the State Government on the

accelerated pace of rural electrification and tubewell

energisation on the other. This would imply change in the

investment pattern on transmission and distribution sector.

Rajadhyaksha Committee had recommended that the investments

on generation should be matched by an equal investment on

Transmission and distribution. In actual practice the

investments in transmission and distribution in Uttar Pradesh

are only a little over 1/3rd of the total investments.

Operation and Maintenance Expenditure

Operation and maintenance expenditure is an item of

revenue nature and comprises O&M stores, spares and services.

The provisions made on the O&M side determine the reliability

of the system. The expenditure being incurred on O&M by the

two boards is considered rather inadequate by the Central

Electricity Authority.The optimum levels of Operations and

Maintenance expenditure depends upon the targetted levels of

planned maintenance and forced outage rates which in turn

depend upon the existing working conditions of thermal plants

with particular reference to the quality of coal being used.

 TABLE 3.8

Operations & Maintenance Expenditure

Per Unit of net energy generation

(P/kWh)

Tamil Uttar All Boards

Nadu Pradesh

1980-81
----------
3.1
-------
4.5
-----------
3.6

1981-82 5.3 3.7 4.1

1982-83 6.0 4.3 4.4

1983-84 7.0 5.1 4.8

1984-85 5.3 5.4 5.1

It is, however, difficult to precisely, determine the impact

of O&M expenditure on the financial performance as higher

levels of O&M expenditure may rather improve productivity and

result in better physical and financial performance.

Establishment Costs

There were 8.6 and 9.5 employees per million units sold

in 1985-86 in Tamil Nadu and Uttar Pradesh respectively

against the national average of 7. 3 employees. The details

about various states are: Gujarat 4. 3, Andhra Pradesh 5. 4,

Maharashtra 4.6, Kerala 5.6, Punjab 6.7 and Karnataka 7.1. It

has been estimated that the average employment in some of the

better managed Boards is 5. 5 employees per million units

sold. Central Electricity Authority has estimated that the

extent of over-staffing in the power industry is in the

neighbourhood of 30 per cent as compared to normative

standards. Over-staffing in both the states is particularly

in the area of thermal generation and distribution. A large

surplus staff is in the category of unskilled and semi-

skilled personnel. It is estimated that in India for the year

1985-86 that reduction· of the establishment to the levels of

the more efficient Boards can result in a net saving of Rs.

340 crores per year .. If Tamil Nadu and Uttar Pradesh Boards

review their manning levels to reduce their establish- ment

to an average of 5.5 employees/MU the possible reduction in

revenue expenditure would be as under -

1985-86
Tamil Nadu U.P. All Boards

Total Number of 90,320

----------
1,12,927 8,26,600
----------
employees
Total No. of Units 10,502 11,887 1,13,016
Units sold. (MU)
Numberof employees/MU 8.6 9.5 7.3
Desirable No. of 5.5 5.5 5.5
employees
Overstaffing 3.1 4.0 1.8
per MU
Establishment 16 17.4 12.2
cost(Paise/kWh)
Expenditure due 10502x16x3.1 11887x17.4x4 113016x12.2x1.8
to over-staffing ------------ ------------ ----------------
(Rs. crores) 8.6 9.5 7.3

= 60.7 = 87.09 = 339.14

The above analysis clearly shows that the performance of

the two boards in terms of physical factors was less than

satisfactory and that if the desirable levels in productivity

of power plants through improvements in plant load factors,

reductions in auxiliary consumption and optimum levels of

operations and maintenance expenditure are achieved along

with the reductions in transmission and distribution levels,

revenue receipts will substantially increase through sale of

additional units so generated. Similarly normative levels in

employment and fuel consumption would decrease the revenue

expenditure thus improving the physical and financial

performance of the two Boards. Besides the factors stated

above, several other factors such as the capacity generation

mix, location of generation capacities with reference to

certa'in inputs like coal as is the case in Tamil Nadu,

terrain of operations, demand/sales pattern, socio-economic

conditions etc. also affect the relative performance of the

Boards. This diversity in the conditions of their operations

causes some inescapable differences in their performance

levels.

II
Pricing Policy of the State Electricity Boards

Tariff making is of vital importance not only to the

electric supply undertaking, but to the state as a whole. The

revenue derived from tariffs is the mainspring of the healthy

growth of the undertaking. At the same time a rational

formulation and proper administration of an adequate but

realistic tariff schedule is necessary to safeguard the

interests of the public and to stimulate heal thy economic

development of the state.

As stated earlier the position of the State Electricity

Boards in India is unique. While a Board has the social

responsibilities of a public utility to serve all who apply

for service, it is also to be governed by the economic

compulsions of a commercial enterprise. Although enjoying

monopoly position in its operations, the dual role thus

thrown upon the State Electricity Board often makes its task
unenviable.
 In this section, it is proposed to examine the tariff

structure of the Tamil Nadu and Uttar Pradesh State

Electricity Boards as 'they have evolved over time. In order

to bring out the rationality behind the present pricing

policy as reflected in the tariff structure, the average

revenue per unit of energy supplied to each consumer class

has been computed and compared to the cost of supplying

power. This will help to bring out the extent to which energy

sale to each consumer class involves profit earning or

subsidisation.

The State Electricity Boards have regarded electricity

pricing as a simple matter of accounting whereby price

adjustments are made in keeping with changes in accounting

cost. Most of the State Electricity Boards follow the average

cost based pricing principle. The actual tariff is worked out

by the application of certain rules of the thumb keeping an

eye on the average cost of supply. Being monopolies as well

as public utilities, the boards give due recognition and

weight to the principles of (a) what the traffic can bear and

(b) cross subsidisation. Under section 78-A of Electricity

(Supply) Act, 1948, the boards in the discharge of their

functions, are to be guided by such directions on questions

of policy as may be given to them by the state government. As

a result, the state objectives of rapid industrialisation,

dispersal of industrial units, development of small scale

industries, expansion of irrigation facilities for stepping

up agricultural production, meeting of urban and household

demand etc. have generally gained precedence in the past over

rigid economic/principles of pricing policy. The Boards were

expected to fix rates at levels which would not impede

economic growth in industrial and agricultural sectors and

shall also meet other socio-economic objectives pursued by

the State.

The consumers of electricity are grouped into various

categories on the basis of the purpose of use or the nature

of demand. These categories have been changed from time to

time keeping in view the load characteristics purpose of

energy use etc. The major categories in Tamil Nadu and Uttar

Pradesh are: ( i) Domestic ( ii) Commercial, (iii) Industrial

(iv) Public lighting (v) Agricultural (vi) Public Water Works

(vii)Traction and Railways (viii) Bulk Supply to Distributing

Licencees and (ix) Miscellaneous supply to mixed loads.

The fixation of tariff rates for different classes of

consumers is not a mere arithmatical exercise of arrivi~g at

the overall cost per unit of power and fixing the rates for

each class at a stage higher than the overall cost to the

Board. The cost of supplying power depends upon several

factors. These include (i) quantity of energy supplied (ii)

maximum demand (iii) load factor (iv) diversity factor (v)

location (vi) time of load incidence (vii) sea~onal

variations of load and (viii) power factor. 24

The cost of supply increases with increase in the

geographical distance of the consumer from the power

generating plant due to increase in transmission and

-------------------------------------------------------------
24. United Nations, Electricity Costs and Tariffs: A General
Study (U.N) New York 1972 p.20.
distribution costs. The Boards are permitted under section

46 and 49(3) of the Electricity (Supply) Act, 1948 to fix the

grid tariff which may ·differ for different areas. Generally,

however, in actual tariff formulation these differences are

ignored as it is an accepted norm that everybody in a region

has a right to get supply at the same price if the nature of

the load is the same. In the past, both Tamil Nadu and Uttar

Pradesh had different tariff schedules for different areas

keeping in view the inter-regional and inter-industrial

variations. For example in sixties Uttar Pradesh had separate

rate schedules for Ganga - Sarda grid, Rihand grid, Matatila

grid etc. With the development of a well-knit power grid

having a network of transmission and distribution lines,

covering the entire state, a uniform tariff structure has

come into existence both in Tamil Nadu as well as in Uttar

Pradesh doing away with the geographical variations.

Both in Tamil Nadu and Uttar Pradesh, price charged from

high capacity demanding consumers is normally based on two

part tariff. One part called 'Demand Charges', is related to

the maximum demand or connected load of the consumer and the

other is related to ~he amount of energy consumed on the kilo

watt hour (unit) basis. From the other categories of

consumers, the price is charged on the basis of per unit of

energy consumed only. Another component of price charged is

the Electricity duty imposed by the · State Government. The

detailed tariff structures and changes over time have been

given in the Appendix III-for Tamil Nadu and III-for Uttar

Pradesh.

13.?0
 Different consumer classes are supplied power at
different voltage levels. To examine the relationship between

the average cost of supply and the average price charged from

each consumer class, average cost of supplying power at

different voltages and the average revenue per unit sold to

I
various consumer categories have been estimated for the

period 1980-81 to 1985-86. In Tables 3. 9 and 3.11 are

presented average revenue per unit electricity sold to each

consumer class in Tamil Nadu and Uttar Pradesh respectively.

In Tables 3.10 and 3.12 the cost of supplying power at

various voltage levels is given for Tamil Nadu and Uttar

Pradesh respectively. The actual calculations have been given

in the ·Appendices III.S and III.6.

It may be noted that the cost of supply increases with

the decrease in the voltage of supply as there is an increase

in transmission and distribution costs as well as operation

and maintenance costs. The cost also increases due to an

increase in transmission and distribution losses. Tables 3.10

and 3.12 show that the average cost of supply at various

voltages has increased in Tamil Nadu and Uttar Pradesh over

time. Given a generation and distribution system, the cost of

supply increases with the increase in factor as well as other

intermediate input costs. Although both systems are

predominantly thermal systems, average cost of supply is

still affected by the levels of hydro generation in different

years. Another reason for increasing cost of supply is that

the share of thermal power in the total capacity/generation

which is much costlier to hydro power has been increasing

1 rl 11
 TABLE: 3.9

TNEB: CONSUMER Category-wise Average Revenue Per Unit

(Paise/kWh)

Sl. Category of 1 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

No. Supply I

1. Domestic 46.00 46.00 46.05 54.98 56.02 52.71 S7·9o

2. Conrnercial 60.00 60.00 64.95- 76.08 85.32 94.74 q 4. 94
3. Public Lighting 40.00 40.00 40.87 39.22 40.13 40.11 51·30
4. Agriculture 16.34 15.12 14.25 14.25 12.24 11.20 il·bO
5. Public \later 35.00 35.00 37.53 40.19 45.09 44.71 44· so
Works
6. Industries 29.73 30.06 43.42 53.79 62.10 73.19

i) L.T. 36.50 36.50 48.25 60.37 69.37 79.14

i i) H. T. 31.50 28.89 42.59 51.98 60.32 72.07 7'1·4 0

7. Railway Traction 32.32 26.88 46.95 60.78 77.63 84.19

8. Bulk Supply 29.40 26.06 36.56 50.40 47.28 56.47 73 ·8o
9. Miscellaneous 21.00 22.09 33.39 39.36 41.98 39.30
10. Total 30.71 30.65 38.15 45.52 51.26 54.48 S"/·lD
------------------------------------------------------------------------------------ - - ----- -.

TABLE: 3.10

TNEB: Cost of Eroergy at Various Vo ltagesenue Per Unit

(Paise per unit)

Sl. Supply-end 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

No.

1. At Bus bar 23.03 27.85 36.36 42.64 35.54 41.20 42.88

2. At EHT-end 26.31 31.65 41.11 48.31 40.76 47.18 51.13
(220 ,110 & 66KV)
3. At H. T. -end 30.43 36.02 46.53 54.52 46.34 53.86 63.42
(22 & 11 KV)
4. L. T. end 59.23 67.40 79.74 92.59 84.30 97.25 85.59
5. Average Cost of
total Generat- 43.82 50.39 63.68 73.12 64.24 76.42 76.78
ion & Supply
------------------------------ ----------------------------------------------------- -----------

1.3 t

132
 TABLE: 3.11

TNEB: CONSUMER Category-wise Average Revenue Per Unit

(Paise per kWh)

Sl. Category of 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

No. Supply
--------------------------------------------------------------------------------- ----------.---

1. Domestic 54.16 54.43 55.67 59.83 54.33 51.80 55.02

2. COf111lerc i a1 68.80 79.23 61.79 71.32 76.90 73.27 76.12
3. 50.85c Lighting 50.85 64.44 68.78 73.52 62.75 58.75 92.30
4. Agriculture 18.22 21.36 22.29 20.33 27.82 28.04 27.27
5. Public Water 46.60 49.86 69.82 72.10 79.31 74.13 94.20
Works
6. Industries 43.00 348.75 56.46 65.12 69.97 70.60 95.00
7. Railway Traction 37.93 46.84 55.49 65.26 70.51 70.32 100.07
8. Bulk Supply@ 21.40 22.38 25.00 40.40 42.74 58.34 56.28
9. Miscellaneous** 20.00 24.51 16.25 24.89 26.15 25.23 23.64
10. Total Supply 34.52 39.85 44.06 51.25 53.42 54.04 63.12
-------------------------------------------------------------------------------------- ---------
@Bulk supply includes supply to Extra-State consumers
**Miscellaneous includes supply to 1i censees

TABLE: 3.12

UPSEB: Average Cost of Energy at Various Voltages

(Pai se/kl-lh)

51. Supply end 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87
No.

1. At Busbar* 28.62 32.90 35.80 40.97 36.17 46.20 46.28

2. EHT end 38.41 34.39 43.87 50.73 42.57 55.81 55.90
3. HT end 43.40 45.20 50.70 57.31 55.96 60.54 64.60
4. LT end 62.87 74.00 75.92 83.03 91.60 93.42 96.74
5. Average Cost of 56.33 64.37 67.11 74.39 79.12 81.81 85.38
total Generation
and supply

*Inc 1udes average cost of generation and purchase.

---------------------------------------------------------------- ------------------ ~-- - ---- --.--
~

1 ~.
' .: :
133
 TABLE 3. 13

TNEB: Consumer Category-Wise Average

Comparison Cost of Average Revenue and
(Paise/kWh)
--------------------------------------------------------------------------------------------- -.- --.
Sl. Category of 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87
No. Supply
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . - - "P

1. Domestic
Average Revenue 46.00 46.00 46.05 54.98 56.02 52.71 57.90
Average Cost 59.23 67.40 79.74 92.59 84.30 97.25 85.59
Surplus/Loss -13.23 -21.40 -33.69 -37.61 -28.28 -44.54 -27.69
2. Commercial
Average Revenue 60.00 60.00 64.95 76.08 85.32 94.74 94.94
Average Cost 43.82 50.39 63.68 73.12 64.24 76.42 76.78
Surplus/Loss 16.18 9.61 1.27 2.96 21.08 18.32 17.86
3. Public Lighting
Average Revenue 40.00 40.00 40.87 39.22 40.13 40.11 51.3
Average Cost 59.23 67.40 79.74 92.59 84.30 97.25 85.59
Surplus/Loss -19.23 -27.4 -38.87 -53.37 -44.17 -57.14 -34.29
4. Public Water Works
Average Revenue 35.00 35.00 37.53 40.19 45.09 44.71 44.8
Average Cost 59.23 67.40 79.74 92.59 84.30 97.25 85.59
Surplus/Loss -24.23 -32.40 -42.21 -52.40 -39.21 -52.54 -40.79
5. LT Industries
Average Revenue 36.50 36.50 48.25 60.37 69.37 79.14
Average Cost 59.23 67.40 79.74 92.59 84.30 97.25 85.59
Surplus/Loss -22.73 -30.90 -31.49 -32.22 -14.93 -18.11
6. HT Industries
Average Revenue 31.50 28.89 42.59 51.98 60.32 72.07 79=4
Average Cost 30.43 36.02 46.53 54.52 46.34 53.86 63.42
Surplus/Loss 1.07 - 7.13 - 3.94 - 2.54 13.98 18.21 15.98
7. Agriculture
Average Revenue 16.34 15.12 14.25 14.25 12.24 11.20 11.60
Average Cost 59.23 67.40 79.74 92.59 84.30 97.25 85.59
Surplus/Loss -42.89 -52.28 -65.49 -78.34 -72.06 -86.05 -73.99
8. Railway Traction
Average Revenue 32.32 26.88 46.95 60.78 77.63 84.19
Average Cost 30.43 36.02 46.53 54.52 46.34 53.86 63.42
Surplus/Loss 1.89 - 9.14 0.42 6.26 31.21 30.33
9. Bulk ~
Average Revenue 29.40 26.06 36.56 50.40 47.28 56.47 73.8
Average Cost 26.31 31.65 41.11 48.31 40.76 47.18 51.13
Surplus/Loss 3.09 - 5.59 - 4.55 2.09 6.52 9.29 22.67
10. Total
Average Revenue 30.71 30.65 38.15 45.52 51.26 54.48 59.20
Average Cost 43.82 50.39 63.68 73.12 64.24 76.42 76.78
Surplus/Loss -13.11 -19.74 -25.53 -27.60 -12.98 -21.94 -17.58
------------------------------------------ ---------------------------------------- -- - ----------

134
 TABLE 3.14

UPSEB:Consumer Category-Wise Comparison of

Average Revenue and Average Cost

(Paise/kWh)
-------------------------------------------------------------------------------------------- - -- - -
Sl. Category of 1980-81 1981-82 1982-83 19R3-84 1984-85 1985-86 1986-87
No. Supply
-------------------------------------------------------------------------------------------- -----
1. Domestic
Average Revenue 54.16 54.43 55.67 59.83 54.33 51.80 55.20
Average Cost(LT) 62.87 74.00 75.92 83.03 91.60 93.42 96.74
Surplus/Loss - 8.71 -19.57 -20.25 -23.20 -37.27 -41.62 -41.54
2. Coomercial
Average Revenue 68.80 79.23 61.79 71.32 76.90 73.27 76.12
Average Cost(Total)56.33 64.37 67.11 74.39 79.12 81.81 85.38
Surplus/Loss 12.47 14.86 -5.32 -3.07 -2.22 -8.54 -9.26
3. Public Lighting
Average Revenue 50.85 64.44 68.78 73.52 62.75 58.75 92.30
Average Cost (LT) 62.87 74.00 75.92 83.02 91.60 93.42 96.74
Surplus/Loss -12.02 - 9.56 - 7.14 - 9.50 -28.85 34.67 -4.44
4. Agriculture
Average Revenue 18.22 21.36 22.29 20.33 27.82 28.04 27.27
Average Cost(LT) 62.87 74.00 75.92 83.02 91.60 93.42 96.74
Surplus/Loss -444.65 -52.64 -53.63 -62.70 -63.78 -65.38 -69.47
5. Public Water Works
Average Revenue 46.60 49.86 69.82 72.10 79.31 74.13 94.20
Average Cost(Total)56.33 64.33 67.11 74.39 79.12 81.81 85.38
Surplus/Loss - 9.73 -14.47 - 2. 71 - 2.29 0.19 -7.68 8.82
6 Industrial
Average Revenue 43.00 48.75 56.46 65.12 69.97 70.60 95.00
Average Cost(ToTal)56.33 64.33 67.11 74.39 79.12 81.81 85.38
Surplus/Loss -13.33 -15.58 -10.65 - 9.27 - 9.15 -11.21 9.62
7. Rai lwa:( Traction
Average Revenue 37.93 46.84 55.49 65.26 70.51 70.32 100.70
Average Cost (HT) 43.40 45.20 50.70 57.31 55.96 60.54 64.60
Surplus/Loss -5.47 - 1. 64 4.79 7.95 14.55 9. 78 36.10
8. Bulk ~
Average Revenue 21.40 22.38 25.00 40.40 42.74 58.34. 56.28
Average Cost (EHT) 38.41 34.39 43.87 50.73 42.57 55.81 55.90
Surplus/Loss -17.01 -12.01 -18.87 -10.33 0.17 2.53 0.38
9. Total ~
Average Revenue 34.52 39865 44.06 51.25 53.42 54.04 63.12
Average Cost 56.33 64.37 67.11 74.39 79.12 81.81 85.38
Surplus/Loss -21.81 -24.51 -23.05 -23.14 -25.70 -27.77 -22.26
------------------------------------------------------------------------------------- --- -- - -- -
over time in Tamil Nadu as well as Uttar Pradesh systems. The

cost of supply may decline if there are economies of large

scale over time, but such a trend is not visible in the case

of Tamil Nadu and Uttar Pradesh.

-The two Boards have revised their tariff from time to

time generally to balance the aggregate revenue and

expenditure without much emphasis on actual cost and

operating structure. The effective tariff rates, on the

overall, however, have remained well below the average cost

of supply and in the absence of timely revision of tariff

rates the gap between the average cost of supply and average

realisation per unit of energy has been progressively

widen1ng, as will be seen from the figures for the two Boards

given below:-

Average Cost of Generation & Supply

Less Average Realisation from Consumers*
-------------------------------------------------------------
.
1985 1986
1980 1981 1982 1983 1984
-81 -82 -83 -84 -85 -86 -87

Tamil Nadu 13.11 19.74 25.53 27.6 12.98 21.94 17. !)-'2..
Uttar Pradesh 21.81 24.51 23.05 23.14 25.7 27.77 22.26

It may, therefore, be inferred without any ambiguity

that the two Boards are suffering losses due to

unremunerative tariff structure.

Now it is proposed to discuss the tariff rates which are

on the monthly basis and average revenue in relation to the

cost of supply to the each consumer category.

Domestic Supply

Tamil Nadu

In Tamil Nadu, this category covers the largest number

of consumers. Their number was 32 lakhs out of the grand

total of 58 lakhs as on 31.3.85. The character of supply to

the domestic consumers is 50 cycles, single phase 230 volts

or 3 phase 400 volts. The present schedule is applicable to

(a) exclusi~ely domestic loads of lights and fans including

'
power loads; (b) handlooms in residences of handloom weavers;

and (c) cottage industries having connected load not

exceeding 5 HP. Consumption of electricity for lights adds to

the peak load during 0500 to 0600 hours and 1800 to 2200

hours. For supplies to small consumers, distribution and

customer costs per kWh run high. A minimum charge, therefore,

is levied to cover a part of the cost of the service drop,

meter reading and billing.

Before 1.5.1979, two tariff schedules existE:!d. One

tariff schedule applied to lights and fans including radios.

There was no fixed- charge. The energy consumption was divided

into three slabs and the price varied with the slab of

consumption. The three slabs were: first 50 units, next 50

units and all excess. This block-rating for domestic

consumption was highly regressive since the low income

household consuming about 50 units per month paid 30 per cent

more per unit than the higher income household consuming,

say, 100 units. Thereafter, a flat rate of 35 paise per unit

was levied as declining block tariff could not be justified

also due to the widening gap between demand and supply for

all consumption. To this was added central excise duty of 3

paise per unit on 1.3.1978. Meter rent of Rs.2 for single

1~7
phase and Rs.5 for poly-phase was in addition to the energy

charge. Second tariff schedule was called 'domestic bulk

supply' rate. This was· meant for households having connected

and utilized load of the electrical equipment like

refrigerators, cookers etc. of not less than 1000 watts. This

separate tariff was considered purposive as it was felt that

such equipment promoted diversity in load and hence lowered

total cost. The rate schedule had fixed charge on slab basis

and the energy charge on flat rate. This tariff was all the

more regressive as consumers enjoying this tariff paid much

less per unit compared to the consumers in the other

category. This separate tariff was abolished and merged into

domestic purposes tariff at the time of general tariff

revision in 1979. In 1981, Central excise and meter rent were

merged in the energy charge to bring the consolidated rate to

a flat 45 paise per unit. Thus rates prevailing for these

consumers in 19 81 had not been increased for more than ten

years and were among the lowest in India. In 1983, the rate

was increased to 55 paise per unit which has not been changed

since then. Huts 2 5 in village Panchayats paid only a lumpsum

of Rs. 2.50 per month per lamp of 40 watts since 1979. The

supply to huts is made free of charge since 1.6.1985.

The comparison of average revenue with the cost of low

tension supply (Tables 3.9 and 3.10) shows that in all the

six years, the domestic consumers were being subsidized.

During these years, there was no State electricity duty. The

25.Living place not exceeding 200 sq.ft. area with mud walls
and thatched roofs.
consumers were, however, paying Central excise duty at the

rate of 3 paise per unit. Even if that is added to the

realization per unit, average revenue was still lower than

the cost of supply. The minimum charges, the consumers were

supposed to pay, were essentially the consumer service

charges. In Tamil Nadu, 75 per cent of domestic consumers

spend below 3 per cent of their income on electricity

consumption. About 10 per cent of the consumers have power

bills between 3 to 4 per cent of their income. The flat rate

for domestic consumption cannot thus be justified. The

consumers having higher levels of consumption due to an

extensive use of air-conditioners, refrigerators and several

other electrical household appliances are receiving greater

subsidy. Such consumers need to be charged through inverted

block tariffs whereby the larger the quantum of power used,

the higher would be the rate so that overall, the Board is

able to realise surplus above the cost of supplying power.

Uttar Pradesh:

In Uttar Pradesh all the consumers including shops,

restaurants and such other commercial establishments in a

town having population less than one lakh and having loads

below 2 kW were included until February, 1986 in a category

of 'Domestic light, fan and power consumers. ' All the

consumers in this category were required to take a separate

connection under another category of 'small power for running

appliances' where individual capacity of the motor exceeded 2

kw/3 BHP. Therefore, several residential houses had two

separate connections resulting in billing complications and

higher costs in respect of metering. In February, 1986 a

regrouping of consumer categories was done so that all

consumption of domestic nature irrespective of the load was

covered under 'Domestic Light, Fan & Power Consumers's and

all commercial estabalishments were covered under Non-

Domestic Category independent of the level of load. Total

number of consumers in this category during 1986-87 were 20.6

lakh out of a total of 29.3 lakh served by the Uttar Pradesh

Board. Since the adoption of a uniform tariff structure for

the whole state, electricity tariffs have been revised

several times between the year 1974 and 1982.

Before February 1986 a flat rate of 55 paise per unit

was charged from consumers in this category. Since then the

rates have been revised and an inverted block tariff has been

introduced. The energy consumption is divided into three

slabs and the rate increases with the higher consumption

slab. The three slabs are: First 30 units per month, next 70

units per month arid remaining units in the month. A net rate

of 60, 72 and 92 paise per unit for each slab consumption is

charged. The domestic supply includes a large number of

consumers in both urban and rural areas. A study of 25

districts of U.P. has indicated that about 51 per cent

consumers consume less than 30 units per month and they

consumed only about 13 per cent of total energy consumed by

this class of consumers. Against this, about 15 per cent

consumers used above 60 per cent energy and their consumption

was more than 100 units per month. Therefore, an inverted

block tariff rate structure was a step in the right direction

so that on average realization rate is higher than the rate

paid by the bulk consumers in this category. Domestic supply

in Uttar Pradesh also covers a large number of consumers of

very low economic group, under 'Jana ta Service Scheme

Connection'. Before February 1986, the consumers were charged

'

a flat rate of Rs.S.OO, Rs.10.00 and Rs.12.50 per month for

one light point, two light points and three light points

respectively. These were revised to Rs. 7. 50 per ~onth for

single point and Rs. 10. 00 per month for 2 or three light

points.

Demand of this category of consumers comes up mostly

during peak hours. The cost, therefore, is higher because of

increased system losses and higher cost of energy. The

comparison of average revenue from the domestic category of

consumers with the average cost of low tension supply in the

State (Tables 3.11 and 3.12) shows that the domestic

consumers were being consistently subsidised in Uttar

Pradesh. The present revised rate still falls below the

average cost of supply.

Agricultural Supply

Tamil Nadu

Total number of consumers in this category that also

includes cottage industries are over 10 lakhs at present who

account for a little over 30 per cent of the total power

consumption in the state. Agricultural services alone consume

about 26 per cent of total supply in the State. As early as

1931, the rate charged per unit for agricultural services was

7.5 paise which was reduced to 6 paise in 1937 and 5.4 paise
in 1945. This rate continued upto 1959 when it was increased

to 7 paise per unit. In 1964, the rate was 8.25 paise which

was marginally increased to 9 paise in 1970. State

electricity duty levied on 1.7.1962 was charged at the rate

of 10·per cent from agricultural consumers upto 1965 when it

was increased to 20 per cent. No duty was charged when the

rate per unit was increased to 12 paise per unit for first

100 un1ts and excess units at the rate of 11 paise per·unit.

In 1974, this declining block tariff was abolished and the

flat rate for entire consumption was 12 paise. The rate was

further increased to 16 paise per kWh in 1976. Until June

1977, an annual minimum amount based on connected load was

charged. This was replaced by a fixed monthly charge of Rs.

1.25 per HP subject to a maximum of Rs.S.OO for the

agriculturists having not less than 3 HP per service & small

cottage industries not exceeding 5 HP. In 1977, a new concept

of small farmers was introduced. Small farmers whose total

holding did not exceed 2.5 acres of wet land or 5 acres of

dry land were given a concession of 2 paise per unit. Meter

rent for poly-phase meters in agricultural services was also

reduced to Rs.2.00 per month. In 1984, the State Government

announced zero charge for small farmers whose family was

solely dependent on the income derived from his agricultural

holdings. All other farmers are being charged only fixed

lumpsum of Rs. 75 per HP of the contracted load per annum.

Cottage industries are charged since 1981 at the rate of 15

paise per unit. At these rates, Agricultural consumers are

also permitted in addition lighting upto 50 watts per 1000

watts of motive power connected upto a maximum of 150 watts.

From the inception of the Government Electricity

Department, a policy of supplying power at a low rate for

agricultural purposes had been followed. The agricultural

consumers were enjoying several concessions like (i) No

service connection charges; ( ii) Waiving of annual minimum

during periods of drought; (iii) Applicability of favourable

agricultural tariff (lift-irrigation) for other operations

like mowing, thrashing and sugarcane crushing; (iv) No power

cuts for agricultural services during periods of low water

level in hydro reservoirs; (v) permission under the same

tariff for farm lighting to a limited extent; and non-

application of the scheme of special guarantee to this class

of services for making capital investment remunerative.

It is true that small holdings and poor standard of

living of the farmers makes it obligatory on the part of.the

Boards to keep the tariff at a relatively low level but at

the same time Board's difficulties arise due to high increase

in costs due to the scattered nature of the agricultural

loads and low demand per installation. But the subsidy to

agricultural consumers is on the increase as would be evident

from the Table 3.13 giving agricultural sector losses. The

sales realizations do not cover even the identified variable

costs incurred, thereby resulting in almost an indirect cash-

subsidy to agriculture consumers.

Low tariff rates may be consistent with the policy of

the State regarding stepping up agricultural production only

in the initial phases. It may be noted that the average

agriculture tariff was extremely low at 11.2 paise/unit

against the overall rate of 54 paise/per unit which in itself

was rather low. This rate is also far below the cost of power

at low tension voltage(LT) end. There is, therefore, an

urgent need for rationalizing the tariff structure,

I
;
particularly with regard to the agriculural tariff in view of

the agricultural consumption being sizeable at 26.3 per cent

of the total consumption in the State. Agricultural tariff

rate compared to the cost of energy at LT end is one of the

fundamental reasons for the heavy financial losses incurred

by the Board. Tamil Nadu Electricity Board's rate for

agri~ultural sector is the lowest of all except that of J&K

and Aridhra Pradesh. As early as 1970, the Expert sub-

Committee had stated in its report that 'the agricultural

tariff could also stand a rise. The climate for action was

bound to turn favourable when the Green Revolution invades

the dry-farming areas.' The sub-Committee felt that there was

full justification for a revision of the agricultural tariff

though the increase could be gradual.

In the sixties, subsidized supply of electricity to

agriculture could be justified as the objective was to

provide incentive to farmers to switch over to tubewell

irrigation to increase agricultural productivity in general

'
and food output in particular as the country was heavily

dependent on imports. Several studies have established that

in the last 15 years, the rich peasants and big farmers have

multiplied their income manifolds. There is absolutely no

justification to their being subsidized.

l~ ~
144
 Based on a survey in Tamil Nadu in 1980, to judge the

agriculturists ability to absorb increasing cost of power by

comparing individual f~rmer's annual power cost bill with the

annual revenue, Swaminathan and Rajan concluded. 2 6

The overwhelming majority of farmers spend less

than 6 per cent on electricity as percentage of
their total revenue receipts. About 90 per cent of
the farmers covered by the survey had annual bills
at below Rs.lOOO/- Even though power cost is mpch
lower than that of labour, fertilizers, seeds and
manures, farmers find it easier to bargain with the
State Government on power tariff. Large farmers
have better abilities to absorb the increasing
costs. The actual price of power to agriculturists
realisable by the Board, therefore, should not be
less than direct cost of power generated and
distributed based on the weighted cost of
generation and distribution assuming that fixed
costs can be absorbed by other consumers. Selling
power in aggregate below direct/variable cost to
agriculturists and extending such consumption may
prove financially unwise in the long run.

Tamil Nadu Electricity Board's pricing policy towards

agricultural consumers is thus objectionable on several

counts. First, zero charge from small farmers leads· to

inefficiency as it is difficult to measure the exact

consumption of energy by the t~-~i..;ewells. The fixed rate from

~\";J.t'

large farmers is no different in effect. Even, the

transmission and distribution losses cannot be measured

precisely. It has been noted that the State Electricity

Boards transfer a part of their transmission and distribution

losses to the agricultural consumption. This is done by the

Boards to show that they are improving/maintaining the system

efficiency by reducing the transmission and distribution

26. K.K. Swaminathan and T.R. Rajan, Report on System for

Tariff Decision in TNEB, Administrative Staff College of
India, Hyderabad, July 1980 (Unpublished)
 TABLE: 3. 15

TNEB; AGRICULTURAL SECTOR LOSSES

(Paise/kWh)
---------------------------------------------------------------------- ------
Year Agricul- Average rate Average Net Total
tural of Reali sa- cost of Loss loss
tion supply (Rs.crores)
(M. U.) at LT end
--------------------------------------------------------------------- ------
1 2 3 4 5 6
----------------------------------------------------------------------- ----
1971-72

1972-73 1470 11.80 26.98 15.18 22.31

1973-74 1575 11.37 31.50 20.13 31.70

1974-75 1845 11.70 35.59 24.22 44.07

1975-76 1690 14.58 37.01 23.59 37.90

1976-77 1691 20.13 44.36 24.23. 40.97

1977-78 1785 17.72 43.04 25.32 45.21

1978-79 2117 15.28 43.04 27.76 58.77

1979-80 2186 15.28 47.06 31.78 69.47

1980-81 2364 15.22 59.23 44.01 104.04

1981-82 2354 15.12 67.40 52.28 123.06

1982-83 2230 14.25 79.74 65.49 146.04

1983-84 2200 14.25 92.59 78.34 172.35

1984-85 2415 12.24 84.30 72.06 174.02

1985-86 2804 11.20 97.25 86.05 241.28

1986-87 3052 11.16 85.59 74.43 227.16

Data Source : TI1EB

losses. Secondly the agricultural tariff system since

beginning is arbitrary and unscientific. It was introduced as

a matter of convenience to the Boards as well as consumers.

But it has lead to the wastage of precious energy as there is

no incentive to economise. It also breeds corruption as the

agriculturists may resort to unauthorised operations.

Uttar Pradesh
Small power for private tube wells/pumping sets for

irrigation, applicable to irrigation load upto 25 BHP and for

additional agricultural process confined to chaff cutter,

thrasher, cane crusher and rice-huller is supplied at 400

volts. Prior to October, 1974 the rate for this class of

consumer was based on unit consumption but due to

unsatisfactory state of metering, and the reported

inconvenience to consumers, the rate was changed on per HP

<
basis. The rate was 15 paise per unit in 1968 which was

increased to 21 paise per unit. With the introduction of new

rate of Rs.15 per BHP per month the average rate on the basis

of 10 BHP, 17 per cent load factor (925 units per month)

worked out to 16.21 paise per unit. The rate was reduced to

Rs.12 per BHP/month in 1979 and restored back to Rs. 15 in

1981. This was increased to Rs. 22.50 per BHP per month in

1982. Since then there has been no change in this rate. The

average rate works out to 24.3 paise/unit on the basis of 925

unit consumption on 10 BHP load. This is based on a sample

study carried out by UPSEB that indicated average consumption

of about 92.5 units per month per HP in private tubewells and

130 units per BHP per month in State tubewells.

1147
 The charge for pumped canals, lift irrigation schemes

and State tubewells having connected load upto 100 BHP on per

HP basis is somewhat bigher. Operated on an estimated load

factor of about 30 per cent, effective rate worked out at 16

paise· per unit in 1968, 18 paise in 1972, 23 paise in 1974

and 31 paise in 1982 which was further revised to an

estimated 48 paise per unit in February 1986.

The tariffs for agricultural consumers in Uttar Pradesh

have progressively remained well below the average cost of

supply and the gap between the average cost of energy has

been progressively widening as is obvious from the tables

3.11 & 3.12. It would be seen from these tables that while

the cost of supply at LT end has increased from 63 paise per

unit in 1980-81 to 97 paise/unit in 1986-87, the average

revenue per unit from the agricultural sector has increased

from 18.22 paise/unit to only 27.27 paise/unit during. the

same period.

The quantum of agricultural sale by the Board has also

increased significantly from 1213 MU in 1974-75 to 2723 MU in

1985-86. Sales to agricultural sector which were about 25 per

cent of the total sales in 1974-75 went up to 33 per cent in

1982-83 and have generally remained above 30 per cent of the

total sales after 1978-79.

In 1984-85 the difference between the cost of supply at

low tension and the average revenue realisation from the

agricultural sector in Uttar Pradesh was 67.78 paise per

unit. The total supply to the agricultural sector was 3611

MU. Thus the total loss to the Uttar Pradesh State

14ta
Electricity Board on account of agricultural sales in 1984-85

would be Rs. 245 crores, which works out to 93 per cent of

the Board's loss for the year 1 without reckoning subsidy.

Against these losses in 1984-85 arising out of sale of power

to the agricultural sector 1 the rural electrification ( RE)

subsidy as provided in the Accounts of the Board is only

Rs. 222.5 crores which is about 91 per cent of the total

los~es on this account.

The Board suffers losses not only due to supply of power

at low tariff for agricultural pump sets but also on account

of supply of power to remote villages under the rural

electrification schemes resulting in higher rural

electrification losses than the loss attributable to supply

of power to the agricultural pumpsets. Though the State

Government provides some subsidy to compensate for these

losses but subsidy has remained mostly unpaid to the Boarq.

The policy of providing heavily subsidised power to the

agricultural sector which is totally unrelated to the cost of

production is misplaced. As has been argued in the case of

Tamil Nadu the benefits of cheap power generally go to the

affluent section of farmers who are in a position to run

their agricultural machinery even on much costlier diesel

oil when there is no electricity supply. The unremunerative

tariff structure is thus the main cause responsible for heavy

losses of the Boards.

Industrial Supply

Tamil Nadu:

The structure of tariff for industrial supply in Tamil

Nadu depends upon the nature of supply viz. High Tension (HT)

and Low Tension (LT) supply. In the past, tariffs of the

Board for HT supply fell broadly under three categories (i)

Two part tariffs; (ii) special rates; and (iii)energy rate

for supply to Tea Estates.

Two part tariff is the standard tariff, applicable to

most of the high tension industrial supply. The rate,

relatively low, has been characterised generally as an

incentive rate with the main objective of helping and

stimulating industrial development in the State. In the two

part tariff the first part is related to the fixed costs and

being a function of the maximum demand, it is called demand

charge. The second part is related to the variable costs and,

being a function of the number of units consumed, it is

called energy charge. The prime purpose of this Hopkinson

device is to cover total costs and to adhere to the principle

that all consumers should pay exactly the cost of supplying

them, so as to uphold the principle of equity.

In Tamil Nadu the industries which were heavy consumers

of power such as cement, fertilizers, caustic soda, aluminium

etc. were offered special rates arrived at by negotiation.

These industries were considered basic to the industrial

development of the State. The policy of giving special rates

for such industries, initiated in 1933, for the Associated

Cement Company, Coimbatore, had been continued ever since

having due regard to the Board's revenue being adequate to

meet the total costs.

All energy intensive industries which enjoyed special

negotiated rates in the past now form part of this category.

Major public sector consumers for whom individually

negotiated "supply end" costs, representing actual costs of

supplying power, were fixed also get covered under this

tariff. The tea estates in the past were charged by the Board

on the basis of a unit rate for energy consumed. There was no

separate charge for demand considering the scattered nature

of load and low load factor. As the proportion of cost of

power to the cost of manufacture of tea was quite low and the

industry could reasonably bear a high rate, it has been

gradually brought in the purview of the two part tariff.

All supply to registered factories, tea estates,

textiles, railway traction, fertilizers, public sector

consumers which include Salem steel plant, Heavy Water plant

and all industrial establishments other than caustic soda,

calcium carbide, aluminium and potassium chlorate covered in

this category is charged at the rate of 64 Paise/kWh together

with the demand charge of Rs.SO/KVA/month. However, caustic

soda, calcium carbide, aluminium and potassium chlorate, big

units with large connected loads, are given concession of

Rs.S.OO in the demand charge. Calcium carbide and potassium

chlorate industrial products of wide use, are also produced

by about 50 small scale units in Tamil Nadu. These smaller

units are also included in this category without reference to

their connected loads. Madras Metropolitan Area attracts a

levy of 5 paise/kWh on the energy charge. The number of

consumers in this category is less than 15 but together they

consume about 37 per cent of the total power consumption in

the State.

New High Tension industries coming under this tariff

presently are charged at a concessional rate of 66.6 per cent

of the prevailing rate for the first three years, 80 per cent

in the fourth year and 90 per cent in the fifth year.

Concessional tariff rates have been extended to new

industries by the Board since beginning.

New industries which work in night shift are also

allowed 20 to 40 per cent concession in rate for energy

during the seven months from July to January.

If the average realisation per unit for HT supply to

industries with the average cost at HT end, is compared, one

finds that from 1981-82 to 1983-84 the realization per unit

was short of the cost to the Board.

Low tension industrial supply covers small industrial

users. This includes non-industrial consumption like factory

lighting. The total number of consumers is about 2 lakhs

accounting for 8 per cent of total consumption in the State.

A monthly minimum based on connected load is charged. The

present energy rate is 80 paise per kWh for non-metropolitan

area. A metro levy is charged for Madras area. Tariff in this

category has been revised almost every year since 1979. The

rate charged per kWh was 36, 50, 60 and 71 paise in 1981,

1982, 1983 and 1984 respectively. This was revised to 8. 0

paise on 1. 6. 85. Since 1980-81 average revenue realisation

per unit was always short of the cost per unit to the Board

at LT end (Tables 3.9 and 3.10). Even in the past, the rates

have been the lowest compared with those on all the other LT

1~2
users except irrigation.
Power charges usually constitute a very small portion of.,, .
the total value added ·in most of the industrial operations.·...~

and increases in power tariff may not affect their production

cost significantly. Low tension industrial consumers are

considered to have built-in financial surplus generating

ability. Subsidisation of such categories only affects

adversely the finances of the Board without giving

substantial benefit to small industries and promoting the

case of industrialisation.

Uttar Pradesh

Industrial supply in Uttar Pradesh has from the very

beginning been covered under three categories. These are (i)

Small and medium power applicable to consumers having a

contract load upto 75 kW (100 BHP); (ii) Large power

applicable to consumers having contracted demand between 75

to 200 kW; and (iii) Heavy power applicable to consumers

having a contracted demand of more than 200 kW.

Small and medium power loads are also applicable to

power looms' consumers having contracted load upto 100 BHP.

Until February 1986 a flat rate charge was levied. The

character of supply is at 400 volts normally but the

consumers can also avail of supply at high voltage enjoying 5

per cent rebate for such supplies. Energy charge per unit has

been revised practically every year during 1978 to 1982. The

rate was 30, 35, 45, 52 and 57 paise per unit in 1978 and the

years following thereon. In 1986 two part tariff was

introduced and a fixed charge of Rs. 15 per BHP was levied on

1~3
contracted load in addition to the charges based on energy
consumption to ensure ~orne minimum recovery of part of fixed
charges. In order that the consumers take measures to

increase their load factor, separate rates have been adopted

in 1986 for consumers upto 25 BHP and for those having loads

between 25-100 BHP.

On the recommendation of a Tariff Rationalisation

Committee, Uttar Pradesh State Electricity Board in 1986

regrouped the electricity consumers so that consumers having

similar load characteristics are brought to the same category

as far as practicable. Until then industrial loads were

divided between large power and heavy power although the
character of supply to both category of consumers was the

same at 11/0.4 KV. Rates for both these categories were

identical except difference in minimum guarantee charges. Two

part tariff system with declining blocks of energy charge

were prevalent until 1981 when a flat energy charge along

with a fixed charge per KVA per month was introduced. In,\.·986

these two categories were merged into Large and Heavy Power.

The new category was sub-divided into two sub-categories

based on use pattern viz. Continuous industries entitled to

use energy during peak hours and non-continuous industries

which may not be entitled to use energy during peak hours.

All industrial supply has been subject to fuel adjustment

clause.

New connections to industries in eight hill districts

namely Almora, Chamoli, Pauri Garhwal, Pithoragarh, Tehri

Garhwal, Uttar Kashi, Dehra Dun and Nainital enjoy

development rebate in tariff for five years from the date of

commencement of supply. Since 1982 this development rebate

for first five years in Bundelkhand region is 50 per cent.

There were 4, 776 industrial consumers in the State in

1986-87' and consumed 53 per cent of the total supply.

In table 3. 11 average revenue per unit for total

industrial supplies is given. Separate figures for LT and HT

supplies have not become available. Therefore, a comparison

with the average cost of total generation and supply reveals

that average revenue per unit of industrial supply is less

than the average cost per unit in all the years from 1980-81

to 1985-86 although in 1986-87 average revenue receipt per

unit supplied to industries was higher than the cost per

unit.

Commercial Supply

Tamil Nadu

Commercial supply. in Tamil Nadu is covered under two

different categories. Consumers taking low tension supplies

are covered under a residuary general purpose tariff

category. Such consumers would be about 5 lakhs in number

accounting for about 4 per cent of the total power

consumption in the State. As the users under this category

are mostly commercial establishments, the rates have always

been relatively high. Upto 1974, declining block tariff was

being charged. In 1974, a flat rate of 45 paise was

introduced, with a metropolitan levy of 2 paise. This was

increased to 70 paise per unit in 1979 with a Metro levy of 5

paise/kWh. The rates per unit had been revised to 78 paise in

1981, 82 paise in 1982, 90 paise in 1983, 101 paise in 1984

and 110 paise in 1985. There was a levy of 5 paise for

consumers in Madras Metropolitan area.

Revenue earnings and profit margins in most commercial

undertakings have always been considered to be more than

adequate to cover power costs. The comparison of average

revenue from tariff and the cost of supply shows that the

average revenue has been much higher than the cost of supply

over the whole period. Though the cost of supplying power to

the domestic and commercial consumers is the same, the

commercial consumers are being charged at much higher rates.

These rates are the highest in the low tension supply. Used

for display, window-dressing and advertisement, the principle

of 'what the traffic can bear' is being applied to this class

of consumers.

Similarly all commercial consumers taking high ten.sion

supplies are covered under a residuary category of High

Tension tariff. The majority of commercial power users under

this category are undertakings like large hotels, shops and

theatres. Industries requiring high tension supply during

construction period are also charged under this tariff. Their

consumption generally adds to peak load. Therefore, the rate

is higher than the rate for other high tension supplies in

the State. A two part tariff is charged for all high tension

supplies. Since 1985 the rate applicable for high tension

commercial supplies was 70 paise per unit together with

maximum demand charge of Rs. 55/month/KVA for non-

metropolitan area. Madras metropolitan area has a levy of ·5

paise per unit on the energy charge. Average realisation,

therefore, is higher than the average cost. Commercial

establishments, no dopbt, have better capacity to absorb

increasing cost of power. However, rates of power need to be
.
so fixed which also provide incentives to conserve power and

discourage excessive use of power by I

commercial

establishments.

Uttar Pradesh

All non-domestic, non-industrial consumers were

classified under two different categories viz. commercial and

mixed load category until February 1986. These two categories

were merged into"one category and named as non-domestic

category. The new category was sub-divided into two sub-

categories viz. those using energy for works of public

welfare and those not using for public purposes (i.e.

commercial).

Commercial consumers like shops, hotels, restaurants,

show rooms, offices etc having contracted load upto 25 kW

were levied flat rate energy charge of 65 paise in 1979, 73

paise in 1980, 80 paise in 1981 and 90 paise since 1982.

These rates also ap.plied to cinemas and thratres for their

lights, fans, projector, air conditioning, air coo~ing plants

etc. irrespective of their connected or contracted load.

Hotels, restaurants, commercial offices etc. having mixed

load above 25 kW were charged 60, 62 and 68 paise per unit in

1980, 1981 and 1982. In all commercial supplies a minimum

charge of about Rs. 25.00 per kW per month of contracted load

is levied since 1982. This minimum charge varies with the

/57
157
nature of commercial establishment.

There were 2.5 lakh consumers in this category who

consumed 454,416 MU of energy in 1986-87. A study of 25

districts of u.P. indicated a consumption pattern where about

37 per cent consumers consume only 5. 32 per cent of total

energy consumed by this category and consume less than 30

units per month. Similarly about 30 per cent consumers whose

consumption was more than 100 units per month consumed about

76 per cent energy:

This category of consumers getting supplies at high

tension are levied same tariff rates as are applicable to

other users getting supplies at those voltages.

Comparison of the average revenue per unit for

commercial category of supply with the average cost of total

generation and supply (Tables 3.11 & 3.12) shows that average

revenue per unit fell short of the per unit cost. A small.per

cent of consumers in this category consume large per centage

of energy. There appears to be no justification to subsidise

,
big commercial consumers of energy.

Other Supplies

Tamil Nadu:

Low tension supplies of the Tamil Nadu Electricity Board

also include supplies for public lighting, public water

supply system, general purpose supplies to non-domestic, non-

industrial non-commercial consumers such as educational

institutions, student hostels, government hospitals, places

of worship, orphanages, public libraries etc.

Total consumption for public lighting is less than 1 per

cent. Part of the supply is metered and part is urumetered.
The rates for such supplies are negotiated under clause XII

of the schedule to ·the Indian Electricity Act, 1910.

Unmetered supply is charged according to the wattage and

type ·of the lamp for specified number of burning hours per

annum. The comparison of average revenue per unit with the

average cost of low tension supply shows that for all the

years the consumers in this category were being heavily

subsidised as the .revenue realisations were much below the

Board's cost at LT end. Rates have generally been kept low

because of the obligatory nature of the service on the part

of local bodies. There is, however, adequate justification to

increase the rates to cover full costs.

Average revenue realization per unit for supplies to

public water supply system is much below the cost of supply.

Similarly LT supplies for general purposes are also

subsidised at present.

High tension supplies by the Board also include supplies

for lift irrigation cooperative societies charged at the rate

applicable to big farmers viz 15 paise/kWh. Supplies to

Pondicherry are at a flat rate based on EHT end cost and HT

end cost. Supplies to licensees are treated as bulk supplies

and are charged on the basis of two part tariff.

Uttar Pradesh:

Public lighting including street lighting system,

traffic control signals, lighting of public parks etc is

covered in a separate category of low tension supplies by the

Board. Supplies are normally charged on a flat rate per unit

or per lamp basis. Since 1982, 62 paise per unit for metered

supplies and Rs. 2. 50 per lamp per month for unmetered

supplies are charged from nagar palikas excluding Lucknow and

Kanpur. Per unit rates are 52 paise at these places. The

supplies are thus subsidised for public lighting.

Uttar Pradesh State Electricity Board also supplies to

Lucknow Cooperative electric supply society Ltd at a flat

rate of 25.5 per unit since 1982. Since June 1984 high

tension supplies are also made for World Bank tubewells and

tubewells of irrigation Deptt. connected on an 11 KV feeder.

A two part tariff is charged for these supplies. High tension

supplies are also made to railways for traction load. Till

1986 three different rates were applicable for three

different sections/routes. Railways have to be supplied

energy during all the 24 hours of the day and are not

subjected to any cut even during scarcity conditions.

Therefore; a fixed charge per KVA per month with energy

charge per unit has been levied since beginning. Different

rates are charged for high tension and extra high tension

supplies. Rates have generally been fixed and revised from

time to time with the increase in the costs.

The above analysis of the pricing policy of Tamil Nadu

and Uttar Pradesh State Electricity Boards bring out that in

Tamil Nadu during the period 1980-81 to 1985-86 the domestic

consumers, low tension industrial consumers and the

agricultural consumers have been subsidised throughout the

period. Average cost at H.T end could not be recovered for

industrial supplies in a 11 the years. Only commercial

I~ o
160
consumers generate surplus. In the case of Uttar Pradesh the

position is rather worse. Even commercial supplies were being

subsidised.

Undoubtedly, the State governments have attached

enormous social benefits to the availability of power. The

value of marginal product for each unit of electricity used

for industry and large scale ground water irrigation has been

considered large enough to justify subsidised operation of

the Boards. However, as a result of unremunerative prices the

two Boards have got burdened with heavier and heavier losses

over the years.

The major drain in the revenues of the State Electricity

Boards· has been supply to the agricultural sector. In both

the States, the agricultural consumers emerge as the most

favoured class. In Tamil Nadu, about 27 per cent of the total

electricity consumed within the State goes to the

agricultural sector. This proportion is above 30 per cent in

the case of Uttar Pradesh. There are two major objections to

the pricing policy towards agricultural consumers. First, the

flat rate system is arbitrary and unscientific. It was

introduced as a matter of convenience to the Boards as well

as consumers. But it has led to the wastage of precious

energy as there is no incentive to economise. Secondly, it

leads to inefficiency as it is difficult to measure the exact

consumption of energy by the tube wells. There is no

justification for large scale subsidies to different

categories of consumers. If certain consumer or a consumer

class or a region has to be supplied power at subsidized

rates to encourage certain industries or develop some

backward region, such subsidies should be quantified

separately and the State Government should pay for it to the

Board. Henderson has pointed out that various incentives and

concessions exist in the tariff structures of various Boards.

This shows that there must be a lot of cross subsidization.

But there are no estimates of the probable subsidies

involved.2 7 The Rajadhyaksha Committee has strongly

recommended that if some consumer category is to be

subsidized to meet certain socio-economic objectives, the

Government should give specific instructions to this effect

and the subsidy be quantified and paid by the Government to

the Boards.

"Such subsidies should form a separate item in the

budget so that public is aware of the quantity of subsidies

and its recepient and can be voted on by the legislature.~· 2 8

Venkataraman has pointed out that there appears to have been

no clear cut policy as to the framing of the tariff structure

in each electricity board in the light of their own

conditions. On the other hand, the entire tariff structure

seems to be the result of historical development with little

effort to see whether the assumptions behind the tariff

require any modification. 2 9. The Rajadhyaksha Committee has

also emphasised that "there is today no principle guiding the

power tariff structure and decisions are made largely on

-------------------------------------------------------------
27. P.D. Henderson, India: The Energy Sector (World Bank 1976)
28. Rajadhyaksha Committee Report, op. Clt., p.82
29. K. Venkataraman, Power Development in India: the finan-
cial aspects (Willey Eastern, Delhi, 1972)

!£16 2
grounds of political expediency coupled with some uninformed
thinking on the correlation between cheap power and economic

development of the State. " 30 Thus there is an urgent

necessity to rationalise the tariff structures in terms of

sound economic principles. Due consideration ought to be
given to social factors but such subsidisation should be

explicit.
As the State Electricity Boards are state level Public

Enterprises 1 they also suffer from certain structural

constraints which, inter alia, inc 1 ude externality in

decision making for determining the price of electricity for

various categories of consumers. In both the states 1 the

tariff structure is decided by the State government and not

by the Boards independently on their own. Due to lack of

sufficient generation of internal resources the Boards are

wholly dependent on ~he State Governments for their long-term

fixed as well as working capital needs. As a result the

Boards because of their dependence on budgetary allocations

are reduced to the level of departmental undertakings leaving

its management little autonomy for decision making. These

constraints, however, do not minimize the importance of

adopting correct power pricing policies to maximize the net

economic benefits of electricity consumption to the economy

and correct the financial imbalance of the State Electricity

Boards.

-----------------~-------------------------------------------
30. Rajadhyaksha Committee, op. cit., p.76