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CHAPTER 5

KESCO’S REVENUE REQUIREMENT FOR FY03 AND BULK SUPPLY TARIFF

5.1 Introduction
In this Chapter, KESCO’s Annual Revenue Requirement for FY03 has been analysed and the
amount for various revenue / expenditure items have been approved. Consequently the Bulk
Supply Tariff (BST) payable by KESCO to UPPCL for the power to be purchased for FY03 has
also been determined.

5.2 Energy Sales Estimation


KESCO has estimated energy sales in FY03 to Domestic, Commercial, Public Lamps and Public
Water Works by projecting number of consumers based on trend over the period FY95 to FY02
and considering specific consumption at FY02 level. For LMV-6 consumer categories
consumption has been assumed at FY02 level while for HV-2 consumer categories reduction in
sale by 202 MU as compared to FY02 has been taken. This reduction is due to closure of
Duncans Industry a bulk consumer.
Thus, total sales considered in FY03 is 1338 MU, as shown in the Table below:
Table-5.1: Consumer category-wise Sale of Energy (MU)
Category FY02 FY02 (Actual) FY03 FY03
(Tariff Order) (Proposed) (Approved)
Domestic (LMV-1, LMV-4 and 726 772 810 810
LMV-10)
Commercial (LMV-2) 180 173 181 181
Public Lighting (LMV-3) 21 22 22 22
Small and Medium Power (LMV-6) 100 89 89 89
Water Works (LMV-7) 34 36 36 36
Heavy and Large Industry (HV-2) 589 617 202 202
Total1 1650 1709 1338 1338

5.3 Distribution Loss


KESCO has projected Distribution loss at 38.37% in FY03, which according to KESCO is an
improvement of 1.78% over the FY02 level of 40.15% computed after excluding sale to Duncans
Industry. KESCO has considered power purchase of 2162 MU and a sale of 1294 MU to
compute the revised level of losses after excluding the sale of 415 MU to Duncan Industries from
the sale and the power purchased. As brought in table below in past three years this bulk

1
Total in this table may not exactly match on account of adjustments for decimal places.

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consumer accounted for more than quarter of revenue and sale of KESCO. Therefore it is
acknowledged that the closure of Duncans Industry, a bulk consumer will have adverse impact
on the losses and revenue of KESCO.
Table-5.2: Impact of the closure of Duncans Industry
FY00 FY01 FY02
Revenue (Rs. Sale Revenue Sale Revenue Sale
Cr.) (MU) (Rs. Cr.) (MU) (Rs. Cr.) (MU)
Duncans 176.10 431.7 171.63 409.2 168.6* 415.5
KESCO 499 1575 540.4 1590 586.5 1709
% 35.3 27.4 31.8 25.7 28.7 24.3
* realized amount was 135 Crore

Had KESCO achieved the loss target of 31.28% set by the Commission for FY02 then for the
sale of 1709 MU it would have needed to procure only 2486.9 MU of energy from UPPCL.
However if the sale of 415 MU to Duncans Industry is discounted both from sale and input
energy then for energy purchase of 2071.9 MU and sale of 1294 MU the target losses for FY02
would be 37.55% instead of 31.28%. In its tariff order for FY02, the Commission had set the loss
reduction target of 1.78% in FY03. Going by this loss reduction target the licensee in FY03
should not exceed the loss figure of 35.77%. If the sale of 415 MU to Duncans Industry
materializes then the licensee would need to procure 2486.9 MU only at 29.5% loss level for the
sale of 1753 MU.

5.4 Total Energy Input Requirement


With approved sale of 1338 MU and the distribution loss level at 35.8%, the energy input
requirement of KESCO for FY03 has been computed as 2084.2 MU.

5.5 Revenue Estimation

5.5.1 Tariff Income


KESCO has proposed that the Commission approve the same retail tariffs, as are applicable to
UPPCL’s consumers. KESCO had made similar request in its earlier tariff filings as well. The
Commission in its order for UPPCL had therefore stated that the retails tariffs approved for
UPPCL for FY03 would be also applicable to the consumers of KESCO. For the period April 02
to October 02, retail tariffs were as per the FY02 tariff order and thereafter from November 02 to
March 03 tariffs would be as per the FY03 Tariff Order for UPPCL. The Licensee has provided

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the details of revenue actually assessed from April to October 2002. The Commission has
estimated the revenue billed from sale of electricity for the remaining 5 months (November 02 to
March 03) based on the approved rates for FY03. The projected category-wise revenue details
are given in the Table below.
Table-5.3: Category-wise Revenue from Sale of Electricity (Rs. Crore)
Category FY02 (Tariff FY02 FY03 FY03 (Actual FY03 (Approved
Order) (Actual) (Proposed) from April to from Nov to
October, 2002) March, 2003)
Domestic (LMV-1, LMV-4 and 157.99 177 206 93.75 111.87
LMV-10)
Commercial (LMV-2) 89.22 82 86 44.26 44.08
Public Lighting (LMV-3) 5 7 7 2.92 3.67
Small and Medium Power (LMV-6) 52.72 43 43 30.47 15.14
Water Works (LMV-7) 10.68 12 12 7.35 5.59
Heavy and Large Industry (HV-2) 282.45 266 95 86.38 34.28
Subsidy for Domestic Consumers 9
Total Tariff Revenue 607.06 587 449 265.14 214.63

The total revenue projected from sale of electricity for FY03 is Rs. 479.77 Crore.

5.5.2 Non-tariff Income


The Commission in the FY03 Tariff Order has merged meter rent with fixed charges in the retail
tariffs. Hence for KESCO, the Commission has not assumed any income from meter rent for the
period November 2002 to March 2003 but for the period April to October 2002 actual meter rent
billed is being considered. Miscellaneous charges, which include reconnection / disconnection
charges, service charges, public lighting maintenance charges, and Load reduction charges, have
been accepted at the levels as projected by the Licensee. In the FY02 Tariff Order, the
Commission had explicitly asked the Licensee to provide information on income from Delayed
Payment Surcharge. However, the licensee has not provided the data in the present filing. The
income accruing from Delayed Payment Surcharge for the period April to October 2002 is Rs.
93.57 Crore. In the provisional Profit & Loss Account for FY02 KESCO has shown Rs. 32.31
Crore as income from DPS. Hence for FY03, the Commission expects that KESCO will earn at
least Rs. 32.31 Crore from Delayed Payment Surcharge as it did in FY02. Other receipts
including income from loans and advances, income from staff welfare activities and certain
miscellaneous income are as per KESCO’s projections. Hence, the total Non-Tariff Income is
estimated at Rs. 35.93 Crore. The details are given in the Table below.
Table-5.4: Other Income (Rs. Crore)
Particulars FY02 FY02 FY03 FY03 (Approved)
(Actual) (Tariff Order) (Proposed)

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Meter Rentals 3.39 5.34 3.54 2.76
Miscellaneous Charges from 0.48 - 0.53 0.53
Consumers
Delayed Payment Surcharges - - - 32.31
Other Receipts – Non-Tariff Income 0.33 0.15 0.34 0.34
Total 4.19 5.49 4.41 35.93

5.6 Expenditure
KESCO’s expenditure in FY02 exceeded the amount proposed by KESCO for FY02 and that
approved in the tariff order for FY02. In FY02 KESCO exceeded the approved amount by 14%.
The performance of the licensee has already been analysed in detail in Chapter 2.

5.6.1 Employee Costs


The actual, estimated and projected cost in FY01, FY02 & FY03 of KESCO along with that
approved for FY01 & FY02 is given in the table below.

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Table-5.5: Employee Cost (Rs. Crore)
Sl. No. Particulars FY01 FY02 FY03
Approved Actual Approved Actual Proposed
1. Salaries 32.24 24.69 23.9 23.54 24.26
2. DA 10.29 10.9 10.05 10.35
3. Other allowances 3.75 6.7 3.73 3.83
4. Ex-gratia Payment 0.00 0.68 0.70
5. Leave Encashment 2.05 2.42 2.50
6. Employer’s contribution 4.83 6.55 6.65 6.40 6.59
for pension & gratuity
Gross 37.07 47.33 48.21 46.82 48.23
Less Expenses Capitalised 0 0 0 3.13 4.86
Total 37.07 47.33 48.21 43.69 43.37
Cost per unit sold (Rs./U) 0.22 0.30 0.29 0.26 0.32
As a % of Distribution 37.9% 20.8% 48.4% 30.4% 30.4%
cost
As a % of total cost 7% 6.6% 8.6% 6.84% 7.75%
Cost per employee 1.18 1.50 1.59 1.55 1.65
Rs. Lakhs

Table-5.6: Employee Deployment Ratio


Details FY01 FY02 FY03 (Proposed)
UPPCL KESCO UPPCL KESCO UPPCL KESCO
Consumers (Nos) per employee 112 111 120 123 133 133
Connected Load (KW) per 218 303 228 327 255 326
employee
Energy sold (MU) per 0.34 0.51 0.37 0.56 0.40 0.46
employee
Total Revenue (Cr.) per 0.09 0.17 0.11 0.20 0.16 0.16
employee

As discussed earlier the figures reported for FY01 & FY02 in the provisional Profit & Loss
Account for FY02 and ARR filed for FY03 differ. In FY01 as per ARR the employee cost in
FY01 and FY02 was Rs. 47.33 Crore and Rs. 46.82 Crore respectively. In the ARR itself there is
a discrepancy, the licensee in the format R-14 has reported the employee cost in FY01 at Rs.
42.82 Crore. In the provisional Profit & Loss Account for FY01, the cost in FY01 & FY02 is Rs.
45.85 Crore and Rs. 47.07 Crore respectively. The Commission for the present order would go
by the figures filled in the ARR but directs the licensee to reconcile the figures presented in the
ARR and the provisional Profit and Loss Account. In FY02, the employee cost is within the
amount approved by the Commission and has decreased by 1.1% over FY01. In FY03, the gross
expenditure under this head is projected to increase by 3%. Per employee cost, which rose by
3.3% in FY02, is projected in FY03 by the licensee to rise by 6.45%. Employee productivity in
KESCO is higher than UPPCL due to higher load density in urban area. The productivity in
FY03 is likely to deteriorate over FY02 due to closure of a major fertilizer factory, which is a

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bulk consumer. The cost per unit sold and as percentage of total cost in FY03 is expected to rise
over FY02 due to the adverse effect of the closure of the fertilizer factory. This cost as a
percentage of distribution cost in FY03 is at FY02 level. These percentages in FY01 do not
depict the general trend as KESCO had provided Rs. 106 Crore, the entire shortfall in collection,
as provisioning amount for bad & doubtful debts, which has increased the total cost of KESCO.
In FY02, the basic salary declined by 4.65% which can be attributed to retirement of 4% of
employees in FY02. In FY03 around 4.4% of the existing 3026 employees are likely to retire.
The general rise in this component of salary for public sector units is around 3%, which is likely
to happen in FY03 as well. However the percentage of retiring employees is more than the
projected rise therefore this component is likely to decline in FY03. Therefore the Commission
would retain the salary expenditure in FY03 at FY02 level. Dearness Allowance has been
allowed at 49% of the basic salary. For FY03 other allowances are estimated at Rs 3.89 Crore i.e.
a rise of 4.3% has been allowed. In FY02, the increase in consumer price index (industrial
workers) was 4.3% (Source: CMIE May 2002) over FY01. The Commission disallows Bonus/
Ex-Gratia given the precarious financial position of KESCO. Similarly KESCO should also
restrain expenditure on leave encashment, which has already been suspended for the officers.
The contribution to PF required has been worked out at 19.08% of the basic salary and DA.

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Table-5.7: Employee Costs (Rs. Crore)
Particulars FY03 (Proposed) FY03 (Approved)
Salaries 24.26 23.54
Dearness Allowance 10.35 11.53
Other allowances 3.83 3.89
Bonus/ex-gratia 0.70 0.00
Leave Encashment 2.50 0.00
Employer’s contribution to GPF and 6.59 6.69
gratuity
Total Cost 48.23 45.65
Less Expenses Capitalised 4.86 1.05
Net 43.37 44.60

Thus for FY03, the total employee cost allowed is Rs. 45.65 Crore, of which the employee cost
chargeable to revenue account is Rs. 44.60 Crore.

5.6.2 Administrative and General Expenses


The actual, estimated and projected cost for FY01, FY02 & FY03 of KESCO along with that
approved by the Commission for FY01 & FY02 is given in the table below.

Table-5.8: A&G Expenses (Rs Crore)


Particulars FY01 FY02 FY03
Approved Actual Approved Actual Proposed
A&G Expenses 1.95 1.38 1.42 1.78 1.89
Less: Expenses Capitalised 0 0 0 0.20 0.31
Total Net 1.95 1.38 1.42 1.58 1.58
Per unit sold (Rs./U) 0.011 0.009 0.008 0.009 0.012
As a % of Distribution cost 1.99 0.60 1.42 1.01 1.11
As a % of total cost 0.36% 0.19 0.25% 0.25% 0.28%

In FY02, KESCO exceeded the approved figure by Rs. 0.36 Crore i.e. 25.4%. This represents a
rise of 29% over FY01. The licensee has explained this substantial increase in A&G cost due to
additional expenditure incurred on bill distribution through post & telegraph department. This
expenditure has not yielded the desired results, as the performance discussed in Chapter 2 clearly
shows. KESCO has projected an expenditure of Rs. 1.89 Crore under this head in FY03, which is
6% more than FY02. The items under A&G are controllable and should be strictly restrained.
The increase in Wholesale Price Index (all commodities) in FY02 was 3.6% over FY01. The
Commission has for FY03 projected A&G expenses to increase at same rate as WPI over the
approved figure for FY02. The regulatory expenses have been included in this head and are
projected at 0.05% of revenue billed in FY02 at Rs. 0.29 Crore. Rs. 0.07 Crore has been
capitalised for FY03. Thus, gross A & G expenses allowed in FY03 are Rs. 1.47 Crore but

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expenses chargeable to revenue account are Rs. 1.40 Crore. The regulatory expenses allowed are
Rs. 0.29 Crore.
Table-5.9: A&G Expenses (Rs Crore)
Particulars FY03 (Proposed) FY03 (Approved)
A&G Expenses (Gross) 1.89 1.47
Less Expenses Capitalised 0.31 0.07
Net Total 1.58 1.40
Regulatory Expenses 0.29 0.29

5.6.3 Repair and Maintenance Expenditure


The actual, estimated and projected cost for FY01, FY02 & FY03 of KESCO along with that
approved by the Commission for FY01 & FY02 is given in the table below.

Table-5.10: R&M Expenses (Rs Crore)


Particulars FY01 FY02 FY03
Approved Actual Approved Actual Proposed
R&M Expenses 7.93 11.58 10.52 15.64 17.21
Less: Expenses Capitalised 0 0 0 0 0
Total Net 7.93 11.58 10.52 15.64 17.21
Per unit sold (Rs./U) 0.048 0.073 0.064 0.091 0.13
As a % of Distribution cost 1.99 0.60 1.42 1.01 1.11
As a % of total cost 0.36% 0.19 0.25% 0.25% 0.28%
As a % of GFA 3.05% 4.45% 4% 5.92% 6.29%

In FY02, the R&M expenses were 35% more than FY01 expenses and were 49% higher than the
approved amount. In terms of percentage of the opening balance of gross fixed asset the rise has
been from 4.45% in FY01 to 5.92% in FY02. According to the licensee the increase has been due
to discharge of the old liabilities of Rs. 2.36 Crore, increase in house & water taxes by Rs. 1.97
Crore and increase in maintenance cost of old network. For FY03, KESCO has proposed an
increase of 10% over FY02 in R&M expenditure to Rs. 17.21 Crore. As a percentage of GFA,
this works out to 6.29% of the opening level of GFA. The Commission as in the previous orders
pegs the R&M expenses at 4% of opening GFA. Capital expenditure of Rs. 2.14 Crore carried
out in FY02 has been disallowed for reasons detailed in Chapter 2. Thus, the total R&M
expenditure approved in FY03 is Rs. 10.85 Crore.
Table-5.11: R&M Expenses (Rs Crore)
Particulars FY03 (Proposed) FY03 (Approved)
GFA 273.47 271.33
% of R&M Expenses 4% 4%
Total 10.94 10.85

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5.6.4 Provision for Bad and Doubtful Debts
KESCO due to its inability to collect its bills from its consumers has proposed provisioning of
bad debts. Total revenue assessed by KESCO from sale of power in FY02 was Rs 571.59 Crore
(without surcharge, ED etc.), and Rs 691.22 Crore (including surcharge). The revenue realization
was Rs 453.01 Crore as per the Cash Book and Rs. 446 Crore as per Billing Agent data, which
indicates a collection efficiency of 65.54% and 64.61% respectively of the billed amount of Rs.
691.22 Crore. It must be borne in mind that this realization includes arrears also, and hence the
actual collection efficiency for bills raised during FY02 was even lower. The detailed analysis of
collection efficiency division wise and consumer category wise has been presented in Chapter 2.
The most disturbing part is that the downward trend in collection efficiency witnessed over past
few years is likely to continue in FY03 as well. The receivables by the end of FY02 were 18.8
months of average monthly billing inclusive of delayed payment surcharge. These are really very
huge and the situation is likely to worsen with the closure of major fertilizer industry. As per the
ARR filed the licensee by the end of FY02 has made a provision of Rs. 127.12 Crore i.e. 21.6%
of the current bill. The provisioning figures provided in the ARR are at variance with the figure
of Rs. 39.12 Crore given in the Provisional Profit & Loss Account for FY02. For FY03, KESCO
has proposed a provision of Rs. 14.76 Crore for bad and doubtful debts i.e. 15% of the
uncollected amount, which for the revenue approved would be Rs.15.76 Crore i.e. 29.78% of the
revenue approved. This extremely high level of provisioning for bad and doubtful debts would be
grossly unjust to UPPCL, because the cost of collection inefficiency would be ultimately borne
by UPPCL. In FY02 as analysed in Chapter 2 KESCO paid Rs. 1.39/Unit as against the approved
power purchase price of Rs. 1.92/Unit. With the help of anti theft laws, GoUP support and
proper follow up of the non paying consumers, the licensee should reduce its receivables and in
case it fails to do so it should bear the cost of its inefficiency. Poor collection efficiency is an
administrative failure. Once a bill is issued it should be collected. There is no justification for
letting the receivables grow year after year. In the absence of clear policy, procedure and effort
for identifying and writing off the receivables, the provisioning of bad & doubtful debts cannot
be allowed. The licensee has admitted the fact that no bad debts have been written off in FY01 &
FY02. It is an acceptable practice to make provision for doubtful debts after a detailed study of
receivables, their age profile and probability of recovering of the arrears. The Commission is
unable to appreciate that in the absence of any such analysis how the figure of 15% has been
arrived at. If KESCO desires to make any provision in future it must lay down guidelines for

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classifying bad debts and conduct case wise investigation as per the provisions of section 4.2 and
4.3 of the Electricity (Supply) Annual Accounts Rules 1985. The Commission has hence
disallowed provisioning for bad and doubtful debts.

5.6.5 Interest and Financial Charges


(a) Interest on Loan from UPPCL
In the FY02 Tariff Order, the Commission had accepted interest on secured loan of Rs 110 Crore
from UPPCL @ 12%. The Licensee for FY02 has determined the interest on Rs. 110 Crore of
loan and Rs. 13.2 Crore of interest payable to UPPCL in FY01 for this loan amount at 12%. The
total interest cost in FY02 is Rs. 14.78 Crore. For FY03, KESCO apart from interest on Rs. 110
Crore and interest liability of Rs. 14.78 Crore has also claimed interest @ 12% on Rs 25 Crore of
long-term liability for “Terminal Benefits Liability Fund”. The licensee has claimed that since
GoUP has taken over the past liability of KESCO then as per clause 4(c) there should be an
adjustment in the debt liability for terminal liability by adjusting secured loan payable and
accordingly Rs. 25 Crore has been treated as part of secured loan. The Commission in its last
Tariff Order had stated that it would approve this adjustment only if the Transfer Scheme is
amended. The licensee in the ARR has claimed interest on this amount but has made no such
provision in the provisional Balance Sheet of FY02. The Commission in its order for FY02 had
urged GoUP to clearly identify the financial liabilities of KESCO and settle the terms &
conditions of the loan. The Transfer Scheme does not disclose whether any interest is to be paid
on this and, if so, at what rate. In spite of clear instructions of the Commission on this issue no
such clarification was issued either by GoUP or UPPCL. In the previous order the Commission
while working out the interest cost had assumed an interest rate at 12%. However, given the
precarious financial position of KESCO the Commission had recommended that a moratorium of
3 years might be given. The Commission finds that ground realities in KESCO have worsened
the licensee is likely to experience acute cash shortfall. The stakeholders UPPCL and GoUP are
not coming forward to help KESCO in improving its operational performance. In the absence of
settled terms & conditions of loan repayment it is of no use to determine the interest liability,
which may have to be latter re determined as and when the terms & conditions of the loan are
finalized. The interest on Rs. 110 Crore and Rs 25 Crore therefore for the present order is not
being recognized. This liability would become due as per the settled terms & conditions of the
loan between KESCO & UPPCL.

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(b) Interest on Terminal Liability
In the ARR filed the Licensee has considered interest expenditure on Rs 46.75 Crore of Terminal
Liabilities @ 14%. As per the provisional Balance Sheet for FY02 Terminal Liability for FY02
and FY01 has been shown as Rs. 60.80 Crore and Rs. 63.62 Crore respectively. KESCO has not
given any explanation for this discrepancy. As per the information provided in the ARR filing
UPPCL owes Rs. 24.76 Crore due to excess payment made to employees of KESCO and UPPCL
by the end of FY02 for terminal liabilities by KESCO. Thus the liability in FY03 on this account
is Rs. 35.24 Crore. Interest default etc. is not being considered as the Commission in its previous
order had provided for the interest on this liability. Further as per the information subsequently
provided KESCO has repaid Rs. 29.20 Crore by November 2002 towards this terminal liability.
The Commission thus allows interest cost on Rs. 35.24 Crore of terminal liability @ 9% and
accordingly Rs. 3.17 Crore has been provided.

(c) Interest on Consumer Security Deposit


Consumer Security Deposit has been taken at Rs 40.36 Crore as projected by the licensee. The
interest cost on consumer security deposit @ 3% is Rs 1.21 Crore and is allowed by the
Commission.

(d) Interest on Deferred Payment to UPPCL


The Commission has projected the cash flow of KESCO as discussed subsequently in this Order.
KESCO has a cash break even at a collection efficiency of around 91%, assuming all other costs
remain unchanged. In view of the fact that collection efficiency of KESCO was much lower in
FY02, it is likely that KESCO may not reach cash break-even level even in FY03. In that event
KESCO would defer payment of a part of the power purchase cost of UPPCL. This would be
treated as loan to KESCO carrying interest at 12% p.a. The Commission has assumed a
collection efficiency of 88% (as per the Multi Year Targets set by the Commission in the FY02
tariff order) for determining cash shortfall. The deferred payment is estimated as Rs. 9.90 Crore
and interest of Rs. 1.19 Crore has been allowed on this account. This interest may be paid along
with the principal in subsequent years. GoUP has been assisting UPPCL to over come cash flow
problems by taking over the past liability of payables to central generating stations but UPPCL
has not passed on any of these benefits to KESCO which is its subsidiary. Therefore the State
Government should specifically provide financial assistance to KESCO by taking over the

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interest liability of power purchase price not paid by the licensee. Although on paper KESCO is
the subsidiary of UPPCL but for all practical purposes takes directions from the State
Government. The Managing Director is appointed by the State Government and not by the parent
company. Also there has been no change in the management structure after corporatisation. For
acts of commission and omission the State Government should provide financial support to the
company other wise at its present operational efficiency power supply conditions will further
deteriorate.
The summary of interest expenditure allowed by the Commission for FY03 is given in Table
below:
Table-5.12: Interest Cost (Rs. Crore)
Expenditure Head FY02 FY02 (Tariff FY03 FY03
(Actuals) Order) (Proposed) (Approved)
Interest on Loans 14.78 13.20 17.97 0
Interest on Security Deposit 1.15 1.10 1.21 1.21
Interest on Deferred Payment to 1.35 1.19
UPPCL (at Collection Efficiency of
88% for FY03)
Interest on PF Loans 6.55 5.70 6.55 3.17
Total 22.48 21.35 25.73 5.57

5.6.6 Depreciation
The opening balance of GFA in FY02 was Rs. 263.92 Crore and Rs. 9.55 Crore of fixed assets
were added during the year as per the details provided by KESCO. The opening value of GFA
therefore for FY03 is estimated to be Rs. 273.47 Crore. The licensee in the ARR had not
provided the detailed break up of the fixed assets but information subsequently provided by the
license indicates the break up as given in table below.

Table-5.13: Depreciation Details (Rs. Crore)


Sl. No. Asset Details Depr. Rate Amount Depreciation
1. Land & Building 3.02% 17.95 0.54
2. Plant, Machinery & transformers 7.84% 50.84 3.99
3. Transmission lines 7.84% 194.35 15.24
4. Office Equipment 12.77% 5.62 0.72
5. Furniture & Fixture 12.77% 0.76 0.09
6. Vehicles 12.77% 3.95 0.5
Total 273.47 21.08

As has already mentioned in Chapter 2 the licensee violated the condition of section 10 of the
license by not getting the prior approval of the Commission of capital works carried in FY02.
Since the funds for most of the works came from the consumers and local bodies the capital

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expenditure for Rs. 13.59 Crore is approved. However the capital expenditure of Rs. 2.16 Crore
carried out under Vidhyak Nidhi is not being approved, as GoUP did not make funds for these
works available and the licensee without waiting for the funds to arrive carried out these works
from its own funds. The work completed under this head pertains to electrification of roads. The
assets used for this purpose carry a depreciation rate of 7.84%. Hence Rs. 0.17 Crore of
depreciation claimed on these assets is being disallowed. Therefore depreciation amount allowed
for FY03 is Rs. 20.91 Crore. The Commission would recognize these assets for claiming
depreciation, returns etc. only when the GoUP reimburses the expense incurred on these works.

5.6.7 Other Expenses


For FY03, the licensee has claimed Rs. 19.76 Crore of rebate and Rs. 0.29 Crore of Regulatory
expenses under this head. The actual rebate allowed by KESCO to its consumers for the period
April to October 2002 is around Rs. 3.77 Crore. The Commission has estimated the rebate to
consumers from November 2002 to March 2003, based on the estimated sales during the period
on pro-rata basis. Thus it is estimated that KESCO would provide Rs. 3.61 Crore as rebate to its
consumers from November 2002 to March 2003. KESCO is thus likely to provide rebate of Rs.
7.38 Crore in FY03, which is lower than the last year’s figure of Rs. 19.76 Crore. This reduction
is due to non-provisioning of rebate given to Duncans Industry a major bulk consumer.
Therefore, Rs 7.38 Crore has been allowed as Other Expenses. The regulatory expenses at Rs.
0.29 Crore have been approved and accounted under A&G.

5.7 Capital Expenditure


KESCO has proposed a capital investment of Rs 30.87 Crore in FY03 to be funded entirely from
consumer’s contribution and internal accruals. In the previous Tariff Order, the Commission had
explicitly stated that internal accruals such as depreciation and consumer’s security deposit
should not be used for capacity expansion unless all expenses including the power purchase
expenses have been met. The Commission directs that KESCO should finalise the availability of
funds for capital expenditure and then submit the schemes for the approval of the Commission.
For FY03 only Rs. 5.73 Crore of Capital Expenditure for which the funds have already been tied
up is approved. The Commission would view any violation of clause 10 of the license seriously.

5.8 Capital Bases and Reasonable Return

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5.8.1 Capital Base
KESCO has estimated Capital Base at Rs 19.31 Crore and requested a return of Rs. 3.86 Crore
on Capital Base. The observations of the Commission on various components of the capital base
are as follows:

(a) Original Cost of Fixed Assets


For FY03, the opening balance of gross fixed assets is approved at Rs. 281.11 Crore, against
KESCO’s proposal of Rs. 304.32 Crore. This is because addition of fixed assets of Rs. 5.73
Crore during FY03 as discussed earlier have been considered and addition of assets worth
Rs. 2.16 Crore has not been approved. As proposed by the Licensee, the Commission has
assumed that 75% of the additions during the year get capitalized in that year itself.

(b) Work in Progress


The work in progress equivalent to 25% of the capital expenditure during the year works out
to Rs. 1.4 Crore.

(c) Average Cost of Stores


As per the Sixth Schedule of the E(S) Act, (1/12)th of the sum of store material and supplies
including fuel in hand at the end of each month of the year should be taken. KESCO has
categorised the stores in hand in two parts, namely O&M stores and capital stores. O&M
stores have been computed on the sum of A & G expenses and R & M expenses. Capital
stores have been calculated on the total investment programme of the licensee. KESCO has
added that past historical ratios have been used to calculate the balances. The Commission
has computed the average cost of stores equivalent to 70 days of the approved R & M
expenses i.e. Rs. 2.08 Crore.

(d) Average Cost of Bank Balances


KESCO has stated that it has computed the average cash & bank balance on the basis of its
unaudited accounts for FY01 and the balance that has been maintained during FY03. The
Commission has calculated the average cost of bank balances as 1/12th of the employee

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expenses including pension liability and A&G expenses approved by the Commission i.e. Rs.
3.93 Crore.

(e) Depreciation
Commission has allowed depreciation as per the details given above.

(f) Loans
Commission has considered a sum of Rs. 110 Crore and Rs. 25 Crore as loan from UPPCL.
Interest payables have not been included as loans as they are deemed to have been utilised for
funding increase in Current Assets.

(g) Consumer Contribution and Security


Commission has considered consumer contribution and consumer security deposits at the
same level as proposed by the Licensee.

KESCO’s Capital Base for FY03, as determined by the Commission is negative, as shown below.

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Table-5.14: Capital Base (Rs Crore)
Sl. No. Details FY03 FY03
(KESCO (Approved)
Proposal)
1. (a) Original Cost of fixed assets 304.32 281.11
(b) Cost of intangible assets 0.00 0.00
(c) The original cost of work in progress 7.76 1.43
(d) Investment compulsorily made under para-IV of the sixth 0.00 0.00
schedule
(e) An amount on account of working capital equal to the sum of: 28
(i) Average cost of stores 2.08

(ii) Average cash and bank balance 3.93

(f) Capitalized loss allowed by the Commission 0 0


Sum of above (1) 340.08 288.55
2. (a) The amounts written off or set aside on account of depreciation 62.22 63.16
of fixed assets
(b) The amount of any loan or subvention from the State 0 0
Government
(c) The amount of any loans borrowed from any organizations or 152.97 135
institutions approved by the State Government
(d) The amounts deposited in cash with the licensee by consumers 40.36 40.36
by way of security
(e) Consumer contribution 65.21 53.27
Sum of above (2) 320.76 291.79
Net Capital Base (1-2) 19.31 (3.24)

5.8.2 Reasonable Return


The maximum rate of return allowed as per the Ministry of Power (MoP) notification dated May
5, 1999 is 16%. Since the Capital Base is negative, KESCO is not entitled to any return on the
Capital Base. The financial & operational performance has been extremely poor and the targets
for efficiency improvements set by the Commission have not been met. The licensee has not
even paid the power purchase price of Rs. 1.92/Unit to UPPCL as approved by the Commission.
Thus the licensee is not entitled to any return till it pays the power purchase price to UPPCL,
which is its first priority. However if it exceeds the improvement targets set by the Commission it
can retain the extra revenue generated in FY03 after meeting all its liabilities.

5.9 Calculation of Bulk Supply Tariff


KESCO purchases its power from UPPCL, which in turn sources its power requirements from
Central Sector Generating Stations and Various State Power Generation Utilities. The Bulk
Supply Tariff has been calculated using the approach followed in the previous order. The
Commission in its earlier order had determined the transfer price at which UPPCL should supply
power to KESCO. This reflects the fair cost to KESCO as well. This cost would ensure that the

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performance of both KESCO and UPPCL would be reflected in their accounts. The transfer price
has been worked out, given the limitation of data, the current power purchase cost that KESCO
may have to pay if it were to source it from the State Generating Stations / CGS directly and if it
were to pay a fair cost for transmission. Also UPPCL should get a reasonable return on this
supply. The price so worked out would show the true and fair picture of the viability of the
operations of both KESCO and UPPCL. Thus, Bulk Supply Tariff computed based on this
method is the sum of Pooled Power Purchase Price of UPPCL, Cost per unit of Transmission
Losses, Cost per unit of Transmission O&M charge and Return on Capital Base for Transmission
Assets only. The Commission would like to reiterate that in the absence of any bulk purchase
price agreement between UPPCL and KESCO this methodology is being adopted. The two
utilities are directed to work out a power purchase agreement between them.
(a) Cost of Power:
UPPCL has entered into PPAs with various power generators both of central & state sector. It is
assumed, for the purpose of this calculation, that no particular source of power is identified for
KESCO. KESCO being the subsidiary of UPPCL whose performance gets reflected in the
Balance Sheet of UPPCL is being charged at the average pooled price of power. The
Commission in its Tariff Order for UPPCL for FY03 approved total power purchase of 39869
MU and the total power purchase cost of Rs. 6539 Crore. Thus the average power purchase cost
of UPPCL comes to Rs. 1.64 per kWh and this is being considered for the calculation of Bulk
purchase price payable by KESCO.
(b) Cost of Transmission Loss
The Commission has approved 39869 MU of power purchase for UPPCL for FY03.
Transmission losses for UPPCL are estimated at 5%. On this basis and considering average price
of Rs 1.64 per unit, the cost of transmission loss per unit of energy delivered to KESCO is
estimated as per following details:
Table-5.15: Cost of Transmission Loss
Power Purchase by UPPCL 39869 MU
Transmission Loss @ 5% 1993 MU
Power Available for Sale by UPPCL 37876 MU
Cost of Energy Lost in Transmission (Rs. Crore) 326.93
Cost of Transmission loss Per Unit (Rs. Per Unit) 0.086

Transmission Cost

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Since no particular transmission network has been identified for KESCO, the entire cost of Rs
497.60 Crore is allocated on proportionate basis of energy available for sale and energy
purchased by KESCO. The break up of total cost of UPPCL under various heads is given in the
Table below. These costs are net of capitalisation. The entire transmission cost is allocated to
37876 MU available for sale. Thus, the cost of transmission is estimated as Rs 0.1314 per kWh.
Table-5.16: Transmission Costs (Rs Crore)
Particulars FY03 (Approved) Transmission Distribution

Employee Cost 935.37 172.24 763.13


Administrative and General Cost 98.51 9.08 89.43
Repair and Maintenance Cost 239.59 35.99 203.60
Interest and Finance Cost 407.5 55.23 352.27
Depreciation 599.73 218.55 381.18
Other Expenses 69.43 6.50 62.93
Total 2350.13 497.60 1852.54

Capital Base and Return to UPPCL


The Commission has estimated a capital base of Rs. 10545.06 Crore for UPPCL in FY03 tariff
order. For the purposes of the current ARR application, the Commission has apportioned the
Capital Base into transmission and distribution functions based on the GFA ratio provided by
UPPCL in their tariff application as no particular transmission assets have been identified for
KESCO. The Commission has determined a return of Rs. 232.9 Crore on this capital base for the
purposes of the calculation of BST for KESCO. The return on capital per unit of energy
transmitted works out to Rs. 0.0615 per unit.

Bulk Purchase price payable by KESCO to UPPCL


The power purchase price of KESCO has been determined as Rs 1.92 per unit as detailed below:
Table-5.17: Bulk Purchase Price payable to UPPCL by KESCO (Rs per Unit)
1 Cost of Power 1.64
2 Transmission Loss 0.09
3 Cost of Transmission 0.13
4 Return on Capital 0.06
5 Total 1.92

The Commission hence approves the BST of Rs. 1.92 per unit for KESCO for FY03. The BST
will be applicable to the power purchased from April 2002 to March 2003. The Commission,
while determining the revenue of UPPCL from sale of power to KESCO, in the Tariff Order for
UPPCL for FY03 has considered this rate of Rs. 1.92 per unit.

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Revenue Requirement
The aggregate revenue requirement of KESCO including the power purchase cost computed on
the basis of transfer price is given in the Table below:
Table-5.18: Revenue Requirement (Rs. Crore)
Sl. No. Details Amount
1 Expenditure
(a) Power Purchase 400.17
(b) Employee Cost 44.60
(c) Administrative and General Expenses 1.40
(d) R&M 10.85
(e) Depreciation 20.91
(f) Other Expenses 7.67
(g) Interest Cost* 4.38
2 Return on Capital Base 0
Total 489.98
Less
3 Non Tariff Income 35.93
4 Subsidy -
5 Revenue Required 454.05
6 Revenue Assessed 479.77
* 100% collection efficiency

Revenue and Cash Flow Projections at Different Levels of Collection Efficiency


The workings have been made assuming a purchase of 2084.2 MU and sale of 1338 MU at T&D
loss of 35.8% and at different collection efficiencies.

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Table-5.19: Cash flow projections
Collection Efficiency 100% 88% 86% 84%
Income
Revenue Assessed 479.77 479.77 479.77 479.77
Revenue Collected 479.77 422.20 412.60 403.01
Non-Tariff Income 35.93 35.93 35.93 35.93
Subsidy 0 0 0 0
Total 515.71 458.13 448.54 438.94

Expenditure
CASH
Employee Cost 44.60 44.60 44.60 44.60
A&G 1.40 1.40 1.40 1.40
R&M 10.85 10.85 10.85 10.85
IFC 4.38 4.38 4.38 4.38
Other Expenses 7.67 7.67 7.67 7.67
Sub Total 68.90 68.90 68.90 68.90

NON-CASH
Depreciation 20.91 20.91 20.91 20.91
Interest (Term Loan) 0 0 0 0
Interest (On Deferred Power Cost) 0.00 1.19 2.35 3.50
Return on Capital Base 0 0 0 0
Sub Total 20.91 22.10 23.25 24.40

Total Expenditure Excluding Power Purchase 89.91 91.00 92.15 93.30

Funds Available for Power Purchase


(a) For Cash Break Even 446.81 389.23 379.64 370.04
(b) For Revenue Break Even 425.90 367.13 356.39 345.64

Deficit at Power Purchase Cost of (Cost of 1.92


Supply)
(a) Cash 47.67 (9.90) (19.50) (29.10)
(b) Revenue 26.76 (32.0) (42.75) (53.50)

Amount KESCO will need to borrow for paying (47.67) 9.90 19.50 29.10
for power purchase to UPPCL for Cash Break
Even if BST is as per the "Cost of Supply
Approach"

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Conclusion
The performance analysis carried out in Chapter 2 and in this Chapter falsifies the myth that
Kanpur is one of the paying areas of UPPCL. The harsh reality is that it paid only Rs. 1.39 per
unit as against the cost of Rs. 1.57 per unit of power purchased by UPPCL in FY02. The present
indications are that in FY03 with the closure of a major bulk consumer the situation is likely to
deteriorate further. In FY02, the distribution cost reported by the licensee was Rs. 0.84 per unit
sold and the receivables amounted to 18.8 months of average billing. The cash flow projections
have been worked out with losses at 35.8% and at different level of collection efficiency. With
the bulk purchase price of Rs. 1.92 per unit and at collection efficiency of 88% the licensee
would experience a cash shortfall of Rs. 9.90 Crore. The Commission has provided for the
interest to be paid on borrowing required to bridge this cash shortfall. The licensee would cash
& revenue breakeven at 90% and 94.6% collection efficiency respectively. These projections are
achievable by a determined management.

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