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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.
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.
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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.
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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.
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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
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.
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
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.
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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.
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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.
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.
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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:
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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.
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
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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
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
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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
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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