Date : 17th October,

2007
 Management Quotes
"The conventional definition of
management is getting work done
through people, but real
management is developing people
through work.“
— Agha Hasan Abedi
 Topics to share with you
Why Distribution Sector important ?
Ailments of Distribution Sector
Cost Components in Distribution
Financial Statements of a Distribution
Company
Capital Budgeting Techniques
Management of Finance in Distribution
Company
Regulatory Framework and Impact of Tariff
Focus Required in Distribution
Meter Reading, Billing and Collection Growth,
Life - Alumni Perception (Engineers vs Finance Officers) etc., Frog
xxx Efficiency Gains, Capex, Outsourcing, Girl
 Power Sector Reforms Impact !
In India : About 434 Distribution Circles

Out of total energy, 55% is billed, 41% is realised

Expected outcome of reforms at macro level are:

Elimination of Commercial Losses –ARM Rs.20,000 Crs.

Technical Loss Reduction to optimum level -

– additional energy - 10,000 to 20,000 MW
– avoid new capacity addition - 15,000 to 18,000 MW
– avoid investment - Rs.60,000-70,000 Crs. oP w
,

e : M e vi e
c
Estimated Cost of inefficiencies is about Rs.57000 Crs. o ur P R
S DR
AP
 Miracle
What is the definition of madness?

“Doing what you have always done and thinking

somehow magically performance will
improve”. M & Hat

In Distribution Sector of India, till Power Sector

Reform initiatives were taken, all SEBs were
trying the same old techniques and methods to
improve but with no positive results.
Why Distribution Important ? Waterman Legend
Gen./ Tr./ Dist.

• Ultimate point where sector goal fulfilled

• Ultimate point of cost recovery.
• Value addition.
• Maximum interface with the end
consumer exists.
• Non-performance affects larger parties.
• Problems encountered are innumerable
 Why Distribution Important ?
• Inefficiencies - cascading effect on
upstream activities.
• Sector demand and require maximum
cross functional management input –
– Technical, Operational, Financial,
Commercial, Marketing, IT, HR, etc.,
 Objectives of Power Sector Reforms
• Pave the way for a healthy, dynamic,
financially viable power sector.
• Create self sustained growth for the
sector.
• Meet the demand of consumers –
supplying quality power at reasonable
tariff.
• Develop creditworthiness to attract
investments.
 Objectives of Power Sector Reforms

• Distancing State Govts. from the

ownership and operations of the power
sector.
• State Govts. to retain with itself only the
role of broad policy formulation.
• Fostering the much needed commercial
orientation to the ailing power sector.
• Encourage competition
 Distribution Reforms
• APDRP launched by GoI is one of the major initiatives
taken to reform the distribution sector throughout the
country.
• MoP, GoI has identified improvement in distribution
sector as the key area for long term sustainable power
sector growth in the country.
• The Electricity Act, 2003 contains specific provisions
relating to Distribution (Part VI - Sec.42 to 60)
• Tariff Policy published by GoI contains specific
provisions relating to Distribution Sector.
 MoP’s Six Level Intervention
MoP, GoI initiated six level intervention strategies to
strengthen power sector viz., at National Level, State
Level, SEB Level, Distribution Level, Feeder Level and
Consumer Level.
Issues relating to Distribution :
Consumer Level :
Distribution: Feeder Level:
Issues
Issues Issues Reliability, Voltage,
Outage Reduction Accountability Metering, Billing,
Loss Reduction Initiatives Collection, Consumer
Satisfaction
Voltage Reliability Efficiency - Billing
and collection Initiatives
Initiatives
Capacity Building Energy Conservation
100% billing
Energy Accounting Project Management DSM
Technical Public Awareness
Responsibility
Accounting Upgradation Road Shows
 Ailments of Distribution Sector
• Distribution Loss – Technical and Commercial
• Metering – Large number of consumer installations not
metered yet.
• Collection Efficiency – Poor recovery affecting cash
flow and other consequential problems. AT&C Loss
level.
• Capex – Absence of internal resources; Dependency
on borrowed capital
• Tariff Risk – Tariffs not cost reflective; No timely
revision, price elasticity of demand.
• Subsidy – Heavy dependency on State Govt.; No timely
release, Huge outstanding (Ref.Sec.65 of EA 2003).
 Ailments of Distribution Sector
• Cross Subsidy – Exorbitant tariffs for Industrial
and Commercial category, Exit from Grid,
Captive generation.
• Demand Supply Gap – Maximum demand from
subsidised/non-paying consumers, Govt.
Policies, Technical constraints.
• Strength of Network - Inadequate and ageing
distribution network
• Theft - Large scale theft
• Inefficient use of electricity by end consumers.
Four Candles
Keep Going
 Financial Statements

 Trading (Manufacturing) Account

 Profit and Loss Account

 Balance Sheet

 Cash flow Statement AS

 Profit and Loss Account
• Income and Expenditure of a Company during a
specified period are depicted here.
• P&L Account indicates the financial performance of
the Company during the said period.
• In Power Utilities , the Revenue from , Transmission /
Sale of power, Non-Tariff Income and Subsidies if any
are included under Income.
• The Expenditure includes Power Purchase Cost,
Employee Costs, R&M Expenses, A&G Expenses,
Interest, Depreciation and Other Revenue Expenses.
 Profit and Loss Account
• The difference between the Income and
Expenditure may be either Profit or Loss. This
is normally referred to as ‘Bottom Line’ of the
Company’s P&L Account.
• For each item of Income and Expenditure
further break-up details are disclosed in
separate Schedules. The number of schedules
may vary depending on the extent of
disclosure.
Accrual Basis vs Cash Basis Impact and Distortions
Year 2004-05 2005-06 2006-07
Energy Sales (Units) 10000 12000 12000
Cost assumed (Rs. per Unit) 3.75 4.75 5.75
Total Cost for the year (Rs.) 37500 57000 69000
Average Tariff (Rs. per Unit) 4.00 5.00 6.00
Billed Demand on Consumer (Rs.) 40000 60000 72000
Collections during the year 30000 66000 60000
(Rs.)

Results on Cash Basis

Profit / Loss (-) (Rs.) (-) 7500 9000 (-) 9000
Avg. Realisation Rate (Rs. / Unit ) 3.00 5.50 5.00
Results on Accrual Basis
Profit / Loss (-) (Rs.) 2500 3000 3000
Avg. Realisation Rate (Rs./ Unit) 4.00 5.00 6.00
 P / L A/c in ‘T’ Form – A sample
Dr. Profit and Loss Account for the year ending 31st March, 2006 Dr.

Expenditure Income (or Revenue)

Amount Amount

To Purchase of Power By Revenue from Sale of power

To Employee Costs to consumers
To Repairs and Maintenance By Revenue from inter-state
Expenses trading of power
To Administration and General By Wheeling Charges
Expenses By Open Access Charges
To Interest and Finance Charges By Miscellaneous Income from
To Depreciation consumers
To Prior Period Expenses (or By Non-Tariff Income
credits) Loss (balancing figures)
To Other Expenses
Profit (balancing figure)
Total Total
 P / L A/c in Horizontal Form – A sample
Particulars Amount
REVENUE :
Revenue from Sale of power to consumers
Revenue from inter-state trading of power
Wheeling Charges
Open Access Charges
Miscellaneous Income from consumers
Non-Tariff Income
Total Revenue
EXPENSES :
Purchase of Power
Employee Costs
Repairs and Maintenance Expenses
Administration and General Expenses
Interest and Finance Charges
Depreciation
Prior Period Expenses (or credits)
Other Expenses
Less : Expenses Capitalised
Total Expenses
Net Profit or Net Loss
 Profit & Loss Account of a DISCOM – A sample
Particulars Amount Other Data
REVENUE : Energy Input :
Revenue from Sale of power to consumers 940.91
6214 MUs
Revenue Subsidy from the State Government 828.25
Non-Tariff Income Sales :
7.46
Total Revenue 4505 MUs
1776.62
EXPENSES :
1421.51 Distribution Loss :
Purchase of Power
150.65 27.50 %
Employee Costs
17.34 Average Cost :
Repairs and Maintenance Expenses
28.21 Rs.3.65/unit
Administration and General Expenses
Interest and Finance Charges 41.92 Average Realisation
Depreciation 82.20 :
Prior Period Expenses (or credits) -1.14
Rs.2.09/unit
Other Expenses 27.18
Cross Subsidy :
Return on Equity 8.74
Rs. 97 Crs.
Total Expenses 1776.62
Capex :
Rs.213 Crs.
 Balance Sheet
• Assets and Liabilities of a Company are depicted
here.
• It indicates the financial position of the Company as
at the end of a period. The figures shown in Balance
Sheet are cumulative since the inception of the
Company.
• The Schedules to the Balance Sheet may vary
depending on depiction.
• Assets broadly include Fixed Assets, Investments,
Current Assets and Deferred Revenue Expenditure.
Contd.,
 Balance Sheet
• Under Liabilities the items of Equity Capital (Share
Capital or share Deposit), Reserves and Surplus,
Loans (Secured and Unsecured), Service Line and
Security Deposits from Consumers are shown.
• Current Assets include Inventories, Sundry Debtors
(Receivables), Cash and Bank Balances, Loans and
Advances and Other Assets.
• Current Liabilities include Power Purchase
Liabilities, Security Deposit from
Contractors/Suppliers, Bills payable and Provisions.
 BALANCE SHEET in Horizontal Form – A sample
Particulars Amount
SOURCES OF FUNDS :
Share Capital
Reserves and Surplus
Secured Loans
Unsecured Loans
Deposits from Consumers
TOTAL
APPLICATOIN OF FUNDS :
Fixed Assets – Gross Block
Less Accumulated Depreciation
Net Block
Investments
Capital Work in Progress
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Other Assets
Total Current Assts
Less Current Liabilities & Prov.
Net Current Assets
Deferred Revenue Expenditure
TOTAL
 BALANCE SHEET in ‘T’ Form – A sample
Balance Sheet as at 31st March, 2006
Capital and Liabilities Assets and Properties
Amount Amount
Share Capital Fixed Assets – Gross Block
Reserves and Surplus Less Accumulated Depreciation
Secured Loans Net Block
Unsecured Loans Investments
Deposits from Consumers Capital Work in Progress
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Other Assets
Total Current Assts
Less Current Liabilities & Prov.
Net Current Assets
Deferred Revenue Expenditure
Total Total
 Cash Flow Statement
• While the P&L Account is based on ‘Accrual’ basis of
reckoning Income and Expenditure items, in Cash
flow statement the income actually received in cash
and expenses actually paid in cash are considered.
• CFS is very vital in a situation where there is
significant variation in Income and Expenditure
figures between accrued and cash basis.
• Depreciation being ‘non-cash’ item of expenditure is
excluded from expenditure outgo in Cash flow
statement. Similar is the treatment for Net profit
(ROR/ROE) which remain with the Company.
 Cash Flow Statement
• Deposits from consumers, Augmentation charges, capital
receipts / grants received in cash, etc., which are not figured
in P&L Account are taken as Cash inflow items in CFA.
• The sum of Depreciation and RoE along with above type of
receipts constitute ‘Internal Resources’ of the Company.
• The ‘Debt Repayment’ (only principal amount) has to be made
normally out of such internal resources.
• If there is residual amount out of Internal Resources after
such debt repayment the same would be available for meeting
Capital Expenditure.
• On the other hand, if there is shortfall to make debt
repayment out of internal resources, the Company has to
borrow for repayment of existing debt (a debt trap position).
 Cost Components in Distribution
• Power Purchase Cost
Internal Resources
• Transmission Cost
• Employee Costs u s
n
Mi
• R & M Expenses
Loan Principal Repayment
• A & G Expenses
(Existing Loans only)
• Depreciation
e is
• Interest & Fin. c If Balance is
n
l tive
a
a Negative
Charges fI B posi
External
• Other Costs Borrowing
• ROE Other Costs Capex
DSCR
 Annual Report
An Annual Report is presentation of the Company’s
performance during a period to the Shareholders.
Contents :
• Chairman’s Statement
• Director’s Report Time
• Financial Statements
• Comments of C&AG of India
• Auditors’ Certificate – Observations of Statutory Auditor
and Management Reply
• Disclosures
• Others
Corporate Governance, Directors’ responsibility statement, Disclosure under
the Companies rules 1988 (i.e., Energy conservation, Technology
absorption, Foreign Exchange earnings and outgo, etc.,), Statement
pursuant to Sec.212 – relating to Subsidiary, Management’s discussion
and analysis on industry and key issues, Committees of the Board,
General Body meetings, etc.,
True and Fair View
of the
Financial
Performance
and Position
Never Say Lie
 Capital
Budgeting
Techniques

Four Things
Capital Budgeting Techniques

• Payback Period
• Discounted Cash flow
Techniques
– Net Present Value (NPV)
– Internal Rate of Return (IRR)
– Benefit-cost Ratio (BCR)
 PAY BACK PERIOD
Original Investments
________________
PBP =
Annual Cash-inflows

Example :
Original Investments Rs.2,80,000
Average Annual cash-inflow
(savings after tax but before depreciation) Rs. 80,000

280000
________ 3.5 Years
=
80000
 NET PRESENT VALUE
Year Project A Project B
Initial Investment Rs.50000 Rs.50000
Cash-inflow 1st Year Rs.15000 Rs.5000
2nd Year Rs.20000 Rs.15000
3rd Year Rs.25000 Rs.20000
4th Year Rs.15000 Rs.30000
5th Year Rs.10000 Rs.20000
Total Inflow Rs.85000 Rs.90000

Evaluation of Projects without using NPV method :

Project A : Rs.85000 - Rs.50000 = Rs.35000
Project B : Rs.90000 - Rs.50000 = Rs.40000

As the Net Cash Inflow is more in respect of Project B than Project

A, Project B is preferred and considered as financially viable.
 NET PRESENT VALUE
Year Project A Project B Discount Project A Project B
Factor at 10% PV PV
Initial Investment Rs.50000 Rs.50000
Cash-inflow 1st Year Rs.15000 Rs.5000 0.909 Rs.13635 Rs. 4545
2nd Year Rs.20000 Rs.15000 0.826 Rs.16520 Rs.12390
3rd Year Rs.25000 Rs.20000 0.751 Rs.18775 Rs.15020
4th Year Rs.15000 Rs.30000 0.683 Rs.10245 Rs.20490
5th Year Rs.10000 Rs.20000 0.620 Rs. 6210 Rs.12420
Total Inflow Rs.85000 Rs.90000 Rs.65385 Rs.64865

Evaluation using Net Present Value :

Project A : Rs.65385 - Rs.50000 = Rs.15385
Project B : Rs.64865 - Rs.50000 = Rs.14865
Based on NPV, Project A is preferred than Project B as the NPV of
future Cash flows is more in ‘A’ than that of Project B
 Internal Rate of Return (IRR)
Procedure / Method of calculation :
 First determine the NPV using some assumed
Discount factor.
 By trial and error method change the discount
factor rate and rework the NPV until the
Original investment equate the Present Value.
 The rate at which the Investment equates the
Present Value is the IRR of the project.
 The IRR is compared to the cost of capital and
the project having higher difference is preferred
to the other projects.
 Benefit to Cost Ratio
(BCR or Profitability Index method)
PV of future Cash inflows
__________________
BCR =
Investments

Example :
Original Investments Rs.5000
PV of future cash inflows Rs.5860
8000
5860
________
= 1.17
5000
Higher the BCR, the more desirable is the investment.
 Comparison – NPV vs BCR
Project A Project B

Rs.

Present Value 30000 60000

Investments 20000 45000

Net Present Value 10000 15000

On NPV basis, Project B is feasible and preferred

Benefit to Cost Ratio 1.50 1.33

On BCR basis, Project A is feasible and preferred

MBA vs CA
 Some
Accounting
Issues
{ Accounting Concepts,
Conventions, Distinctions }
 Accounting Concepts
Money measurement concept
Separate entity concept
Going concern concept
Cost concept
Dual aspect concept
Accounting period concept
Objective evidence concept
Realisation concept
Accrual concept
Matching concept
 Accounting Conventions

Convention of Materiality
Convention of conservatism
Convention of consistency
Convention of full disclosure
 Distinctions One should invariably know
Capital Expenditure and Revenue Expenditure :
Funds used by a company to acquire or upgrade
physical assets such as property, industrial
buildings or equipment is capital expenditure. On
the other hand, expenditure incurred for running
and maintaining the assets or purchasing goods for
resale is revenue expenditure.
Capital Receipt and Revenue Receipt :
Any receipt either in cash or kind meant for creation
of an asset is a Capital Receipt, whereas the receipt
from trading or non-trading activities is a Revenue
Receipt.
 Distinctions One should invariably know
Cash Expenditure and Non-cash Expenditure:
Revenue Expenditure involving cash outgo is Cash Expenditure.
Examples are Salary and wages, Repair expenses, interest,
etc., . Revenue Expenditure charged to P&L A/c but not
involving cash outgo is Non-cash expenditure. Examples are
Deprecation and Return on Equity or Profit.
Revenue Accrued and Actually Realised :
Revenue accrued means revenue earned during a period. It
includes both revenue accrued and received and also revenue
accrued but not received during the period. On the other hand
Revenue Actually Realised is the revenue actually realised in
cash during the period. Revenue Demand or billed revenue is
‘Revenue Accrued’ and Collections from consumers is
‘Revenue Actually Realised’.
 Distinctions One should invariably know

Charged to Revenue :

All items which are taken as expenditure in P&L Account for comparing

with the Revenue and arriving at profit or loss are stated to have

been ‘Charged’ to Revenue. These items have to be invariably

considered for finalising the Accounts. Examples are Salaries,

interest, etc., which have to be absorbed by the Company invariably.

Appropriation of Profit :

Appropriation means distribution or taking ‘out of’ profit earned.

Examples are Transfer to Reserves, Payment of Dividend, etc.,.

Appropriation of profit arises only when the Company has earned

profit. Other-wise there is no scope for appropriation.

 Distinctions One should invariably know
Capital Expenditure and Revenue Expenditure :
Funds used by a company to acquire or upgrade physical assets
such as property, industrial buildings or equipment is capital
expenditure. On the other hand, expenditure incurred for
running and maintaining the assets or purchasing goods for
resale is revenue expenditure.
Capital Receipt and Revenue Receipt :
Any receipt either in cash or kind meant for creation of asset is a
Capital Receipt, whereas the receipt from trading or non-
trading activities which towards acquisition or asset Liability
‘secured’ on asset with lender having legal right to proceeds
from sale of that asset on liquidation, up to the amount of the
liability. Liability without any such security is ‘Unsecured’
Loan.
 Distinctions One should invariably know
Cash Expenditure and Non-cash Expenditure:
Revenue Expenditure involving cash outgo is Cash Expenditure.
Examples are Salary and wages, Repair expenses, interest,
etc., . Revenue Expenditure charged to P&L A/c but not
involving cash outgo is Non-cash expenditure. Examples are
Deprecation and Return on Equity or Profit.
Revenue Accrued and Actually Realised :
Revenue accrued means revenue earned during a period. It
includes both revenue accrued and received and also revenue
accrued but not received during the period. On the other hand
Revenue Actually Realised is the revenue actually realised in
cash during the period. Revenue Demand in DCB Statement
can be compared to ‘Revenue Accrued’ and Collections can be
compared to ‘Revenue Actually Realised’.
 Capex, Debt, Depreciation, Profit – Inter-related
• There are two sources for funding capex. One is internal resources and
the other is external source.
• Depreciation and Profit which are non-cash expenditure constitutes
‘Internal Resources’.
• Repayment of existing Debt is not an expenditure item chargeable to P&L
A/c, but involves cash outgo.
• Repayment of existing debt has to be met out of internal resources
available from depreciation and profit.
• After meeting repayment of existing debt obligation out of internal
resources, if any amount is left, it is available for funding capex.
• If there is negative internal resource generation i.e., repayment of
existing debt is more than available internal resources, the shortfall has
to met out of fresh borrowings or it results in default in repayment of
debt. This situation is termed as ‘debt trap’.
• To ascertain the capacity of the company to repay its existing debt,
normally Debt Service Coverage Ratio (DSCR) is calculated.
 Issues Normally Misunderstood
by Non-Finance Officers
Capital or Revenue Expenditure make no difference
Cash collection at Revenue Units is Company’s Income
Profit shown in P&L Account is available in cash with the Company
Deposits collected from consumers is also our Revenue
Augmentation charges collected is also our Revenue
Company can raise loan to whatever extent it desires
Non-capitalisation of an asset has no financial impact
As the Co.,.is making all payments in time, its financial health is good
Payment of Suppliers and Contractors Bills can be met out of Revenue
Collections.
Average Realisation Rate (ARR) means revenue realised ie., collected
per unit of energy sold.
 Issues Normally Misunderstood
by Non-Finance Officers
Revenue Arrears written off would reduce the Company’s burden
Company will earn profit if the entire revenue demanded is collected
during a specified period (ignoring the cost & quantum energy
purhcase & sales)
Entire Depreciation is available as internal resources for taking up
capital works
Maintaining 100% collection efficiency i.r.o. revenue would solve all
financial problems (ignoring the huge accumulated past arrears)
Company is generating resources for meeting capital works program
(either through support from Govt. or out of internal resources)
In spite of not recovering 100% revenue demand and required subsidy
not released in full during a period Company is able to meet its routine
committments – Doesn’t mean Company’s financial health is sound.
By deferring discharge of current liabilities, such payments might
have been made.
TARIFF
Related
Issues
 Tariff / Regulatory Risk; MYT

G
IN
C
N
A
L
A
B

Reasonable Tariff Recovery of Full

Rates for Consumers Cost to the Licensees
Quality of Power Attract Investments
 Tariff Classification

Generation Tariff

Transmission Tariff

Distribution Tariff

Retail Supply Tariff

 Tariff – Cost - profit
Price = Cost + Profit.

Tariff = Cost + RoE

Inevitable
for the
Regulated Distribution Ceiling /
Licensee to Cap
control cost
 Pricing (Tariff) Principles
• In a competitive market prices are
determined by demand-supply
equilibrium
• Profits are resultant
• Promote economic efficiency
• Non discriminatory tariff structure
• Easy to understand and implement
• Avoid Tariff shocks
• Gradual reduction of cross-subsidies
 Methods of Tariff Determination

1. Rate of Return (RoR) Regulation : All costs incurred by

Utility together with a reasonable return on its
investments are allowed to be passed through to
consumer by means of Tariff.
2. Performance Based Regulation (PBR) : A system of
regulation where the tariff that can be charged is linked
to some performance standards. Utility gets higher
return than normal if it can improve its performance
beyond the standards and vice-versa.
3. Multi-Year-Tariff (MYT) : Tariff setting methodology
providing future tariff determination according to set
formula. It provides greater certainty regarding cash
flows.
 The Electricity Act, 2003 - Part VII Tariff

Section 61 to 66 of the Act deals with the Tariff.

n
Appropriate Commission specify

io
iss
terms & conditions and shall be

m
guided by the following :

m
Co
• CERC Norms – principles and methodologies specified
• Commercial Principles – conducting generation,
transmission, distribution and retail supply business.
• Competition, efficiency and economic use or
resources
• Safeguarding Consumers’ interest and recovery of
cost
Contd.,
 The Electricity Act, 2003 - Part VII Tariff

• Principles of rewarding efficiency

• MYT principles
• Cost reflective
• Promote co-generation and renewable sources
of energy
• National Electricity Policy and Tariff Policy
• No undue preference but may differentiate
(based on load factor, power factor, voltage, total consumption,
geographical position, nature of supply)
Contd.,
 The Electricity Act, 2003 - Part VII Tariff

• No tariff amendment more than once in

any financial year
• Procedure for calculating ERC
• Determination of tariff by bidding process
• Procedure for tariff order
• Provision of subsidy by State
Government
 TARIFF POLICY
Legal Background :
• In compliance with section 3 of the Electricity Act, 2003 and
in continuation of NEP, Central Govt. notified the Tariff
Policy on 6th January, 2006.
Objectives :
• To ensure availability of electricity to consumers at
reasonable and competitive rates.
• Ensure financial viability of the sector and attract
investments
• Promote transparency, consistency and predictability in
regulatory approaches and minimise perceptions of
regulatory risks.
• Promote competition, efficiency in operations and
improvement in quality of supply.
 TARIFF POLICY
Highlights (Contents) :
• General Approach to Tariff
– (ROI, Equity norms, Depreciation, Cost of Debt,
Forex risk, Operating norms, MYT)
• Generation
– Procurement of power (all future procurements through CBG
only), Tariff structuring, Captive generation, NCE
projects.
• Transmission pricing, loss allocation, other issues.
• Distribution – MYT, Revenue requirements and costs,
Tariff Design ie., linkage to CoS, Two part tariff, Cross
subsidy surcharge, etc.,.
 MULTI – YEAR - TARIFF (MYT)
Legal background :
• According to Sec.61 of the Electricity Act,
2003, the Commission shall specify the terms
of conditions for determination of tariff.
• The GoI notified the Tariff Policy on 06.01.2006.
• The Tariff Policy specifies MYT frame to be
adopted.
• In Karnataka, the KERC has notified the Terms
and Conditions of Tariff under MYT framework
on 31st May, 2006.
 MULTI – YEAR - TARIFF (MYT)
MYT Framework for calculation of ARR & ERC.
• Control Period – forecast of ARR and filing of
ERC
• Forecast – based on reasonable assumptions
• Trajectory – for specific variables, performance,
incentives and disincentives.
• Annual Review of Performance – controllable
and uncontrollable factors.
• Mechanism for pass through of gains and
losses
• Determination of tariff for each financial year
within the control period based on the
approved forecast
 MULTI – YEAR - TARIFF (MYT)
Other issues in MYT framework
• Target Availability
• Treatment of Losses
• Capital Expenditure
• Debt Equity Ratio
• Element of Costs
• Taxes on Income
• Non-tariff income
• Incentive and Rebate
• Surcharge
• Late Payment charge
 Annual Tariff Revision vs MYT
Annual Revision : MYT :
Filing of ARR / ERC Filing of ARR and ERC for Control Period
Validation Year-wise Details
Public Hearing Process the Application
Discussion / Meetings Validation and Objections/Suggestions from
public
Tariff Order
Issue Order
Repeat the same
exercise for each year Order contains targets
Annual Review of Performance
Pass Order – approve gain or loss,
mechanism for sharing / pass through,
approve modifications to the forecast for
remainder period of control period,
approve modifications to tariff for the
remainder control period.
Aggregate Revenue Requirement (ARR)
Particulars Amount (Rs. Crs.)
Power Purchase Cost 7585
Employee Costs 1222
Repairs and Maintenance Expenses 156
Administration and General Expenses 218
Depreciation t i ve 302
st r a
Interest and Finance Charges Illu mbers 653
Other Expenses Nu 140
Net Prior Period Expenses 71
ROE 233
Less : Expenses Capitalised -78
Total Expenses (after capitalisation) 10502
Less : Other Income (Non-Tariff Income) 62
Aggregate Revenue Requirement 10440
 Revenue Gap, Subsidy & Tariff Increase
Particulars Amount
(Rs. Crs.)
Aggregate Revenue Requirement
10440
(ARR)
Revenue at existing rates (on accrual
8014
basis)
Revenue Gap before Subsidy from
2426
GoK
Subsidy provided by GoK for the year 1780
Revenue Gap after Subsidy for which
Tariff increase is proposed by 646
ESCOMs
 Govt. Policies vs Commercial Viability
Government Policies on following have
significant impact on the Performance of
Distribution Companies :
– Quantity of power supply – particularly
to subsidized sector.
– Tariff path – i.r.o. subsidized
categories
– Provision for subsidy in the budget
– Capital support
Govt. Policies vs Commercial. Viability
– Waivers and write offs
– Concession to certain consumers
– Policy decisions on Generation
capacity addition, Industrial Policy,
Agricultural policy, Infrastructure
Development, etc.,
– Implementation of socio-economic
schemes
– Targeted economic growth – GDP
 Business Plan / Turnaround
• Distribution Companies have to develop a
Business Plan envisaging future vision.
• Such Plan should have realistic targets based
on past trend and future challenges
• Plan should have a time bound roadmap for
achieving business turnaround.
• Key performance parameters to be laid down
for regular monitoring and revising the target
suitably during the projection period.
 Change Requirement
• Reduce T&D Losses
Technical Loss
– Optimum feeder utilisation
– Proper conductor sizing
– Proper distribution transformer capacity
– Reactive power management
– Use of low loss equipment
– Reducing the breakdown
 Change Requirement
Commercial Loss
– Accurate and efficient metering
– Replacement of faulty meters with least
delay
– Regular consumer survey
– Energy accounting
– Prompt reading of meters and billing
– Reducing the billing cycle
 Change Requirement
• O&M Activity vs Commercial Activity :
– Distinguish these two activities.
– More focus is required on Commercial aspects.
• Improve Collection Efficiency
– Monitor recovery status on regular basis
– Adopt different methods for habitual defaulters
– Enforce disconnections effectively
• Enhance employee productivity
– Put in place HR Policy
– Skill up-gradation through Training
 Change Requirement
• Focus on Customer Satisfaction
– Customer Charter
– Complaint Handling
– Grievance Redressal
– Customer Meet (Jana Samparka Sabha)

• Supply Quality Power

– Reliability, Voltage, Frequency

• IT intervention
– Computerisation, SCADA, VSAT,
 Change Requirement
• Strengthen Internal Administration
– Corporate Governance
– Commitment

• MIS
– Strengthen the data base
– Look at real time data for decision making

• Work on sound principles of Management

• Adopt
– A proactive approach towards emerging business
– Revenue model which would require different set of skill,
knowledge and mindset.
 Change Requirement
• Infuse Equity in cash.
• Foster Economic Growth
– Industrial / Agricultural growth
– GDP Growth – Power Sector contribution
• Innovative Schemes
• Cost Consciousness – Thrust on Power Purchase Cost
– CARR
– Cost Audit
• Adopt state of the art technology
• Capex – Optimal level program, Right Capital
Budgeting Techniques
 Evaluation of Performance
Questions for self-evaluation of a Distribution Company:
• How do our customers rate us?
• How is our finances?
• Can we continue to our performance and
create value for our customers?
• What must we excel at – operational efficiency,
customers satisfaction, ideal employer, growth
and learning or a Distribution company per
excellence?
Angel
Tap
e-mail id of H.L. Mukunda

hl_mukunda@yahoo.com

Company Anger Laws People – Makes Difference Motivation

 Cross Subsidy
Subsidising Category : Example : LT Industrial Category
Average Realisation Rate Rs.4.72 per unit
Average Cost of Power Supply Rs.3.70 per unit
Cross Subsidy per unit Rs.1.02 per unit
Total Consumption (sales) of this category 1405 MUs
Total Cross Subsidy amount available from this Rs.143.31 Crs.
category
Subsidised Category : Example : IP Sets below 10 HP
Average Realisation Rate Rs.0.63 per unit
Average Cost of Power Supply Rs.3.70 per unit
Difference in ARR and ACPS Rs.3.07 per unit
Total Consumption (sales) of this category 8790 MUs
Amount to be subsidised to this category either from Rs.2698.53 Crs.
Cross Subsidy or Revenue Subsidy from GoK
 SALARY PACKAGE
What I need….
 SALARY PACKAGE
What I asked my Consultant for………….
 SALARY PACKAGE
What my HR promised…….
 SALARY PACKAGE
What I felt it as …….
 SALARY PACKAGE
What I have got …. Before Tax
 SALARY PACKAGE
What I have got …. After Tax
 Debt Service Coverage Ratio
(DSCR)
DSCR indicates the amount of cash flow available to meet
annual interest and principal repayment on debt

EBIT
___________________
DSCR =
Interest + Principal
Repayment {1/(1-t)}

Where : EBIT = Earnings before Interest and Tax

‘t’ represents the corporate tax rate

Lower the ratio higher will be risk of debt servicing. This ratio
should ideally be over One.
 Aggregate Technical and Commercial
Loss (AT&C Loss)
Concept :

It represents the difference between units input and the units realised. It captures
both the energy loss and the impact of collection efficiency
Importance :
AT & C Loss is one of the best yardsticks to measure the efficiency of an
ESCOM. This can also be worked out for any Revenue Unit like Feeder, DTC,
Sub-division, Division, Circle, Zone.
Billing / Collection / Business Efficiency :
The percentage of energy billed (ie., input minus T&D Loss) is the ‘Billing
Efficiency’. The percentage of Revenue Collection to Revenue Demand is
‘Collection Efficiency’. The product of Billing and Collection Efficiency is
‘Business Efficiency’. The residual ie., 1 minus Business Efficiency is the AT&C
Loss (in%).
 A T & C Loss (Figures of KPTCL and ESCOMs )
Example Actual
Energy Purchased (or Energy Input) 100 Units 31260 MUs

Energy Sold by ESCOM to Consumers (incl. sales to 78 Units (T& D Loss in 21572 MUs
Hukkeri Society ) Units 22)
Revenue Demand (billed by ESCOM to Consumers) 78 Units (@ Re.1 / Unit) Rs. 7,000 Crs.

Revenue Collection 65 Units (@ Re1 / Unit) Rs. 6,300 Crs.

A T & C Loss 35 Units

T & D Loss { (100 minus 78 in % for Ex.) and ( 21572 / 31260 for 22.00 % 31.00 %
Actuals) }
Billing Efficiency (ie., 100 minus T&D Loss) 78.00 % 69.00 %

Collection Efficiency {65 / 78 for Ex.) and ( 6300 / 7000 for 83.00 % 90.00 %
Actuals)}
Business Efficiency (i.e., Billing Efficiency X Collection Efficiency) 65.00 % 62.10 %
A T & C Loss (100 minus Business Efficiency) 35.00% 37.90 %

( 21572 ) ( 6300 )
AT&C _____________ X _______
Losses = 1 - X 100
( 31260 ) ( 7000 )

= 37.90 %
 Accounting Standards
• AS 1 – Disclosure of Accounting Policies
• AS 2 – Valuation of Inventories
• AS 3 – Cash Flow Statements
• AS 4 – Contingencies and Events occurring after the
Balance Sheet date
• AS 5 – Net profit or loss for the period, prior period
items and changes in Accounting policies.
• AS 6 – Depreciation Accounting
• AS 7 – Accounting for Construction contracts
• AS 8 – Accounting for Research and Development
• AS 9 – Revenue Recognition
• AS 10 – Accounting for Fixed Assets
 Accounting Standards
• AS 11 – Accounting for the Effects of changes
Foreign Exchange rates
• AS 12 – Accounting for Government Grants
• AS 13 – Accounting for investments
• AS 14 – Accounting for Amalgamations
• AS 15 – Accounting for Retirement benefits in the
Financial Statements of Employees
• AS 16 – Borrowing Costs
• AS 17 – Segment Reporting
• AS 18 – Related Party Disclosure
• AS 19 – Leases
• AS 20 – Earnings per Share
 Accounting Standards
• AS 21 – Consolidated Financial Statements
• AS 22 – Accounting for taxes on income
• AS 23 – Accounting for Investments in Associates in
Consolidated Financial Statements
• AS 24 – Discontinuing Operations
• AS 25 – Interim Financial Reporting
• AS 26 – Intangible Assets
• AS 27 – Financial Reporting of Interests in Joint
Ventures
• AS 28 – Impairment of Assets
• AS 29 – Provisions, Contingent Liabilities and
Contingent Assets
 MBA v/s Engineer

This particular joke won an award for the best joke in a

competition organized in Britain and this joke was sent by an
Indian......

An MBA and an Engineer go on a camping trip,

set up their tent, and fall asleep.
Some hours later, the Engineer wakes his MBA friend.
"Look up at the sky and tell me what you see."

The MBA replies, "I see millions of stars."

"What does that tell you?" The MBA ponders for a minute.

"Astronomically speaking, it tells me that there are

millions of galaxies and potentially billions of planets.
 Astrologically, it tells me that Saturn is in Leo.

Time wise, it appears to be approximately a quarter past three.

Theologically, it's evident the Lord is all-powerful and we are small and
insignificant.

Meteorologically, it seems we will have a beautiful day tomorrow.

Economically there are mass scales of stars in the sky.

So "Economy of Scale " would be the ideal strategy in that market.

Strategically such market would be a volume driven market

Financially it would be a low margin market.

From HR point of view we would require huge manpower

 What does it tell you?"

The Engineer is silent for a moment, then speaks.

  
 
"Practically"

"Someone has stolen our TENT"