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SUMMER INTERNSHIP REPORT

Study of electricity distribution system and Recommend on methodology for segregating

supply and wire businesses in retail competition for MERC

UNDER THE GUIDANCE OF

Mrs. Sreelatha Neelesh, Faculty, NPTI

&

Shri Rajendra Ambekar, Director (Tariff),

Maharashtra Electricity Regulatory Commission

At

Maharashtra Electricity Regulatory Commission, Mumbai

Submitted by

Vijay Chhabra

ROLL NO: 94

MBA (POWER MANAGEMENT)

(Under the Ministry of Power, Govt. of India)

Affiliated to

MAHARSHI DAYANAND UNIVERSITY, ROHTAK

AUGUST 2013



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Executive Summary

The hedge against volatility in the undulating/soaring electricity prices and the risks associated in

the wholesale spot market or the price exchange by the electricity retail market is the future. The

reason to choose this topic is obvious because of credentials MERC has as an initiator to revive

its course of action. This State Electricity Regulatory Commission pioneers in cajoling the

Distribution Licencees in segregating their accounting heads into Wire Business and Supply

Business vide the power vested to it by the Electricity Act, 2003. The report aimed to generalize

the ways in which apportionment of expenses to the respective businesses can be carried out for

the prudence check by the Commission.

The primary endeavor was to study the Regulatory framework. The competition in the

distribution of electricity is not in a developed stage in India compared to the international level.

The privatization and competition in generation in such countries was developed about a decade

before EA, 2003 was framed, though the amendments take place as and when required.

Transmission of electricity is still sought a monopoly in many Countries and controlled by the

Government. The distribution network operators and retail suppliers are defined their roles.

Segregation of their businesses invites competitiveness in a way that the utilities lure customers

by their marketing strategies including schemes and offers to save on their electricity

consumption and hence reduce the bills, akin to any other sector.

The learning from international experience provided with the insight to the benefits and

challenges to the sustainability of retail competition in India. The distribution Tariff Orders of

the Distribution Licencees in the State of Maharashtra were compared. The business plan models

were studied to derive the thinking or method to segregate the expenses into wire and supplybusinesses. Each accounting head for a utility was studied to analyze the impact on net

Aggregate Revenue Requirement. The comparison continued with the Tariff Orders of other

utilities. Trendline yielding equations for the graph were derived to assess its validity with that of

the business model of other utility. The distribution utilities from the States of Bihar and Gujarat

were also studied to analyze the segregation.



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Each accounting head is the function of dependent variables which also alter other independent

variables. The return on equity, say is dependent on the power purchase expenses, Regulatory

asset, opening GFA for the financial year computed by the Commission, etc. The Power

Purchase expense is the function of energy sales, transmission and distribution losses;

distribution losses are the function of the performance of the utility, and so on. The Operation &

Maintenance expense, say comprise of three types of expenses. The segregation of expenses of

one of the components is not in conjunction with that for the other type, as retrieved from the

tariff plans. The distribution licencee differ from each other in the system operation, inclination

towards energy efficiency or demand side management, capital investment plans in other

businesses, etc. The challenge was to arrive at the generalized form or Statements taking care of

the impact of rise in prices for the changeover consumers for the incumbent licencee. The scope

of the study extends to the application of partial differentiation in the equations that can be

formed.

Forum of Regulators, the congregation of the law makers has been able to convince the

Government for sustainability of retail competition in the country. The Regulatory Commissions

of some States have imbibed for segregating the accounts, which others need to follow. The

amendment in the Act would, definitely alleviate the risk of maintaining and managing separate

accounts of the two businesses for the Distribution Licencees, which currently, they are obliged

to do so in prerogative of the SERCs.

The generalizations, arrived at would be of immense usefulness to the Commission while

adopting the unified methodology, for apportionment or segregation of expenses into the

respective businesses, to be followed by the licencees. I have also provided with my views on the

examination of the business plans by the Commission and gave recommendations at places.



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List of Abbreviations

CEA Central Electricity Authority

ARR Aggregate Revenue Requirement

ISO Independent service Provider

FERC Federal Energy Regulatory Commission

CERC Central electricity Regulatory Commission

MERC Maharashtra Electricity Regulatory Commission

GERC Gujarat Electricity Regulatory Commission

BERC Bihar Electricity Regulatory Commission

BSES Brihan Mumbai Electric Supply and Transport Undertaking

TPC-D The Tata Power Company Limited – Distribution Business

RInfra-D Reliance Infrastructures Limited’s Distribution Business

MSEDCL Maharashtra State Electricity Distribution Company

Limited

UGVCL Uttar Gujarat Vij Company Limited

BSPHCL Bihar State Power (Holding) Company Limited

PJM Pennsylvania New Jersey Maryland Interconnection LLC

LLC Limited Liability Company

RTO Regional Transmission Organization

CAMMESSA (Compañía Administradora del Mercado Mayorista

Eléctrico), administrator of Argentina wholesale electricity

market



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DNO/DSO Distribution Network/Service Operator

CTU Central Transmission Utility

STU State Transmission Utility

PPE Power Purchase Expenses

O&M Operation and Maintenance

A&G Administration and General

R&M Renovation & Modernisation

GFA Gross Fixed Assets

NTI Non-Tariff Income

CSD Consumer Security Deposit

ARR Aggregate Revenue Requirement

ACoS Average Cost of Supply

RoCE Return on Capital Employed

NTP National Tariff Policy

NEP National Electricity policy

RoE Return on Equity

JERC Joint Electricity Regulatory Commission



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Table of Contents

Executive Summary...................................................................................................................... 2

List of Abbreviations .................................................................................................................... 4

List of Tables....................................................................................................................................... 8

List of Figures ..................................................................................................................................... 8

Chapter 1 Introduction ................................................................................................................ 9

1.1 Background of Retail business ........................................................................................................... 9

1.2 Challenges in distribution system of electricity. .............................................................................. 10

1.3 Benefits and challenges for sustainability of retail competition in India. ........................................ 12

1.4 Segregation of distribution business................................................................................................. 13

1.4.1 Functions of retail supply and wire network businesses ........................................................... 14

1.4.2 Regulatory structure .................................................................................................................. 17

1.5 Distribution models adopted in India and other countries................................................................ 17

1.5.1 (Maharashtra) India ................................................................................................................... 17

1.5.2 PJM............................................................................................................................................ 19

1.5.3 Australia .................................................................................................................................... 21

1.5.4 New Zealand.............................................................................................................................. 23

1.5.5 United Kingdom ........................................................................................................................ 26

1.5.6 Argentina ................................................................................................................................... 28

1.6 Learning from international experience ........................................................................................... 29

Chapter 2 Methodology.............................................................................................................. 30

2.1 Research Objective ........................................................................................................................... 30

2.2 Problem Statement............................................................................................................................ 31

2.3 Limitations........................................................................................................................................ 32

Chapter 3 Data Collection.......................................................................................................... 33

3.1 Comparison of expenses computed by the Commission for MYT Business Plans of BEST, TPC-Dand RInfra-D........................................................................................................................................... 33

3.2 Comparison of segregation of wire and supply businesses by the licencees in approved Multi Year

Tariff Business Plans .............................................................................................................................. 35

3.3 Analysis of Expenses........................................................................................................................ 38

3.4 Analysis of O&M expense ............................................................................................................... 38



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3.5 Impact of Net Expenses on ARR .............................................................................................. 40

Chapter 4 Analysis & Findings.................................................................................................. 41

4.1 Power Purchase Expenses including transmission Charges ............................................................. 41

4.2 Total Capitalization .......................................................................................................................... 41

4.3 Operation & Maintenance Expenses ................................................................................................ 42

4.4 Depreciation ..................................................................................................................................... 44

4.5 Interest on long term loans ............................................................................................................... 45

4.6 Interest on Working Capital ............................................................................................................. 46

4.7 Interest on Consumer Security Deposit ............................................................................................ 46

4.8 Provision for bad debts ..................................................................................................................... 46

4.8.2 System Average Interruption Duration Index (SAIDI) ................................................. 48

4.8.3. Customer Average Interruption Duration Index (CAIDI) ........................................... 48

4.9 Contribution to Contingency Reserves ............................................................................................. 52

4.10. Other Expenses including Incentive and Discounts ...................................................................... 53

4.11. Return on Equity............................................................................................................................ 54

4.12. Non tariff income .......................................................................................................................... 55

Chapter 5 Conclusions and Recommendations........................................................................ 56

5.2 Scope for further study ..................................................................................................................... 58

Chapter 6 Bibliography.............................................................................................................. 59



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List of Tables

Table 1 Symbol Notation for Case Example 1 ........................................................................................... 39

Table 2 Employee Cost expense................................................................................................................. 39

Table 3 Impact of Net Expenses on ARR................................................................................................... 40

List of Figures

Figure 1 Electricity industry supply structure ............................................................................................ 14

Figure 2 Reliability Pricing Model............................................................................................................. 21

Figure 3 Australia spot market structure .................................................................................................... 23

Figure 4 Methodology ................................................................................................................................ 31

Figure 5 Expenses computed by the Commission (Rs. Crores) ................................................................. 34

Figure 6 Segregation of wire and supply businesses by the Distribution Licencees.................................. 35

Figure 7 Comparison of segregation models with MSEDCL (ARR FY-11) ............................................. 38Figure 8 Case Example 1............................................................................................................................ 39

Figure 9 Comparison of contribution of the cost centers to the opening GFA........................................... 53



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Chapter 1 Introduction

1.1 Background of Retail business

Open access is the mechanism crafted to usher in competition and choice, and in turn facilitate

investments and protect the interests of the consumers. The Electricity Act, 2003 provides for

retail competition through open access or multiple licencees supplying through their own

distribution networks. While the provision of multiple licencees in the same area is perceived by

many as cherry picking by new entrants, others have criticized the requirement of multiple

networks as wasteful and suggested the complete separation of the supply function from ‘wires’

business, on the lines of the restructured electricity industry in many Countries.

Legal and Policy Issues

The concept of multiple distribution licencees in the same area existed even in the Indian

Electricity Act, 1910, which provided that the grant of a distribution licence shall not in any way

hinder or restrict the grant of a licence to another person. The State Government was however

required to consult the SEB before granting a licence. SEBs had the statutory right to undertake

distribution in the entire State. The EA, 2003 took a more liberal approach and required the

regulators to not to refuse a distribution licence only on the grounds that there already existed

one licencee in that area, if the applicant fulfilled the statutory requirements relating to financial

capability and past business track record in respect of compliance with other laws. One other

condition is that the Central Government should have no objection if the area includes defense

installation or airport, etc. Such second and subsequent licencee, however, is required to

undertake distribution through its own network. The intent of the Parliament to minimize

possible entry barriers was noticeable in an amendment to the Act in 2003-04, which

circumscribed the conditionalities that could be laid down for compliance by the applicant. Every

distribution licencee has the duty to fulfill universal supply obligation and, to develop and

maintain an efficient, coordinated and, economical distribution system. Tariff for retail supply is

to be determined by the SERC/JERC, which also has the discretion to just specify a ceiling for

tariff in case there is more than one licencee in the same area. The Act does not require a licence

for composite scheme of generation and distribution in rural areas.



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The Parliamentary Committee that examined the Bill was flooded with apprehensions of cherry

picking by new entrants endangering the viability of the incumbent licencee and leading to a

tariff shock to its consumers. After considering this aspect, the Committee recommended that the

new entrant should be given a mix of urban and rural areas or a mix of remunerative and un-

remunerative clusters. The NEP also stipulates that if a licence is to be given for part of an area

of an existing licence, the minimum area for such a new licence should be at least a municipal

council, municipal corporation or a revenue district. Full conscious of the likely problems of

cherry picking, the Policy also asks the regulators to keep watch on initial connection charges

levied by the new licencee so that these are not so high as to intentionally avoid low-end

customers. The stipulation regarding minimum area, if the licence is given for a part of the

existing licencee’s area, has also been included in the statutory rule concerning conditionalities

of financial capability and code of conduct. The rule was notified in March 2005.

The Tariff Policy gives flexibility to a licencee to charge lower than the regulated tariff in a

competitive situation, but without claiming additional revenue from the regulator. It also gives

discretion to the incumbent licencee to file a separate revenue petition for part of his area, if there

is new competition licencee in such part area.

1.2 Challenges in distribution system of electricity.

Section 1 (17) of Electricity Act, 2003 reads as “distribution licencee” means a licencee to

operate and maintain a distribution system for supplying electricity to the consumers in his area

of supply;

Section 14 Proviso 6 reads as Provided also that the Appropriate Commission may grant a

licence to two or more persons for distribution for electricity through their own distribution

system within the same area, subject to the conditions that the applicant for grant of licence

within the same area shall, without prejudice to the other conditions or requirements under this

Act, comply with the additional requirements 1[relating to the capital adequacy,

creditworthiness, or code of conduct] as may be prescribed by the Central Government, and no

such applicant, who complies with all the requirements for grant of licence, shall be refused

grant of licence on the ground that there already exists a licencee in the same area for the same

purpose:



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Suffix 1 in the above provision denotes The Distribution of Electricity Licence (Additional

Requirements of Capital Adequacy, Creditworthiness and Code of Conduct) Rules, 2005

Section 42 (1) reads as “ It shall be the duty of a distribution licencee to develop and maintain an

efficient co-ordinated and economical distribution system in his area of supply and to supply

electricity in accordance with t he provisions contained this Act.” (Emphasis added)

MERC has used the following criteria to determine the petitioner’s eligibility to for grant of

distribution licence:

i. Minimum area of supply requirement (E1)

ii. Capital Adequacy requirement (E2)

iii. Creditworthiness requirement (E3)

iv. Code of Conduct requirement (E4)

v. Requirement of own network rollout plan (E5)

Following the rules and regulations and the opinion dated May 14, 2011 rendered by Shri Gopal

Subramanium, the Learned Former Solicitor General of India, to the Forum of Regulators, the

Commission evaluated petitions in Cases 5,6,7,8 of 2011 on the grounds that a distribution

licencee must develop, operate and maintain its own distribution network in that area.

A committee was constituted under Chairman, CEA for examination and recommendation on the

proposed amendments in the Electricity Act, 2003. The Committee deliberated on the proposed

amendment in section 14 of the Act to enable a second/subsequent licencee to become a retails

supply licencee and supply electricity through the distribution network/system of incumbent

licencee without having the requirement to own distribution network and suggested that the

distribution system may be separated from supply of electricity with two separate licences to two

separate legal entities.



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1.3 Benefits and challenges for sustainability of retail competition in India.

In the meeting headed by Chairman, CEA for introducing competition in retail electricity supply

in India dated 27thJune’13 the discussions came out with the suggestion to propose amendment

in the section 14 of EA, 2003 highlighting benefits by separating carriage and content.

a) It will avoid conflict of interest and bring neutrality in the network business.

b) It would enable the two functions focus their efforts on reduction of commercial losses

and efficiency enhancement.

c) It would bring transparency in the cost and revenue streams of the distribution business.

d) In separating wire business it would promise assured return and encourage investment in

expanding distribution networks.

e) It would improve access of distribution network in rural areas.

f) The existing distribution network can remain a natural monopoly possibly with

Government ownership with a regulated return.

g) Separate supply business would ensure reduction of commercial losses and efficiency

enhancement.

h) It is predicted that the focus of distribution licencees on geographical area will increase,

which the Commission had suggested to TPC-D in Case No. 165 of 2011 to form clusters in the

geographical area assigned for computation of sales and ARR while reporting and filing petition

before the Commission in order to avoid cherry picking of consumers.

Challenges for sustainability of retail competition in India:

a) In reference to Section 1 (7), Section 14 Proviso 6, Section 42(1) of EA’03, former

Solicitor General’s opinion and eligibility criteria of MERC for granting Distribution Licence

under Network Rollout Plan norm; it can be inferred that the possibility of parallel Distribution

Licencees using their own distribution network for retail supply is mandatory. Obviously,

duplication of network would lead to increase capitalization and wheeling costs to be borne by

both the subsidizing as well as the subsidized customers.



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b) To be able to operate in such a dynamic market where consumers switch suppliers

frequently, the distribution licencees should have flexibility on the power procurement side

which accounts for 80-85% of the total cost of a bundled distribution (wires + supply) entity.

However, this can be ensured only in a balanced or supply surplus system without excessive

reliance on long-term contracts.

c) A merchant market has not yet evolved to the extent seen in international markets marked

by retail competition. With the kind of deficit witnessed in the State of Maharashtra and in the

country, the opening of retail distribution to competition without a vibrant wholesale

market/merchant market, will pose a number of issues.

d) Power Procurement from long term Power Purchase Agreements (PPA) is of the order of

85% for TPC-D, 46% for RInfra-D and 96 % for BEST. The power purchase cost is considered

as a completely pass-through element for Distribution Licencees. As the power purchase costs

including fixed costs are pass-through, the consumers staying with the incumbent distribution

licencee are likely to face a significant tariff impact.

e) International markets such as Australia and UK have introduced full retail competition

only after fully competitive bulk markets came into operation. In the petitions filed by threedistribution licencees under study; none have considered impact of open access consumers in

Business Plan.

1.4 Segregation of distribution business

A distribution utility in India normally conducts two distinct types of activities – distribution or

network business and retail supply business. In some of the countries like UK, Nord Countries,

Australia etc, the distribution network and retail supply are handled by separate companies. In

these countries, the distribution network is regulated business and retail supply is fully or

partially competitive. The distribution network company levies “distribution charge/wheeling

charge” on the retail supply companies according to their respective contracts and the retail

supply company levies a “supply charge” on its retail customers. In case of Indian utilities,



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network and retail supply business are managed by a single entity. For designing an incentive

scheme, it is necessary to treat the two businesses separately since cost and revenue drivers for

each of the businesses are different.

1.4.1 Functions of retail supply and wire network businesses

Figure 1 Electricity industry supply structure (PricewaterhouseCoopers India Private Limited, 2010)

The distribution infrastructure up to the consumer’s meter is part of the wires business, and the

distribution infrastructure from meter to consumer premises is part of the supply business.

Distribution Network function involves transporting of electricity from transmission systems

(transmission ends at 66kV) to customers. Traditionally described as customer end part of wires

business (transmission is the generator end) with more radial operations rather than networked.

This involves in setting up of network consisting of the poles, wires, transformers etc. to reach

the electricity physically to the consumer. Main activities are:

(a) Setting up of physical network – poles, wires, transformers etc to reach electricity to

consumers



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(b) Obtaining the ‘right-of-way’ – in order to set up the network poles, distribution wires

company should approach the local authorities for obtaining permission

(c) New connections – extension or erection of network, so that new area loads are added to the

systems – either a pull or push growth phenomenon

(d) Maintenance of network – ensuring that the network is in good condition, available to

dispatch electricity at any time and is adequate (doesn’t cause electrical instability)

(e) Quality of supply – maintaining proper conductor, transformer loading, transformer

maintenance such that the consumer is assured of quality power – assured voltage, assured

ampere and frequency.

Retail supply function is also called as merchant function (not physical function). Retailing is

sale of electricity to the final consumers and till recently thought of as part of distribution

business. The main activities involved are:

(a) Procurement of electricity from wholesaler or bulk supplier (as mentioned earlier, the

electricity generated, flows directly to consumer through wires at various voltages).

(b) Pricing of electricity.

(c) Selling of electricity including the following commercial functions

(i) Connection of consumer to the network – on payment of certain charges and signing up to

consume energy equivalent of ‘x’ kW of load – categorization depending on the type of service(LT – Domestic, commercial, industry of certain voltage and HT – Colonies, industries,

Railways etc)

(ii) Metering of energy used by consumers – setting up meter in consumer premises, their

maintenance, reading the meters at regular intervals and ensuring that energy accounting tallies

up

(iii) Commercial losses – meaning that energy has been consumed but not billed, either because

the consumer is not accounted or because the meters are not read properly or not working or

simply theft of energy by consumers.

(iv) Billing of electricity supplied – usually on variety of factors such as connected load, load

factor, energy demand, energy supplied, consumer service etc. and approved by regulator at

periodic intervals.



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(v) Collection of bills – setting up infrastructure of collecting the dues from consumers such as

‘section offices, kiosks, mobile vans, internet, cheque drop boxes, auto-debit to accounts’ etc.

(vi) Disconnection of service – as per the contract with the consumer, the supplier is allowed to

discontinue services to the consumer. Reconnection is possible with clearing of dues and

payment of reconnection charges.

In most of the countries where the Power sector is advance and stable the Distribution and Retail

Supply are handled by separate companies. In these Countries, the Distribution is regulated

entity and Retail Supply is fully or partially competitive. The distribution company levies

“distribution charge” on the retail supply companies according to their respective contracts and

the retail supply company levies a “supply charge” on its retail customers. In the case of India

there exist no distinct entities for wheeling and retail supply business. Hence, it is a bit complex

to segregate the cost between the two businesses and arrive at a distribution and a supply charge.

Today, the problem is arising because the wire business and supply business are operating in an

integrated manner, with the same entity having the distribution and supply licence. The EA, 2003

provides for issue of integrated distribution and supply licence. However, for effective

competition to be introduced, the Wire Business, both at the transmission and distribution level,

should be segregated and regulated, whereas the Supply Business could be largely de-regulated

in terms of pricing. Eventually, in order to have full scale retail competition, the Wires Businesswill have to be separated from the Supply Business, and it is essential to de-link the operation of

the Wire Business from the operation of the Supply Business. Once this is done, one can have

multiple supply licencees, who can procure the required quantum of power and supply to

consumers using the common wire network. Such kind of competition will enable the tariffs to

go down, as well as enable further improvement in the quality of service and supply, since the

supply licencees will have to create differentiation and brand identity by ensuring quality supply.

The international experience in introducing competition in retail supply also shows that instead

of parallel networks, multiple suppliers are allowed to supply through a common network, as it is

not economically viable to duplicate the distribution network, considering the sunk-cost

associated with the existing network and the scale of economies derived from network operation.

Also, only transmission and distribution segments are regulated under price cap mechanism,



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since they are natural monopolies, while the generation and supply business are freely

competitive businesses. In this context, it becomes imperative to separate the supply from wire

business to make retail supply competitive.

1.4.2 Regulatory structure

Proviso 1 in Regulation 71 of Maharashtra Electricity Regulatory Commission (Multi Year

Tariff) Regulations, 2011 requires every distribution licencee to maintain separate records for the

Distribution Wires Business and Retail Supply Business and to prepare an Allocation Statement

to enable the Commission to determine the tariff, pursuant to each such application made by the

Distribution Licencee.

Following this regulation, The Tata Power Company Limited Distribution (TPC-D) and Reliance

Infrastructures Limited Distribution business (RInfra-D) submitted their petitions; Case No. 165

of 2011 and Case No. 124 of 2011 respectively segregating their accounting heads into Wire and

Supply businesses. The segregation model adopted is as per the business gain and the auditing

done by Commission is not as per any guidelines. Regulation 78.4.1 of MYT 2011 provides for

the recovery of Operation & Maintenance expenses relating to the Distribution Wires business

on normative terms.

The report aims to recommend the methodology for segregating accounting heads in wire and

supply businesses while computing the Aggregate Revenue Requirement (ARR) for the

Commission to audit the petitions coming before it.

1.5 Distribution models adopted in India and other countries.

1.5.1 (Maharashtra) India

The Preamble to Electricity Act, 2003 talks of promoting competition in electricity sector and the

Act gives direction to the Central Commission (Section 79) and State Electricity Regulatory

Commission (Section 86, 42, 63) to take necessary steps to promote competition in electricity

sector.



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In the Mumbai region of the Maharashtra State, four Distribution Licencees hold the licence to

distribute electricity within the areas specified in their respective licences and within the ambit of

the relevant orders of the Maharashtra Electricity Regulatory Commission (“the Commission” or

“MERC”) and various judgments of the legal bodies. The licencees are:

a) Brihan Mumbai Electricity Supply and Transport Undertaking (“BEST”) Case No. 124 of

2011,

b) Reliance Infrastructure Ltd. (Distribution business), (“RInfra–D”) Case No. 158 of 2011,

c) The Tata Power Company Ltd. (Distribution business) (“TPC-D”) Case No. 165 of 2011, and

d) Maharashtra State Electricity Distribution Co. Ltd. (“MSEDCL”). Case No. 19 of 2012.

While M/s. BEST, RInfra-D, and MSEDCL operate within specific distribution licence areas

allocated to them, distinct from each other, TPC-D, on account of its historical background and

the Supreme Court Judgment dated 8th July, 2008, is licensed to distribute power in the entire

Mumbai region excluding the Mira-Bhayander area served by RInfra-D and excluding all the

areas served by MSEDCL. Thus, there are multiple Distribution Licencees in each area. Each

licencee has an obligation to supply electricity to all consumers, who demand electricity supply

from them (Universal Service Obligation, as mentioned in Section 43 of EA, 2003). The

operationalisation of parallel distribution licence is one of the ways to promote competition in

electricity sector.

In exercise of powers conferred under Sections 61 and 62 of the EA 2003 and Regulations2(1)(Proviso 3)& 2(3) of the Maharashtra Electricity Regulatory Commission (Terms and

Conditions of Tariff) Regulations, 2011, the Commission notified distribution licencees to

submit application for determination of tariff under Section 64 of the Act or application for

annual performance review under Regulation 2(1)(Proviso 3)& 2(3) of the Tariff Regulations as

per guidelines given in MERC (Uniform Recording, Maintenance and Reporting of Information

Regulations) (URIMS), 2009.

As mentioned before in the background of the report, Proviso 1 in Regulation 71 Maharashtra

Electricity Regulatory Commission (Multi Year Tariff) Regulations, 2011 requires every

Distribution Licencee to maintain separate records for the Distribution Wires Business and Retail

Supply Business and to prepare an Allocation Statement to enable the Commission to determine

the tariff, pursuant to each such application made by the Distribution Licencee.



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Following this regulations, The Tata Power Company Limited Distribution (TPC-D) and

Reliance Infrastructures Limited Distribution (RInfra-D) submitted their petitions; Case No. 165

of 2011 and Case No. 124 of 2011 respectively segregating their accounting heads into Wire

Business and Supply business. The segregation model adopted is as per the business gain and the

auditing done by Commission is not as per any guidelines. Regulation 78.4.1 of MYT 2011

provides for the recovery of Operation & Maintenance expenses only relating to the Distribution

Wires business on normative terms.

1.5.2 PJM

PJM Interconnection operates the world’s largest wholesale electricity market as the regional

transmission organization for the area that encompasses all or parts of Delaware, Illinois,

Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,

Tennessee, Virginia, West Virginia and the District of Columbia. PJM’s competitive wholesale

electricity market began operating in 1997. Based on its success, PJM since then has led a

dynamic process that has expanded the number and kinds of markets available to its more than

800 members.

The Energy Market consists of Day-Ahead and Real-Time markets. The Day-Ahead Market is a

forward market in which hourly prices are calculated for the next operating day based on

generation offers, demand bids and scheduled bilateral transactions. The Real-Time Market is a

spot market in which current locational marginal prices are calculated at five-minute intervals

based on actual grid operating conditions and are published on the PJM website. PJM settles

transactions hourly and issues invoices to market participants monthly.

PJM also operates a Day-Ahead Scheduling Reserve Market. It obtains supplemental, 30-

minutes reserves that may be needed to deal with unanticipated system conditions during the

actual operating day. To ensure the future availability of the generating capacity and otherresources that will be needed to keep the regional power grid operating reliably for consumers,

PJM developed a new method of pricing capacity called the Reliability Pricing Model. It was

implemented in 2007. The RPM system includes incentives that are designed to stimulate

investment both in maintaining existing generation and in encouraging the development of new

sources of capacity – not just generating plants, but demand response and energy efficiency



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programs as well. It works in conjunction with PJM’s regional planning process to ensure the

future reliability of the system.

Evolution from LMP model to RPM

LMP = System energy Price + Transmission Congestion Cost + Cost of Marginal Losses

System Energy Price

Represents optimal dispatch ignoring congestion and losses

Same price for every bus in PJM

Calculated both in day ahead and real time

Congestion Price

Represents price of congestion for binding constraints

Calculated using cost of marginal units controlling constraints and sensitivity factors on

each bus

Will be zero if no constraints

Will vary by location if system is constrained

Calculated both in day ahead and real time

Loss Price

Represents price of marginal losses

Calculated using penalty factors Will vary by location

Calculated both in day-ahead and real-time

Reliability Pricing Model (RPM)

Resource commitments to meet system peak loads three years in the future

• Three year forward pricing which is aligned with reliability requirements and which adequately

values all capacity resources

• Provide transparent information to all participants far enough in advance for actionable

response.

An Installed Reserve Margin (IRM) = 15.4% satisfies the reliability criterion for the 2015/16

Delivery Year.

Resource Adequacy ICAP Requirement = Forecast Peak Load * (1+ IRM)



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Figure 2 Reliability Pricing Model (PJM)

1.5.3 Australia

The Australian Energy Market Operator (AEMO) was established to manage the NEM and gas

markets from 1 July 2009. With respect to the electricity market AEMO has two core roles:

• Power System Operator

• Market Operator

Since the commencement of the NEM, electricity consumers have progressively gained the right

to choose their own supplier. This has meant that AEMO’s responsibilities have extended from

managing the wholesale market to providing the systems and processes to support competition

and choice for all end-users in the retail electricity market. Delivering full retail competition

(FRC), or contestability, has required new information technology systems to process transfers of



22

customers between registered retailers in the NEM. The systems that facilitate this function

contain one of the largest metering databases in the World. They accept data from a variety of

electricity meter types and have the capacity to process information from up to 10 million

meters. AEMO’s systems are set up to provide key meter installation details to support a simple

and rapid information transfer process. Different metering processes are required for different

types of meters used in the NEM, to support consumer transfer and core settlement procedures

and to calculate load profiles. The cost of electricity consumed is then calculated according to a

user profile that approximates the pattern of use in a typical situation. By June 2009,

approximately 6.3 million customer transfers from one retailer to another had taken place. As a

result of the introduction of full retail competition, electricity retailers are increasingly

competing, and creating new and unique products as a means to increase their customer bases.

In the spot market dispatch price is determined every five minutes, and six dispatch prices are

averaged every half-hour to determine the spot price for each trading interval for each of the

regions of the NEM. AEMO uses the spot price as the basis for the settlement of financial

transactions for all energy traded in the NEM. National Electricity Law and Rules set a

maximum spot price, also known as a Market Price Cap, of $12,500 per megawatt hour (MWh).

This is the maximum price at which generators can bid into the market and is the price

automatically triggered when AEMO directs network service providers to interrupt customersupply in order to keep supply and demand in the system in balance.



23

Figure 3 Australia spot market structure (AEMO, 2010)

AEMO is required to operate the power system efficiently and ensure agreed standards of

security and reliability are maintained. Operating the NEM involves conducting a sequence of

activities to facilitate trade between the producers and wholesale consumers of electricity. These

activities include establishing demand levels, receiving offers to supply from generators,

scheduling generators, dispatching generators into production, calculating the spot price,

measuring electricity use and financially settling the market. Ancillary services are those services

used by AEMO to manage the power system safely, securely and reliably. Ancillary services

maintain key technical characteristics of the system, including standards for frequency, voltage,

network loading and system re-start processes.

1.5.4 New Zealand

The five major generation companies produce more than 90 percent of New Zealand’s

electricity. New sources of generation can be developed in New Zealand without securing any



24

specific approval from the Commission. The main Regulatory requirements are that a new plant

conforms to the relevant technical codes and has the necessary resource consents. Generators that

are bigger than 30 MW or which are grid-connected compete in the electricity spot market by

submitting ‘offers’ to the System Operator for the right to generate electricity to satisfy demand,

subject to transmission capacity.

In addition to retailers, a small number of customers, typically large industrial users, also buy

electricity directly from the spot market. These parties will typically also enter into financial

contracts (often called ‘hedges’), which smooth out some or all of the volatility in spot prices.

In addition to managing the existing transmission system, Transpower plans and builds new grid

investments. These grid investments are first reviewed and approved by the Electricity

Commission.

Transpower is responsible for all transmission development processes; for example, resource

consents, access rights and construction. The national grid transports electricity from over 50

power stations, and connects with distribution networks or major industrial users at around 200

grid exit points (GXPs) around New Zealand.

The Electricity Commission is responsible for overseeing New Zealand’s wholesale and retail

electricity markets, operating the electricity system, promoting the efficient use of electricity and

regulating some aspects of electricity transmission. In addition to its role as competition

‘watchdog’, Commission administers the price control regime for transmission and distributionbusinesses, and enforces the legislation that requires a level of ownership separation between

network activities and generation/retailing.

The distribution business has been segregated into two segments, i.e., the lines business and the

supply business. The Electricity Act, 1992 introduced contestability in the retail segment by

removing the exclusive retailing rights and the obligation to supply. At that time, the separation

of the lines business and the supply business within the distribution business had not been carried

out. As a result, the network operators who owned the lines business continued to operate in the

retail supply segment. Several measures, including public disclosure of information relating to

line charge, and financial separation of the competitive activities (generation and retailing) from

the monopolistic activities (lines business) to promote competition, were implemented. However,

there was a concern that the electricity companies, being vertically integrated natural

monopolies, would use their market power in distribution to exclude competition at the retail



25

level. To address this concern, the Electricity Industry Reform Act was introduced to reform the

electricity industry to better ensure that costs and prices in the electricity industry were subject to

sustained downward pressure and the benefits of efficient electricity pricing flowed through to

all classes of consumers by

1) Effectively separating electricity distribution from generation and retail; and

2) Promoting effective competition in electricity generation and retail.

Common ownership of electricity distribution businesses and of either an electricity retailing or

electricity generation businesses (other than minor cross-ownerships) is prohibited. Presently,

around 29 lines companies own the local distribution networks throughout New Zealand and

operate as monopolies. The line companies are connected to the national grid at the GXPs.

Generally, the line companies sell their distribution or line services to retailers who manage the

electricity supply agreements with the end consumers. The network operators are subject to a

targeted price control regime which was introduced in 2004. Under the regime, the line

businesses are only potentially subject to control if they cross either of the two thresholds of

performance. The regime is referred to as “targeted control” because only those businesses that

cross the thresholds, trigger the Commission to identify lines businesses whose performance may

warrant further examination, and if necessary, control of prices, revenues and/or quality. The two

thresholds adopted by the Commission for all electricity lines businesses (with the exception of

Transpower), are: compliance with a specified price path based on the CPI minus X pricemethodology, and compliance with specified reliability and consumer engagement criteria.

The operation of the electricity retail market is overseen by the Commission in order to promote

strong retail competition and fairness to consumers. Its role includes providing arrangements for

the protection of consumers, as well as administering retail market rules such as metering

arrangements, customer switching and reconciliation – the process by which the quantity of

electricity purchased by each retailer is calculated. The key features are that customers can

switch between retailers, and any party can be an electricity retailer provided they meet the

minimum requirements. While the extent of retail competition varies across the country,

customers have a choice of retailers. The retail tariffs are not subject to price control. In some

parts of New Zealand, there are five or more competing retailers. All of the main generation

companies in New Zealand are also electricity retailers. In addition, there are a number of

smaller independent electricity retail companies. Furthermore, the switching process has become



26

easier over time, and can now be executed over the phone with the new electricity retailer. Free

web-based tools are also available to help residential users to shop around.

1.5.5 United Kingdom

The United Kingdom (“UK”) electricity industry was one of the first to experience reforms,

which became a model for the remaining countries. In the pre-reform era, the Central Electricity

Generating Board was responsible for the generation and transmission of electricity, while 12

area electricity boards (AEB) were responsible for distribution and supply to consumers. On 31

March 1990, as part of the privatisation of the electricity system in England and Wales, the area

electricity boards were changed into independent regional electricity companies (RECs) and the

CEGB was split into four companies -- three generation companies and the National Grid

Company, operator of the National Grid. The National Grid Company was placed under the

ownership of the RECs. On 11th December 1990, the RECs were privatised. In 2000, as part of

further restructuring of the market under the Utilities Act 2000, the public electricity suppliers

were required to have separate licences for their supply business and distribution networks,

which were renamed as distribution network operators (DNOs). Presently, there are five types of

electricity licences:

a. Generation - Allows the licencee to generate electricity for the purpose of giving supply to any

premise or enabling a supply to be given.

b. Transmission - Allows the licencee to participate in the transmission of electricity for the

purpose of enabling a supply to be given.

c. Inter-connector - Allows the licencee to participate in the operation of an electricity

interconnector. Participating in the operation as an electricity inter-connector is defined as: co-

coordinating and directing the flow of electricity into or through an electricity inter-connector, or

making such an interconnector available for use of conveyance of electricity.

d. Distribution - Allows the licencee to distribute electricity for the purpose of enabling a supplyto be given. Electricity is distributed from the National Grid Network through a low voltage

network of wires to customers.

e. Supply – Allows the licencee to supply electricity to different premises.

The regulator Office of Gas and Electricity Markets (OFGEM) has a market monitoring role -- it

publishes periodic reports on developments in the domestic retail market and conducts



27

investigations and consultations on the performance of the domestic and the non-domestic

markets, when necessary. Most of UK’s electricity is generated by gas, coa l and nuclear stations.

Thirty large (>1GW) power stations meet the majority of the electricity demand. The generation

industry is a competitive market. There are four transmission systems in the UK - one in England

and Wales, two in Scotland, and one in Northern Ireland. Each is separately operated and owned.

The largest, in terms of line length and share of total transmission, is the National Grid Company

(NGC) system, covering England and Wales. NGC also operates electricity ‘interconnectors’ –

overhead lines connecting the transmission networks in England and Wales to Scotland, and an

undersea link that connects France and England. Transmission operators also have a role in

balancing generation and demand at all times, to ensure the security of the network.

The distribution lines business is considered a natural monopoly and is a licenced activity in UK.

There are fourteen licenced areas, based on the former Area Electricity Board boundaries, where

the Distribution Network Operators (DNOs) distribute electricity from the transmission grid to

consumers. In 1990, the Area Boards were replaced by regional electricity companies (RECs),

which were then privatized. The DNOs are the successors of the distribution arms of the RECs.

Under the Utilities Act 2000, they are prevented from supplying electricity; this is done by a

separate company chosen by the consumer who makes use of the distribution network. DNOs

hold regional licences for the provision of distribution network services and are regulated by theOFGEM. DNOs are under a statutory duty to connect any customer requiring electricity within a

defined area, and to maintain that connection. Various charges related to DNO operations are as

follows:

_ Use of system charges: To pay for network reinforcement, maintenance and renewal, paid by

generators and suppliers, broadly in proportion to their use of the network. Charges are highest

for generators in remote regions, far from demand.

_ Connection charges: To cover costs of infrastructure required for new connections, paid by

generators and customers wishing to connect.

_ Balancing charges: To meet costs of matching supply with demand, and providing reserve

generation, paid by large generators and suppliers.

The DNOs are regulated through five-year price control periods, which include curbs on

expenditure as well as incentives to be efficient and to innovate technically. The price controls



28

set the maximum amount of revenue which energy network owners can take through charges

they levy on users of their networks to cover their costs and earn them a return in line with

agreed expectations. Ultimately, charges are passed to electricity consumers. Transmission and

distribution costs make up around 4% and 17% of the average domestic bill, respectively.

The retail electricity market in UK was opened up in three phases for large users (> 1 MW) in

1990, for medium users (> 100 kW) in 1994, and for residential consumers in 1999. Full

competition was introduced in Great Britain from 1999. Extant regulation prohibits the

distribution network operators from holding supply licencees. Allowing customers to choose the

supplier of their choice has kept up the pressure on costs and promotes greater choice of tariffs

and services for customers, such as the fixed price and capped price offers now available to

domestic customers. Competition in metering services also helps suppliers to deliver more

innovative products to customers. This competitive market in retail supply has developed well.

1.5.6 Argentina

• CAMMESA administers the market non-profit corporation equally owned by the wholesale

market. It is a federal Government and four associations representing generators, transmitters,

distributors, and major users. It is in charge of scheduling and dispatching generators in

accordance with the power demand, on the basis of using marginal costs and availability offered

by generators, employing those generators offering the lowest marginal costs first.

• The law also established a Federal Energy Council to advise the Secretary of Energy and the

Congress and administer the National Fund of Electricity, which is used for regional subsidies.

• Power generation companies are not allowed to own majority shares in Argentina's three

transmission companies.

• The transmission & distribution companies have to provide open access to their systems for the

power generators on a regulated basis.

• Distribution companies are organized as regional monopolies and permitted to buy electricityfrom the MEM or through contracts with power generation companies.

• The energy market was liberalized for customers with demands greater than 5 MW; this has

been successively reduced to 30 kW. These customers are free to contract directly with

generators and can participate directly in the generation market.



29

• Tariff for Regulated customers (below 30 kW) is calculated by a formula that takes into

account the wholesale prices, seasonality, capacity and local charges, if any.

1.6 Learning from international experience

Post introduction of wholesale competition, supply of electricity is often separated from the

operation and ownership of the distribution wires and a number of suppliers or retailers

compete to sell electricity to customers, or rather customers choose their suppliers, i.e., retail

competition is allowed.

Choice of supply for large customers is often introduced at the same stage as wholesale

competition, and then extended to smaller consumers at a later stage. Suppliers buy their

electricity from the wholesale market and then pay the transmission and distribution

companies a regulated price to transport their electricity to customers. Customers may also

elect to purchase their electricity directly from generators. The UK, New Zealand, Australia

and many other countries have moved to retail competition -- first allowing large customers

choose and then eventually extending competition to all electricity customers.

In full retail competition, the regulator generally regulates only the natural monopoly (wires)part of distribution and competitive retail, or selling services are deregulated. However, as a

measure to protect consumer interest, in countries such as Australia, there is a default service

provider, whose tariff serves as a ceiling. The consumer receives regulated “delivery”

services from the local utility and can shop for a supplier of competitive services. Customers

who do not or cannot find a competitive supplier are offered “default service” (typically) by

their local utility.



30

Chapter 2 Methodology

2.1 Research Objective

As discussed in section subtitle 1.4.3 of the report, the petitions filed by the distribution utilities

for the approval of MYT Business Plans do not provide with the justified methodology to

apportion the expenses in segregating wire and supply businesses. MERC (MYT) Regulations,

2011 and MERC (URIMS) Regulation, 2009 provide for the regulations for computation of the

petitions by the Commission and the format of submission of the petitions. The regulation

provides with the apportionment of O&M expenses as computed case to case. For other

accounting heads, there is no justifiable expense apportionment methodology.

The report aims to find the methodology for apportionment of expenses from Regulatory

perspective. The initial endeavor would be to compare the petitions of the licencees on ARR

determined as per their business plans and Commission’s response to the same. The Commission

answers the prayers arbitrarily in the interest of the consumers as well as the utilities and hence

proceeds in its approach vividly case to case basis. The next endeavor would be to compare the

logical thinking behind the apportionment of the expenses into wire business and supply

business. The expenses in some of the accounting heads like O&M expense and PPE expense is

a function of many other dependent variables which determine other accounting heads too.Generalized formulation, if could be found out would provide with the best results. Learning

from international experience would aid in delivering results. The segregation done in the

business models of all the licencees would be analyzed with each other and with the business

model so other States, if feasible. The accounting heads are to be analyzed individually to arrive

at the generalized equations or uniform methodology to be adopted.

The target would be complete the assigned task well before time so that there is enough time at

the end to correct at the perusal of the alterations suggested by the mentors at MERC and the

faculty at the institution.



31

Figure 4 Methodology

2.2 Problem Statement

The segregation of businesses into wire and supply businesses is checked and computed by the

Commission for the petitions filed by the distribution licencees for MERC (MYT) determination.

Apportionments of the expenses need justifiable approach by which Commission can check and

the licencees can follow the same.



32

2.3 Limitations

The data in the worksheet for business plans of the petitions filed by the Distribution Licencee

lack linking at some places, which implies that there are chances of data manipulation. The

methodology adopted by the licencees and operators in other countries is also not explained in

their respective websites/public domain.



33

Chapter 3 Data Collection

3.1 Comparison of expenses computed by the Commission for MYT Business Plans

of BEST, TPC-D and RInfra-D

.



34

Figure 5 Expenses computed by the Commission (Rs. Crores)



35

3.2 Comparison of segregation of wire and supply businesses by the licencees in

approved Multi Year Tariff Business Plans

Figure 6 Segregation of wire and supply businesses by the Distribution Licencees

Some of the salient features are:BEST

a) BEST does not have any Open Access consumers and thus, sales from Supply Business

and Wheeled energy have been considered at the same level.



36

TPC-D

b) TPC-D adopted conservative approach to project growth in switchover customers due to

issues like:

Challenges for cable lying in South Mumbai Area:

i. Permission from various Authorities such as MCGM/PWD/MMRDA and Traffic Police

needs to be obtained. This process of obtaining permission for cable laying ranges from 1 month

to 3 months.

ii. Permission is granted only during fair season, which is practically 6 months (October to

March).

iii. Permission is denied for excavation of roads under 1 year guarantee.

iv. In case of South Mumbai Area, full carriage is concretised as compared to paver blocksin road shoulders in Mumbai Suburbs area. Permission is denied for breaking concrete based

roads.

c) Commission accepts the fact that distribution losses of TPC-D would increase

considering the increasing network and LT consumer base

d) Power is to be procured from the following three routes namely:

1. Case I bidding, as directed by MoP to consider the impact on long term PPAs due to

Open Access 12.5%

2. Bilateral sources 2.2%

3. Imbalance Pool 0%

4. Own generation 85%

e) TPC-D submitted that it is too early to predict the impact of Open Access on the Business

Plan but the Commission is of the view that TPC-D should continue to procure power through

Case I bidding and reduce its dependence on bilateral purchases in the interest of the consumers.

f) Total Transmission System Cost or (TTSC) is to be shared by the various Distribution

Licencees in proportion to the co-incident peak (however, average of Coincident Peak Demand



37

and Non-Coincident Peak Demand should be considered as per MERC (MYT) Regulations,

2011 of these Distribution Licencees.

g) Standby charges depend on percentage of sharing in coincident and non-coincident

peaking period. SLDC charges are proposed to be raised due to high involvement as they will be

the nodal center in implementation of retail competition.

h) Receivables to be considered for provisioning of Bad and doubtful debts are sundry

debtors outstanding for a period more than the regular collection period of the Utility, whereas

the receivables considered for the computation of Working Capital Requirement are the bills

outstanding and shall be collected before the next billing cycle.

i) Rent component added in computation of Non Tariff income only in Wire business.

j) Commission is of the view that clusters can be identified geographically in BEST and

RInfra area and thus the capital expenditure can be segregated.

RInfra-D

k) RInfra-D further submitted that 40% of the changeover consumers have opted for RInfra-

D’s meters, which form part of the Retail Supply business assets and not the Wire business.

RInfra-D contended that the wheeling charges payable by changeover consumers do not include

such expenses.



38

3.3 Analysis of Expenses

Figure 7 Comparison of segregation models with MSEDCL (ARR FY-11)

3.4 Analysis of O&M expense

Case example 1

Consider a 500 kVA distribution transformer in a locality feeding electricity to poles with 3 core

95 sq. mm cross section wire 500 households with the average consumption of 5kW each are to

be supplied power. Considering 3 core 50 sq. mm. 200 m wire feeding every 10 households, the

cost of laying wire associated for the wire business is Rs. 3.32 crore and that of retail supply

business is Rs. 2.36 crore.



39

Table 1 Symbol Notation for Case Example 1

S. No. Symbol Notation Approx cost (in Rs)

1 Distribution Transformer (500kVA) 10000

2 3 core 50 sq.mm wire 200x50x300=3000000

3 Pole 20000x150=30000000

4 3 core 16 sq.mm wire 450x50x160=36000005 3 core 95 sq.mm wire 500x525=262500

6 AMR 5000x4000=20000000

Table 2 Employee Cost expense

S. No. Employee grade NumbersEmployee

Expense

Cost per km

1 GET/Asst Managers 10 40 lakh 4.75 lakh

2 Manager/Sr. Manager 2 30 lakh

3 GET/Asst Managers GET 10 40 lakh 3.3 lakh

4 Manager/Sr. Manager/QC 2 30 lakh

50

no.

3 core 50 sq.mm 200 m wire

10 m. 20m. 50m.

Figure 8 Case Example 1



40

3.5 Impact of Net Expens es on ARR

Table 3 Impact of Net Expenses on ARR



41

Chapter 4 Analysis & Findings

4.1 Power Purchase Expenses including transmission Charges

A distribution licencee contracts the sufficient power for 24X7 supplies to the consumers in the

State. In MSEDCL some consumers have opted for open access. To compensate the loss of

consumers and stranded capacity of around 700 MW, MSEDCL has allocated 5% of the

fixed/capacity charges of power purchase in wires business and balance 95% of fixed/capacity

charges and entire variable cost of power purchase allocated to the retail supply business since

procurement of electricity from wholesaler or bulk supplier for sale to end consumer is the main

activity of retail supply business. Further, entire transmission charges paid to Transmission

Licencee is allocated to the retail supply business.

The TPC-D and RInfra-D have submitted the breakup of the power procured from all the sources

to calculate the power purchase expenses considering distribution and transmission losses.

Allocation to wire and supply businesses is not ascertained. It can be concluded that since the

power procured is the major task of Supply business, hence the apportionment suggested could

be 100% for Supply business.

4.2 Total Capitalization

The major components that form retail supply asset are meters and billing equipments (computer

etc). Similarly, majority of the plant and Machinery and lines and cables form Distribution

Assets. Other fixed assets include buildings, office equipments, furniture and fixtures, vehicles

etc.

BEST has allocated capital expenditure on ‘Meters’ in supply business and other assets (Land,

Building, DEA, MV, Tools & Equipments, Furniture and office equipments, cable street and

lighting lamps to wire business. Hence, the Apportionment has to be done on actual basis of

investment in the respective businesses.



42

4.3 Operation & Maintenance Expenses

This accounting head comprise of Employee expenses, Administration & General expenses and

Renovation & Modernization expenses.

To segregate the employee cost MSEDCL has used the basis of employee requirement to

undertake the Retail Supply and Wire business. 75% employees engaged in Wire business and

25% in Supply business. RInfa-D has used the basis of allocation as 30% to the number of

employees/no. of substations and 70% weightage to the number of employees per 1000

customers. The TPC-D used the formula as .

Increasing the Employee Expenses apportionment to 80% in wire business causes 2% increase in

the Wire ARR and decreasing the apportionment to 70% causes decrease by 2%. The curve

plotted in Figure yields the equation as

a) Power equation for the trendline as and R2 = 0.838

b) Logarithmic equation for the trendline as y = 649.6 ln(x) + 2901 and R2 = 0.802

The variation in the ARR values by comparing with the values in the other business model came

to be 452 (8.7% decrease in ARR) for the Power equation and 459 (9.6% decrease in ARR) for

the logarithmic equation.

The variance computed by increasing the wire business by 1% causes increase in ARR by

1.33%.

Hence the equation yields no good result.

The conclusion can be drawn that the expenses be allocated on the basis of number of employees

engaged per 1000 number of consumers for the respective businesses as suggested by the

Commission.

MSEDCL apportioned the A&G expenses as 75% to wire business and 25% to supply business.

RInfra-D apportioned 50% of expense on the basis of expenses/(1000xNo. of consumers) and

50% on the basis of expenses/employee. The TPC-D has computed the incremental factor in

supply business due to changeover consumers and hence the more employees engaged.



43

If the A&G expenses are apportioned 74% to wire business, the ARR is affected by 0.08%.

Comparing it with the other States, the ARR reduces by 1.33%. The curve plotted in Figure

yields the equation as

a) Power equation for the trendline as and R2

= 0.810

b) Logarithmic equation for the trendline as y = 156.2 ln(x) + 5026 and R2 = 0.802


to be 133 (2.3% increase in ARR) for the Power equation and 135 (2.4% increase in ARR) for

the logarithmic equation.


The conclusion can be drawn that the expenses be allocated on the basis of expenses accrued or

incurred for the respective businesses. Say for example, the rent paid for the accommodation of

the staff or office premises can be segregated for the employees engaged in the respective

businesses, wherever feasible. If segregation to that extent is not possible, then the general

method of evaluation can be expenses/(1000xNo. of consumers)

MSEDCL apportioned the R&M expenses as 95% to wire business and 5% to supply business.RInfra-D computed on the basis of opening GFA. The TPC-D has computed the incremental

factor in wire business due to increase in expense on ‘machinery and hydraulic works’.

If the R&M expenses are apportioned 100% to wire business, the ARR is affected by 0.3%.

Comparing it with the other States, the ARR reduces by 1.05% for every 1% decrease in wire

expenses. The curve plotted in Figure yields the equation as

a) Power equation for the trendline as and R2 = 0.808

b) Logarithmic equation for the trendline as y = 125.5* ln(x) + 5276 and R2 = 0.802


to be 133 (3% increase in ARR) for the Power equation and 135 (3% increase in ARR) for the

logarithmic equation.



44


The staff assigned to wire and supply businesses projecting growth in the distribution and risk of

changeover consumers can be suitably categorized by forming groups. These groups in each

business would comprise of junior, middle and senior employees.

For Wire business, the number of employees would increase if switchover consumers increase.

For Retail supply business, in case of increase in the changeover consumers the staff which was

earlier employed in meter installation would shift to the monitoring/auditing staff of the meters

installed by that of new licencee. This would require more skilled employees and more middle

management staff. Hence, training needs need to be catered to meet the competent levels with

quality certifications. Renovation & Modernization expenses depend on opening GFA of the

financial year. The expenses are projected to increase due growth in the supply business.

Installation of AMI and DSM equipments to meet out the losses arising due to distribution would

increase the capital expenditure required.

As discussed earlier, the distribution network up to consumer meter is part of the wires business

and the infrastructure beyond meter is part of the Retail Supply business. Therefore, majority of

R&M is required for the portion up to consumer meter and infrastructure beyond consumer meter

or other supply related equipments don’t require that much R&M. Considering this fact, R&M

expenses could be allocated as 95% to Wires Business and 5% to Supply Business.

The O&M expense as in Case Example 1 is 58% wire and 42% supply business. The capital

expenditure involved is also in the same ratio. This cannot be the ideal case due to many

assumptions involved here. Moreover, it is not in situ with the data in the orders (ref. Table 1 &

Table 2).

4.4 Depreciation

Depreciation expenses are allocated on the proposed ratio of fixed assets between wires and

retail supply business. i.e., 90% to the Wires Business and 10% to the Supply Business by

MSEDCL. RInfra-D adopted voltage wise segregation (33kV & above, 11kV & above, below

11kV) and the TPC-D also allocated on the basis of GFA which depend on capitalization plan



45

done considering physical progress of the activity carried out during previous financial years and

the time period for capitalization of new assets

Annexure 1 referred to in Regulation 31.2(b) of MERC (MYT) Regulations, 2011 doesn’t give

details of the time period on which the depreciation value of the assets is to be computed.

Allocation of expenses as 95% causes 0.74%increase in wire ARR.

The conclusion can be drawn that given the time period for computation of the depreciation

value of the assets and segregating the assets as per the usage in respective businesses. Where

this is not possible, general method of segregating the assets voltage wise would be useful. The

increase by 1% in wire expenses in BEST Business Model yields similar result as in MSEDCL

Business Model. Hence, the general method of segregation holds good where required.

4.5 Interest on long term loans

Majority of the long term loans are taken for capital works. Interest expenses on long term loans

by MSEDCL, RInfa-D, and The TPC-D are allocated on the proposed ratio of fixed assets

between wires and retail supply business. i.e. 90-93% to Wires Business and 10-7% to Supply

Business.

The interest expenses are passed on to the consumers. A way to reduce the impact can be to

reduce the interest rate of loans granted by the financial institutions. This is possible if long term

loans are applied by few financial institutions. To mitigate the risk the utilities enhance their

portfolio and prefer applying for loans to more than a few institutions. In reference to the criteria

for awarding licence to the distribution company, the Electricity Rules, 2005 focuses on the

Capital Adequacy, Creditworthiness and Code of Conduct of the utilities. The Commission,

when convinced of the strong financial position of the licencees proceeds in awarding the

licence. At the point of time while assessing the financial health of the utilities, the business plan

of those applicants who plan to procure loans from many financial institutions and short term

loans can be checked with more prudence.



46

4.6 Interest on Working Capital

TPC-D apportioned 100% book value of stores, materials and supplies to wire business.

MSEDCL apportioned 90% and RInfa-D apportioned 10% to wire business.

This depicts that the apportionment is done as per the business gain of the company. The method

of apportionment can be suggested here to be on the basis of application/usage of the assets in

the respective businesses and like the other accounting heads, on the basis of the GFA of the

book value of the assets. For eg. if the book value of stores, materials and supplies is apportioned

on the basis on which depreciation of assets is evaluated in MSEDCL Business plan model, the

increase in wire ARR is 0.5%.

4.7 Interest on Consumer Security Deposit

Consumer security deposit is considered to be for retail supply business only. The risk associated

with the investment accrued on the wire business requires apportioning at least 5% to the wire

business. The impact as studied in the MSEDCL Business model is increase of wire ARR by

0.22%

4.8 Provision for bad debts

Reward policy of BEST include parameters of high collection efficiency and low distribution

loss which result in higher and faster revenue realization, high liquidity and reduction in

quantum of power purchase (which contributes to 75% to 80% of the total expenditure) to sell

the same quantity of power.

The Ten Point program chalked out by MSEDCL at the time of segregation includes

improvement in collection efficiency through measures like:

Reduction of live arrears

Reduction of P.D. arrears

Zero tolerance for non-payment of bills

100% billing on the basis of actual meter reading and elimination of average billing

Use of spot billing and other special billing and collection techniques.



47

The approach to the collection center is the prerequisite. With the collection efficiency

achieved over 99% by TPC-D in the past encouraged it to take up benchmarking of

distribution network reliability indices with Kinetrics, Canada.

The concept of Distribution Collection loss (DCL) was introduced by Hon'ble MERC in

the Order dated August 3, 2005 in the matter of Principles and protocols of load shedding

The {Clause No. 21 (L-ii)}, of the order dated August 3, 2005:

“The Commission also agrees that all other Consumers and areas should share in load

shedding, in such a manner that the more efficient regions in terms of lower distribution

losses and higher collection efficiency should be subjected to lower load shedding . This

is based on premise that , in times of scarcity, the available energy should be rationed

amongst the consumers such that the more efficient usage is encouraged, since there is

no merit in dumping electricity in areas which do not efficiently utilize a scarce resource.

The Clause No. 25 (b) of the order dated August 3, 2005

“It is necessary to distinguish between areas with better performance, and to undertake

lesser load shedding in areas with lower distribution losses and higher collection

efficiency, all else being equal. This would be in keeping with the principle that at the

time of scarcity, areas where energy is not being efficiently utilize or paid for should rank

lower in the rationing order.’

The Hon’ble Commission has followed the principle of T & D Losses and collectionefficiency as the basic parameters to determine the different groups / areas and has

accordingly prescribed higher load shedding in areas having higher T & D losses & lower

collection efficiency. In the process the Hon’ble Commission has given 70% weightage

to distribution loss & 30% weightage to collection efficiency. The losses criteria was

considered as prime objective of managing the load, and this was reflected in weightage

in the ratio of 70:30 for the Distribution loss and collect ion inefficiency, respectively.

Some of the reliability indices are:

4.8.1 System Average Interruption Frequency Index (SAIFI)

This index is designed to give information about the average frequency of interruptions per customer over

a pre-defined area, which could be the entire distribution licence area or over smaller portions of the

system, such as an operating area or individual feeder.



48

SAIFI = Sum of all customer interruptions/Total number of customers served

SAIFI = (Σ Ni) / NT

SAIFI is measured in units of interruptions per customer over a fixed duration, usually a month

or a year.

4.8.2 System Average Interrupt ion Duration Index (SAI DI)

This index is commonly referred to as customer minutes of interruption and is designed to

provide information about the average time the customers are interrupted.

SAIDI = Sum of all Customer interruption durations/Total number of customers served

SAIDI = (Σ r i x Ni) / NT

SAIDI is measured in units of time, often minutes or hours expressed as interruption duration per

customer, over a fixed duration, usually a month or a year.

4.8.3. Customer Average Interruption Durat ion Index (CAIDI)

CAIDI gives the average outage duration that any given customer would experience.

CAIDI can also be viewed as the average restoration time.

CAIDI = Sum of all Customer interruption durations/Total number of customer interruptions

CAIDI = (Σ r i x Ni) / (Σ Ni) = SAIDI / SAIFI

CAIDI is measured in units of time, often minutes or hours, over a fixed duration, usually a

month or a year.

Where,

i An interruption event

ri Restoration time for each interruption event

T Total

Ni Number of interrupted customers for each interruption event during reporting period

NT Total number of customers served for the area being indexed



49

The Central Electricity Authority (CEA) publishes monthly reliability indices for selected towns

using following formulae for calculating monthly Consumer and 11kV reliability indices:

1. Consumer Reliability Indices =

((No of consumers x 24 x No of days in that month x 60)-(Outage duration in minutes)) x 100

-----------------------------------------------------------------------------------------------------------------

(No of consumers x 24 x No of days in that Month x 60)

2. 11 kV feeder Reliability =

((No of feeders x 24 x No of days in that month x 60)-(Outage duration in minutes)) x 100

-----------------------------------------------------------------------------------------------------------------

(No of feeders x 24 x No of days in that Month x 60)

The formulae indicated above are variants of System Average Interruption Duration Index

(SAIDI). The accuracy of above mentioned formulae depends on outage duration estimation.

However, it is difficult to verify the same, unless consumer indexing and tripping details are

maintained properly.

Proposed Mechanism for measuring Network AvailabilityNetwork Availability is an indicator of how much time the distribution network is available to

the supplier for supplying electricity. Hence, it is proposed to adopt a variant of the CEA

formulae to indicate Network Availability.

It is important that Utilities maintain data on:

o Planned Maintenance Outage details

o Load shedding

o Force Majeure outages

o Trippings



50

While calculating the values of SAIDI, the interruptions due to Load Shedding, Interruptions

caused by events outside the control of the Network Business and Interruptions due to natural

calamities need to be excluded. Proposed Formula is:

Wires Network Availability = (1- (SAIDI / 8760)) x 100

Where,

SAIDI = Sum of all Customer interruption durations/Total number of customers served

Wires Network Availability is proposed to be measured over the course of a month and year and

will be expressed in percentage terms. As mandated under the Tariff Policy, the Commission has

to increasingly focus on regulation of the supply quality and service standards, rather than the

regulation of costs. The Standards of Performance stipulated by the various State Electricity

Regulatory Commissions (SERCs) for their respective State needs to be adhered to by Utilities

strictly. Any variation in this regard has to be considered as a controllable factor, and sharing of

gains/losses has to be undertaken. In this context, the FOR Report on MYT framework and

Distribution Margin recommends as under:

“5.4.2 A Composite Index of Supply Availability and Network Availability should be specified.

The SERCs should give appropriate weightage to these two factors. Supply availability should bemeasured on the basis of power contracted by distribution licencees on a long-term basis for the

power procurement plan submitted by the utility. Network availability should be measured on the

basis of reliability indices such as SAIDI, CAIDI and SAIFI. Feeder Reliability Indices at 11 KV

voltage level as specified by CEA would be appropriate till 100% consumer indexing is achieved

in the licencee’s area as the exact number of effected consumers by any interruption will be

known only thereafter. The target achievement for Composite Index of Supply Availability and

Network Availability may be specified as 95% for urban areas and 85% for rural areas .

However, the SERC may initially fix a lower norm for network availability for rural areas

keeping in view the present levels of service with trajectory for time bound improvement. For

every 1% under-achievement in composite availability for urban or rural areas, ROE shall be

reduced by 0.1% of equity.



51

The SERC shall specify the mechanism of computing Composite Index of Supply Availability and

Network Availability.”( emphasis added )

Since, under the proposed framework, the Wires Business and Supply Business are being

segregated, the performance indices of both Businesses may be kept separate, rather than

determining a Composite Index.

Supply Availability

FOR has recommended that SERCs should specify Supply Availability. It is proposed that

Supply availability may be measured on the basis of power contracted by distribution licencees

on a long-term basis for the power procurement plan submitted by the Utility and may be

represented in two sub-heads as under:

1. Base load Supply Availability: This parameter may be used to represent ability of Supply

Business to meet its base load requirement. Proposed formula for calculation of this parameter is

Base load Supply Availability = (Actual Contracted Base Load Supply in MW) x (No of Off-

Peak hours)/((Base load in MW) x (No of off Peak hours))

2. Peak load Supply Availability: This parameter may be used to represent the ability of the

Supply Business to meet its peak load requirement. Proposed formula for calculation of

this parameter is Peak load Supply Availability: (Actual Contracted Peak Load Supply inMW) x (No of Peak hours)/((Peak load in MW) x (No of Peak hours))

Since the peak hours and off-peak hours could vary from one season to another, the above

computations may be done in such a manner that the sum of off-peak hours and peak hours is

8760 hours, i.e., the total number of hours in a year. It is proposed that SERCs may specify Index

for Supply Availability based on Base load Supply Availability and Peak load Supply

Availability, with the weightage for Base load Supply Availability and Peak load Supply

Availability being considered as, say, 75% and 25%, i.e., greater emphasis may be placed on

meeting base load requirements. It is felt that the Supply Availability for base load should be

100% and concession, if any, may be given in the peak load supply availability, since as per the

distribution licence conditions, the licencee is supposed to ensure supply on 24 x 7 basis, and

there is no specific reference to load shedding under the EA 2003. It is envisaged that SERCs



52

will specify Supply Availability trajectory based on past performance of Supply Business,

however, it should not be lower than 90%, and should be progressively increased in a maximum

of three years to 95% or 98%. In case the actual contracted supply is higher than the normative

level, then the Supplier will be entitled to an incentive, and conversely, if the actual contracted

supply is lower than the normative level, then the Supplier will be subjected to a disincentive.

Annual Performance Review and Mid terms performance of the licencee forms the basis of

computation of many other factors by which the Commission get convinced and award

incentives. This will pave a road for distribution margin discussed about.

4.9 Contribution to Contingency Reserves

In accordance with Regulation 36.1 of the MERC MYT Regulations, 2011; the contribution to

contingency reserves should be 0.25% to 0.5% of the opening GFA for the financial year. The

TPC-D has apportioned 97% expenses to Wire Business and 3% to Supply Business. MSEDCL

and RInfa-D apportioned 90% expenses to Wire Business and 10% to Supply Business. The

contribution to the GFA as given in Business Plans is as follows:



53

Figure 9 Comparison of contribution of the cost centers to the opening GFA

The major contribution is of Plant and Machinery and Cables & Mains i.e., Supply Business and

Wire business. In case of Rinfra-D, the contribution of Plant & Machinery is 63% and in case of

MSEDCL it is 34% and in case of TPC-D it is 100%.

Thus, the generalization would be on the basis of usage of assets, which is computed by the

Commission.

4.10. Other Expenses including Incentive and Discounts

The other expenses of comprise of the expenditure on DSM, load factor incentive, power factor

incentive, interest to suppliers/contractors, rebate to consumers, compensation for injuries to staff

and outsiders.



54

The apportionment of expenses cannot be justified to be allocated to only retail supply business

as the employees’ contribution, engaged in the wire business is not considered. The distribution

margin, in future will depend on the performance/ contribution of the employees in respective

businesses to reduce power failures and other innovative methods employed. Hence, the

apportionment need be based on wire availability and supply availability factors as discussed

earlier.

4.11. Return on Equity

The Commission has computed RoE at the rate of 15.5% per annum of the equity for the

distribution Wires Business and at the rate of 17.5% per annum on the equity of the Supply

Business, respectively, in accordance with the MERC MYT Regulations, on the opening equity

of the year and on 50% of the approved levels of asset capitalisation during each year of the

Control Period and considering the normative debt: equity ratio as 70:30.

The excerpt from FOR report:

“….However, another objective that is presently not being achieved or targeted in the

distribution sector is the linkage of returns with the Availability of the Network and Supply

Business. FOR has also recommended that certain Availability norms should be specified for

Network Availability and Supply Availability, and the incentive/disincentive should be given in

terms of addition/reduction in ROE. Hence, the Distribution Margin approach has been

proposed with the objective of improving the hitherto neglected aspect of Availability of the

Distribution Business…. the incentive/disincentive will be in terms of addition/reduction in

percentage of ARR that can be earned/reduced for over-/under- achievement vis-à-vis the target

availability. To start with, the additional ARR may be considered as +0.2% of ARR for every

percentage point increase/decrease in Availability vis-à-vis the normative levels, for Wires

Business and Supply Business, separately..”

The rational behinds 15.5% for wire business and 17.5% for supply business is also given in the

same report which reads as

“…If the Availability goes to 100%, then the maximum Distribution Margin, amounting to +2%

of additional return will be available to the Distribution licencee… If the Availability goes to as

low as 80%, then the reduction in ARR will be commensurate with a reduction of maximum 2%



55

return…Thus, if the RoE for Generation and Transmission Business is considered as 15.5%, and

RoE for Distribution Business is considered as 17.5%, then the return for the Distribution

Business, after accounting for the Distribution Margin, can vary between 15.5% and 19.5%...”.

The concept of incentivizing the distribution licencee lies in its performance. The reliability

indices of which are given by the Wire Availability and Supply Availability. Thus it can be

proposed that the segregation should be based on the consolidated contribution of the wire and

supply availability. For example, if we compute RoE at the rate of 15.5% x Wire Availability x

(Regulatory Equity in the beginning of the year + Equity portion of Assets Capitalization) for

wire business, the Wire ARR reduces by 4.04%. On similar lines computing Supply ARR at the

rate of 17.5% would increase Supply ARR by 8.2%. Overall there is reduction in ARR by 2.8%.

4.12. Non tariff income

Rate of interest for the investment should be on the basis of CAGR computed by the

Commission for the growth in the projection of demand and sales.

Rent component, as added only in the wire business by The TPC-G is to be checked. The rent

would certainly increase if the retail supply business will prosper in a locality to accommodate

the designated staff. The rent component can also be pondered over to be reduced as many

inhabitants/flats which are purchased on lease basis by the licencee could actually be purchased,

though it solely depends on the capital expenditure business plans of the firms.

The other major components include interest on delayed payment and contribution to

contingency reserves. The segregation should be based on the expenses accrued in respective

businesses



56

Chapter 5 Conclusions and Recommendations

5.1 Power Purchase Expenses

The apportionment suggested shall be 100% for Supply business.

5.2 Total Capitalization

The Apportionment shall be done on actual basis of investment in the respective

businesses.

5.3 O&M Expenses

The expenses shall be allocated on the basis of number of employees engaged per 1000

number of consumers for the respective businesses as suggested by the Commission.

5.4 A&G Expenses

The expenses shall be allocated on the basis of expenses accrued or incurred for the

respective businesses. Say for example, the rent paid for the accommodation of the staff

or office premises can be segregated for the employees engaged in the respective

businesses, wherever feasible. If segregation to that extent is not possible, then the

general method of evaluation can be expenses/(1000xNo. of consumers)

5.5 R&M Expenses

R&M expenses shall be allocated as 95% to Wires Business and 5% to Supply Business.

5.6 Depreciation

Given the time period for computation of the depreciation value of the assets the

segregation of the assets shall be as per the usage in respective businesses. Where this is

not possible, general method of segregating the assets voltage wise would be useful.

5.7 Interest on long term loans



57

At the point of time while assessing the financial health of the utilities, the business plan

of those applicants who plan to procure loans from many financial institutions and short

term loans can be checked with more prudence.

5.8 Interest on working capital

The method of apportionment shall be suggested to be on the basis of application/usage

of the assets in the respective businesses and like the other accounting heads, on the basis

of the GFA of the book value of the assets.

5.9 Interest on Consumer security deposit

Expenses shall be allocated as 95% to Supply Business and 5% to Wire Business.

5.10 Provision for bad debts.

Prudence check required to assess the financial health of the company as well as the

expenses be based on the performance of the company.

5.11 Contribution to Contingency Reserves

The generalization would be on the basis of usage of assets, which is computed by the

Commission. Interest on Contingency reserve can be identified for Wires and SupplyBusiness separately based on GFA.

5.12 Other incentives including Incentives & Discounts

The generalization would be on the basis of usage of assets, which is computed by the

Commission.

5.13 Return on Equity

Segregation shall be based on the consolidated contribution of the wire and supply

availability considering the Wire Availability and Supply Availability.

5.14 Non tariff income

The segregation shall be based on the expenses accrued in respective businesses.



58

5.15 Segregation of accounts for SEZ

Ministry of Commerce & Industry (Department of Commerce), Government of India has

issued a notification dated 3 March 2010 granting “deemed Distribution Licensee ”

status to the SEZ developer.

It shall be recommended to propose the segregation of the wire business and the supply

business for the SEZ developer in its tariff petitions.

5.2 Scope for further study

The generalized equations formed on the basis of analysis done on the trendlines can be modified

with introduction to the partial differentiation of the dependent variables. The independent

variable is the function of other dependent variables. The other independent variables, like in

case of Power Purchase Expenses and Operation & Maintenance Expenses are functions of many

same independent variables. Mathematics provide with the solution by forming partial

differential equations for such cases. The access to the methodology adopted by other countries

would provide with more insight to the reasoning which would be highly recommended for the

model to be adopted in India.



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ABPS Infrastructure Advisory Private Limited. (2011). Study on evolving an appropriate model for

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AEMO. (2010). Introduction to Australia's National Electricity Market. Australia: Australia Energy

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BERC. (2013). BERC Case No. TP41 of 2012 for ARR for 2013-14. Patna: BERC.

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summer internship report _2_ scribd

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