Revenues to meet the gap

Based on the above ARR estimates APCPDCL has computed the gap between its revenues and costs.The following table provides this statement of differences.

[1] No subsidy has yet been indicated. However it is the belief of the Licensee that the GoAP will continue to subsidise the sector

APCPDCL is proposing the following revenue enhancement measures, some of which have already been applied for before the Commission during the current year.

During the current financial year APCPDCL had not proposed any change in the retail tariff rates in consideration of the efforts to reduce system losses and improve internal efficiency. In fact the effective realisation from the Domestic category was reduced as a consequence of introduction of six tariff slabs instead of four existing in the previous year. However it is apparent to the company that the costs are increasing more than anticipated and the revenues have not kept pace with the cost increases. Even with the additional loss reduction proposed for the ensuing year APCPDCL considers it appropriate that the rates be revised for the ensuing financial year. The rate revisions proposed for the ensuing year are modest and largely restricted to levels lower than compounded inflation index increases for two years. The rate increases proposed for the various categories are outlined later in this section.

 APTransco and APCPDCL have already applied to the Commission for revision of the wheeling charges and institution of grid support charges and the Commission has completed its hearings on the same. Based on its filings APTransco expects that the net realisation from these charges will be in the order of Rs. 215 crores. As outlined in the aforementioned application APTransco will share the realisations with the Discoms in a 75:25 ratio for energy wheeled at 33kV or 11 kV levels. APCPDCL expects a realisation, net of costs, of Rs. 45.1 crores

APCPDCL is also proposing additional measures to attract additional industrial consumption to the Grid. APCPDCL has already constructed a large number of industrial express feeders to provide reliable power to large industrial consumers. The capacity additions in the AP system will also aid in the process of reducing outages for these consumers. Under these circumstances APCPDCL believes that the captive generation capacity, particularly the sets that use liquid fuels for generating power, should be progressively retired. Generation by such sets are inherently inefficient as compared to grid power, and presence of such sets should be restricted only to emergency requirements of the industries for running critical equipment and facilities. APCPDCL proposes to provide appropriate incentives to the industries retiring such captive capacity and consuming from the grid. The detailed proposal is furnished as Annexure 4 of this filing. Preliminary computations indicate that 149 MU of energy can be sold to these consumers resulting in a realisation, net of costs, of Rs. 25.6 crores.

In addition to the above APCPDCL is proposing increase in the customer charges being paid by its consumers. The customer charges in the state have been last revised in 1995. During the period elapsed since then the costs have gone up substantially, but the customer charges have remained unrevised. In the recent years APCPDCL has been upgrading its customer services significantly. APCPDCL has introduced a spot billing system for a significant body of its Domestic and Commercial consumers and is in the process of extending these services to others. The end use metering arrangements have been revamped and a large number of old meters have been replaced by high accuracy meters that are relatively more expensive. In addition consumer care centres have been instituted with appropriate investments in equipment and transport facilities to provide prompt service to consumers. Great care is also being taken to standardise billing and collection procedures, a fact manifested by the sharp drop in the levels of exceptional bills in the system. APCPDCL believes that it is appropriate that the customer charges be revised in light of these measures being undertaken by the company. However in revising these charges, APCPDCL has duly considered the additional burden on consumers with relatively lower capacity to pay, particularly the first slab of Domestic consumers, and have accordingly proposed a lower increase for these consumers. Details of the proposed customer charge revisions are provided in the section on miscellaneous charges later in this document.

1 Cost of service

Section 8 of the "guidelines" issued by the Commission for ERC and tariff filings require the Licensee to file the costs of servicing the various consumer classes based on embedded cost and marginal cost methods. The estimates of embedded and marginal costs, particularly the marginal cost estimates, are important benchmarks in determining whether the tariffs reflect the economic costs of servicing its customers. The guidelines require these costs to be determined by customer classes and/or voltage levels and compares the tariffs with these estimates of costs by category and/or voltage.

Methodology of Determination
The costs of retail supply and/or distribution of energy can be calculated by two alternative methods, the embedded cost method and the marginal cost method. The embedded costs of service reflect the average costs associated with servicing that category based on accounting information that is available for that category. As per guidelines 8.2 (f), embedded cost of service by consumer category is provided in Form 4.5. In addition the detailed study can be provided if required.
The embedded cost method however does not consider the demand that is to be placed on the system by the future users of the system. Typically this method uses the projections of costs based on historical accounting costs that have been incurred for servicing the category. Thus the revenues derived from tariffs can be closely matched with the costs of service derived from this method.

For determination of future tariffs it is appropriate that the economic costs reflect those associated with future use of the system and not just those for past use.The cost of distribution and retail supply not only vary with the quantum of energy used or transmitted but also with the time of day during which the energy is transmitted and the season of the year.These variations in costs are dependent on the marginal demand placed on the distribution system on account of the distribution of energy and also on account of the cost of additional generation capacity that has to be contracted to meet this demand.In the transmission and distribution system, not only does additional capacity need to be built in for any incremental load that occurs when the system operates at its peak capacity, but also for the costs associated with additional losses.The incremental losses at peak capacity increase exponentially with the additional demand placed on the system.Similarly for supply of energy at the peak load, additional capacity has to be contracted and the costs related to contracting of this capacity reflect the costs associated with servicing these loads.The exact costs depend on the nature of the generating capacity contracted for meeting the additional load.

APCPDCL appreciates the importance of sending the right cost signals to the various users of the grid. A scarce resource like electricity needs to be priced based on the economic costs of generating and supplying the resource. A higher price than the economic costs will lead to building capacities that are not optimal in size and thus will not allow for realisation of economies of scale. In addition this will drive away the load from the grid to other sources of supply that may not reflect the optimal use of such resources. Conversely, charges that are lower than costs will lead to excessive consumption of a scarce resource in an uneconomic manner.

APCPDCL believes that marginal cost based pricing methods reflect the economic costs of servicing much more closely than embedded cost based pricing. APCPDCL has attempted to develop marginal cost information for providing an appropriate basis for pricing of electricity. An LRMC model has been developed within the EISP project (SNC-Lavalin), and is populated with 1998/99 data. A copy of a report on this model, including results, was forwarded to the APERC in early 2000. The model uses an indicative system expansion plan based on the data available at that time.

APCPDCL would welcome the comments of APERC regarding the acceptability of the method proposed and the model structure. A further copy of the LRMC model report dated February 2000 can be provided if required.
The long term system investment plan for the horizon year 2015 is now being updated and should be completed by March 2002. APCPDCL therefore suggests that upon the acceptance of the methodology by APERC, the LRMC data would be updated at that time and forwarded to the Commission. Due to the nature of LRMC costing, we would not expect major changes to the results already obtained.

However for the purpose of present subsidy and cross-subsidy allocation as well as the required directional movement of the tariffs, the estimates of embedded cost may be adequate. The present tariff distortions are extremely large and hence movement towards cost reflective tariffs will take substantial time. In addition, the embedded cost base CoS estimates have the advantage of capturing accounting costs accurately. Once the gap between tariffs and costs is substantially bridged it would be worthwhile to emphasise upon marginal cost based CoS estimates for tariff and subsidy determination.

2 Principles of tariff design

APCPDCL has in its previous tariff filing for the FY 2001-02 asked for retention of the retail rates being paid by the consumers at the time of the filing, except for the Domestic category where six slabs were proposed to be introduced instead of the four existing on the date of filing. The Hon’ble Commission in its order dated March 24, 2001 accepted the tariff proposal of APCPDCL for the FY 2001-02.
During the FY 2001-02 APCPDCL has also improved its revenue enhancement and loss reduction measures and the revenue collection performance in the current months also show an encouraging trend. Significant measures are being taken to plug leakage in the metering and billing processes and enhance billing levels. However, the imbalance in the tariff rates for various categories of consumers still exist. This does not allow proper economic signals being send to the consumers and results in inefficient consumption and consequent stress, both financial and operational, on the system. The impact on the performance of APCPDCL on account of the changing cost structures and the changing consumption pattern on account of distortions in tariff has been analysed in its ARR application and the Licensee wants to obviate such distortions to the extent possible. Consequently it proposes to marginally raise the tariff rates and restructure the tariff design for certain key categories to promote efficient consumption. from the existing levels. APCPDCL has proposed rationalisation of the slab structures of certain categories, primarily the Commercial and the Industrial categories. APCPDCL believes that the proposed structures will also prevent revenue leakage without adversely affecting consumers.
 

Justification for proposed tariffs

The tariff proposals contained in this FPT reflect a balance among the following competing objectives:

• Minimise rate shock to any customer category or sub-category

• Improve revenues by encouraging consumption in high revenue yielding industrial consumers.

• Meeting the Annual Revenue Requirement of APCPDCL

Because these objectives are frequently conflicting, it is not practical to fulfill any one objective completely. APCPDCL has been under considerable strain in the past due to shift of subsidising industrial consumers to alternative sources of power, apart from the industrial slowdown in recent years. In recognition of the importance of industrial growth for the economy of the state and also in improving the cash flow of the company, APCPDCL has undertaken major operational initiatives like providing Express feeders for industrial consumers, attempting uninterrupted supply to them, betterment of consumer grievance redressal process, etc. In addition, APCPDCL proposes to encourage increased consumption in the HT industrial category through specific tariff measures, the details of which are provided in the proposal for the particular category.

However the improvements proposed are not confined to the HT Industrial category alone. As indicated earlier APCPDCL has taken a series of measures to improve quality of supply in the LT categories and also the levels of overall customer service. APCPDCL is making all efforts to ensure that all areas under its jurisdiction receive reliable supply and is implementing the necessary infrastructure for this purpose. All efforts are also being made to stop illegal consumption.
APCPDCL has also programmed a sharp reduction in the overall levels of technical and commercial loss in its area. Effective steps are being taken to replace defective or slow meters and also address issues in billing. On account of these measures APCPDCL is in a position to propose a significantly lower level of tariffs than what would be necessary otherwise.
In this context, however, it must be mentioned that the present tariff proposals use the ARR for the ensuing year and the ARR is only a baseline. In reality there would be deviations from this baseline. These potential deviations present a significant risk to APCPDCL’s financial viability and there is a need to mitigate these risks which it believes are not addressed adequately by the current mechanisms. In its ARR filing, APCPDCL has requested for pass through mechanisms to shield the company from these risks. APCPDCL requests appropriate orders from the Hon’ble Commission to introduce these systems for mitigation of the risks incident on APCPDCL.
 

Classification of Consumer categories

The consumer classification is essentially the same as ordered by the APERC in its tariff order dated March 24, 2001. The description of the class/ classes of consumers falling under different categories are described in Annexure 1.

Proposed retail tariff rates

The proposed schedule of charges has been determined with the objective of unbundling costs and reflecting them appropriately in the tariff structure.
The current schedule of charges, has the following components:
 

A brief explanation of the nature of each of the above charges is provided below.

 Energy charges

These charges are per kwh of energy consumed. The energy charges at present include recovery of both variable and a large proportion of fixed costs, but generally do not reflect the true marginal costs of production. Most of the fixed costs are also covered in this charge, the extent of which varies between categories.

Demand Charges
Demand charges are designed to enable APCPDCL to meet at least a part of its fixed cost obligations. At present demand charges are applicable to few HT categories only. However, imposition of demand charges requires meters capable of measuring maximum demand. Apart from the HT categories having demand meters only some the LT Industrial category consumers have such meters at this time. Hence APCPDCL is proposing an optional tariff with a demand charge component based on contracted demand in place of the fixed charges based on connected load. The cost of installing such a meter does not justify the benefit for all categories and also for relevant categories, replacement with such electronic meters requires substantial effort and time. Hence, APCPDCL does not propose to extend these charges to other categories at this juncture.

Fixed charges

APCPDCL recognises the need for collection of fixed charges from those categories consumers who are not subjected to demand charges. Presently, only the LT Industrial category (including Cottage Industries) have a fixed charges based on HP. APCPDCL has considered the introduction of fixed charges for other categories having a single part tariff. However, APCPDCL believes that the fixed charges incident on a category should be linked to the variability in revenues from the category and not to the cost structures of the Licensee alone. In future, when better information is available on the variability in consumption profiles of the categories across time of the day and months of the year, APCPDCL will consider introduction of fixed charges for these categories to address the variability in revenues and costs.

Monthly minimum charges

These charges are currently made applicable in respect of certain tariff categories, to ensure certain minimum amount from the consumer, when the consumer does not consume a minimum level of energy.
APCPDCL also has a minimum charge for Demand for categories having a two-part tariff. APCPDCL proposes to continue the existing minimum billing demand level of 80 percent, for categories for which Demand charges are applicable. This is necessary to protect APCPDCL’s fixed charge revenues from variations beyond an operations range.

Demand Over-drawal charges

Demand over-drawal charges are currently applicable for categories with two part tariffs. APCPDCL proposes to continue with the current structure of demand over-drawal charges. These charges are essential as they protect APCPDCL from under-contracting of load by consumers. In addition, APTransco pays capacity charges to generators, a substantial part of which are on account of fixed costs, which can be expected to be passed on to APCPDCL. The penalties on over-drawl would help APCPDCL pay for any surcharge incident on it for overdrawal by its consumers.

Flat rate tariffs (for agriculture categories)

Flat rate charges are applicable to the unmetered agricultural and irrigation consumers. These charges are based on the pump capacity, and location of the consumer and not the actual level of energy offtake.
APCPDCL also recognises that having charges based on pump capacity and independent of actual usage is an inefficient method of tariff design. The absence of any metering infrastructure is the primary impediment in introducing metered tariffs on a universal basis for the consumers of this category.
Agriculture tariffs in Andhra Pradesh are among the lowest in the country, with the exception of the free supply states. This has proved to be a heavy drain on the finances of APTransco and its subsidiaries. The resultant cross subsidies have severe impact on the tariffs of other categories (especially the industrial categories), pushing the rates substantially above the cost of service and to levels which are among the highest in the country, affecting the competitiveness of these industries, and driving them towards captive generation.

Customer charges

In addition to the tariff charges, APCPDCL also has customer charges for various categories, which are accounted under miscellaneous income in its accounts. APCPDCL proposes to increase the customer charges through this filing. The details of increase of customer charges are as follows: