Date of order:13.9.2007

1. The PSERC issued Tariff Orders for the years 2004-05 and 2005-06 on 30.10.2004 and 14.6.2005 respectively. Aggrieved by these Tariff Orders, PSEB preferred two Appeals before the Appellate Tribunal for Electricity, New Delhi. (Appeal Nos. 54 and 55 of 2005). Appeals against the Tariff Order of 2005-06 of the Commission were also filed with the Appellate Tribunal by the Power Intensive Industrial Consumers of Punjab (Appeal Nos. 4, 13, 14, 23, 25, 26, 35 and 36 of 2005). While disposing of these appeals, the Appellate Tribunal, in its judgement dated May 26, 2006 directed the Commission to reconsider certain issues. Accordingly, the Commission has undertaken further examination of these matters and passes this order.
2. Determination & Allocation of cost of RSD Project
   

   2.1    The Appellate Tribunal considered the contention of the industrial consumers that apportionment of 79.1% of the cost towards power component and 20.9% to Irrigation Branch was arbitrary and that PSEB has been unjustifiably burdened with huge cost which is resulting in higher tariffs. The Tribunal also took note of some of the Tariff Orders passed by the Commission in this regard and observed that the contentions of the industrial consumers had been echoed by the Commission. The Tribunal did not agree with the submissions of the counsel for the Board and the State Government that RSD Project cost is beyond the domain of the Commission and directed the Commission to determine cost of RSD Project to be allocated to the Board by due diligence and fair study. The Board and the State Government were directed to file all relevant documents before the Commission for determining cost to be allocated to the power component of the project. The Tribunal further ordered that in case the Commission decided to allocate reduced cost of RSD Project to the Board, consequential effect thereto shall be given by the State of Punjab. The Commission was directed to complete determination and allocation of cost of this project and make available relief to the consumers in the truing up exercise for the year 2006-07. It was further directed that such relief would be made available to all consumers and not confined to the industrial consumers alone.

   2.2    In compliance with the Order of the Tribunal, the Commission has obtained necessary information from the Board and the State Government and examined the entire issue relating to the determination and allocation of the cost of RSD Project. From a perusal of the Detailed Project Report (DPR) of Ravi Project Unit-I, Ranjit Sagar (Thein) Dam Project and UBDC Hydel Stage-II, the Commission noted that the Ranjit Sagar Dam Project which was initially envisaged to be completed within a period of 7 years at an estimated cost of about Rs.700 crores (at November 1983 price level); was ultimately commissioned after a period of over 17 years in August 2000 and the total expenditure booked on RSD upto March 2001 was Rs.5414.44 crores which increased to Rs.5949.83 crores as on March 31, 2004. RSD Project is a multi purpose project and as per the decision of the State Govt. the cost of the project was to be shared between PSEB and the Irrigation Branch of the State Govt. in the ratio of 79.1% and 20.9% respectively. Based on this ratio, the share of PSEB in the total cost worked out to Rs.4282.82 crores in March 2001 which was allocated to the Board. The cost of RSD Project allocated to PSEB increased to Rs.4498.94 crores as on March 31, 2006 as reflected in the statement of accounts for the year 2005-06.

   2.3    To put the cost allocation of RSD Project to PSEB in proper perspective it is necessary to refer to previous Tariff Orders of the Commission. The Commission started functioning from April 18, 2001. It passed its first Tariff Order for the year 2002-03 on September 6, 2002 wherein the Commission for the first time made an observation that cost allocation of RSD Project in the ratio of 79.1% and 20.9% between PSEB and Irrigation Branch appeared to be unjustified. In response to Commission’s observations the State Government conveyed its willingness to address the issue. Similar observations on RSD Project cost allocation were made in the Tariff Order for 2003-04 issued by the Commission on May 23, 2003. Taking note of the assurance given to the Commission and the observations of the Commission in this respect in the Tariff Order of 2002-03, the State Government on May 5, 2003 appointed a one man Committee headed by Sh. A.S. Chatha, IAS (Retired) to go into the cost allocation of the Project. The Commission was however, not informed of the constitution of the Chatha Committee or the review being undertaken of the cost of RSD Project. Meanwhile, taking into account the objections raised by consumers and the utility, the Commission again made observations in its subsequent Tariff Orders about apparent disproportionate allocation of the cost of the Project. It appears that the Chatha Committee submitted its report to the State Government recommending retention of allocation of Project cost in the ratio of 79.1 % : 20.9 % between PSEB and the Irrigation Branch and the report was accepted by the State Government. This fact came to the knowledge of the Commission only when a letter dated September 14, 2004 from the Additional Secretary (Power) was received alongwith a copy of the Chatha Committee report wherein the State Government’s acceptance to the cost allocation ratio of 20.9% and 79.1% between Irrigation Branch and PSEB was also communicated. On the receipt of Govt. communication dated 14-09-2004 and taking note of the fact that the State Govt. had taken action in response to the Commission’s observations, appointed and accepted Chatha Committee’s report on allocation ratio of RSD Project, the Commission did not make any further comments on this matter in the Tariff Order for the year 2006-07 issued on May 10, 2006, thereby implicitly accepting the cost allocation as recommended by the Chatha Committee.

   2.4    From the above, it is evident that the State Government took note of the Commission’s observations in the Tariff Orders and had appointed the Chatha Committee to consider re-allocating RSD Project cost between PSEB and Irrigation Branch. This Committee after detailed observations confirmed the same ratio for cost allocation as determined earlier by the Central Water & Power Commission and the Government of India. The Commission accepted the cost allocation of the project as brought out above in the Tariff Order of 2006-07. Apart from this the Commission on re-examination of the issue and the available data has taken note of the following:

   1. The Detailed Project Report (DPR) containing statistical data of the past fifty years or so was considered by the State Government as well as by the Planning Commission for approval of the cost allocation between PSEB and Irrigation Branch. No other reliable statistical data/information has come to the notice of the Commission warranting change in the allocation ratio.
   2. The State Government has accepted the cost allocation ratio of 79.1% and 20.9% based on the ‘Facilities Used Method’; a method also recommended by the Government of India and commonly adopted for apportionment of cost of similar multi purpose projects across the country.
   3. This cost sharing ratio stood approved by the Central Water and Power Commission. It was on this basis that the Government of India had released their 2/3rd share of the cost of re-modeling of UBDC system.
   4. The said cost sharing ratio already stands re-looked into and upheld by Chatha Committee which was appointed by the State Government in pursuance of Commission’s directions. The cost sharing ratio as a result of review also stands accepted by the State Government.
   5. RSD Project was conceived and approved for execution long before the regulatory regime came into being. The capitalized cost of all assets of PSEB based on historical cost as reflected in the statement of accounts has been accepted without any alteration or re-determination of such cost of any other past project. The Commission has accepted historical cost as reflected in the accounts of PSEB as the basis of Tariff determination in the past. There is no other reliable data or basis available for interfering with the cost of assets as reflected in the accounts of PSEB. It will be against the principles of accounting to re-determine the cost of one project/asset without similar revaluation/re-determination in the case of other assets of PSEB. Accordingly, there appears to be no justification for re-determination of cost of RSD Project alone.
   6. Redetermination of cost is also inadvisable given the fact that RSD Project has inter-state cost allocation implications, with the State of J&K being required to meet 10% cost chargeable to the Irrigation Branch.
   7. RSD Project is a power oriented project and was approved as such by the Govt. of India and the Planning Commission. Available data shows that after RSD Project came up, irrigation potential has increased only marginally as the net enhancement in utilization of water in the UBDC System is 0.14 M.A.F., whereas power potential increased to a much greater extent with installed capacity being enhanced by 600 MW and annual generation in a dependable year by 1509 MU. The Shahpur Kandi project was not originally conceived as a part of RSD Project.
   8. The Commission has been fixing tariff with reference to average cost of supply and as such all classes of consumers benefited equally from sharing of cheap power generated/purchased from different projects/sources like Bhakra and Shanan alongwith costly power generated from RSD Project. Review of cost of RSD Project without undertaking review of other projects does not appear to be justified.
   9. No doubt the initial cost of power generated from RSD Project at Rs.6/unit was high but the cost of generation has come down with the passage of time. This is evident from the table below which indicates that cost of generation came down to 291.48 paise per unit in 2005-06 with likely further decrease in the years to come:
   
   Cost of generation of power per unit from RSD PROJECT
   
   

   Year	2001-02	2002-03	2003-04	2004-05	2005-06
   Net Generation (MUs)	1226.14	1148.07	1544.86	1128.24	1988.99
   Total Cost	73866.23	73047.88	67907.44	61567.17	57975.90
   Cost per unit (paise)	602.43	636.27	439.57	545.69	291.48

   2.5    It is true that the cost of generation bears a direct relationship with the quantum of electricity generated which in turn is dependent on availability of water in the reservoir. However, the cost of the project would in any case come down with the adjustment of depreciation over the years leading to favourable effect on cost of supply from this project even if generation is reduced for any reason in a particular year.

   2.6    For the reasons brought out above, the Commission is of the view that it is inadvisable and perhaps even impossible to redetermine the cost of RSD Project at this stage. In so far as apportionment is concerned, this seems, on the whole, to have been fairly accomplished by the State Govt. with an open mind on the subject. The issue was reviewed by the Chatha Committee which after going into all relevant aspects recommended that the apportionment of 79.1% and 20.9% between PSEB and the Irrigation Branch be retained. The Commission, accordingly, holds that no interference is called for in the already determined and allocated cost of RSD Project.
   
   

3. RE & Cash Subsidy

   3.1    The Tribunal in para 116 of the order has held that the Commission was bound to require the Government to pay outstanding subsidy including Rural Electrification Subsidy and the manner of payment was also to be specified as required under Section 65 of the Electricity Act, 2003. In para 117 of the judgement the Tribunal has directed that the Commission shall determine the following:

   1. What is the total amount of subsidy payable by the State to the Board including cash and RE subsidy without any adjustment of earlier loans or interest?
   2. What should be the mode of payment of subsidy?
   3. To what extent the subsidy could be applied or adjusted towards the principal (loans)?
   4. What is the amount of interest payable by the Board to the State?
   5. What is the quantum of amount which the state has failed to disburse towards RE subsidy?
   Before going into the issue in accordance with the directions of the Tribunal, it is important if there is clarity as to what the terms ‘Rural Electrification (RE) subsidy’ and ‘Cash subsidy’ really imply.

   3.2    As per agreement of July 1975 between the Government of India and the International Development Agency for extending Rural Electrification Credit, the State Government in its letter dated April 6, 1977 gave an undertaking to the Govt. of India stating that with effect from April 1, 1977 it will provide PSEB with an annual subsidy equivalent to the amount by which the Board’s operating expenses in respect of Rural Electrification Operations exceed its revenue from such operations or such lower amount as may be required for the Board to achieve and maintain a return of 9.5% of its average capital base. The return of 9.5% comprised of three components viz. 6% interest on Govt. loans to PSEB, 3% return on net fixed assets and 0.5% as general reserve. In 1987, the State Government imposed a restriction that the subsidy amount would be confined to the amount of interest due on State Government loans. From 1995-96, the rate of RE subsidy was enhanced to 15% consisting of 12% interest on State Government loans and 3% towards rate of return on net fixed assets (NFA). PSEB, instead of restricting its claim for RE subsidy to the lower of the two alternatives, claimed subsidy from the State Government with reference to the total assets of PSEB and not restricting it to the assets of RE operations alone. From February 14, 1997, the State Government allowed free supply of electricity to AP consumers without any compensation being paid to PSEB. The revenue loss on this account appears to be the basis of PSEB’s claim for ‘cash subsidy’.

   3.3    The Tribunal had in its judgement, observed that it will be open to the Commission to call for the record of the Board and the State Government including their statement of Accounts to determine these issues and directed them to assist the Commission in this respect. Accordingly, the Commission requested the Board and the State Government to furnish complete details of RE/cash subsidy payable by the State Government to PSEB. The Board furnished detailed information on 18th September 2006. From a perusal thereof, the Commission noted that subsidy totaling Rs.5470 crores was provided for in the accounts for the year 2001-02, a part of which was RE subsidy while the remaining amount pertained to cash subsidy. No separate details are available of the extent of RE subsidy and cash subsidy reflected in this amount of Rs.5470 crores. However, out of this, an amount of Rs.2228 crores was adjusted against interest on State Government loans payable upto March 31, 2002 by the Board. The balance claim of Rs.3241.94 crores shown as receivable for the period from 1998-99 to 2001-02 remained under dispute with the State Government and was ultimately written off in the accounts of the Board in the year 2004-05. After 2004-05 PSEB has not shown any amount of RE/cash subsidy due from the State Government for the period 1997-98 to 2001-02.

   3.4    The Board started supply of free electricity to AP consumers w.e.f. February 14, 1997. On estimation by the Commission, the revenue loss suffered on this account by the Board upto March 2002 works out to Rs.1121.30 crores approximately. Since PSEB had been claiming RE subsidy so as to earn 15% return on the total assets of the Board after adjustment of its losses, the amount of cash/revenue loss on account of free supply of power to AP consumers appears to have been accounted for in the total amount of receivable subsidy of Rs.5470 crores. This fact stands verified with reference to audited annual accounts of the Board for the year 2004-05 where the total amount of subsidy (RE subsidy and cash subsidy) taken into account is Rs.5470 crores out of which Rs.2228 crores was adjusted against interest on government loans and the balance Rs.3241.94 crores was written off in 2004-05 thereby increasing the accumulated losses of the Board to Rs.4367.03 crores as on March 31, 2005.

   3.5    The Commission observes that the manner in which the claim of RE subsidy was raised and adjusted against interests due on government loans seemed to be acceptable to either side right upto the year 1996-97. It appears that the Board thereafter began to raise subsidy claims that were higher than the amount of interest payable by it to the State Government and for this reason adjustment did not take place. It is possibly for this reason that subsidy claim accumulated to Rs.5470 crores for the period 1998-99 to 2001-02 against a total interest amounting to Rs.2228 crores payable by the Board to the State Government. While it is a fact that there was no upfront compensation to the Board for free supply of electricity to AP consumers which commenced from February 1997, it is also a fact that the total amount of subsidy claim did not entirely relate to subsidy claimed on this account. The Board had upto 1997-98 claimed subsidy to cover the gap between the cost of its operations and revenue and this remained uncontested so long as this gap could be covered by interest due to the State Government from the Board. It is clear that once this method was no longer acceptable to either side, the issue had to be mutually decided afresh and this has apparently been done by transferring the outstanding subsidy claim to the accumulated losses of the Board. In this manner, no direct burden has been cast on the consumers and the extent to which the Board might have been forced to raise additional resources to meet their revenue requirements is an issue that has been separately addressed by the Commission in this order while discussing the question of diversion of funds from capital to revenue account.

   3.6    The Board has reported that no subsidy is receivable from the Government for the period beyond 3/2002 to the year 2005-06. However, the actual position of AP subsidy due and paid by the State Govt. from 2002-03 to 31st March 2006 based on AP consumption as determined by the Commission is as under:

   (Rs. in crores)

   
   

   Year	Consumption finally approved in ‘True up’ exercise(in MUs)	Total Revenue Required	Revenue collected from consumers as per annual accounts	Amount of subsidy payable by GoP	Amount of subsidy received as per annual accounts	Subsidy short (-) excess(+)
   2002-03	5820	1164.00	151.42	1012.58	900.00	(-) 112.58
   2003-04	5745	1149.00	329.21	819.79	787.69	(-)32.10
   2004-05	6472 (4328+ 2144)	1281.54	391.80	889.74	873.61	(-)16.13
   2005-06	7317	1565.84	203.41	1362.43 *4.08 1366.51	1385.92	(+)19.41
   Total						(-)141.40 Intt (-)1.74** (-)143.14
   Subsidy payable by State Government						143.14

   * Rs.4.08 crores represents meter rentals and service charges ** Interest of Rs.1.74 crores was levied by the Commission on balance unpaid subsidy of Rs.19.31 crores for the year 2003-04.

   3.7    Apart from AP subsidy, the State Government has been providing subsidy upto 50 units per month to Scheduled Castes Domestic Supply (DS) consumers with a connected load cap of 300 watts. This amount of subsidy has been taken into account by the Commission in its respective Tariff Orders from the years 2002-03 onwards. While the State Government has been paying subsidy of Rs.50 crores every year, the actual amount due on this account was much lower. The table below indicates the amount of subsidy due and amount of subsidy paid by the State Government upto 2005-06:

   (Rs. in crores)

   Sr. No.	Year	Amount of subsidy due	Amount of subsidy paid	Subsidy received in excess (+)
   1.	2002-03	20.69	50.00	(+) 29.31
   2.	2003-04	8.11	50.00	(+) 41.89
   3.	2004-05	8.20	50.00	(+) 41.80
   4.	2005-06	27.50	50.00	(+) 22.50
   5.	Total	64.50	200.00	(+) 135.50
   Excess Subsidy paid by the State Govt.				135.50

   3.8    It is evident that there is a short payment of AP subsidy of Rs.143.14 crores and excess payment of subsidy of Rs.135.50 crores for Schedule Castes DS consumers by the State Government from 2002-03 to 2005-06 with the net amount of subsidy payable by the State Government upto the year 2005-06 working out to Rs.7.64 (143.14-135.50) crores. As a result of discussions in the above paras, it has also been concluded that no amount of subsidy is now payable by the State Government to the Board for the period 1997-98 to 2001-02. Accordingly, in compliance with the directions (i) and (v) of the Tribunal referred to above, the Commission holds that the total subsidy payable by the State Government upto the year 2005-06 is Rs.7.64 crores as determined above. This amount due from the State Government will, in accordance with the Tribunal’s directions, be taken into account in the true-up of 2005-06 incorporated in the Tariff Order for 2007-08.

   3.9    The second direction of the Tribunal concerns the mode of payment of such subsidy. It is necessary to refer, in this connection, to Section 65 of the Electricity Act, 2003 which inter-alia states that if the State Government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commission under Section 62, the State Government shall notwithstanding any direction which may be given under Section 108, pay the amount, in advance and in such manner as the State Commission may direct. Quite evidently, the subsidy payable by the State Government to PSEB needs to be paid in advance as per requirement of the law. In this view of the matter, the question of any adjustment of subsidy towards principal (loans) does not arise. In fact the State Government has already started making payment of the amount of subsidy by cheque at the end of each quarter with effect from 2004-05 onwards. In line with the legal position brought out above, the Commission decides that the State Government will hereafter make payment of subsidy in quarterly instalments at the beginning of each quarter. The amount due to be paid to the Board for each quarter will, for the purposes of ease of reckoning, be one fourth of the total amount of subsidy payable in any particular year as determined by the Commission.

   3.10    The Commission is also required {direction (iii)}to determine the extent to which subsidy could be adjusted against outstanding government loans to the Board. It is normal practice that a loan is granted under mutually agreed terms and conditions. Accordingly, the lender and the borrower enter into a bilateral contractual agreement to abide by such terms & conditions of the payment and repayment of the loans before the loan is disbursed. The Commission is of the view that it would, therefore, be inappropriate if any adjustment of outstanding subsidy is effected against outstanding government loans to the Board. Section 65 of the Electricity Act 2003 adequately provides for a situation where subsidy payable is not forthcoming and a recourse to those provisions is always available in the event of a default.

4. Diversion of Funds and interest on Govt. loans:

   4.1    The Appellate Tribunal referred to the submissions on behalf of the Industrial consumers that interest bearing loans were procured by the Board for capital investment but were used to meet revenue deficit and that the Commission had allowed the entire amount of interest except a sum of Rs.100 crores as a pass through. The Board had on the other hand urged that the Commission had wrongly disallowed a sum of Rs.100 crores out of its interest claims for the years 2004-05 and 2005-06.

   4.2    After considering the submissions of the parties, the Tribunal directed that the issue relating to the extent of interest which can be allowed as a pass through shall, for the year 2006-07, be determined and resolved by the Commission alongwith the determination of issues relating to RSD cost allocation, subsidy and high rate of interests on Govt. loans. This is to be accomplished during the truing up exercise for the year 2006-07. In compliance with the directions of the Tribunal, the Commission has examined de novo, the facts relating to diversion by the Board of capital funds for revenue purposes and rate of interest payable by PSEB on government loans.

   4.3    The Commission had made a detailed calculation of diversion of funds in the Tariff Order of 2004-05 wherein net fixed assets of the Board were found less by an amount of Rs.4212.06 crores and Rs.4181.90 crores for the years 2002-03 and 2003-04 respectively than the funds available for creation of such assets. On account of such diversion of funds, the Commission had disallowed interest of Rs.100 crores from the ARR of the Board for the year 2003-04. Following the rationale of this decision, interest cost to the extent of Rs.100 crores has been similarly disallowed in the Tariff Orders of 2004-05, 2005-06 and 2006-07.

   4.4    As stated above, the Commission had calculated diversion of funds of Rs.4214.06 crores and Rs.4181.90 crores by the Board for the years 2002-03 and 2003-04 respectively by taking into account the value of the net fixed assets of the Board at the end of the years 2001-02 and 2002-03. The Board while now furnishing information in this respect worked out diversion of capital funds for revenue purpose as under:
   
   (Rs. in crores)

   Sr. No.	Year	Amount of Diversion
   1.	2002-03	3442.74
   2.	2003-04	3262.83
   3.	2004-05	3531.46
   4.	2005-06	3169.30

   4.5    The Board has also given the following reasons for arriving at different amounts of diversion than that determined by the Commission in its Tariff Orders:

   1. Opening balances as on 1.4.2002 & 1.4.2003 have been taken into account for the years 2002-03 & 2003-04 in Table 7.37 of the Tariff Order for the year 2004-05, whereas the closing balances as on 31.3.2003 and 31.3.2004 ought to have been considered.
   2. PSEB took the figure for work-in-progress (WIP) for RSD PROJECT as Rs.1380.25 crores and Rs.1345.64 crores instead of Rs.1469.27 crores and Rs.1444.21 crores for the years 2002-03 and 2003-04 respectively. The Commission in its calculations had taken the composite figure of WIP as the break-up thereof between different projects was not available to the Commission.
   3. Besides, the State Government during 3/2005 decided to withdraw loans of Rs.1322.62 crores related to RSD PROJECT, being the Irrigation Branch share, from the total GOP loans. Accordingly, the share of 20.9% loans of RSD PROJECT pertaining to Irrigation Branch was worked out by PSEB to be Rs.1380.25 crores and Rs.1345.64 crores instead of Rs.580.28 crores and Rs.580.28 crores as worked by the Commission for the years 2002-03 and 2003-04 in the Tariff Order of 2004-05.
   4. Inventory at Construction Stores was not considered by the Commission for calculating the capital assets.

   4.6    In addition, it has also come to the notice of the Commission that the State Government had accepted PSEB’s payment liabilities of Rs.637.35 crores which it owed to Public Sector Undertakings in 2003-04. Accordingly, the Reserve Bank of India issued bonds of Rs.637.35 crores on behalf of the State Government in 2003-04, the debt servicing liability whereof is being borne by the State Government. As such, the carrying cost of these bonds will affect neither PSEB nor electricity consumers. The Commission had not earlier taken into account the issue of RBI Bonds while working out the amount of diversion by PSEB.

   4.7    The Commission has given due consideration to the issues now submitted by the Board and finds that these are not without force. Accordingly, it accepts the figures of Rs.3442.74 crores as the cumulative diversion of funds for the years 2002-03. Diversion of funds for the years 2003-04, 2004-05 and 2005-06 as worked out by PSEB is Rs.3262.83 crores, Rs.3531.46 crores and Rs.3169.30 crores respectively. However, it is noted that the amount of Rs.637.35 crores relating to RBI Bonds issued by RBI in 2003-04 have not been accounted for by PSEB in the amount of diversion for these years. After taking this into account, diversion of funds for 2003-04 and 2004-05 works out to Rs.3900.18 crores and Rs.4168.81 crores respectively.

   4.8    The Commission further notes that the amount of diversion of Rs.3169.30 crores for the year 2005-06 worked out by PSEB was based on pre-audited accounts. Besides, PSEB has also not taken into account the RBI Bond amount of Rs.637.35 crores. The Commission has now worked out the amount of diversion to be at Rs.3828.23 crores based on audited annual accounts of the Board for the year 2005-06. This also includes the amount of Rs.637.35 crores related to RBI bonds.

   4.9    In the light of the above discussion, the Commission determines the year-wise quantum of funds diverted for revenue purposes as tabulated below:
   
   (Rs. in crores)

   Sr. No.	Year	Amount of Diversion
   1.	2002-03	3442.74
   2.	2003-04	3900.18
   3.	2004-05	4168.81
   4.	2005-06	3828.23

   4.10    In order to ascertain the diversion of funds in the year 2006-07, the amount diverted, if any, as on 31.3.2007 is to be ascertained. However, as the accounts for the year 2006-07 are not available with the Commission, the amount of diversion has been worked out based on figures contained in the accounts for the year 2005-06 which has been determined at Rs.3828.23 crores. The Commission tentatively adopts the same as the amount diverted in 2006-07 subject to review on availability of audited accounts for the year. This includes an amount of Rs.637.35 crores relating to RBI bonds having no interest liability on the Board. However, the amount of diversion for calculating interest liability works out to Rs.3190.88 (3828.23 – 637.35) crores.

   4.11    The Commission observes that it is difficult in a large organization such as the Board to pinpoint any particular loan or amount of capital borrowings that might specifically have been diverted for revenue purposes. For the same reason it is almost impossible to work out the exact amount of interest to be disallowed on this account as it is not possible to precisely identify the extent of the amount of diversion at different points of time in a year. Thus, as diverted funds can not be related to any particular loan or investment, the Commission deems it fair and reasonable to determine the interest which is at par with the average rate of interest paid by the Board in respect of State Government loans which works out to 12.22% per annum. On this basis, interest on the diverted capital funds of Rs.3190.88 crores @ 12.22% works out to Rs.389.92 crores. Once this figure is arrived at, the relevant issue is to determine as to who should bear this interest burden.

   4.12    The Tribunal has in para 53 of its judgement observed that while the Board is undoubtedly a statutory body, it is also evident at the same time that ‘it is the hand and voice of the State Government’ which has a controlling interest in the Board and exercises pervasive control over it. In this view of the matter, a major portion of the liability of interest on diverted funds must fall upon the State Government. It is at the same time necessary to appreciate that diversion of funds occurred largely on account of the need to meet the gap between revenue requirements and income of the Board. The Tribunal has referred to issues such as high cost of RSD Project, non-payment of subsidy by the State Government and high rate of interest on government loans. Other reasons for mis-match between resources and expenditure of the Board could be its sub-optimal performance in respect of critical parameters such as T&D loss and administrative costs, failure to review tariffs from time to time in order to cover up increase in the legitimate costs of the Board or even the high cost of power purchase. The actual cost may be a combination of several factors. While it may not be necessary to dwell upon all these issues in any further detail, it would be fair to observe that despite the pervasive control of the State Government, the Board must also bear a portion of the responsibility for such state of affairs. For this reason, the Commission proposes to maintain the disallowance of Rs.100 crores out of interest cost of the Board as already disallowed in the year 2006-07 in the Tariff Order of 2006-07. The remaining burden must, for reasons brought out above, be borne by the State Government. Moreover, it would be inadvisable to further adversely impact the financial health of the Board or without adequate justification penalize the consumers.

   4.13    Accordingly, the balance interest cost of Rs.289.92 crores is directed to be disallowed from the interest payable on government loans in the ARR for the year 2006-07 when the same is reviewed in the Tariff Order for 2007-08. This amount shall not be paid by the Board to the State Government and if it has already been paid/adjusted against subsidy due, the State Government will refund this amount to the Board. This would result in a relief of Rs.289.92 crores to the consumers on account of transfer of this liability to the State Government for the year 2006-07.

   4.14    In Para 130 of the order, the Tribunal has also directed the Commission to resolve the issue of high rate of interest on State Government loans and the extent to which interest can be allowed as a pass through. In this connection it may be mentioned that the Commission has all along been allowing interest costs of the Board in each of its Tariff Orders. It had, at the same time, noted that the carrying cost of loans of the Board was on the higher side especially, keeping in view the prevalent rates of interest in open market. Accordingly, the Commission, in Tariff Orders for the years 2002-03 to 2005-06 had directed the Board to approach its financial institutions including the State Government for rescheduling/restructuring of loans with the objective of bringing the rates of interest in line with the prevailing market rates. .

   4.15    Subsequently the Commission noted that while most financial institutions were able to restructure/reschedule their loans and reduced the rates of interest on loans to the Board, the interest cost of the largest loan portfolio belonging to the State Government continued to range between a low of 6.5% and high of 15% with the total annual carrying cost of Rs.480.73 crores on the State Government loans of Rs.4537.53 crores for the years 2003-04 to 2005-06. It was in this background that the Commission had directed the Board to take up the matter with the State Government to explore possibilities of bringing down the rate of interest. The Board approached the State Government for restructuring its loans in December 2005 but the latter expressed its inability to agree with the proposal of the Board and had responded that this issue would be addressed while finalizing the financial restructuring plan (FRP) of the Board.

   4.16    The Board has further intimated that during 2005-06, the State Government had converted Rs.140 crores out of its loans into equity. In addition, the State Government deducted an amount of Rs.1322.62 crores pertaining to the Irrigation Branch’s share of the cost of RSD Project from the loans advanced to PSEB. With these adjustments, the balance outstanding State Government loans to the Board came down to Rs.3074.91 crores and the State Government equity in the Board increased to Rs.2946.11 crores at the end of March 2006. The Board has also confirmed that interest cost in 2006-07 on the outstanding State Government loans has been computed as Rs.375.91 crores. With this interest cost, the average rate of interest on outstanding Government loans works out to 12.22% which is comparable to the Prime Lending Rate of 12% of the State Bank of India for the month of June 2007. Moreover, the Reserve Bank of India has issued bonds of Rs.637.35 crores on behalf of the State Government against PSEB’s liabilities towards PSUs which are being serviced by the State Government. If these are taken into account, the average rate of interest of 12.22% of State Government loans will come down further.

   4.17    In the light of the above, the Commission decides that there is no further necessity of pressing the State Government for reduction of rates of interest on loans to the Board since they are largely comparable with the prevailing interest rates. This has also resulted in bringing down the debt servicing cost of the State Government loans to Rs.375.91 crores per annum in 2006-07 from an earlier annual cost of Rs.480.73 crores.
   
   

5. Cost of Supply, Cross Subsidy and Determination of Separate Tariffs

   5.1    Matters relating to determining the cost of supply and the cross subsidy generated or consumed by different categories of consumers and determination of separate tariffs came up for the consideration of the Tribunal. In paras 119 and 156 of its judgement, the Tribunal directed as under:

   1. The Commission shall determine the cost of supply of electricity to different class and categories of consumers;
   2. The Commission shall also determine the average cost of supply;
   3. Once the figures of cost of supply and average cost of supply are known, the Commission shall determine the extent of cross subsidies added to tariff in respect of each class/category of consumers; and
   4. The consumers who are being cross subsidized by the Commission, a limit of consumption shall be specified for which special support through cross subsidy may be provided. Once the consumer exceeds the limit, he shall be charged at normal tariff. These directions shall be applicable from the next tariff year onwards.
   5. The Commission is directed to determine separate tariffs for generation, transmission, distribution, wheeling and retail sale of electricity.

   5.2    As per the Tribunal’s observations, these directions pertain to the year 2007-08.
   These issues will, accordingly, be dealt with in Tariff Order for 2007-08.

Place: Chandigarh
Dated: September 13, 2007