Chapter-8

Other Issues Relating to ARR for the year 2004-05

OTHER ISSUES

    Besides the determination of Annual Revenue Requirement for the year 2004-05, the Commission has noted certain other issues relevant for determination of Annual Revenue Requirement of the Board and utilization of expenses allowed by the Commission. These issues are discussed below:
8.1     CREATION OF DEPRECIATION RESERVE FUND
    The Commission notes that every year, substantial sums of the order of over Rs.500 crores are being allowed to the Board towards depreciation. This amount represents deterioration in the value of assets due to their wear and tear on account of usage during the year. The rates of depreciation presently being charged are as prescribed by the Government of India prevalent during the relevant period. The depreciation amount is supposed to cover expenses of the organization for replacement of assets after they have served their life. At most, the depreciation amount can be allowed to be used for re-payment of loans taken by an organization for capital investment. It is true that the replacement of assets may not always be possible with the amount of depreciation made available to the organization. This is because the replacement value may be even higher than the original value of assets due to inflation and other factors whereas depreciation charges of the Board are limited to the original value of assets less residual value. All this, however, does not change the basic purpose of depreciation which is to allow the organization to replace its assets without having to borrow loans for this purpose. As this is the purpose of providing for these expenses in the costs of the Board and allowing their recovery from consumers through tariff, it is vitally important for the Commission to ensure that these funds are not diverted by the Board for any other purpose. As such, the Board is required to maintain a separate Depreciation Reserve Fund to the extent of the expenses allowed by the Commission under this head, every year. No money in the Fund should be withdrawn by the Board for any purpose other than meeting capital expenditure approved by the Commission. Also, to the extent of Depreciation Fund being provided in a year, there is no need for the Board to resort to borrowings from outside source to meet capital costs. The Commission will, therefore, also not allow any interest on funds so raised by the Board in its ARR for the year. A system needs to be developed to ensure proper utilization of depreciation expenses being allowed by the Commission to the purpose for which these are meant and to eliminate chances of diversion of money from this Fund for other purposes.

    The Board may, therefore, consider creation of such a Fund and crediting of the depreciation expenses to this Fund. It may also develop a proper system to ensure that money in this Fund is not diverted by the Board for any other purpose. A specific proposal in this regard may be incorporated by the Board in its ARR 2005-06 failing which the Commission will be forced to pass orders to this effect on its own.

8.2     DIVERSION OF FUNDS FROM GENERAL PROVIDENT FUND
    The Commission notes that as per the last audited balance sheet of the Board available with the Commission i.e. for the year 2002-03, balances in the General Provident Fund of the employees of the Board are Rs.1263.89 crores as on March 31, 2003. As against this, the investments from General Provident Fund are only to the extent of Rs.112.78 crores as indicated in Schedule 35 & 25 of the balance sheet respectively. This indicates major inadequacy in investment of General Provident Fund. The substantial inadequacy in investment of General Provident Fund deposits does not merely indicate inadequate investment but rather diversion of General Provident Fund of the employees of the Board for Board’s own business purpose. In fact, the Board is not maintaining the deposit of its employees in their GPF account in a separate Bank Account but is keeping the same merged with other funds of the Board from its regular business. This practice is unhealthy and unethical. It results in diversion of employees personal deposits for Board’s business purposes. Segregation of employees funds from Boards business funds is also the Board employees long standing demand. In case of unbundling or disinvestment of the Board, it will become absolutely necessary not only to segregate the employees personal funds from the Board’s business funds, but also to provide for all deposits in the GPF in cash at one go. It is, therefore, necessary to ensure segregation of Board’s business funds from the employees deposits in the General Provident Fund.

    The Commission appreciates that it may not be possible for the Board to make good this diversion in a short span of time. At the same time, the Board cannot be allowed to continue to divert the General Provident Fund deposits of its employees for its revenue /capital requirements which are not allowed by the Commission. As such, it is incumbent for everyone – the Government, the Commission and the Board itself - to ensure that a separate General Provident Fund Account is opened and at least new accretions in General Provident Fund every year are deposited in this Account. No withdrawals should be allowed from this Account except for the purpose of meeting the requirements of General Provident Fund.

    In the light of the above discussions, the Board may come up with a specific proposal to this effect in its ARR for 2005-06.
8.3     PRINCIPLES FOR DETERMINATION OF EMPLOYEES COST IN FUTURE YEARS
    The Board in its subsequent submissions before the Commission vide their letter dated September 15, 2004 has highlighted that the manpower of the Board has decreased consistently in the last three years – be it in absolute number of manpower or number of employees per MUs of energy sold or per lac rupees of revenue or per circuit kilometers of network. The Board has also stated that this decrease in manpower is despite the fact that all the six parameters which could be used as basis for determining reasonable level of manpower and their productivity in the Board have increased over the same period. These six parameters along with the CAGR for the last three years are given below:-
      a) No.of consumers              3.2%

      b) Connected load (MW)      6%

      c) Network circuit (KM)       2.7%

      d) Energy sold (MUs)           3.7%

      e) Per capita consumption     3.7%

      f) Units sold per domestic consumer      3.9%

    The Commission considers that there is some weight in the argument of the Board and the employees cost need not be kept capped by the Commission at an absolute amount on a long term basis. In the long term, the productivity of employees will be better judged by linking it to some of the productivity measures rather than in absolute terms. The employees cost to be allowed by the Commission needs to be based on pre-determined norms of such parameters for productivity and fixing targets for improvements therein.

    The Board is, therefore, directed to bring a specific proposal for consideration of the Commission in its ARR for 2005-06 failing which the Commission will be constrained to take decision of its own volition.
8.4     COST OF RANJIT SAGAR DAM PROJECT
    High cost of Ranjit Sagar Dam Project has been a cause of concern for the Commission. The Commission has commented upon this issue in its earlier two Tarif Orders also. As already pointed out therein, time run over of the project of over a decade resulted in huge cost run over and the project conceived at a cost of about Rs. 700 crores was finally executed at over Rs. 5700 crores. Of the total cost of the project, the sharing of cost was in the ratio of 79.1 percent and 20.9 percent for the PSEB and Irrigation Department respectively. Even the cost rightfully to be apportioned to the Irrigation Department representing 20.9 percent was not taken over by the State Government. This resulted in over burdening the Board substantially. The Commission already disallowed this portion of cost amounting to Rs. 1444 crores for the purpose of determining Annual Revenue Requirement of the Board in its last two tariff orders. The consumers on their part, have also been highly critical of the exorbitant cost of this project and have pointed out that the cost of power from this project works out to over Rs. 6 per unit. It has been further stated that even purchase of power from costliest sources will be cheaper than this power and the Board should not be forced to take over the project at this cost.

    The Commission has been very concerned about the high cost of the project and has suggested to the Government to look into this aspect and come up with solutions. No progress in this regard, however, seems to have been taken place as the cost continues to be reflected in the Balance Sheet and Annual Revenue Requirement of the Board as before. The Commission would again like the Board and the Government to look into this issue and respond so that a justifiable and rightful solution is found. The Commission will give its final view thereafter.

    TABLE OF CONTENTS