COST MANAGEMENT IN ELECTRICITY

DISTRIBUTION BUSINESS

BY

K.C.NANDA

16th Oct, 2015

1

Programme on

Business Excellence through Cost Management

SESSION OVERVIEW

Types of Cost in Distribution Business and source

of funding.

All Costs are Regulated by SERC and classified

under controllable and non-controllable.

Allocation of Cost voltage wise and consumer

category wise.

Cost of supply or cost to serve a consumer.

Cost allocation w.r.t Wheeling and Retail supply

business

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FLOW CHART OF ELECTRICITY

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DISTRIBUTION OF ELECTRICITY

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TYPES OF COST IN DISTRIBUTION BUSINESS

All costs are grouped under two category namely

fixed cost and variable cost.

Fixed costs are incurred towards creation of or

upgradation of Net work Assets, Land & Building,

F&F, Vehicles, Office Equ.etc

Costs included under variable cost are Power

Purchase cost, Employee cost, A&G Expenses,

R&M expenses, Depreciation, Interest and Finance

Charges, Provision for bad & doubtful debts, ROI,

contingency reserve etc.

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SOURCES OF FUNDING…

Fixed costs are generally funded through different

types of Govt schemes, Consumer Contribution,

Long term loans and own accruals of the licensee

Some of the Govt Schemes (in Odisha) towards

strengthening of Network assets as follows

Biju GramjyotiYojana (BGJY)

Biju Saharnachal Vidyutkaran Yojana(BSVY)

Development Programme of Energy System

Improvement(DESI)

CAPEX scheme

RLTAP in KBK districts

Dedicated Power Supply to DHQ Hospital (DHH) & (MCH)

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SOURCES OF FUNDING ….

Shifting of lines & S/S from premises of Govt.Schools &

Anganwadi kendras

Strengthening of Infrastructures in Elephant Corridor

Odisha distribution sector strengthening

Project(ODSSP)

Odisha Dedicated Agriculture and Fishery

Feeder(ODAFF)

Apart from the above central Govt funding project

like Dindayal Upadhya (RGGVY phase-II)

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CONSUMER CONTRIBUTION, DEPOSIT &

GRANT

Works executed in part or all from the funds from

the users in the context of deposit works;

Capital works undertaken by utilising grants

received from the State and Central Governments,

including funds under RGGVY, APDRP, etc;

Any other grant of similar nature and such amount

received without any obligation to return the same

and with no interest costs attached to such

subvention

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SOURCES OF FUNDING

Variable expenditures are met through business

operations of the DISCOMs.

Aggregated Revenue Requirement (ARR) of the

DISCOMs approved by SERC.

SERC approves the expected revenue for the

ensuing year along with anticipated expenditures of

the distribution licensee on annual basis.

Expected revenues are from different category of

consumers on the basis of their load and voltage of

supply.

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POWER PURCHASE COST • A distribution licensee used to source the required

power either directly from a generator or from a trader (in case of Odisha GRIDCO is the trader).Following are the component of power purchase cost

• Bulk Supply Price

• Transmission charges

• SLDC charges

• UI or Deviation charges

• Accordingly payment has to be made towards power purchase as per terms of PPA with the generator or trader ( in case of Odisha as per approved BSP to GRIDCO)

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POWER PURCHASE COST

• Along with the bulk supply price transmission charges to STU or CTU as the case may be.

• SLDC charges to SLDC on monthly basis as per approved rate.

• In addition to above UI charges, Deviation charges, additional deviation charges etc are also part of power purchase cost.

• Power purchase cost is the major cost for a distribution licensee which is around 80% of the total cost.

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OTHER VARIABLE COST

Other variable cost comprises of the following items

in a distribution business:

Employee Cost

Repair and maintenance expenditure

Administrative and General Expenses

Depreciation

Provision for bad & doubtful debts

Interest and finance charges.

Return on investment

Contingency reserve

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ANALYSIS OF SHARE OF VARIABLE COST

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a)Power purchase cost

b) Employees cost

c) Repair and Maintenance cost

d) Admn. & General Expenses

e) Provision for bad and doubtful debts

f) Depreciation

g) Interest loans and financial charges

h) Interest on Security Deposits

i) Return on equity

j)Contingency reserve

ALL COSTS ARE REGULATED BY SERC

Costs are categorised as controllable & uncontrollable

Uncontrollable factors include:

Force Majeure events

Change in law/ judicial pronouncements by Govts or

commission

Fuel price variation

Variation in consumer number or mix or quantities of

electricity supplied to consumers/ under open access

Transmission loss

Variation in market interest rate

Taxes & statutory levies

Taxes on income

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CONTROLLABLE FACTORS

Variation in capitalization on account of time or cost

overruns or inefficiencies in implementation

Variation in interest & financial charges on account of

the above

Variation in technical and commercial losses of Discoms

Variations in performance parameters

Variations in working capital requirements

Failure to meet performance standards

Variation in labour productivity

Variation in O&M expenses

Variation in wires availability

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CONTROLLABLE AND UNCONTROLLABLE COSTS

Controllable

Employee Cost

Repair and Maintenance

Administrative & General Expenses

Interest and Finance Charges

Depreciation

Return on Equity

Non-tariff income

Uncontrollable Cost

Power Purchase Costs

Fuel Costs

Taxes on Income

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ALLOCATION OF COST VOLTAGE WISE &

CONSUMER CATEGORY WISE

Variable costs are required to be allocated voltage

of supply wise i.e EHT, HT and LT

Allocation of cost consumer category wise is

required for better cost control but it is a challenge

for the DISCOMs

Category of Consumers

Domestic,Ktj (LT)

General Purposes (LT & HT)

Irrigation pumping and Agriculture(LT & HT)

Small Industries (LT)

Medium Industries (LT & HT)

Public Lighting (LT) 17

ALLOCATION OF COST VOLTAGE WISE & CONSUMER

CATEGORY WISE

Bulk Supply Domestic (HT)

Specified Public Purposes (LT & HT)

Public Water Works and swerage Pumping(LT &HT)

Large Industries (LT, HT & EHT)

Mini Steel Plant (HT & EHT)

Power Intensive Industries (HT & EHT)

Railway Traction (HT & EHT)

Emergency Supply to CGPs

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COST OF SUPPLY OR COST TO SERVE A

CONSUMER

When allocation of all the variable cost would be

completed voltage wise and consumer category wise,

then cost of supply or cost to serve a consumer can be

ascertained.

Whether all consumers are paying the cost of supply or

not?

Is there any category of consumers who are paying

more than the cost of supply?

If yes/no then why?

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RECOVERY OF COST OF SUPPLY THROUGH

TARIFF

Consumers whose tariffs are less than the cost of

supply, they are cross subsidized consumers.

And consumers paying more than the cost of

supply are cross subsidizing consumers.

As mandated in tariff policy average tariff should be

within (+/-) 20% of average cost of supply.

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SEPARATION OF WIRES AND SERVICES Objectives of Policy

The objectives of National Distribution Policy are to create an environment that:

identifies and contains the wheeling costs of power by reeling in losses;

increases focus on wires system strengthening and development;

increases accountability, transparency and commercial prudence and thereby reducing and controlling AT&C losses;

opens up and introducing competition in retail supply;

offers consumers a choice of supplier;

improves customer service;

develops an energy market; and.

achieves long-term commercial viability of the power sector

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Particulars Wires

Business (%)

Retail Supply Business

(%)

Power Purchase Expenses 0% 100%

Standby Charges 0% 100%

Employee Expenses 60% 40%

Administration & General Expenses 50% 50%

Repair & Maintanance Expenses 90% 10%

Depreciation 90% 10%

Interest on Long Term Loan Capital 90% 10%

Interest on Working Capital and on Consumer security deposits 10% 90%

Bad Debts Written off 0% 100%

Income Tax 90% 10%

Transmission Charges intra state 0% 100%

Contribution to contigency reserves, if any 100% 0%

Return on Equity 90% 10%

Non Tariff Income 10% 90%

Wheeling charges of the Distribution Licensee

Allocation Matrix for Segregation of Expenses between wires and supply business

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Thank you