Citation Codes

Equivalent Citations

citation codes

Case Number

AppealNo.15of2008&IA38/08AppealNo.20of2008&IA50of2008AppealNo.21of2008&IA52and53of2008AppealNo.22of2008&IA54and55of2008AppealNo.23of2008&IA56and57of2008

Attorney(S)

Judges

MGJ & HLB

Acts

Section 42, 43 of The Electricity Act 2003
ELECTRICITY ACT 2003

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Smart Summary

Structured Summary of the Tribunal Opinion (Appeals Nos. 15, 20, 21, 22 & 23 of 2008)

Bench: Hon'ble Mr. H.L. Bajaj (Technical Member) and Mrs. Justice Manju Goel (Judicial Member). Pronounced: 09 October 2009.

Factual and Procedural Background

Five distribution companies in Karnataka filed these appeals against orders of the Karnataka Electricity Regulatory Commission (KERC) that determined the Annual Revenue Requirements (ARR) and tariff for the Multi Year Tariff (MYT) period 2007-08 to 2009-10 (Appeal Nos. 15 & IA38, 20 & IA50, 21 & IA53, 22 & IA55 and 23 & IA57 of 2008). The appeals raised a set of common issues, and the Tribunal disposed of the appeals by a common judgment. Appeal No. 15 was taken up as the reference appeal because it raised all nine enumerated issues.

Legal Issues Presented

Truing up for the past period.
Inadequate Power Purchase Cost allowed.
Inclusion of Transmission Losses in calculating loss level for the appellants.
Interest and Finance Charges.
Depreciation and Operation & Maintenance (O&M) Charges.
Loss level for the Multi Year Tariff Period.
Fixing Differential Tariffs across different licensees.
Limiting the purchase of power from Non-Conventional (Renewable) Energy Sources to 10% of total power procurement (raised in Appeals Nos. 15, 21 & 22 of 2008).
Arithmetical Mistakes (raised in Appeals Nos. 15 & 22 of 2008).

Arguments of the Parties

Appellants' Arguments

The Commission reopened past financials and carried out truing up using a different methodology, philosophy and assumptions than those adopted earlier, which is improper; this denial affected recognition of Power Purchase Cost paid to Tanir Bhavi Power Corporation.
The Commission reduced projected power purchase cost by assuming higher availability from hydro sources, thereby reducing cash flow and hampering procurement; reliance was placed on prior Tribunal authority that Commission should not normally interfere with distribution companies' power purchase plans.
The Commission wrongly included transmission losses in computing distribution companies' power requirements despite distribution companies not being responsible for transmission losses.
The Commission substantially reduced claimed interest and finance charges contrary to Tribunal decisions; appellants sought interest on actual loans and prevailing rates for future loans.
The Commission reduced depreciation and O&M expenditure projections subject to later truing up; appellants argued such pre-tariff reductions go against Tribunal direction that projections should not be reduced absent prudence checks after the year.
The Commission set a loss-level trajectory for the MYT period substantially lower than the licensees' projections despite empirical reductions already achieved by the licensees.
The Commission fixed differential tariffs across licensees though the State Government had, by letter dated 26 September 2007, directed maintenance of uniform tariffs; appellants argued the Government can issue policy directives under Section 108 of the Electricity Act, 2003.
Where Power Purchase Agreements (PPAs) approved by the Commission require procurement from Renewable Sources beyond 10%, such procurements should be allowed in the ARR even if they exceed 10%.
There are obvious arithmetical mistakes in the Commission's orders which should be corrected.

Respondent Commission's Arguments

With respect to truing up, the Commission relied on its powers and, as noted in the proceedings, the issue of methodology was covered by earlier Tribunal decisions (the respondent's counsel conceded coverage by Appeal No. 09 of 2008).
On power purchase cost, the Commission submitted that power purchase cost for past years can be trued up on the basis of actual data for 2007-08 and 2008-09 and any deficit adjusted in truing up; 2009-10 power purchase cost could be determined via truing up.
Regarding inclusion of transmission losses, the Commission's position was that the Government had assigned PPAs to ESCOMs and payments are accounted at the generator bus (not at ESCOM-KPTCL interface); thus ESCOMs are already paying for losses and inefficiencies in transmission cannot be passed on to consumers.
As to interest and finance charges, the Commission contended that interest on belated power purchase payments cannot be passed through to consumers and must be borne by distribution companies; the Commission allowed interest on working capital (including two months receivables).
For O&M, the Commission noted that licensees had not proposed the required formula under MYT Regulations, so the Commission prescribed a formula based on RPI-X methodology (an internationally accepted practice).
On loss targets, the Commission stated targets were based on studies undertaken by the appellants themselves (including anti-theft drives) and fixed in consultation with licensees.
Regarding differential tariffs, the Commission said the State Government letter was a request and not a policy direction under Section 108 of the Act; therefore the Commission proceeded to determine differential tariffs consistent with earlier Tribunal decisions.
On renewable procurement, the Commission applied the then-prevailing KERC Regulations (Power Procurement from Renewable Sources by Distribution Licensees) 2004, which limited maximum procurement from renewables to 10% when approving ARR, and observed appellants had certified they had not reached the 10% cap when submitting PPAs for approval.
The Commission was prepared to correct obvious arithmetical errors pointed out by the appellants.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Tribunal judgment in Appeal No. 100 of 2007 (Karnataka Power Transmission Corporation Ltd.) — Order dated 04 December 2007	Truing up cannot be an occasion for re-thinking from first principles; the Commission should not undertake truing up afresh based on new assumptions where previous truing up had been done.	The Tribunal relied on this principle to hold that the Commission cannot redo truing up using a revised policy or new methodology and directed that truing up be limited to the gap between actual figures and approved/anticipated figures as per earlier approach.
Tribunal judgment in Appeal No. 09 of 2008 — Order dated 09 May 2008	Reiterated that truing up is meant to bridge actual expenses/revenues and anticipated ones at year-end and that a second truing up based on new methodology is impermissible.	The Tribunal applied this authority to direct that KERC carry out truing up based upon the stated principle and not on revised policy or new methodology.
NDPL v. DERC — Appeal No. 265 of 2006 (Tribunal judgment dated 23 May 2007)	Clarified the concept of truing up: a second truing up is warranted only when provisional accounts differ from audited accounts; truing up fills the gap between anticipated and actual expenses and should not be used to mask arbitrary prior reductions.	The Tribunal used this exposition to find that the Commission's second truing up based on a changed approach (where provisional and audited accounts did not substantially differ) was not permissible.
Bangalore Electricity Supply Company Ltd. (BESCOM) v. Karnataka Electricity Regulatory Commission (KERC), 2008 ELR (APTEL) 164 (referenced in the opinion)	The Commission should not normally interfere with distribution companies' plans and projections for power purchase; variations can be adjusted in truing up; responsibility for estimating power requirement lies with the utility.	The Tribunal relied on this precedent to hold that appellants' power purchase projections, unless perverse or grossly wrong, should not be interfered with; directed Commission to allow power purchase cost on actuals and carry cost in truing up for the relevant years.
Appeal No. 84 of 2006 — KPTCL v. KERC (Judgment dated 29 August 2006)	Responsibility for forecasting and ensuring supply rests with the utility (transmission/distribution) which must plan to meet increasing demand; utilities have domain to plan and invest.	The Tribunal cited this to emphasize that estimating power requirement is the utility's duty and that the Commission should not assume day-to-day operational responsibilities of the utility; used to support non-interference with reasonable projections.

Court's Reasoning and Analysis

The Tribunal addressed each of the nine enumerated issues by applying settled principles (as drawn from earlier Tribunal authorities) and the facts and regulatory context presented in the appeals. The Tribunal consistently applied the central notion that the truing up exercise is intended to reconcile anticipated/provisionally allowed figures with actual/audited figures at year-end and is not a vehicle for the Commission to re-cast prior approvals by adopting new methodologies or assumptions.

Issue 1 — Truing up: The Tribunal concluded that truing up must be limited to filling the gap between actual expenses/revenues and those anticipated at the beginning of the year. The Commission was directed to carry out truing up on that principle and not on the basis of a revised policy or fresh methodology.

Issue 2 — Power Purchase Cost: The Tribunal found that estimating power requirements is the obligation of the distribution companies. Unless an appellant's projections are perverse or grossly wrong, the Commission should not interfere; differences should be addressed in truing up. Given that tariff years 2007-08 and 2008-09 were already completed and 2009-10 underway, the Tribunal directed the Commission to: (i) allow power purchase cost on the basis of actual available figures for the earlier years, and (ii) allow carrying cost during truing up.

Issue 3 — Inclusion of Transmission Losses: The Tribunal accepted the appellants' contention that distribution companies (ESCOMs) did not control transmission losses and therefore the Commission should not include transmission losses when calculating ESCOMs' revenue requirements. The Commission was directed to correct revenue requirements accordingly.

Issue 4 — Interest and Finance Charges: The Tribunal agreed with the Commission that interest on belated power purchase payments cannot be passed on to consumers (the working capital interest already includes interest for two months receivables). However, the Tribunal directed that interest on other loans should be allowed during truing up after due prudence checks.

Issue 5 — Depreciation and O&M Charges: Because appellants had not submitted the O&M formula required by MYT Regulations, the Commission's prescription of an RPI-X-based formula was accepted as a response. The Tribunal directed appellants to submit the O&M formula as required under MYT Regulations. Depreciation was to be allowed as per the Commission's Regulations and given effect in the truing up exercise.

Issue 6 — Loss Level for MYT Period: The Tribunal acknowledged that loss reduction targets were set in consultation with licensees and that licensees had met or surpassed them; therefore the Tribunal would not interfere with the Commission's targets. However, the Tribunal ordered that appropriate adjustment should be made for the Commission's decision not to consider EHT (Extra High Tension) sales when benchmarking losses.

Issue 7 — Differential Tariffs: The Tribunal examined the State Government letter dated 26 September 2007 and determined that it was not a policy direction under Section 108 of the Electricity Act, 2003 (the letter was treated as a request reiterating the Government's stance). The Tribunal confirmed that the Commission may determine differential tariffs based on cost, consumer mix, power availability, losses and efficiency; the Commission's differential tariff decision was upheld.

Issue 8 — Limiting Renewable Procurement to 10%: The Tribunal noted the KERC (Power Procurement from Renewable Sources by Distribution Licensee) Regulations, 2004 which specified a minimum of 5% and maximum of 10% renewable procurement (clause 3.1). The Tribunal observed that these Regulations were amended in January 2008 to specify minimum percentages for each licensee (and remove a specified maximum for later years). The Tribunal held that for tariff year 2007-08 the Commission's limitation to 10% could not be faulted, but directed that where PPAs already required procurement in excess of 10% and fixed charges had to be paid, the Commission should allow up to the maximum per-unit cost of procurement from non-renewable sources for 2007-08. For tariff years 2008-09 and 2009-10 the Commission was directed to allow actual purchase cost of energy from renewable sources, as the amended Regulations required a minimum without specifying a maximum.

Issue 9 — Arithmetical Mistakes: The Tribunal directed the Commission to consider and correct the obvious arithmetical mistakes pointed out by the appellants in the specified orders/pages.

The Tribunal concluded by recording the specific paras where directions were given (paras 8, 11, 13, 16, 19, 24, 28, 33 and 35 of the judgment) and disposed of the appeals accordingly.

Holding and Implications

Holding: APPEAL ALLOWED IN PART. The Tribunal disposed of the appeals with specific directions to the Commission (as identified in paras 8, 11, 13, 16, 19, 24, 28, 33 and 35 of the judgment).

Direct consequences and practical implications (as ordered by the Tribunal):

The Commission must redo or adjust its truing up consistent with the principle that truing up reconciles actual/audited figures with approved/anticipated figures and must not employ a new methodology to re-open prior truing ups.
Power purchase cost for completed years should be allowed on the basis of actual figures and carrying cost must be allowed in the truing up exercise.
Transmission losses should not be included in calculating revenue requirements of distribution companies (ESCOMs); revenue requirements should be corrected accordingly.
Interest on belated power purchase payments is not allowable; interest on other loans may be allowed subject to prudence check during truing up.
Appellants should submit the O&M formula required under MYT Regulations; depreciation to be allowed as per Commission Regulations and reflected in truing up.
Loss reduction targets fixed in consultation with licensees were upheld but adjustments should be made for exclusion of EHT sales where relevant.
The Commission's determination of differential tariffs across licensees was upheld; the State Government letter was not treated as a Section 108 policy direction.
Regarding renewable procurement: for tariff year 2007-08 limited relief was granted to honor PPAs (allowance up to maximum per-unit cost of procurement from non-renewable sources where PPAs required excess procurement); for 2008-09 and 2009-10 the actual purchase cost of renewable energy was to be allowed consistent with the amended Regulations.
The Commission was directed to correct obvious arithmetical errors pointed out by appellants.

The opinion applied and relied upon established Tribunal jurisprudence concerning the nature and limits of truing up and the allocation of responsibility for estimating power requirements. The judgment does not purport to lay down a new legal principle; it applies prior authorities and regulatory provisions to the facts before the Tribunal and provides remedial directions to the Commission.

Disposition: Appeal allowed in part; no order as to costs; pronounced in open court on 09 October 2009.

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Bangalore Electricity Supply Company Ltd. & Others v. Karnataka Electricity Regulatory Commission & Others

Per Honble Mr. H.L. Bajaj, Technical Member Five distribution companies in Karnataka have filed these appeals against the orders passed by Karnataka Electricity Regulatory Commission (KERC or the Commission in short) _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 4 of 32 whereby the Commission has determined the Annual Revenue Requirements (ARR) and tariff for the distribution companies for the Multi Year Tariff Period 2007-08 to 2009-2010. As the following common issues have been agitated in these appeals, we are disposing these appeals with this common judgment.

1. Truing up for the past period

2. Inadequate Power Purchase Cost allowed.

3. Inclusion of Transmission Losses in calculating loss level for the appellants.

4. Interest and Finance Charges

5. Depreciation and Operation and Maintenance Charges

6. Loss level for Multi Year Tariff Period

7. Fixing Differential Tariffs across different licensees.

2. In addition to the above issues, in Appeal Nos. 15, 21 and 22 of 2008, the following issue is also agitated. _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 5 of 32

8. Limiting the purchase of power from Non-Conventional Energy Sources to 10% of the total power procurement. The following issue is also agitated in Appeal No. 15 and 22 of 2008:

9. Arithmetical Mistakes.

3. We have taken up Appeal No. 15 as reference Appeal as it agitates all the nine issues mentioned above. Issue No. 1: Truing up for the past period.

4. The appellant has contended before us that the respondent Commission has reopened the past financials of the distribution companies and that the truing up has been carried out on the basis of different assumptions, methodology and the philosophy adopted when compared to the one adopted for the previous years. The appellant contended that the Commission has applied a wrongful methodology so as to deny the Power Purchase Cost paid by the distribution companies to the Tanir Bhavi Power Corporation. The Commission is reopening the truing up _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 6 of 32 previously undertaken. Learned Counsel for the appellant submitted that the issue of reopening past financials to find surplus by adopting new methodology earlier followed by the Commission for truing up for the past period has been decided by the Tribunal in case of Karnataka Power Transmission Corporation Ltd. in Judgment dated December 04, 2007 passed in Appeal No. 100 of 2007 and in the Judgment dated May 09, 2008 passed in Appeal No. 09 of 2008.

5. In this regard Mr. Rao, learned counsel for the respondent FKCCI conceded that the present issue of fresh truing up for the past period of the methodology adopted for truing up is squarely covered by the decision of the Tribunal in Appeal No. 09 of 2008 dated May 09, 2008.

6. In Appeal No. 09 of 2008 dated May, 09, 2008 this Tribunal had held as under:-

31. The Commission has proceeded on the basis that it is entitled to undertake truing up for the financial years 2000-01 to 2005-06 by virtue of the observations _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 7 of 32 contained in Para 28 of the Order dated December 04, 2007. In the above part of the Order, this Tribunal had observed that the truing up per se cannot be faulted and, therefore, the Tribunal does not want to interfere with the decision of the Commission in this regard in order to cleans up accounts of the past though belatedly. We reiterate that the truing up stage is not an opportunity for the Commission to re-think de-novo on the basic principles, the premise and issues involved in the initial projections of the revenue requirements of the licensee and that once the truing up exercise has been carried out, the Commission is not permitted to again take up the truing up exercise based on new assumption. We had specifically dealt with the case of KPTCL where the Commission had been carrying out the truing up exercise on year-to-year basis and had not given effect to the results of such exercise during all these years. Therefore, the Commission was neither required nor authorized to undertake the truing up afresh, particularly, based on new assumptions or new processes or new methodology. The Commission could have trued up based on the audited figures, if the earlier exercises were done on provisional basis. _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 8 of 32

32. In case of NDPL vs DERC, in Appeal No. 265 of 2006, the appellant (NDPL) had contended that second truing up is warranted only when there is difference between the provisional accounts on the basis of which the first truing up is done and audited accounts, which may have been furnished after such truing up.

33. We consider it necessary to set out below the relevant extract from this Tribunals judgment of May 23, 2007 in Appeal No. 265 of 2006:

60. Before parting with the judgment we are constrained to remark that the Commission has not properly understood the concept of truing up. While considering the tariff petition of the utility the Commission has to reasonably anticipate the revenue required by a particular utility and such assessment should be based on practical considerations. It cannot take arbitrary figures of increase over the previous periods expenditure by an arbitrarily chosen percentage of 4% or 20% and leave the actual adjustments to be done in the truing up exercise. The truing up exercise is mentioned (sic) to fill the gap between the actual expenses at the end of the year and anticipated expenses in the beginning of the year. When the utility gives its own statement of anticipated expenditure, the Commission has to accept the same except where the Commission has reasons to differ with the statement of the utility and records reasons thereof or where the Commission is able to suggest some method of reducing the anticipated _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 9 of 32 expenditure. This process of restricting the claim of the utility by not allowing the reasonably anticipated expenditure and offering to do the needful in the truing up exercise is not prudence. In any case, the method adopted by the Commission has not helped either the consumer or the utilities. It can only be expected that the Commission will properly understand its role in assessing the revenue requirement of the utility and in determination of the tariff in accordance with the policy directions and the relevant law in force.

34. In the present case admittedly there has not been any substantial change between the provisional accounts and the audited accounts on all the three scores the Commission has done the second truing up on the basis of revised policy which is not permissible as per above judgment.

35. For the financial years 2000-01 to 2003-04 the aggregate deficit found by the Commission was of Rs. 479.09 crores. Now adopting a new approach the Commission has discovered a surplus of Rs. 738.23 crores as against the deficit earlier found and thereby providing for an adjustment on account of additional Power Purchase Cost of Tanir Bhavi of Rs. 545.87 crores. Commissions order clearly shows that it has found a new methodology and process to undertake truing up. Truing up exercise has to be done with reference to the _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 10 of 32 amounts approved and the actual figure. The Commission has changed the approved figure of Rs. 183.29 crores for the revenue requirements for the year 2002-03 for the purpose of truing up and that too on a second attempt. This was not permitted by the Tribunal in its order dated December 04, 2007. Such an approach is against the essence of true-up exercise: True up exercise is meant to fill the gap between the actual expenses and revenues estimated at the end of the year and anticipated expenditure and revenue at the beginning of the year.

36. The Commission has erred in its assessment of power purchase quantum to be considered for the purpose of revenue requirement for the relevant year FY 2000-01 to FY 2005-06. While arriving at the quantum of power purchase to be allowed for revenue requirement, KERC should first reduce the disallowed T&D losses from the quantum of power purchase entered in the audited accounts of KPTCL. From the figure so arrived, the Commission has to reduce the allowed T&D losses which will give the quantum of power available for sale yielding revenue. Moreover, KERC has to realize that the audited sale quantum includes metered sale and unmetered sale which also includes agricultural pumping _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 11 of 32 sets and, therefore, there is an overlapping between the unmetered sale and loss. In this view of the matter, we are of the opinion that calculations should be carried out on the basis of the methodology given by KPTCL in its Memo of Appeal at para W. We order accordingly. Analysis and decision

7. This Tribunal has since held that the truing up exercise is meant to fill the gap between the actual expenses and the actual revenues at the end of the year and expected expenditure and revenue at the beginning of the year. The truing up cannot be done on the basis of revised policy or by adopting new philosophy or a new methodology.

8. We direct that the Commission carries out the truing up based upon this principle. Issue No. 2: Inadequate Power Purchase Cost allowed.

9. The appellant contended that the Commission has significantly reduced the projection of power purchase cost _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 12 of 32 proposed to be incurred by the distribution companies for the Multi Year Tariff (MYT) assuming higher availability from hydro sources which entail substantially lower costs. This has resulted in lowering the cash flow considerably to the appellants. Learned counsel cited the decision of this Tribunal in case of Bangalore Electricity Supply Company Ltd.(BESCL) V/s Karnataka Electricity Regulatory Commission (KERC) & Others, 2008 ELR (APTEL) 164 which deals with the tariff of the appellants for the year 2006-07 wherein it has been held that the Commission should not normally interfere with the plans and projections of the distribution companies for power purchase and that any excess or deficit over the projection can be adjusted during the truing up exercise. Learned counsel for the respondent also submitted that issue of power purchase cost can be trued up on the basis of actual data available for the years 2007-08 and 2008-09 and that the deficit, if any, can be adjusted in the truing up exercise. He also stated that the power purchase cost for the year 2009-10 can be determined on the basis of truing up exercise. _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 13 of 32 Analysis and decision

10. The Commission has proceeded to reduce the power purchase cost of the appellant companies by assuming higher availability from hydro sources. The issue before us is whether the Commission is right in interfering with the projection of the appellant for power procurement. It is the responsibility of the distribution companies to arrange for power to supply to the consumers in the entire state. It is the appellant who projects figures of power available from various sources so as to ensure that it has adequate power supply to meet the demand of consumers in its area of license. By over projecting hydro based power, the Commission has reduced the cash flow of the appellant thereby debilitating it to procure power from available sources. In view of this, this Tribunal in its judgment in Appeal No.250 of 2006 in the case of Bangalore Electricity Supply Company Limited & Ors. v/s Karnataka Electricity Regulatory Commission & Ors. 2008 ELR (APTEL) 164 had held as under:

28. The basic issue before us is as to who should estimate the power requirement. It is the responsibility of the appellant _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 14 of 32 to ensure power supply and also give new connections required during the year. The DISCOM have their own planning departments where experts assess the power requirements. This Tribunal in its judgment in Appeal No. 84 of 2006, dated August 29, 2006, in case of KPTCL vs KERC has decided that it is for the utility to estimate the future demands. Relevant para from our judgment is extracted below: The Commission overlooked the fact that the appellant being transmission utility transmitting power through out the State for the bulk supply as well as distribution has an obligation to maintain the supply as well as quality supply and when the demand increase, either at the level of distribution or at the level of bulk supply it is the transmission licensee who should provide for the supply. This obviously means that the transmission utility has to plan in advance and should be in a position to supply power as demanded from time to time. Section 42, 43 of The Electricity Act 2003 also should not be lost sight of. To meet the ever increasing demand consequent to development and improvement in the status of the consumer public, industrialization, computerization, heavy industries and requirement increases by geometric proportion, it is for the transmission utility or such other utility to estimate the future demands as well, besides improving the quality and standard of maintenance. This is possible only if the utilities have the freedom to plan with respect to their investment, standardization, upgrading of the system. For such a course it is within the domain of those utilities to undertake to plan, invest and execute the projects or schemes of transmission etc. If the view of the Commission is to be sustained, as already pointed out, the same would mean for each and _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 15 of 32 every investment an approval has to be sought by the utility in advance which is not the objective of the Act.

29. It is not for the Commission to assume day to day duties and responsibilities of the appellant as it is the appellant alone who has to ensure power supply and who should estimate the requirement of power. Any way, at the end of the year the truing up has to be done. The appellants have fairly submitted that in case of any over recoveries they will refund the excess amounts collected by them with interest to the consumers.

11. We hold that as the appellant is responsible for meeting the power demand in its area, its projections unless perverse or grossly wrong should not be interfered. Any variation in power procurement cost can be taken care of during truing up exercise. In the present case since tariff years 2007-08 and 2008-09 are over and we are in the midst of the tariff year 2009-10, the Commission is directed to i) allow the power purchase cost on the basis of actual available figures and ii) also allow it the carrying cost, while carrying out the truing up exercise. _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 16 of 32 Issue No. 3: Inclusion of Transmission Losses in calculating loss level for the appellants.

12. Mr. Ganesan, learned counsel for appellant has contended that the Commission has erroneously included transmission losses in calculating the power requirements. Appellant stated that it is a distribution company and does not undertake transmission of electricity in the state of Karnataka which is undertaken by Karnataka Power Transmission Corporation Limited (KPTCL). Moreover, the appellants have no control over the transmission losses. The Commission erred in accounting for the transmission losses while calculating the revenue requirements for the appellant. The Commissions view is that any inefficiencies in the transmission system in terms of loss has to be borne either by the Transmission Licensee or the ESCOMS. The Commission contends that the Government of Karnataka has assigned PPAs to the ESCOMS and that the ESCOMS are making payment for power purchases, which are accounted at the generator bus and not at the interface point of ESCOMS with KPTCL. Thus the _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 17 of 32 ESCOMS are already paying for the losses also. The Commission contends that any inefficiency in the transmission system in terms of loss has to be borne by ESCOMS and that this inefficiency cannot be passed on to consumers. Analysis and decision

13. We find force in the contention of the appellants, being only distribution companies, they have no control over the transmission losses occuring in the transmission system and, therefore, there can be no adjustment of the transmission losses while calculating revenue requirement for the appellant ESCOMS. The Commission is directed to effect necessary corrections in the revenue requirement Issue No. 4: Interest and Finance Charges

14. Mr. Ganesan has contended that the Commission has substantially reduced the interest and financial charges as claimed by it thereby reducing the revenue requirement and tariff. He contended that the appellant had proposed interest charges on loans payable on the basis of actual loans taken by the _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 18 of 32 distribution companies and the prevailing Prime Lending Rate of State Bank of India for the future loans to be taken. He averred that the reduction in interest and financial charges is contrary to the decision of this Tribunal.

15. On the other hand respondent Commission asserted that interest on belated power purchase payments cannot be passed on to KPTCL and that it has to be borne by the distribution companies who are repositories of revenue from the consumers. The Commission is allowing interest on Working Capital which includes interest on two months receivables. The interest on belated power purchase payments cannot be allowed to the distribution companies. Analysis and decision

16. We agree with the contention of the Commission that as far as interest on belated power purchase payment is concerned the same cannot be allowed to the appellant as the Working Capital interest allowed includes interest on account of two months _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 19 of 32 receivables. However, as regards interest on account of other loans, the Commission is directed to allow the same during truing up exercise after due prudence check. Issue No. 5: Depreciation and Operation and Maintenance Charges

17. The appellant contended that the Commission has reduced the depreciation and O&M expenditure claimed by it on the basis of assumptions subject to truing up after the year is over. Appellant submitted that this is against the orders of the Tribunal which states that the projections of the utilities with regard to expenditure should not ordinarily be reduced. He urged that the Commission may review such expenditure after the tariff period and conduct prudence check of such expenditure incurred by the licensees. He submitted that the Commission ought not to reduce such expenditure proposed by the licensee before the tariff year.

18. It is contended by the Commission that the appellant should have proposed a formula for arriving at the O&M expenses. Since _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 20 of 32 the licensee did not file the proposal as per the MYT Regulations the Commission has prescribed the formula which is based on International Accepted Practice: RPI- X methodology in arriving at the formula for the O&M expenses. Analysis and decision

19. Under the circumstances we would direct the appellant to approach the Commission by submitting O&M formula as required under MYT Regulations. As far as depreciation is concerned we direct that the same may be allowed as per Regulations of the Commission and given effect to during truing up exercise. Issue No. 6: Loss level for Multi Year Tariff Period

20. Mr. Ganesan contended that the Commission has considered the loss level trajectory for the Multi Year Tariff period which is substantially lower than the loss level projected by the licensee. He submitted that the appellants have substantially reduced loss _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 21 of 32 level from the level prevalent in the base year 2006-07. The loss level achieved by the companies from the base level for the year 2006-07 are given in the table below: Distribution Company 2006-07 2007-08 2008-09 (Provisional) BESCOM 23.73 19.99 16.81 MESCOM 15.29 13.71 12.95 CESC 25.80 22.62 17.35 HESCOM 29.95 25.06 25.15 GESCOM 35.52 26.03 26.01 Total for the State 25.71 21.67 19.46

21. Mr. Ganesan averred that from the table it is clear that the companies have functioned in an efficient manner and substantially reduced the loss levels.

22. Mr. Ganesan contended that the Commission has changed the methodology of determining distribution losses by having reference to input energy exclusive of EHT sales. Which has distorted loss level figures of the appellant. The Commission has _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 22 of 32 not given any reason for the change in methodology for benchmarking the distribution losses by excluding EHT sales.

23. Per contra it is contended by the Commission that the loss target fixed by the Commission were based on studies undertaken by appellants themselves. The appellant had undertaken anti theft drives and submitted the result thereto. Based on these steps the Commission has scientifically fixed the loss target which had been accepted by the appellant and, therefore, the issue of fixing loss target is a settled issue. Analysis and decision

24. The Commission while determining the tariff is required to inter alia encourage efficiency, economical use of resources and reward efficiency in performance. It is for the Commission to set loss reduction targets to encourage efficient operations. In the present case these targets have been set in consultation with the licensees who have also been able to meet/surpass these targets. In view of this we would not like to interfere with the orders of the Commission in this view of the matter. However, we hasten to add _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 23 of 32 that appropriate adjustment on account of not considering EHT sales may be allowed to the appellants. Issue No. 7: Fixing Differential Tariffs across different licensees

25. Learned counsel for the appellant has contended that the Commission has determined differential tariffs for the different distribution companies in the state of Karnataka. In this regard Mr. Ganesan submitted that the issue of differential tariff has been decided by the Tribunal in the case of Bangalore Electricity Supply Company Limited v/s Karnataka Electricity Regulatory Commission 2008 ELR (APTEL) 164 wherein the Tribunal has held that the Commission has jurisdiction to have differential tariff and on this issue the appeal filed by the distribution companies was dismissed. He submitted that however, in this case the Government of Karnataka vide their letter dated September 26, 2007 addressed to the Commission has directed to maintain uniform tariff to all distribution licensees in the state of Karnataka. He submitted that the state Government has the power to issue policy directives to the Commission under Section _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 24 of 32

108 of The Electricity Act, 2003 but the Commission has failed to implement the policy directive of the State Government and has gone ahead with the determination of differential tariff for the distribution companies in Karnataka.

26. Per contra the Commission contended that the Government, vide their letter dated September 26, 2007 have only requested the Commission reiterating their earlier stand that the Government is not in favour of differential tariff at this stage. This is not a policy direction under Section 108 of the Act. Therefore, in view of the earlier decision of the Tribunal the Commission has determined differential tariff for different distribution licensees. Analysis and decision

27. The determination of tariff for each distribution licensee is based on the cost and expenses, power availability for the particular distribution licensee, consumer base and consumer mix of the distribution licensee, their efficiency of operations, _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 25 of 32 distribution losses etc. etc. In order to encourage efficient operation, it is only necessary that the different licensees have competition amongst themselves to carry out their operations in more efficient manner. In view of this, this Tribunal held that the Commission may determine differential tariff, according to the geographical location of the consumers, different distribution licensees could have differential tariffs for their respective area of operations. The letter dated September 26, 2007 from the Government of Karnataka to Secretary, KERC relied upon by the appellant ends with the following para. In this connection, I am directed to reiterate that the Government is not in favour of differential tariffs at this stage. This may be brought to the notice of the Commission

28. We are inclined to agree with the contention of the Commission that the aforesaid letter dated September 26, 2007 relied upon by the appellant is not any policy direction in terms of Section 108 which has not even been quoted in the letter. This is _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 26 of 32 only an innocuous suggestion. In this view of the matter, the appeal is not allowed and we uphold the decision of the Commission. Issue No. 8: Limiting the purchase of power from Non- Conventional Energy Sources to 10% of the total power procurement. (In appeal Nos. 15,21 & 22 of 2008)

29. The appellant has contended that the Commission while approving its power purchase cost has limited the purchase of power from Non-Conventional Energy Sources to 10% of the total power procurement of the distribution companies. While doing so the Commission relied on the KERC (Power procurement from renewable sources by distribution licensees), Regulation, 2004 which provides for a maximum of 10% electricity to be procured from Non-Conventional Energy Sources. The Commission has ignored the facts that all agreements to procure power from Non- Conventional Energy Sources have been approved by it and in these circumstances the appellant has no option but to purchase such electricity from Non-Conventional Energy Sources. He averred that with approved Power Purchase Agreements in place, _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 27 of 32 the appellant cannot wriggle out of the agreements which have been duly approved by the Commission. He urged under such circumstances procurement of power under approved Power Purchase Agreement from Non-Conventional Energy Sources be allowed in the ARR of the appellant even if such procurements exceeds 10% of the total power procurements of the appellant.

30. Per contra it is contended by the Commission that the KERC (Power Procurement from Renewable Sources by distribution licensees) Regulations, 2004 under the provisions of The Electricity Act, 2003 had been gazetted on October 10, 2004. These Regulations were finalized after giving an opportunity to all stakeholders including appellant licensees and nodal agencies, KREDL. As per these Regulations maximum power procurement from the renewable sources is limited to 10%. The Commission says that while submitting the PPAs for approval the appellants were furnishing a certificate that they are yet to reach the maximum of 10%, therefore while approving ARR, the Commission _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 28 of 32 has restricted the power purchase from renewable sources to 10% as per the prevailing Regulations. Analysis and decision

31. We find it necessary to give below relevant clauses of the KERC Regulations regarding Renewable Sources of Energy. Clause 3 of the KERC (Power Procurement from Renewable Sources by Distribution Licensee) Regulations, 2004 states as under:

3. Quantum of purchase of electricity from Renewable Sources of Energy. 3.1 Each Distribution Licensee shall purchase a minimum quantum of 5% and a maximum quantum of 10% of electricity from renewable sources expressed as percentage of its total consumption during a year. Till such time the STU or any licensee is engaged in the activity of bulk purchase and sale of electricity to distribution licensees in the State, the quantum of purchase from renewable sources shall be considered as the above specified percentage expressed as percentage of total _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 29 of 32 consumption in the area of supply of all such Distribution Licensees considered together.

32. However, the above Regulations have been amended vide Notification No. S/03/1 dated January 23, 2008 (Notified in Karnataka Gazette January 31, 2008 Part 3 Pages 239, 240 wherein the Clause 3 has been amended as under:

11. Amendments to the following Regulations of KERC (Power Procurement from Renewable Sources by Distribution Licensee) Regulations 2004: The existing sub-clauses as in column 3 of the Table below shall stand substituted by the provisions as in column 4. Section As existing As amended

1 2 3 4

1 3.1 Each Distribution Licensee shall purchase a minimum quantum of 5% and a maximum quantum of 10% of electricity from renewable sources expressed as percentage of its total consumption during a year Till such time the STU or any licensee is engaged in the activity of Each Distribution Licensees shall purchase a minimum quantity of electricity from the renewable sources expressed as a percentage of its _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 30 of 32 bulk purchase and sale of electricity to distribution licensees in the State, the quantum of purchase from the renewable sources shall be considered as the above specified percentage expressed as percentage of total consumption in the area of supply of all such Distribution Licensees considered together. total consumption during a year as specified below:

1. BESCOM 10% 2.MESCOM 10%

3. CESC - 10%

4. HESCOM- 7%

5. GESCOM- 7%

6. Hukeri - 7% Society

2 3.6 The Commission may review the quantum of purchase from renewable sources once in every 3 years. The Commission may review the quantum of power purchase s and when it considers necessary.

33. Gleaned from the angle that the Commission has limited the renewable source power purchase cost to 10% of the total power purchase cost as per the then prevalent KERC Regulations, (Supra) this decision cannot be faulted. However, the Act requires promotion of co-generation and generation of electricity from renewable sources of energy. It is also a fact that even after procuring power in excess of 10% from renewable energy sources, Karnataka faces power shortage after exhausting all other sources of power procurements. In view of the prevalent ground reality, it will only be prudent, so as to encourage renewable energy sources _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 31 of 32 and to honour the PPAs already entered into by the appellant where they are bound to pay at least the fixed cost charges, to allow upto the maximum per unit cost of procurement from sources other than the renewable energy sources. We order accordingly for the tariff year 2007-08. However, for the tariff years 2008-09 and 2009-10, the Commission is directed to allow the actual purchase cost of energy from Renewable Sources as the amended Regulations (Supra) require a Minimum percentage without specifying any maximum limit from the Renewable Sources. Issue No. 9: Arithmetical Mistakes (In appeal No. 15 and 22 of 2008)

34. It is contended by the appellant that there are some obvious arithmetical mistakes in Appeal No. 15/2008 ( Page No. 265 and Appeal No. 22/08, page No. 256). He submitted that these mistakes are obvious and may be corrected by the Commission. _____________________________________________________________________________________________________ No. of corrections Appeal Nos. 15&IA38,20&IA50,21&IA53,22&IA55 and 23&IA57 of 2008 Page 32 of 32

35. The Commission is directed to look into the mistakes pointed out by the appellants and correct the same, if required.

36. The appeal is accordingly allowed in part. We dispose of the appeal with our directions in paras 8,11,13,16,19,24,28,33 and 35.

37. No order as to costs.

38. Pronounced in the open court on 09th day of October, 2009. (H.L. Bajaj) (Mrs. Justice Manju Goel) Technical Member Judicial Member

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